South Korea is using Japan’s playbook to boost the value of
its companies, analysts say, as its neighbour’s stock market surged to a record
high last week, thanks to years of corporate governance reforms and other steps
to encourage share buybacks, lower cross-holdings and increased dividends.
Under the Corporate Value-up Programme, the South Korean
government will encourage and support companies’ voluntary efforts to return
more capital to shareholders and improve governance, the Financial Services
Commission (FSC) said.
Companies will be able to refer to a detailed guideline set
for release by the government in the first half of 2024 for their reporting
plans, the FSC said.
This could help “resolve the problem of the ‘Korea
discount’”, the regulator said in a statement.
The discount refers to a tendency for South Korean companies
to have lower valuations than global peers due to factors such as low dividend
payouts, and the dominance of opaque conglomerates known as chaebols.
Some analysts said the proposals do not go far enough.
“The market was already expecting some ‘sell on the news’,
but profit-taking pressure turned out to be even heavier as the announced
proposal was just too disappointing,” said Eugene Investment Securities analyst
Huh Jae-hwan.
“It was just too plain, with few measures seen as
incentives. Neither compulsory requirements nor tax benefits were in there,
which were steps the market had been anticipating,” the analyst said.
The benchmark Kospi index fell as much as 1.42 per cent in
morning trade, with losses led by automakers and banks, which are often
considered undervalued. These sectors had rallied hard recently ahead of the
government’s reform proposal.
To encourage voluntary reforms, the FSC is considering
preferential treatment in tax policies for companies that enhance their market
value and increase shareholder returns.
The regulator will also introduce an index of firms with
strong shareholder value.
FSC vice-chairman Kim So-young said at a press conference
that the reforms must be voluntary, not compulsory, adding that the proposal
“includes more and much stronger incentives than those rolled out in Japan”.
Mr Kim said many companies are striving to improve their
market value and more are expected to follow.
Joining the government’s push, South Korea’s stock bourse
said earlier in February that it will establish a team dedicated to improving
corporate governance, while the national pension fund decided to invest in
companies working to boost their value.
South Korea’s Kospi rose 19 per cent in 2023,
underperforming the Nikkei and the United States’ S&P500. In 2022, its
performance beat only Russia among the Group of 20 big economies.
About two-thirds of Kospi-listed companies trade at a
price-to-book value ratio (PBR) of less than 1, meaning their market value is
less than the value of assets on the balance sheet.
Global tech titan Samsung Electronics is not doing much
better, trading at a PBR of 1.2 compared with Taiwan Semiconductor
Manufacturing Company’s 5.2, according to LSEG data. REUTERS