[Inside Chodong] Will the 'Corporate Value-Up' Program Lead a Stock Market Rebound?

KOSPI Falls to the 2,400 Level
Improving PBR Through Shareholder Returns Expected to Benefit the Market
Detailed Measures to Be Announced Next Month

The stock market, which had hoped for a strong rise in the new year fueled by the vigorous energy of the Blue Dragon, has yet to recover from its sluggishness even as the first month of the year comes to an end. On the first day of this year, the KOSPI recorded 2669.81, surpassing last year's peak of 2667.07, raising expectations for a new year rally. However, the index has since steadily declined, falling to the 2400 level.

In contrast, the neighboring Japanese stock market continues its high-flying momentum at the start of the year, enjoying its best boom period. The Nikkei 225 index surpassed the 36,000 mark on the close of the 22nd, marking its highest level in 34 years since the collapse of the 'bubble economy.' The Nikkei index had reached 38,915 at the end of 1989 during the bubble economy period but plummeted to 7,054 in March 2009 due to the bubble burst and financial crisis. Starting last year at the 25,000 level, the Nikkei 225 steadily rose throughout the year, reclaiming the 30,000 mark and continuing its upward trend, breaking records for the highest level in 34 years day after day. The Nikkei 225 rose more than 28% last year and has increased nearly 7% so far this year.

In response to the remarkable rise of the Japanese stock market, our government has begun benchmarking Japan's market. The government particularly focused on Japan's efforts to improve companies with low price-to-book ratios (PBR), thereby enhancing corporate value. PBR is an indicator showing how large a company's market capitalization is relative to its capital; a ratio below 1 means the stock price is below the liquidation value. In April last year, the Tokyo Stock Exchange required listed companies with a PBR below 1 to disclose specific plans to improve this and to regularly report compliance on their websites. It warned that companies failing to comply could be delisted from the market. Consequently, many listed companies announced share buyback plans and other efforts to raise their PBR. According to the Tokyo Stock Exchange, 49% of companies listed on the Prime Market, which mainly consists of large-cap stocks, have either disclosed or are reviewing plans to enhance corporate value. Additionally, an analysis by Nihon Keizai Shimbun of about 1,800 companies listed on the Tokyo Stock Exchange showed that the proportion of companies with a PBR below 1 decreased from 51% at the end of 2022 to 44%.

The financial authorities have announced the introduction of a 'Corporate Value-Up Program' based on this example. The Corporate Value-Up Program encourages listed companies to voluntarily analyze the reasons for their undervaluation and establish response strategies. It involves comparing and disclosing key investment indicators such as PBR and return on equity (ROE) by market capitalization and industry, and recommending companies communicate their corporate value improvement plans with shareholders.

Although more concrete measures are expected next month to clarify the details, the market currently views efforts by companies to improve PBR through shareholder returns as beneficial to the domestic stock market. The insufficient level of shareholder returns by companies has long been cited as one of the factors behind the 'Korea Discount.' Korea's average shareholder return rate over the past decade is only 29%, which is lower than the emerging market average (37%) and even China (32%).

With the stock market shaking from the start of the year, interest in resolving the Korea Discount is more prominent than ever. While there are various causes for the Korea Discount, bold improvements should be made starting with what can be changed. Only then can the undervaluation label attached to Korea be removed.