Holding Company Stock Price 'Value Up' with Introduction of Corporate Value-Up Program

Low PBR Stocks Rally... Holding Companies Hit Consecutive Record Highs
Corporate Value-Up, Opportunity to Resolve Holding Companies' Undervaluation

As the government's corporate value-up program is introduced and the low price-to-book ratio (PBR) stocks continue to show strong performance, holding companies are also experiencing a bullish trend, with many hitting new highs amid expectations that the corporate value-up program will resolve undervaluation. Holding companies are expected to benefit from the corporate value-up program as they can easily secure resources for expanding shareholder returns and have high treasury stock ownership ratios.

According to the Korea Exchange on the 8th, holding companies consecutively recorded 52-week highs the previous day. Lotte Holdings reached an intraday high of 33,450 KRW, marking a 52-week high. Lotte Holdings' stock price rose from the 29,000 KRW range at the end of last month to the 33,000 KRW range. GS also rose more than 6% that day, reaching an intraday high of 52,500 KRW, setting a new 52-week high. In addition, SK Square, Hyundai Gf Holdings, Dong-A Socio Holdings, Hanil Holdings, and KISCO Holdings also recorded intraday 52-week highs.

The recent stock price strength of holding companies is interpreted as due to expectations that the corporate value-up program will resolve undervaluation. Yang Ji-hwan, a researcher at Daishin Securities, said, "We are upgrading our investment opinion on holding companies to 'overweight,'" adding, "The reason for the upgrade is the expectation that the discount rate on holding companies' net asset value (NAV) will shrink due to the introduction of the corporate value-up program aimed at resolving the discount in the Korean stock market."

According to Daishin Securities, the average PBR of holding companies included in the KOSPI 200 (29 general holding companies and 10 financial holding companies) is 0.56 times, which is undervalued compared to the KOSPI 200 PBR of 0.95 times. Researcher Yang said, "We believe that companies with a PBR below 1 and exposed to regulatory risks (large corporations, financial, telecommunications, etc.) are highly likely to implement policies responding to the government's value-up program," explaining, "Samsung C&T, the top controlling company of the Samsung Group, has already announced that it will cancel all its treasury stocks within three years, and SK Innovation has also decided to cancel about 800 billion KRW worth of treasury stocks."

To increase corporate value through expanded shareholder returns, a stable financial structure and solid performance are essential, and holding companies meet these conditions. Researcher Yang analyzed, "Holding companies have a stable financial structure due to debt ratio limits under the Fair Trade Act, and cash flow is favorable due to dividend and royalty income from subsidiaries," adding, "The characteristic of holding companies that large-scale facility investments are not required also makes it easier to secure resources for expanding shareholder returns."

As corporate shareholder return policies are expected to expand due to the government's corporate value-up program and improvements in treasury stock systems, interest in holding companies with high treasury stock ownership ratios is expected to grow. Lee Sang-heon, a researcher at Hi Investment & Securities, said, "The core of the recent government corporate value-up program and treasury stock system improvements is the determination to eradicate major shareholders' private interests and improve governance, and this trend is likely to lead to expanded shareholder return policies such as high dividends and treasury stock cancellations," adding, "As shareholder return policies such as dividend increases and treasury stock cancellations by holding companies become full-fledged, the valuation of holding companies may be re-evaluated."

According to SK Securities, the treasury stock ratio held by domestic listed companies was 2.7% as of the end of the third quarter last year, while the treasury stock ratio held by holding companies was 8.2%. Choi Kwan-soon, a researcher at SK Securities, said, "With improvements in treasury stock-related systems, the possibility of treasury stock cancellations by companies with high treasury stock ratios is expected to increase, so interest in holding companies with low PBR and high treasury stock ownership will rise," adding, "This could be an important opportunity to break away from the traditional low PBR."