Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 555

Could Korean corporate reform trigger a Japan-style market rally?

It’s not uncommon to find conglomerate businesses in Korea and Japan with a large dominant shareholder (often a family), cross shareholdings, inefficient balance sheets with loads of cash or investments weighing on returns on equity, and low payout ratios.

In Korea, the Chaebols (a handful of family run conglomerates) dominate the business landscape, and cross shareholdings amongst the family’s business interests can resemble a Jackson Pollack painting.

Japan's moves to lift company returns

Japan has been on a pathway of reform for the last decade, but the pressure to lift corporate governance intensified in 2023 when the Tokyo Stock Exchange (TSE) set its sights on companies with an ROE of less than 8% and valuation of less than 1x book – almost half the stocks listed in Japan. These companies have been told to provide a plan of how they will, amongst other things, increase capital efficiency, returns and shareholder value via distributions – and lift price to book above 1x.

There’s no legal enforcement but Japanese companies are responding to the TSE’s threat to ‘name and shame’.

Today, more companies are communicating shareholder return targets, introducing return on capital and excess return KPIs, and are increasing diversity on their boards. The earnings growth of Japanese companies has been building for some time (Figure 1 – even outperforming US equities!) and now dividends and buybacks are also increasing.

Figure 1: TOPIX EPS growth has outperformed S&P over the last ten years

But Japan has had a phenomenal run in the 12 months since the TSE announced its carrot and stick policy – up 45% in local currency at writing.

The Nikkei has finally breached its previous all-time high set 35 years ago!

And even removing the benefit of the weak Yen, the Nikkei’s performance is only a whisker behind the S&P 500’s in USD-terms, without the benefit of Nvidia (Figure 2).

Figure 2: Pressure on corporate governance reform has driven Japanese equities

As Figure 2 shows, Korea (the KOSPI index) is being left behind its neighbour. And it’s not just the last 12 months. The KOSPI has underperformed the Nikkei over the last decade despite a higher economic growth rate.

Is Korea set to follow the Japanese playbook?

With 70% of KOSPI constituents priced at less than 1x book, Korean regulators look like they may be following the path carved by Japan with the recent announcement of their Value Up program.

In a similar vein, the rationale is to incentivise better use of capital, reduce cross shareholdings and improve shareholder returns. Korea’s Finance Minister has indicated tax incentives for corporates that increase dividends and/or cancel treasury shares will be implemented in 2024, as well as potentially cutting income tax on dividends for investors – another powerful incentive for the formidable Chaebols to increase distributions.

Also in discussion is a reduction in inheritance tax, which is known to be a key impediment to unwinding complex family crossholdings within the Chaebols. Any progress here, along with evidence that the National Pension Service is putting its weight behind the scheme, would be significant positive catalysts - The National Pension Service owns 10% of the Korean equity market.

Like Japan, Korean regulators have suggested they may publish a list of friendly and unfriendly companies, and non-compliance may ultimately risk de-listing – but time will tell how this policy unfolds, and how it will be enforced.

We must acknowledge there have been false starts around corporate governance reform before, and while it’s dangerous to think this time is different the regulator appears to be acting more forcefully. And maybe the performance of the Nikkei over the last 12 months is the kindling to start the fire.

A stock example: Hyundai Motor

We look for companies that are mispriced relative to their business resilience and their growth profile and we assess a company’s resilience based on 'Multiple Ways of Winning' – the more ways we can win from owning an investment, in all likelihood, the better the quality of the business franchise. Business resilience is a spectrum - some of our investments have more ways of winning than others – but we do have a minimum threshold. We won’t buy stocks with binary outcomes because that risks capital destruction.

To be blunt we’re not putting all our eggs in the Value Up basket. Instead, we’re focusing on companies with solid investment cases where Value Up represents another way we can win.

Hyundai Motor is a good example of this.


Source: Morningstar

The first element to consider for any global cyclical is where we are in the cycle. Demand for autos has been strong, and assuming no negative macro shocks we remain constructive around the cycle. As economies reopened after COVID we saw consumers, flush with fiscal transfers, wanting to buy cars but unable to do so due to supply chain constraints. On our forecasts, auto demand was curtailed by up to 30 million units, a material figure compared to pre-COVID global auto sales of around 90 million units. This supply-driven consumption deferral can continue to support auto demand, and autos are typically beneficiaries of falling short-term rates as financing becomes more affordable.

Hyundai with its strong mass market brand has taken market share over the last few years and is strengthening the brand further via new product launches (such as pushing into SUVs) and attractive designs in the premium segment. The company is well-positioned for decarbonisation with competitive EV technology and a compelling hybrid offer. This is important as hybrids today are proving more popular with consumers as they are more affordable than full battery electric vehicles without the anxiety over driving range. EVs and hybrids account for around 15% of Hyundai Motor’s total volumes giving them one of the highest electrified mixes of the incumbent automakers. The company derives around 40% of its profits from the US and has relatively little exposure to China, where domestic supply has significantly increased.

We expect some normalisation in price and mix across the industry as supply chains have fully normalised, but this is already discounted into valuations across the sector. At 5x earnings and 0.5x book, Hyundai Motor is cheap relative to peers.

Finally, Hyundai Motor shareholders will benefit from any enforcement of the Value Up initiative given the idle assets on the balance sheet. The company has more than 25% of its market cap in cash as well as investments in related entities and property assets. Any progress here would lift the company’s ROE (currently 7% through the cycle) and with it, the valuation. The company can also easily lift distributions to shareholders from the current 25% payout ratio.

 

Alison Savas is Investment Director and a Portfolio Manager at Antipodes Partners. Antipodes is affiliated with Pinnacle Investment Management, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers from Pinnacle and its affiliates, click here.

 

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Superannuation

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Have Apple and Google reached the beginning of the end?

It might be hard to imagine a world where Apple and Google aren’t dominant, but disruption often starts with tiny cracks. AI's emergence into the mainstream might have set the stage for a new generation of leaders.

Superannuation

Did retirees lose out when they accepted defined benefit schemes?

Defined benefit pensions were designed to offer security in retirement. But new tax policies and arbitrary limits now erode their value - especially for Australians who contributed their own savings to these plans.

Property

Why Australia's agricultural land boom has stalled

Farmland prices have flatlined, bringing one of the most dramatic rural property cycles in Australian history to an end. The market for agricultural land now seems to be entering a new and more nuanced phase.

Property

The retail property niche offering income and growth

Neighbourhood shopping centres have fought off one perceived threat after another. What's more, they continue to offer secure income from blue-chip firms and other tenants linked mostly to essential spending.

ASX plans to attract more IPOs don’t go far enough

High-profile Australian stock market listings, like Guzman Y Gomez's IPO in 2024, are rare. ASIC aims to streamline the IPO process to boost listings, but faces barriers like share structures and governance.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.