As discussions in the National Assembly intensify over the revision of the Commercial Code and the Capital Markets Act, which expands the 'duty of loyalty of directors' to shareholders, expectations are growing that listed holding companies may be revalued. The undervaluation of domestic holding company stocks is attributed to the successive listings of subsidiaries and grand-subsidiaries, as the revisions to the relevant laws would provide a legal basis to limit this.
According to Hong Kong-based Credit Lyonnais Securities (CLSA) on the 25th, the market capitalization discount rate compared to the net worth (NAV) of 11 domestic holding companies was an average of 54.1% as of the previous day. SK had the highest at 73.2%, followed by Hanwha at 72.6% and HD Hyundai at 69.8%. Samsung C&T, the holding company of Samsung Group, also recorded a market capitalization discount rate of 65% compared to NAV. The higher the discount rate compared to NAV, the lower the stock price is assessed.
The biggest reason for the undervaluation of holding company stocks is the mention of 'duplicate listings.' This occurs as subsidiaries and grand-subsidiaries pursue initial public offerings (IPOs) for fundraising, which dilutes the holding company's equity. In particular, the current discount rate for holding companies' NAV is interpreted as reflecting not only the listings that have already been made for subsidiaries and grand-subsidiaries but also the potential for future duplicate listings.
For instance, in the case of Hanwha, the stock price has jumped more than 50% this year alone, but the holding company discount rate is 27.8 percentage points higher than the past average (44.8%). The significant rise in the stock prices of listed companies under Hanwha, such as Hanwha Aerospace and Hanwha Ocean, had a large impact.
The issue of duplicate listings has been raised multiple times, leading to calls for legal revisions and arguments to expand the duty of loyalty of directors to shareholders. The market views that if the duty of loyalty of directors expands from the company to shareholders, it would be difficult to proceed with duplicate listings that minority shareholders oppose.
The related revision of the Commercial Code passed through the first subcommittee of the National Assembly's Legislative Judiciary Committee the day before. The opposition plans to have the revisions voted on in a plenary session on the 27th after passing through the full committee.
However, concerns are not small among corporations regarding the potential for increased lawsuits due to the revisions to the Commercial Code. The ruling party maintains a position of opposition. The People Power Party plans to request that Acting President Choi Sang-mok, who is also the Minister of Strategy and Finance, exercise their right to request reconsideration (veto) if the revision to the Commercial Code passes the plenary session.
The ruling party and government are pushing for an alternative by revising the Capital Markets Act. The intention to expand the duty of loyalty of directors is the same, and listed holding companies will still be subject to the law even if the Capital Markets Act is revised. Discussions on the revision of the Capital Markets Act have also started in the National Assembly's Political Affairs Committee subcommittee.
Park Gun-young, a researcher at KB Securities, noted, "One of the key factors for the discount of holding companies' NAV is the conflict of interest between controlling shareholders and ordinary shareholders, and if a balanced system is designed and established, the discount rate is expected to decrease."
From the perspective of investors, the timing of investment is critical. Even if the revised Commercial Code or Capital Markets Act is finally announced, implementation is likely to take place only a year later, as time is needed for the revision of related enforcement decrees and rules.
In particular, there is a possibility that IPOs may proceed more quickly for corporations needing funding during the grace period for implementation. This means that the holding company discount rate may increase further in the short term. For example, LS has a discount rate of about 60.8% compared to NAV, and it is known that currently more than five affiliates are pursuing listings.