New 'Value-up' plan to tackle 'Korea discount' lacks enforcement bite

Financial Services Commission (FSC) Chairman Kim Joo-hyun speaks during a policy seminar regarding the Corporate Value-up Program at the Korea Exchange's office in western Seoul on Monday. [FSC]

Korea’s financial regulators outlined the framework for the highly-anticipated “Value-up” program aimed at resolving the country’s chronic undervaluation of stock prices, or so-called Korea Discount, on Monday.

The program will be run on a voluntary basis; there will be no legal obligation for the companies to take part in the initiative, which was met with a degree of disappointment from investors who had bought up undervalued stocks in anticipation of the government initiative.

The plans were announced by the Financial Services Commission (FSC) during a policy seminar on the Corporate Value-up Program held on Monday at the Korea Exchange’s office in western Seoul.

Senior officials from both the FSC and the Korea Exchange were in attendance, as well as representatives from major institutional investors such as the National Pension Service, NH Investment & Securities and Samsung Asset Management, while employees of listed companies including Posco International participated in the discussion session.

“Enhancing the corporate value of a company is not something that can be achieved in a short period of time with only one or two measures,” FSC Chairman Kim Joo-hyun said during the event.

“We hope that the [Korean] public will have a patient look and support, for a long period, the Value-up initiative,” said Kim.

Korea Exchange CEO Jeong Eun-bo stressed in his opening remarks that the program could be an “opportunity for the [benchmark] Kospi index to break its record set in 2021, to exceed the 3,300 threshold,” urging companies to improve the transparency of their governance structure and shareholder return policies.

The financial authorities will receive feedback from investors and listed companies through a second policy seminar in May and finalize the program’s details by June. Companies willing to take part will be able to join the initiative starting the latter half of this year.

The authorities outlined the program's three main pillars: a nonbinding guideline to incentivize better shareholder return policies, a new index to promote companies' efforts to enhance their valuation and a bolstered government support system.

The aforementioned guideline will provide basic principles and directions for voluntary disclosures and encourage companies to outline mid- to long-term plans to raise their corporate value. The regulators suggested that companies listed on the Kospi and Kosdaq disclose key performance indexes, such as price-to-book ratios (PBR) and returns on equity, every quarter.

Corporate tax incentives and other regulatory and administrative benefits will be awarded to those with desirable performance.

Moreover, the “Korea Value-up Index” — which will include companies with “proven records” of enhancing corporate value — will be developed by September as well. Exchange-traded funds, or ETFs, tracking the index will be launched and listed by December, which will enable better access to such companies for retail investors, the FSC said.

Lastly, a new division is to be set up under the Korea Exchange along with an advisory board to follow up on the Value-up initiative.

The program is known to have benchmarked Japan, which has been pushing government-led, voluntary stimulus measures since the early 2010s.

Addressing concerns as to whether a voluntary approach would have any significant impact on the market, the FSC said that “it is more realistic and desirable to provide incentives to encourage participation” than it is to coerce companies with regulations, as “mandatory disclosures may lead to tokenism, making companies' filings meaningless and perfunctory.”

Some view the announcement as disappointing compared to investors' expectations for the program, which have been high since it was first mentioned in mid-January, inflating the prices of lower-PBR stocks.

“The gap between the anticipation for the Value-up Program and the actual details revealed during the seminar is bigger than expected,” said analyst Lee Kyoung-min in a report.

While remaining positive about the government’s long-term approach, Lee warned that stocks with low PBR will inevitably suffer from the fallout of recent rallies driven by investor excitement.

KB Securities analyst Kang Seung-geon pointed out that “Stocks in the financial sector are experiencing increased volatility,” as the market expectation for the Value-up Program has already been reflected in share prices, and added that “uncertainties remain, in terms of investors' expectations becoming realized, because of the program's focus on each company's voluntary participation.”

The Kospi closed at 2,647.08 on Monday, down 17.76 points or 0.67 percent from the previous trading day.

Stocks in the financial, automotive and retail sectors — which are generally considered to be undervalued — plunged that day. KB Financial Group slid 5.02 percent, and Shinhan Financial Group lost 4.5 percent, while Kia fell 3.12 percent. Heungkuk Fire & Marine Insurance nose-dived by 11.93 percent.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]