Market Undervaluation
Samsung Electronics shares closed at 1,305,000 won (US$1,132) on July 17, equivalent to approximately 290 percent of the price during the global financial crisis in 2008. Nevertheless, the company’s price-to-book ratio (PBR) stood at 0.96, about one-fifth of Apple’s.
This is an example of how undervalued Korean stocks are. Recently, Elliott Management was opposed to a merger between Samsung C&T and Cheil Industries on the grounds that the price of Samsung C&T shares was low.
The undervaluation of individual stocks has resulted in the undervaluation of the Korean stock market as a whole. It has drifted sideways for four years while American, Japanese, Chinese, and European stock markets have enjoyed a boom.
Experts point out that this is because of the structural vulnerability of the Korean capital market. “Korea is a small-scale open economy, and its capital market is fully open to the outside, which means that the country is easily swayed by external factors such as tapering,” one of them explained, adding, “Enterprises themselves need to make efforts to raise their dividend payout ratios, make their governance more transparent, etc.”
According to industry sources, the corporate value of Samsung Electronics, which has the largest aggregate market value in Korea, is approximately one-fifth of Apple’s. Apple recorded a PBR of 4.95 in the middle of this month, when Intel’s was 2.38. The market caps of Samsung Electronics and Intel are 188.8 trillion won (US$163.8 billion) and 162.9 trillion won (US$141.3 billion), respectively. Hyundai Motor Company’s PBR is at 0.51 or so. “Although the PBR is not the sole index for corporate value analysis, the low PBR levels of those companies representing Korea imply that shareholders have a lot of discontent,” said Hwang Young-ki, chairman of the Korea Financial Investment Association, continuing, “Besides, the PBR of the market as a whole is low and those of conglomerates are particularly low, which is problematic.”
For reference, Toyota’s current PBR is 1.53. The figure is 1.18 for GM and no less than 26.14 for Tesla Motors. That of POSCO is just 0.38, much lower than Nucor’s 1.67, Baosteel’s 0.93, Nippon Steel’s 0.7, and Alcoa’s 0.84. Samsung C&T has a PBR of 0.8 with a market cap of 10.8259 trillion won (US$9.39222 billion). Meanwhile, Shimizu Corporation has a PBR of 1.88, along with an aggregate market value of 7.7902 trillion won (US$6.7568 billion).
The underestimation can be attributed at least in part to Korean enterprises’ corporate governance structures being weakened during the course of business inheritance. This has led to a higher level of vulnerability to vulture funds such as Elliott Management, which, in turn, has brought about a bearish stock market that foreign investors refrain from investing in.