[Q&A] "Introduction of qualitative requirements such as Value-Up Index and shareholder returns... Expectation of overseas institutional investment"

Korea Exchange Announces 'Korea Value-Up Index'
Individual Stock Weight Cap Limited to 15%
"ROE Adopted as Final Selection Criterion to Resolve Undervaluation"

Jung Eun-bo, Chairman of the Korea Exchange, is announcing the constituent stocks and selection criteria of the 'Korea Value-Up Index' at 3:30 PM on Tuesday, September 24, 2024, in the press room of the Korea Exchange Seoul building.
[Photo by Korea Exchange]

The Korea Exchange announced the 'Korea Value-Up Index' on the 24th to promote market evaluation and investment attraction for companies with excellent corporate value.

Prior to the announcement of the Value-Up Index, the Exchange gathered diverse opinions from market participants such as pension funds and asset management companies, consulted various experts, and conducted activities including deriving the index concept, establishing detailed selection criteria, verifying and analyzing index performance.

The following is a Q&A with a Korea Exchange official regarding questions raised during the development process of the Value-Up Index.

- What differentiates the Value-Up Index from existing representative indices such as the KOSPI 200?

▲ We introduced various qualitative criteria reflecting the unique characteristics of the Value-Up Index. Even companies with large market capitalization can be excluded. Additionally, by introducing a weighting cap system, the weight of individual stocks within the index is limited to 15%, reducing the correlation coefficient with existing representative indices. Existing market representative indices did not apply a weighting cap system. Through the introduction of the weighting cap in the Value-Up Index, the influence of mega-cap stocks such as Samsung Electronics and SK Hynix within the index has been reduced.

- What are the core indicators of the Value-Up Index?

▲ Profitability, shareholder returns, price-to-book ratio (PBR), and return on equity (ROE). To select companies that generate stable profits in the domestic industry, which is mainly composed of cyclical industries, a screening criterion for deficit status was introduced. Also, to balance shareholder returns and corporate value growth, a requirement of 'shareholder returns for two consecutive years' was introduced. Considering the large variation of PBR by industry, a relative evaluation within the industry group (top 50% in industry and overall ranking) was introduced to select companies receiving favorable market evaluation. ROE was adopted as the final selection criterion as a key indicator to resolve undervaluation in the domestic stock market, since it can be improved through continuous efforts and activities such as profitability and capital structure improvement.

- Why were 100 constituent stocks selected?

▲ Based on feedback from the industry including asset management companies, considering differentiated linked product design from KOSPI 200, operational convenience for exchange-traded funds (ETFs), and market representativeness of selected companies, the number was finalized at 100 stocks. It was judged that constructing the index with fewer than 100 stocks could restrict large-scale fund inflows from pension funds due to liquidity issues.

- What are the differences from the Japanese Value-Up Index?

▲ The Japanese JPX Prime 150 Index selects constituent stocks based on a dual criterion of '75 stocks with excellent capital efficiency' and '75 stocks with top market capitalization among companies with excellent market evaluation.' This approach excludes industry characteristics and selects stocks solely based on PBR and ROE, which is considered to cause issues such as exclusion of some sectors like banks and representative companies from the index.

The Korea Value-Up Index comprehensively considers multiple investment indicators including PBR, ROE, profitability, shareholder returns, market evaluation, and capital efficiency, and is designed considering industry characteristics and market balance. Also, to reflect industry characteristics, relative evaluation within industry groups is applied when applying criteria such as PBR and ROE to strengthen industry and market representativeness.

- Are there separate incentives for listed companies not included in the Value-Up Index?

▲ Although special measures such as relaxed inclusion criteria were applied to companies that disclosed Value-Up plans early, some companies failed to be included due to not meeting minimum market capitalization requirements. For these companies, support is provided through regular corporate report publications linked with the Korea IR Council, corporate promotion and investor meeting opportunities via joint IRs hosted by the Exchange, and additional points for excellent disclosure corporations and KOSDAQ awards. Further incentives will also be considered in the future.

- What is the expected scale and listing date of products related to the Value-Up Index?

▲ After the calculation of the Value-Up Index, ETF listing review and securities registration statement submission will be completed, and related ETFs are scheduled to be listed in early November. Demand surveys for Value-Up Index-based ETFs targeting major asset management companies expect participation from about 10 companies. Additionally, index futures based on the Value-Up Index will also be listed.

- Are there plans to develop other follow-up indices besides the Value-Up Index?

▲ Industry feedback confirmed demand for various follow-up indices such as leveraged indices and sector indices based on the Value-Up Index. There was also demand for developing Value-Up indices targeting undervalued stocks and small- and mid-cap stocks. However, since undervalued stocks and small- and mid-cap stocks have high volatility in Value-Up indicators and stock prices, additional in-depth review is needed to create a well-developed index. We plan to continuously pursue follow-up index development through establishing reliable detailed selection criteria and gathering market opinions.

- How much capital inflow is expected through the Value-Up Index?

▲ We hope for as much capital inflow as possible. Especially, the high level of interest in Korea Value-Up from overseas is positive. Some global institutional investors are naturally reallocating investments from the Chinese capital market to East Asian countries such as Japan, Korea, and India, and in this process, Korea Value-Up may serve as an opportunity to consider investment in the domestic stock market. There is significant interest in the development of the Value-Up Index. Once index futures and ETFs are launched, investments from both domestic and overseas investors are expected.