[The Treasury Stock Trap]④ The Price Outlook for Stocks with High Burn and Retention Ratios

"Expectations for SK and Samsung C&T Undervaluation Resolution"
Concerns Over Company Shares Flooding the Market

Editor's NoteThe Financial Services Commission is reviewing a reform plan for the treasury stock system. The key points include 'mandatory cancellation after treasury stock repurchase' and 'prohibition of new share allotment to treasury stock during spin-offs.' The financial investment industry and individual investors welcome these changes, expecting improvements in shareholder rights. On the other hand, the business community opposes the plan, arguing that one of the means to defend management rights may disappear. This article analyzes the current status and effects of treasury stock repurchases and cancellations by domestic listed companies to explore reform measures for the treasury stock system.

[Asia Economy Reporter Lee Seon-ae] Alongside the financial authorities' moves to reform the treasury stock system, investor interest targeting the 'treasury stock effect' is also growing. Holding companies undervalued relative to their earnings may emerge as attractive investment targets. Companies that have been canceling treasury stock are expected to continue actively returning value to shareholders, warranting close attention. Conversely, if a stock has a high treasury stock holding ratio but no intention to cancel, there is a risk of a flood of treasury stock hitting the market, so caution is advised.

Kim Su-hyun, Head of Research Center at DS Investment & Securities, said, "If mandatory cancellation of treasury stock is introduced, only companies with good intentions (shareholder returns) will repurchase treasury stock, increasing scarcity and potentially driving up stock prices." He added, "Especially companies that have actively repurchased and canceled treasury stock over the past three years are likely to continue doing so after the system changes."

The companies with the highest ratio of treasury stock canceled relative to repurchased over the past three years were DI (10.1%), Meritz Financial Group (9.0%), and MDS Tech (6.7%), followed by Halla (4.5%), Kona I (3.6%), Kumho Petrochemical (3.4%), and POSCO Holdings (3.0%). Shinhan Financial Group (2.6%), Meritz Fire & Marine Insurance (2.4%), Hana Financial Group (1.4%), and KB Securities (0.8%) also ranked among the top 15 companies.

Regardless of management rights defense, from a stock price perspective, treasury stock cancellation is expected to serve as a momentum for holding companies to escape undervaluation. Lee Sang-heon, a researcher at Hi Investment & Securities, analyzed, "When treasury stock repurchase leads to cancellation, it can be an important factor in reducing the possibility of controlling shareholders abusing treasury stock and overcoming stock undervaluation." Companies attracting particular market attention include SK and Samsung C&T, which have large treasury stock holdings. As of the end of September last year, SK Group held 24.4% (18,126,820 shares) of its total shares as treasury stock. Samsung C&T's treasury stock ratio also reached 13.2% (23,422,688 shares). Researcher Lee Sang-heon stated, "If SK cancels its treasury stock holdings, it could have a medium- to long-term positive effect on its stock price." He also noted, "Whether Samsung C&T cancels its treasury stock will be a decisive variable in its shareholder return policy."

However, caution is advised as some stocks with high treasury stock ratios may sell existing treasury stock on the market after the system changes. The top stocks by treasury stock ratio include Shin Young Securities (52.7%), Jogwang Leather (46.6%), Il Sung Pharmaceutical (44.3%), Telcoware (42.0%), Joongang Enervis (41.6%), Motonic (34.5%), Buguk Securities (33.4%), SNT Heavy Industries (32.7%), Hanssem (32.6%), and Lotte Holdings (32.3%). Kim Su-hyun advised, "It is necessary to refer to the list of stocks with high treasury stock ratios," explaining, "Depending on how existing treasury stock is handled after the system change, there is a risk of stock price decline or potential for increase."