Lotte Shopping, E-Mart, Hanwha Life, and Hyundai Steel. These are familiar names and companies with market capitalizations exceeding 1 trillion won on the Kospi. However, starting November 2, a somewhat unfamiliar label called "Low PBR" was attached to 151 stocks in the domestic stock market, including these companies. How should we interpret this label?

01. Even 1-Trillion-Won Market Caps Couldn't Escape

On November 1, the Korea Exchange designated 151 companies in total as low-PBR companies, comprising 96 on the Kospi and 55 on the Kosdaq. Among the disclosed list were Lotte Chemical, E-Mart, Hanwha Life, and Hyundai Steel, which boast Kospi market caps of over 1 trillion won. On the Kosdaq, companies with market caps exceeding 100 billion won, such as Korea Capital, Dongwon Development, and KCC Construction, also made the list.

On the exchange's disclosure website, orange markers were attached starting November 2. They can also be checked through order windows on securities firms' apps, though the timing and method of display vary by firm.

02. The Unfamiliar Name "Low PBR"

Companies publicized as low PBR mean they are recognized with relatively low values in the stock market compared to their held net assets. PBR (Price Book value Ratio) is calculated by dividing a company's current stock price by its net asset value per share. A PBR of 1 means market capitalization and net assets are equal. If it is higher than 1, the market assigns a value higher than net assets, and if it is lower than 1, it means the company is evaluated at a price falling short of its net assets.

For instance, if net assets are 100 million won and the PBR is 0.3, it means the value of the company evaluated by the market is 30 million won. This can be interpreted as a signal that the market evaluates the company's profitability or future growth potential relatively low. The average PBR of the 151 companies disclosed this time is around 0.25, which falls far short of the average of about 1.8 for all domestic listed companies.

03. Why Were the Names Disclosed?

This is a follow-up measure to the capital market overhaul plan announced by the Financial Services Commission last March.
It is about pressuring companies to improve corporate value through "naming and shaming," namely releasing names and causing public embarrassment. The intention is to improve issues such as neglecting low stock prices for the benefit of controlling shareholders and induce companies to voluntarily raise their values, the so-called value-up. The exchange plans to release the list of low-PBR companies next May and November.

04. Will the "Value-Up" Have an Effect?

Changes actually appeared in Japan. After the Tokyo Stock Exchange introduced the disclosure of lists by company in January 2024, the disclosure rate of Prime Market-listed companies rose from 31% in July 2023 to 94% by the end of September this year. Moreover, the stock prices of companies that disclosed improvement plans increased.

In South Korea as well, on the 2nd, the first day of the list disclosure, the stock prices of some stocks rose, showing expectations for value-up, with Hyundai Steel jumping over 10%, Lotte Shopping over 8%, and Daeneung Shipping over 7%.

However, voices of concern also exist. One expert pointed out that list disclosures without disadvantages provide weak incentives for companies to step up PBR improvements. In fact, while 34 companies omitted from this list submitted improvement plans, how specific those plans are and whether they will actually be implemented remain separate issues.

Furthermore, even if companies increase dividends or buy back and cancel treasury stocks to boost PBR, stock prices do not necessarily rise. This is because if company funds leak out through dividends, stock prices can drop accordingly, and treasury stock cancellations do not guarantee stock price increases either. On the contrary, views exist that focusing funds on dividends and treasury stock cancellations rather than research and development or facility investment could weaken long-term growth momentum.

05. "We Will Help You 1-on-1"

Starting next year, the exchange plans to provide customized 1-on-1 PBR improvement consulting support targeting 151 companies, helping them from analyzing the causes of low PBR to setting goals and establishing plans. The Financial Services Commission also plans to revise stewardship code guidelines to encourage institutional investors to engage with shareholders of low-PBR companies.

Will this disclosure of low-PBR lists end up as mere corporate shaming? Or can it become a starting point that drives substantial changes in companies?


Deep Dive Q&A
Q1. What are the core purpose and criteria for the financial authorities introducing the "naming and shaming" policy of publicizing a list of low-PBR companies?

A1. The publication of the low-PBR company list was introduced to improve the practice where companies, as listed firms, neglect stock prices lower than their net asset value and to pressure them to voluntarily raise corporate value (value-up). A PBR (Price Book value Ratio) of less than 1 means that the company value evaluated by the market falls short of book-value net assets. The 151 companies publicized this time are those whose average PBR is merely around 0.25, and by disclosing their names with orange markers through disclosure systems and securities apps, it induces monitoring by the market and shareholders along with efforts to enhance shareholder value.

Q2. What are the positive effects and concerning side effects that the low-PBR list disclosure and value-up policy will bring to the stock market?

A2. As a positive effect, much like the Tokyo Stock Exchange case in Japan, disclosures of voluntary dividend expansions, treasury stock cancellations, and shareholder-friendly policies by listed companies are expected to increase, serving as an opportunity to resolve South Korea's chronic "Korea discount." On the other hand, concerning side effects include the possibility that enforcement power for corporate compliance will be weak due to the absence of mandatory disadvantages, and worries that if companies rashly increase dividends or burn treasury stocks just to meet PBR figures, research and development and facility investment could shrink, undermining long-term corporate growth momentum.