Korea Inc's Japan makeover only scratches surface

NVH Korea

12/03/2024 11:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Anshuman Daga
       SINGAPORE, March 12 (Reuters Breakingviews) - South
Korea and Japan rarely see eye to eye. But Seoul is now copying
its neighbour's corporate reform drive to lift anaemic
valuations. Voluntary disclosures and tax breaks, though, lack
teeth and are unlikely to spur change among the family-run
conglomerates, or chaebol, that dominate the $1.9 trillion stock
market.
    The financial regulator's ambitious plan requires broad
support. Dubbed the "Corporate Value-Up Program", the
preliminary guidelines encourage companies to publish plans on
how to improve valuations - similar to Japan. South Korea is
going one step further by proposing preferential tax treatments
as well as a "Korea Value-Up Index" comprised of top-performing
stocks to motivate firms.
    It's a timely move to fix the stubborn Korea Discount,
whereby years of weak corporate oversight and underwhelming
shareholder returns have resulted in giants like Samsung
Electronics  005930.KS  and Hyundai Motor  005380.KS  trading at
lower valuations than global peers. In contrast, Japanese stocks
have surged to record highs as entities heed the local bourse's
call to focus on  shareholder value. Investors shunning Chinese
equities plus a mania for all things artificial
intelligence-related have also helped. The Nikkei 225 Index
 .N225  is up 38% over the past year, versus just 15% at Korea's
Kospi 200  .KS200 .
    Powerful chaebol led by Jay Y. Lee's Samsung empire means
Japan's playbook of voluntary disclosures can only go so far.
The top 10 family-controlled conglomerates account for
two-thirds of the market value of the Kospi 100 index, per
Societe Generale. Unlike in consensus-driven Japan, influential
families like Samsung's Lee clan have little incentive to make
their companies more attractive to investors. On the contrary,
South Korea's up to 60% inheritance tax, versus a 25% average
for OECD nations, can be a deterrent for many to lift share
prices. Roughly two-thirds of Korean-listed firms trade below
book value.
    Seoul can take bolder steps. Treasury stock, or shares that
have been repurchased but not retired, for instance, has long
been used to strengthen control of insiders at the expense of
minority investors. Requiring companies to cancel any such
unused securities could yield quick benefits. Some 17% of the
Kospi 200 index constituents hold over 10% of their shares as
treasury stock versus 8% in Japan's Topix  .TOPX , per SocGen.
Tougher rules, rather than incentives, will revitalise Korea
Inc.
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    CONTEXT NEWS
    South Korea's Financial Services Commission in February
announced the "Corporate Value-up Program" which comprises
measures to support listed companies in their voluntary efforts
to improve valuations.
    Korean authorities are exploring tax incentives and other
benefits and will finalise guidelines after receiving feedback
from companies. Firms can then disclose plans in the second half
of 2024 but there is no specific deadline.
    The move follows a similar effort by the Tokyo Stock
Exchange in 2023 urging companies to boost shareholder value,
along with new government guidelines to drive mergers and
acquisitions. That has helped push Japanese stocks to record
highs.
   

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Graphic: Korean shares trade at a discount to Japan    https://reut.rs/43c97mk
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 (Editing by Robyn Mak and Katrina Hamlin)
 ((For previous columns by the author, Reuters customers can
click on  DAGA/ 
anshuman.daga@thomsonreuters.com; Reuters Messaging:
anshuman.daga.thomsonreuters.com@reuters.net))