South Korea is trying to set the stock market on fire with its corporate governance reforms and take Japan’s lead. There are hills in Korea that are difficult to climb.
Wednesday’s parliamentary elections probably won’t make progress any easier either. The opposition party, “Together with the Democratic Party”, won a strong victory, suggesting a political stalemate in the remaining three years of President Yoon Seok-yeol’s term.
South Korea has a contradiction in capitalism: great companies like Samsung Electronics
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SK Hynix and Hyundai Motors have terrible stock prices.Samsung’s book value is 1.3 times, rival Taiwanese semiconductor’s is 6 times
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Jonathan Pines, lead portfolio manager for Asia ex-Japan at Federated Hermes, said:
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Much of this disparity is driven by the ownership of chaebols, the family-run businesses that make up the majority of South Korea’s listed companies. The founding family has largely departed from the Japanese keiretsu chain, leaving behind a professional, albeit conservative, management team.
South Korean law gives chaebol families incentives to keep stock prices low as inheritance taxes peak at about 60%. They are given a gruesome variety of tools to accomplish that goal. Corporate directors have no fiduciary duty to shareholders, and there are no restrictions on related-party transactions, such as a corporate headquarters purchasing assets from family members or affiliates. Managers can force minorities to sell their shares at market prices.
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Compared to such abuses, the corporate value improvement program announced by the Yun administration in February gave investors a weak impression. Although much has been written about the Japanese style of “honor and shame” for companies that sell below book value, the actual law was hardly mentioned.
“Korea has yet to find Japan’s level of corporate governance combined with business fundamentals,” said Laure Negier, global equity portfolio manager at Comgest.
Yun expressed support for lowering inheritance taxes. James Lim, a partner at Dalton Investments, said the idea is unlikely to sit well with his left-wing Democratic opponents, who seem more interested in exposing their teeth to corporate boards. In any case, decisive action may take time. “My basic philosophy is that we need to be very cautious about investing in South Korea,” he says.
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However, this does not mean that the current situation will continue forever. As the real estate market cooled and services like Robinhood gained popularity, the number of retail investors in South Korea more than doubled compared to before the pandemic, from a population of 52 million to 14 million.
“This is a powerful voting bloc” against the chaebol families, Pines said. He is overweight Korean stocks, saying they are cheap enough to benefit from any reform. “In a way, this is a free option and there is potential for improvement,” he says.
Dalton’s Lim avoids Korea’s big names, but delves deep into a few small mavericks.His top choice is Meritz Financial Group.
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It is run by the heir of a rebellious conglomerate and returns 50% of profits to shareholders. As a result, the stock price has increased eight times over his time in the past three years.Mr. Lim also has an interest in local bank JB Financial Group.
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The stock price has increased 50% in the past year.
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Igor Tishin, a technology analyst at Harding Loevner, likes Samsung’s business case despite concerns about governance. The South Korean giant is leading the global race for high-bandwidth memory chips essential for artificial intelligence, and is Taiwanese Semi’s closest competitor in chip manufacturing, he argues.
“Samsung is an underrated enabler of the AI revolution,” Tisin said.
The prospect of Samsung and other companies ditching the “Korean discount” and catching up with their global peers is certainly appealing. Just don’t hold your breath.
