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.