Why Korea remains Metrica's largest exposure

Despite the widespread perception of many Korea stocks as “value traps”, Metrica is excited about opportunities in this market for five reasons.

First, while the market has all but ignored the corporate reform theme over the last few months, the drumbeat of policy debate and regulatory implementation continues in the background. We can group the major initiatives into three categories according to progress:

1. Early-stage (under debate):

   The highlight here is the revision of inheritance and gift tax rules to dissuade companies from suppressing their share prices to lower their major shareholders’ tax bills. The initial plan to calculate taxes based on a minimum of “current market price or 0.8x net asset value” seems likely to be somewhat watered down to a “current market price plus 30%” formula, but this is still being debated. Whatever happens, deliberate price suppression is going to be a key focus for regulators, exchanges and investors from now on, making it harder for companies to get away with behaviour that would have been overlooked in the past.

   Metrica also looks forward to other shareholder protection measures in the works such as mandatory tender offer requirements and a fair-value M&A pricing framework.

2. Middle-stage (implemented but not yet effective):

   Korea Exchange’s “naming and shaming” framework starts in November. The exchange will publish a list of the bottom 25% of stocks in each sector ranked by price-to-book. Companies can get off the list by publishing “Value-up” plans explaining how they propose to boost returns and improve valuations.

   Also coming up is mandatory cumulative voting, starting in September, making it easier for minority shareholders to elect directors by concentrating their votes on a preferred candidate.

3. Late-stage (effective but not yet tested):

   The in-principle prohibition on “duplicate listings” (i.e. parent-subsidiary dual listings) came into effect two days ago. Metrica looks forward to seeing the first time this is tested in a shareholder vote, whereby connected shareholders will be capped at 3%.

   Now that Korea is making it difficult to create new listed holding company structures, the next logical step is to clean up the existing ones, of which Korea has more than anywhere else in the world. Tokyo has made tremendous progress along these lines, and while we acknowledge the important structural differences between the two markets, the extreme valuations found in Korea could lead to very attractive returns from even a small amount of progress.

   Metrica is also looking out for the first major “expansion of directors’ fiduciary duty to shareholders” legal case. We are quite sure that this legislation is already at the margin affecting the conduct of boards, even if it hasn’t yet resulted in a public fight.

Second, investors are exercising their rights more frequently, as evidenced by the 67% year-on-year increase in annual general meeting shareholder proposals. Now that activism-minded investors have more tools available to them, we expect this trend to accelerate.

Third, the emergence of “gold-standard” listed companies such as SK Square, whose improved corporate governance translated into massive returns for investors, gives shareholders of other companies an additional lever to pressure them to improve their own standards.

Fourth, recent headlines from Japan suggesting a raising of shareholder voting thresholds imply a partial winding-back of the activism-friendly environment, painting Korea in a comparatively more positive light.

Fifth, many companies in Korea are still trading at 70% to 90% discounts to net asset value, despite two years of corporate governance reform progress.

To capitalise on the opportunities offered by Korea and other markets, Metrica has hired a new analyst with very relevant experience who will be starting in the near future. This will take the investment team to four.