[2024 Financial Forum] Lee Hyoseop "Value-Up Program, Peer Pressure as Penalty"

The 13th Seoul Asia Financial Forum
"Korean Stock Market Undervalued... Value-Up Needed"
"Results Expected Within 3 Years... KOSPI 3000 Also Possible"

"The most sophisticated penalty mechanism in a market economy is the voluntary change induced through peer pressure within the same industry."

Lee Hyo-seop, Head of the Financial Industry Division at the Korea Capital Market Institute, said this on the 9th at the 13th Asia Financial Forum held at the Westin Chosun Hotel in Jung-gu, Seoul. This was in response to criticism that investors were disappointed because the 'Corporate Value-Up Program Guidelines' announced by the financial authorities on the 2nd did not include penalties. Lee presented on the 'Current Status and Achievements of Korea's Value-Up Program' at the forum hosted by Asia Economy.

Lee Hyo-seop, Head of the Financial Industry Department at the Korea Capital Market Institute, is attending the "2024 Asia Financial Forum" held on the 9th at the Chosun Hotel in Jung-gu, Seoul, and giving a lecture on the topic "Current Status and Achievements of the Korean Corporate Value-Up Program." Photo by Kang Jin-hyung aymsdream@

Undervalued Korean Stock Market... "Value-Up Needed"

Lee pointed out that Korea's 'Total Return Index' is low compared to major countries. The Total Return Index reflects not only stock price changes but also returns obtained by reinvesting dividends. Over about 10 years from 2013 to last year, Korea's Total Return Index yield was 61%, which is lower than major countries such as Japan (297%), the United States (271%), Taiwan (246%), Germany (110%), and China (71%). Lee explained, "Japan's Total Return Index is the highest among major countries due to active attempts at governance and reforms such as the price-to-book ratio (PBR) reform, including Abenomics."

He also pointed out that Korea's stock market PBR is lower than that of major countries. Over the 10 years from 2014 to last year, Korea's stock market PBR averaged 1.04, which is the lowest compared to major countries such as the United States (3.63), Taiwan (2.07), Germany (1.59), China (1.5), and Japan (1.4). At the end of last year, Korea's PBR was 1.05, less than a quarter of the United States' (4.55). A lower PBR means that companies are undervalued. This is why the government has actively worked to resolve the Korea discount (undervaluation of the Korean stock market).

Lee believes that to raise Korea's stock market PBR, return on equity (ROE) and dividend growth rates must be increased, and capital procurement costs reduced. The low ROE of Korean listed companies is one of the main causes of the Korea discount. Lee explained, "Korea has high ROE volatility among major countries" and "this is because of the small open economy structure and the high export proportion of cyclical sectors."

He added that shareholder returns through dividends and improvements in corporate governance should lead the value-up of the Korean stock market. Lee said, "Korean companies' controlling shareholders' interests and general shareholders' interests do not align well," and "there is a need to enhance the role of the board of directors and corporate ethics."

Lee Hyoseop, Head of the Financial Industry Division at the Korea Capital Market Institute, is giving a lecture on the topic "Current Status and Achievements of the Korean Corporate Value-Up Program" at the "2024 Asia Financial Forum" held on the 9th at the Chosun Hotel in Jung-gu, Seoul. Photo by Kang Jinhyung aymsdream@

Value-Up Program in Operation... "Effects Expected Within 3 Years"

Lee predicted that if Korean companies properly utilize the value-up program, visible effects on the Korea discount will appear within three years. If companies voluntarily participate in value-up and achieve results, more companies will join, creating a virtuous cycle that attracts more investment.

In fact, since the government first mentioned the corporate value-up program in the '2024 Business Promotion Plan' on January 17, the KOSPI has risen 10.5% by the end of last month. This is a higher increase compared to the Shanghai Composite (9.6%), Germany's DAX (9.1%), Japan's Nikkei (8.3%), and the US Dow Jones Index (1.5%) during the same period. Additionally, from January to April, foreigners net purchased 19 trillion won, the largest scale in the history of the Korean stock market. Lee said, "This year, foreigners' net purchases of the Korean stock market are expected to reach about 56 trillion won, the highest ever," and added, "This reflects expectations for Korea's value-up program, and if this trend continues, a KOSPI of 3000 is possible."

Lee stated that a mid- to long-term task for the success of value-up is to improve corporate governance so that the interests of controlling shareholders and general shareholders align. For the advancement of the capital market, he also mentioned that the financial investment income tax (capital gains tax) should be abolished on the premise that the current securities transaction tax is maintained. He said, "The IPO system, which encourages listing when sales peak, should also be improved," and "the delisting system to quickly weed out zombie companies that do not meet standards should be revised."