Korea continues to be a key focus. Foreign investors are still generally quite sceptical on the prospects for the Value-up programme, with fewer than 30% expecting it to have a meaningful impact Principal reasons are the perceived inability of the government to pass legislation due to its minority position combined with the structural impediment of an equity market dominated by majority shareholders that seemingly don’t care about share prices.

This scepticism is well-reflected in the prices of potential Value-up beneficiaries such as listed holding companies, which on aggregate are still trading at around start-of-year levels. Very little is priced in, in other words.

Against this backdrop, we continue to maintain our constructive stance. Companies have started to release Value-up plans, targeting higher shareholder value through share buybacks, treasury share cancellations, enhanced dividend policies etc. Although the pace has so far been slow, regulators and others have started to apply gentle persuasion to the laggards. A few days ago, both the Financial Supervisory Service and Financial Services Commission publicly called on companies to speed up their participation in Value-up. The CEO of Korea Exchange (KRX) also met the leaders of the ten largest conglomerates to convey the same message.

In response, LG, Hyundai, POSCO and Kia have committed to publish their Value-up plans in 4Q. We expect that peer pressure will motivate the others to follow in due course – failing which, the pressure from the government, regulators and investors may become a little less gentle.

We acknowledge that the Value-up related tax incentives bill to be submitted to the National Assembly this month will quite likely run into hurdles due to the government’s minority position. However, with the opposition party also aiming to tackle the “Korea discount”, as evidenced by their recent release of a rival plan (the “Korea Booster Project”), we can ultimately expect support from the legislature in one form or another.

In any case, looking at the Japanese example, it has been the efforts of the stock exchange4 rather than the government that have had the greatest impact on market valuations. So even if the legislative effort stalls, we believe Korea can still make further meaningful progress towards a more minority investor-friendly stock market.

In addition, we still have other upcoming catalysts such as the launch of the Value-up index in September and associated exchange-traded fund shortly after.

Following a period where the Korean “Corporate Value-Up” (CVU) beneficiaries retreated to below start-of-year levels, effectively pricing in a zero chance of success, the group staged a tentative, partial rebound in July (figure 1), potentially marking the start of “Round two”.

The catalyst may have been the release of CVU plans by two major banks – Shinhan and Woori – incorporating large share buybacks and multiyear shareholder return commitments. It seems that investors are happy to see concrete evidence of progress in the midst of fears over the government’s ability to implement CVU. Shinhan and Woori’s plans were well received by shareholders and highly rated by a leading Korean corporate governance think-tank.

Another encouraging data point was to be found in the 1H 2024 listed company statistics released by the stock exchange. Share buybacks increased 25% year-over-year to KRW2 trillion in the period, and share cancellations were up a staggering 191% to KRW 7 trillion.

Potentially more significant was the release of a new set of proposals – intended to rival CVU – by the opposition Democratic Party of Korea, named “Korea Booster Project”. In contrast to CVU, which incentivizes companies to act through tax incentives, the Korea Booster Project will reformthe Commercial Code to strengthen the rights of minority shareholders through:

1. expanding the fiduciary duty of directors to all shareholders (not just the company);
2. mandating the appointment of independent directors not influenced by controlling shareholders;
3. expanding the separate election of directors who are audit committee members;
4. promoting the use of cumulative voting in large corporations (which strengthens the ability of minority shareholders to elect directors); and
5. implementing mandatory electronic voting and proxy solicitation for listed companies.

With both ruling and opposition parties now actively seeking to eliminate the “Korea discount”, the prospects for successful reform are significantly higher than what is priced in by the market, in Metrica’s view.

Upcoming catalysts including the “Value-up index” launch in September and creation of the associated exchange-traded fund in Q4 are likely to stimulate further interest in the theme.

Following a draft proposal released in April, India’s market regulator SEBI recently finalised a market reform aimed at enhancing price discovery and liquidity for the nearly 70 holding companies listed on the country’s stock exchanges.

Under the new regime, the exchanges will hold annual “special call auctions” for the stocks of companies that hold at least 50% of their assets in the form of shares in other listed companies. The main feature of the special call auctions is that they will not have price limits, in contrast to regular trades on the exchanges. They should therefore have the greatest impact on names that are stuck at very low prices due to a lack of trading volume.
The announcement resulted in improved market sentiment towards the whole sector.

It is rare to see a prominent investment theme go from zero to one hundred and back to zero again in the space of a few months. However, that is the story of Korea’s “Corporate Value Up” (CVU) initiative in 2024. In March, we wrote about how CVU beneficiaries had given back some of their year-to-date performance due to concerns about the government’s ability to enact related legislation post-election. Last month this went even further. Looking at one group of names potentially affected by CVU – listed holding companies – shows how 96% of the initial rally had been reversed by the final week of May (figure 1).

In other words, the market went from pricing in zero chance of CVU prior to President Yoon’s speech in mid-January, to pricing in some meaningful probability (we estimate 20 – 30% based on where holding companies trade elsewhere in the region), and then back to almost-zero again. It is as if investors are getting a second chance to buy Nvidia at the May 2023 price, i.e. prior to the AI theme taking hold. Our views as expressed in the March newsletter are unchanged. While recognising that the path to success is unlikely to be a straight line, we believe that government, stock exchange and investor support for CVU and broader corporate governance reforms is not going away. Catalysts later in the year, such as index and ETF creation, and the promotion of companies adhering to CVU, will create further volatility and opportunities in the Korea market.

SEBI announced a consultation to improve the stock delisting framework.

SEBI’s main proposal would allow any company to be delisted via a fixed price tender offer, contingent upon 90% acceptance by all shareholders. This would be a great improvement on the current system of reverse book-building, which allows shareholders with small stakes to hold a transaction hostage by driving up the tender price to unreasonable levels, frequently resulting in the offeror walking away.

Of particular interest to us was an additional proposal specifically aimed at holding companies – defined by SEBI as those with at least 75% of assets in the form of stakes in other companies.

Assuming two-thirds approval from public (nonpromoter) shareholders, holding companies would be able to delist through a scheme of arrangement whereby the holding company’s shares are cancelled in exchange for shares in the underlying listed holdings, with unlisted shares sold for cash which is then paid out.

The relatively low voting threshold would make it significantly easier to unlock the value contained in some of the deeply-discounted Indian holding companies, in our view.

Japan’s Financial Services Agency is examining a long-standing loophole in the tender offer rules. Currently, an acquirer can buy any amount of shares in a company on-market without having to tender for the whole company.

A tender offer is only required when a 33% or more stake is bought off-market. This contrasts with jurisdictions such as the UK, where an acquirer must make a full tender offer upon reaching a certain threshold, irrespective of how the shares were acquired.

The loophole has resulted in quite a few recent instances of investors coercing companies into paying large dividends or executing large share buybacks, which in many cases have disadvantaged other (particularly foreign) shareholders due to withholding taxes.

Closing the loophole will improve the transparency of the market and level the playing field for all investors.

The regulator is also looking at rules around coordinated actions by multiple shareholders.  At the moment, it is not clear how much discussion can take place between shareholders before joint disclosure filings are required. In practice this leads many investors in Japanese listed companies to be cautious about talking to other shareholders.

Dialogue between minority shareholders can be a powerful check on corporate governance. Metrica looks forward to seeing how the new framework facilitates this.