(Bloomberg) -- Investors are looking for potential stock-market winners from South Korea’s launch of the Value-Up Index, a key plank of the government’s push for better corporate governance and improved shareholder returns.
Korea Exchange, a securities exchange operator in the country, said it will unveil the gauge this month, considering factors including member companies’ profitability, payout ratios and capital efficiency. The index and the release of related financial products may provide new impetus to the “Corporate Value-Up Program” announced in February, which aims to boost the local equity market’s depressed valuations.
That plan has had mixed success so far as it relies on companies’ voluntary efforts. Investors are hoping the new index will spur inflows and give companies the incentive to follow the government’s initiative. The benchmark Kospi Index has fallen nearly 3% in 2024 after a strong start to the year, as initial optimism over the campaign cooled.
“This Value-Up Index launch should provide tailwinds to Kospi as domestic pension funds will allocate larger capital into this,” said James Hong, an analyst at Macquarie Securities Korea Ltd. Management will face peer pressure and the gauge will also help boost retail investors’ interest in value names versus tech and growth-oriented stocks, he added.
Here’s what investors and analysts are looking at ahead of the release:
Banks, Automakers
Investors expect automakers and bank stocks to have a higher chance of being added to the index, thanks to their strong cash flows and efforts to comply with the government’s initiative.
KB Financial Group Inc. and Hana Financial Group Inc. have said they will release plans to boost corporate value in the fourth quarter, while Shinhan Financial Group Co. and Woori Financial Group Inc. have already disclosed their plans in July. Meritz Financial Group Inc. is another candidate after being one of the first to file a shareholder return policy to the exchange.
“It’s not difficult to imagine that the financial names will be prominent constituents due to their leadership in the plan deliveries,” said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd.
Automakers Hyundai Motor Co. and Kia Corp. are also likely to be included, given their strong cash flow, upside in shareholder returns and healthy balance sheet, Macquarie analysts wrote in a Sept. 11 note.
Hidden Candidates
Some of the less-obvious companies will be monitored by investors for potential inclusion in the index. While large-caps like financials and autos have benefited the most this year, there’s been a strong flow into small, promising names over the past month, according to a note from Kiwoom Securities Co.
Some of the small-cap stocks picked by Kiwoom, based on shareholder returns, are chemical goods manufacturer Miwon Commercial Co., education provider MegaStudyEdu Co., tourism company Hana Tour Service Inc. and software provider Com2uS Corp.
As large companies are generally already aligned with new practice and disclosure requirements, “any surprise inclusion would have to come from smaller, domestic-focused sectors and companies,” said Kieran Calder, head of equity research for Asia at Union Bancaire Privee in Singapore.
Samsung’s Odds
Some brokerages have left out Samsung Electronics Co., the country’s largest stock accounting for more than 18% of Kospi’s market capitalization, in their list of potential index candidates.
The world’s largest maker of memory chips has yet to disclose a shareholder return policy following the government’s drive. That’s in contrast to other conglomerates such as Hyundai Motor, which announced its own Value-Up plan last month, and LG Corp., which is set to disclose it in the fourth quarter. A Samsung spokesperson said the company is reviewing its plan from “various angles to continue boosting its mid-to-long term value.”
Samsung Electronics has a “big discrepancy” between “where cash is and where cash is needed,” and room to expand its shareholder return policy is limited given its large market capitalization, according to the Macquarie note. Its smaller Korean rival SK Hynix Inc. may be able to implement a more progressive policy after its debts are paid down, the brokerage said.
Japan’s Case
The Value-Up gauge takes its cues from Japan’s JPX Prime 150 Index, which was launched in 2023 with a focus on companies deemed to be creating value.
While Japan’s efforts to boost corporate value have propelled its equity benchmarks to multi-decade highs, analysts note the success was the result of years of concerted policy drive. And in contrast to the broader campaign’s success, the index itself has drawn little interest.
The index has been “quite specific” and “not broad enough to attract passive flows,” said Andrew Jackson, strategist at Ortus Advisors Pte.
--With assistance from Sohee Kim.
©2024 Bloomberg L.P.
