Fast reading
- In our opinion, the ‘Korea discount’ has deprived investors of returns, in many cases leaving them impoverished relative to the growing value of the very companies into which they have invested. We believe it has also raised the cost of capital for South Korean enterprise, reduced risk-taking and economic activity, while undermining innovation. Were the Korea discount to be fully eliminated, we believe that the price at which the average South Korean company trades could double, with some tripling1.
- Measures to address the discount will be effective only if they address its key cause: the tremendous power imbalance between controlling shareholders and minority shareholders. Indeed, a rule of thumb for assessing which measures are most likely to be effective is the following: the greater the resistance of controlling shareholders to the implementation of a measure under consideration, the more effective is that measure likely to be in closing the Korea discount. If controlling shareholders do not resist a (non-tax related) measure, it is unlikely to be effective.
- Without effective regulatory change, we expect South Korean companies to do the bare minimum, albeit with a friendlier veneer. In this circumstance we expect action to be limited to the buyback of discounted preferred stock (because they are a small part of capital), cancellation of treasury shares (when they are not needed to secure control – for this generation or the next), the sale of some non-core investments and a marginal improvement in dividend policies.
Korea discount: a dream deferred?
Please also see: Asia ex-Japan Equity: Letter to Investors (South Korea – enough is enough)
Also see: The unpersuadables?
For further insights on Asia ex-Japan Equity please click here.
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1 This is based on our model and as such cannot be guaranteed.
