[Q&A] "Value-Up Index is not an absolute standard for shareholder return scale... Will continue market communication"

Actively Reviewing Proposed Changes to This Year's Constituent Stocks
"Composed of Companies Meeting Various Qualitative Criteria"

Yang Tae-young, Head of the KOSPI Market Division at the Korea Exchange, is giving an additional explanatory briefing regarding recent major media reports on the Korea Value-Up Index selection criteria and selected stocks.
[Photo by Korea Exchange]

As concerns about the 'Korea Value-Up Index' released on the 24th continued to arise in the market, the Korea Exchange (KRX) provided additional explanations on the 26th.

In response to criticisms raised after the announcement of the Value-Up Index, the Exchange stated that it would actively consider changing the constituent stocks within this year, ahead of the regular revision scheduled for June next year, taking into account industry opinions and participation in disclosures of corporate value enhancement plans.

The following is a Q&A with a Korea Exchange official addressing some of the concerns and questions raised in the market regarding the selection criteria and constituent stocks after the Value-Up Index announcement.

- Is it true that stocks with low dividend yields were included simply because shareholder returns such as dividends or share buybacks were considered?

▲ 'Shareholder returns' are only one element among the selection criteria and are not considered an absolute factor. If the scale of shareholder returns alone were the selection criterion, high-growth companies focusing on corporate value growth through future business investments rather than dividends could be relatively disadvantaged. Considering industry characteristics and individual companies' business conditions, it is believed that sustainability?such as whether shareholder returns have been made for two consecutive years?should be evaluated rather than the scale of shareholder returns, to encourage the establishment of a shareholder return culture.

- Were companies that are already overvalued included in the index, while companies expected to enhance corporate value in the future were excluded?

▲ The main purpose of developing the Value-Up Index is not to identify undervalued or high-dividend companies, but to compose the index with representative companies that have excellent qualitative indicators such as return on equity (ROE), thereby raising the overall value of the Korean stock market by involving them. There will be demand for new indices with various concepts, such as undervalued stocks or small and mid-cap stocks with potential for corporate value growth. We plan to gather market opinions and establish reliable detailed criteria to develop follow-up indices.

- Why were some leading financial stocks like KB Financial excluded? Also, questions have been raised about the inclusion of SK Hynix.

▲ Constituent stocks were selected focusing on companies that meet various qualitative requirements such as profitability, market evaluation, and capital efficiency. Companies that excel in specific criteria like shareholder returns but fall short in other qualitative requirements were excluded. For example, KB Financial did not meet the ROE requirement, and Hana Financial did not meet the price-to-book ratio (PBR) requirement. Like most major market indices, the Value-Up Index operates a special exception system for stocks with significant influence to maintain index continuity and stability. In the case of SK Hynix, its industry and market representativeness, the 15% weight limit within the index, recent performance and future outlook, and industry opinions were comprehensively considered to decide on its retention in the index.

- Since many stocks overlap with existing representative indices, does the Value-Up Index lack differentiation?

▲ Among the top 100 market capitalization stocks in KOSPI and KOSDAQ, 32 stocks are included in the Value-Up Index. Among KOSPI 200, 56 stocks are included, and among KOSDAQ 150, 33 stocks are included, with 11 non-overlapping stocks, resulting in a diverse composition. Additionally, a weight cap system was applied to reduce the correlation with existing representative indices. Unlike existing market representative indices, which do not apply weight caps, the Value-Up Index uses weight caps to reduce the influence of mega-cap stocks such as Samsung Electronics and SK Hynix within the index.

- Did you anticipate the concerns raised after the Value-Up Index announcement? If so, what is your position on them?

▲ Some concerns were somewhat anticipated. We listened to experts' opinions and exchanged views on the goals of the Value-Up Index. We believe that what the Exchange aims for and what the market demands may differ. While it is possible to attract investors by reflecting only their demands, we thought it is not feasible to meet only that demand. We plan to first announce representative indices and then continuously communicate with the market to develop indices that fit specific concepts. How the Value-Up Index is perceived is important. The ultimate goal is to create a virtuous cycle by continuously discussing what works well and what does not.