Global investors back Corporate Value-up Program, but challenges remain

Korea Exchange CEO Chung Eun-bo speaks at the Korea Capital Market Conference 2024 at a hotel in Seoul, Monday. Yonhap

Since the launch of the Corporate Value-up Program in February, foreign investors have shown growing interest in Korean tech stocks with strong long-term returns, as well as undervalued financial and automotive stocks. This trend highlights the valuation appeal of Korean stocks to foreign investors, according to J.P. Morgan.

However, the so-called "Korea discount" or undervaluation of Korean stocks, has only been widening.

“Our stock market has recently been perceived as underperforming compared to overseas markets, with a growing number of domestic investors choosing to invest directly in foreign markets. As a policymaker, I feel a sense of regret and responsibility over this trend,” said Financial Services Commission Chairman Kim Byoung-hwan.

He made the remarks during the Korea Capital Market Conference 2024, hosted by the country's bourse operator Korea Exchange (KRX). The sessions were intended to discuss the challenges and opportunities of Korea's capital markets. But the main focus was clearly the Corporate Value-up Program, a government-led initiative to revamp the stagnated stock market by improving corporate governance and shareholder returns.

Mixo Das, Asia equity strategist at J.P. Morgan, noted that the slowing growth trend is a global phenomenon, but attributed the undervaluation of the Korean stock market specifically to poor capital management by Korean corporations.

"Korea's return on invested capital (ROIC) is consistently below peers across sectors. If Korea ROICs, currently at 6.3 percent, move up to the peer average of 9 percent via asset disposal and use proceeds to buy back shares, that would imply a 60 percent upside to equity prices."

He also addressed the low shareholder return rate and share buybacks, noting that "the dividend payout ratio among mid-sized companies remains significantly lower than in other countries."

Corporate efforts are also important, he said, as the market remains heavily represented by family-owned companies. Korea’s governance score, according to MSCI, stands at just 26 percent, considerably lower than the global benchmark. Tax reforms could positively impact this situation, as Korea has relatively high tax rates.

Nevertheless, he said the policy is "moving in the right direction" and could benefit both corporations and investors.

Financial Services Commission Chairman Kim Byoung-hwan, left, and Korea Exchange CEO Chung Eun-bo pose during a ceremony celebrating the listing of Corporate Value-up exchange-traded products. The ceremony was held as part of the Korea Capital Market Conference 2024 at a hotel in Seoul, Monday. Yonhap

Despite low participation in voluntary Value-up disclosures, the Korea Exchange (KRX) remains optimistic about their potential impact. To date, only 64 companies — representing just 2.5 percent of the 2,608 listed on the KOSPI and Kosdaq — have issued voluntary or guidance disclosures.

The KRX anticipates that more than 100 companies are expected to take action by the end of this year, according to a survey conducted by the exchange among listed companies.

"The short preparation period led to a disclosure level that fell short of initial expectations," Yi Bu-yeon, executive director at KRX, said. "Starting next year, as the index incorporates companies that meet disclosure requirements, we expect a greater differentiation."

The exchange also promised various incentives, including tax support measures and benefits for companies recognized for excellence. Outstanding companies will be recognized for the first time in May of next year.

Meanwhile, the much-awaited Value-up exchange-traded products — comprising 12 exchange-traded funds (ETFs) and one exchange-traded note — were launched.

A total of 20 securities firms participated as liquidity providers for these products, which amounted to 51.1 billion won ($37.3 million). Some of the products track and invest in stocks included in the Value-up Index, as well as those that may be added in the future.

On their first day of listing, the products saw an increase of about 2 percent, outperforming the growth rate of most stocks in the benchmark KOSPI.

"Although we are not exactly certain how many years this could take, given the enormous amount of interest in the Corporate Value-up Program among both Korean and foreign investors, we think the size of the Value-up ETFs could grow to about 10 trillion won or more in the next 3 to 5 years," Douglas Kim, an analyst at SmartKarma, a Singapore-based investment research firm, said, citing the rise of the Korean ETF market.