Taking a page from Japan’s playbook in advancing corporate reforms, Korea recently announced a corporate value-up program to help boost the value of its listed companies and alleviate the “Korea discount”.

“Korea discount” is a term used by the market to describe the tendency of South Korean companies to trade on depressed valuations relative to global peers.

This phenomenon is likely due to multiple factors including the dominance of family-owned conglomerates with complex shareholding and ownership structures, sizeable balances of shares held in treasury, no legal fiduciary duty to the company for directors, and lack of tag-along rights for minority investors around takeovers which renders minorities more vulnerable.

The Korea Composite Stock Price Index, or Kospi, has lost 0.2% so far this year, while Japan’s Nikkei has gained 17.5% in the same period, even though both Japan and Korea share a similar industry tilt, net-cash companies, low returns-on-equity, and unloved valuations. Almost 69% of Kospi is trading below book value, further highlighting the need for reforms (Chart 1).1

Chart 1. Percentage of companies with trailing price to book of less than 1x (%)

Source: Jefferies, FactSet, February 2024. Note: Based on interim reporting trailing price to book.

Yet in a market dominated by retail investors, Korea’s value-up program is also a somewhat populist measure ahead of the country’s parliamentary elections next month.

The program’s three key pillars span providing tax incentives for companies to voluntarily prepare and communicate their corporate value enhancement, supporting investor access to companies’ shareholder value enhancement plans through the possible creation of a Korea value-up index, and establishing support systems, such as a dedicated team at the Korea Exchange.

Sectors like autos and banks, which trade at a valuation discount relative to global peers, rallied ahead of the announcement on February 26, but retreated again because the news was perceived as disappointing and lacking in details and teeth – the new measures are voluntary and mostly at the planning stage, while there is a lack of clarity on incentives and no penalties for non-compliance.2

Tackling the “Korea discount”

This is not the first time we have seen efforts to level the playing field between Korea’s conglomerate owners and minority investors. Many investors may remember similar efforts a decade or so ago to push for higher dividend returns.

Undeniably, the country has seen a pick-up in investor activism with one governance service provider noting a 50% rise in public campaigns launched last year versus 2022. Whether the majority-retail investor base, which has favored a revolving narrow band of growth-orientated stocks in recent years, will jump on the value-up bandwagon remains to be seen.

Devil in the details

Some market participants are also adopting a wait-and-see stance – looking for more concrete details to be released later. The government will hold a second seminar in May and finalize the guidelines by June.

There is some political risk to this reform because Korea’s parliamentary elections will be held in April. However, the approval rating for President Yoon Suk Yeol's government and ruling party are on an upward trend. Some of Korea’s huge family-owned conglomerates – or chaebols – have started to act, such as committing to an earlier-than-targeted cancellation of all their treasury shares. Banks have also raised dividends.

We may begin to see the Korea discount being reduced if the government follows through with concrete tax perks for corporates in May or June and companies, especially the chaebols and those with majority insider holdings, commit to following value-up by disclosing measures to raise return-on-equity and price-by-volume, as well as enhance returns to minority shareholders.

Such a collective effort on the part of the government and companies will go a long way in boosting trust in Korea’s capital markets and creating a culture of greater regard to shareholder value.

Final thoughts

While perhaps an often-overlooked market due to its mature economy and popular brands, we believe it would be wise for investors to monitor Korea’s value-up program closely. This is a program that could potentially increase the appeal of Korean companies and boost stock valuations in Asia’s fourth-largest economy.

1 "South Korea unveils measures aimed at boosting stock markets, tackling ‘Korea discount." CNBC, February 2024. https://www.cnbc.com/2024/02/26/south-korea-unveils-measures-to-boost-stock-markets-tackle-korea-discount.html.
2 "South Korea unveils reform measures to tackle 'Korea discount'." MSN, February 2024. https://www.msn.com/en-us/money/companies/south-korea-unveils-reform-measures-to-tackle-korea-discount/.

Important information

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