Korean corporate preferred stock discount of 45%, the broadest in ten years Samsung's 110 trillion won repurchase plan or the “Korean discount” may be eliminated

The Zhitong Finance App learned that Samsung Electronics' much-anticipated share repurchase plan is causing investors to expect the Korean giant to buy preferred shares without voting rights, thereby narrowing its deep discounts and setting a precedent for other companies.

More than 100 Korean companies, including Hyundai Motor Company and LG Chem, have issued preferred shares to raise capital without diluting the voting rights of the founding families. Although these preferred stocks enjoy a small dividend premium over common stocks, their trading price is discounted by an average of 45%, which is a typical sign of a capital mismatch, according to Sachin Mistry, portfolio manager at Palliser Capital in London.

Market observers expect that Samsung will target discounted preferred shares in any repurchase action. This move will not only save money, but also help circumvent a rule that may force related parties to reduce their holdings. The undervaluation of preferred stocks has become the focus of investors' attention, at a time when South Korea is advancing corporate governance reforms to eliminate the “Korean discount” — a systemic undervaluation that has plagued the Korean stock market for a long time.

“The momentum for narrowing the discount gap is building up,” said Han Sangkyoon, chief investment officer of Quad Investment Management. The company sold Samsung's common shares and increased its preferred shares earlier this year, betting that the valuation gap will close. “The discount on preferred shares is excessive,” he said.

Last month, Samsung Electronics announced that it will spend up to 110 trillion won (about 81.8 billion US dollars) to share AI dividends with shareholders. This move is one of the largest shareholder return plans in the world's history. Although the company did not specify the repurchase amount, there is currently a 26% difference between preferred shares and common shares.

According to compiled data, the spread has widened to its widest level in more than a decade, even though it has recently narrowed from 37% due to repurchase expectations.

Hyundai Motor also announced a share repurchase plan including preferred shares in August. The premium of modern common stock over preferred shares is currently over 50%.

“If a company buys back preferred shares and cancels them, it can save future dividend expenses,” said Kang Dong-oh, an individual investor who initiated a campaign to improve the valuation of preferred shares. “The more a company buys back preferred shares, the greater the benefits for all shareholders.”

Furthermore, according to South Korean law, Samsung's financial affiliates are prohibited from holding more than 10% of common voting shares. Large-scale repurchases of common shares will cause the shareholding ratio of related parties (linked to the founding family) to exceed this limit, forcing them to reduce their holdings. By repurchasing preferred shares, Samsung can not only avoid breaking the existing shareholding structure, but also boost valuation.

The 10% shareholding limit “may limit the amount of common shares a company can buy back, so it may repurchase more preferred shares,” said Molly Pieroni, president of Texas Yacktman Asset Management. “This may trigger a narrowing of the discount.”

Through the buyback, Samsung will also increase the value per share, which will help gradually eliminate the “Korean discount.”

Yacktman Asset Management and other investors expect that Samsung's buyback action may trigger a complete revaluation of preferred stocks in the Korean corporate sector.

“We view preferential stock discounts as a symptom of the 'Korean discount' — limited market access affects the 'normal' price discovery,” said Yacktman's Pieroni. “As Korea continues to open up its market to international investors, we expect this discount to gradually narrow.”