Nearly 70% of listed Korean firms undervalued

The Seoul bourse of Busan-headquartered Korea Exchange (KRX) in Yeouido / Yonhap

Nearly 70 percent of the Korean companies listed on the benchmark KOSPI are valued at less than their liquidation value, data showed, Wednesday, highlighting concerns over the chronic “Korea discount” or tendency for stocks listed on the bourse to be traded at a discount compared to other markets.

In the data released by the Korea Exchange (KRX), 541 or 67.7 percent of the 797 domestic stocks on the KOSPI are currently traded below a price-to-book ratio (PBR) of 1.0. The 797 excluded preferred stocks.

The PBR is figured out by comparing it with the book value per share (BPS), the value of a company’s equity divided by the number of shares outstanding.

A PBR below 1.0 means a company’s market value is lower than its book value. Under such circumstances, the current stock price is less than the money it would get by selling all its assets at book price.

“The finding reminds us again of the Korea discount, said Chung Eui-jung, head of the Korea Stockholders Alliance, which is comprised of 18,000 retail investors, noting that such a discount persists despite a roster of domestic stocks that includes leading businesses in the world.

For instance, POSCO Holdings, which wholly owns the world’s sixth-largest steelmaker POSCO, had a PBR of 0.6 although its price per share went up 60 percent this year alone.

The flagship affiliate of the world’s third-largest carmaker Hyundai Motor Group, Hyundai Motor had a PBR of 0.43.

The group’s smaller affiliate, Kia performed better than Hyundai Motor but still settled at 0.78 in its rating.

The underestimation of stock value was the same for the country’s major banking groups. KB Financial Group had a PBR of 0.43, while Shinhan Financial Group's was at 0.37 and Woori Financial Group stood at 0.31.

Of the other big-name firms in the financial and manufacturing sectors, Samsung Life Insurance was rated at 0.56, SK Telecom at 0.96, LG Electronics at 0.89, Korean Air at 0.78 and CJ CheilJedang at 0.66.

Correspondingly, the PBR of the KOSPI stocks as a whole turned out to be 0.88, far less compared to 4.1 of S&P 500's stocks, which are the 500 largest stocks traded in the U.S. market.

While the Korea discount is mainly attributable to threats posed by North Korean and the government’s strict regulations, experts said the listed companies also have a job to do to overcome their respective undervaluations.

Chung argued that leaders of family-owned conglomerates do not necessarily attempt to boost their firm’s stock value because higher prices will result in higher inheritance tax when managerial succession occurs.

Hong Ki-hoon, a professor at Hongik University’s College of Business, said reckless overexpansion, paid-in capital increase and other management strategies should be refrained by large businesses to avoid negative assessment from foreign investors.