The KOSPI is continuing a record rally, but more than half of listed companies have a price-to-book ratio (PBR) below 1. Among them, a considerable number are in an extremely low PBR state with PBRs not even reaching 0.3. Experts note that a low PBR does not automatically make a stock an "undervalued stock," and advise caution in investing.
According to the Korea Exchange (KRX) on the 1st, as of Apr. 30, of 804 stocks listed on the main board (excluding preferred shares), 505 (62.8%) had a PBR below 1. Among them, 60 corporations (7.5%) had a PBR that did not even reach 0.3.
Over the past year, the KOSPI rose about 158% from the 2,550 level to the 6,600 level, but during the same period the share of low-PBR corporations edged down only slightly, from 69.5% to 62.8%. With gains concentrated in a handful of stocks, many undervalued names still remain.
Typically, low-PBR stocks with PBRs below 1 are seen as undervalued. A PBR below 1 means that if the corporation were liquidated, the market (share price) is valuing it lower than its asset value.
However, experts point out that buying simply because a stock is "cheap" is risky. Many low-PBR listings have low share prices for structural reasons such as weak earnings or slowing growth.
Among corporations with PBRs below 0.3, 10 (15.8%) were "penny stocks" with closing prices below 1,000 won that day. Given the tougher delisting criteria, these corporations are likely to be subject to delisting after July. Recently, some corporations conducted free capital reductions and the like to meet listing-maintenance requirements, sending their share prices plunging.
Aprogen Biologics (0.13 times) decided in February on a reverse stock split by merging 15 common shares into 1, without compensation, to offset accumulated losses. The share price, which had been in the 300-won range, rose briefly on expectations of escaping penny-stock status, but then turned down and fell to the 250-won range. Women's underwear corporation VIVIEN also carried out a free capital reduction at a 30-to-1 ratio for common shares last month for the same purpose, and the next day the share price plunged 23.8%.
For some corporations, the delisting risk has materialized. KC GreenHoldings, an environmental holding company, received a "disclaimer of opinion" from its auditor on the consolidated financial statements for fiscal 2024 and is now subject to a delisting review. Tire manufacturing and equipment corporation Dynamic Design also received a "qualified" opinion in its audit report for the second straight year and on the 13th submitted an objection to delisting to the exchange.
High market capitalization does not make a corporation an exception. Lotte Chemical, with a market cap of about 4 trillion won, posted a consolidated net loss last year approaching 2.5 trillion won. As cheap Chinese imports squeezed the position of Korea's petrochemical corporations, operating cash flow also plunged 68.3% in one year to 488.9 billion won last year.
A lack of willingness by corporations to support their share prices is also cited as a problem. Of the 63 listings with PBRs below 0.3, only nine (14.2%), including Lotte Himart, Lotte Shopping and E-MART, issued value-enhancement plans within the past year. Among corporations with PBRs below 0.2, there were none.
Experts advise that as low-PBR names increase, it is necessary to weigh a corporation's fundamentals and willingness to return value to shareholders in a comprehensive manner.
An investment-strategy researcher at a securities firm said, "It is hard to judge a stock undervalued just because its PBR is low," adding, "Given that many corporations are being valued low for structural reasons such as weak earnings or slowing growth, a selective approach is needed."