Even as foreign investors dump shares in Korea's stock market, they are actively scooping up some holding company stocks. Analysts say that, rather than simply approaching low price-to-book ratio (PBR) names as in the past, the market is increasingly separating the wheat from the chaff within holdings based on subsidiary growth potential, cash generation, and capacity for shareholder returns.
According to the Korea Exchange (KRX) on the 19th, foreigners have posted about 92 trillion won in net sales on the main board so far this year. In contrast, they have been buying major holding companies across the board. SK (584.6 billion won), Doosan (534.0 billion won), and Hanwha (345.5 billion won) are representative. The inflow of foreign funds has sent share prices sharply higher. Since the start of the year, SK has surged 102.3% and Doosan 92.1%, nearly doubling. Foreign equity stakes have also grown. During this period, SK's foreign equity ratio jumped from 26.93% to 29.78%, and Doosan's rose from 14.96% to 18.89%.
Brokerages say recent foreign money is moving to holdings with stable cash flows and attractive dividends rather than simple undervaluation themes. Because holding companies have a structure in which stable cash steadily flows in based on subsidiary dividends and brand royalties, they are relatively preferred in volatile markets.
However, some say the recent strength in holdings cannot be explained simply as a defensive play as in the past. That is because share prices are soaring mainly in certain holdings reflecting growth expectations in specific industries such as semiconductors, shipbuilding, and defense. In fact, HD Hyundai continues to benefit from favorable conditions in shipbuilding, power equipment, and construction machinery, and Hanwha is also seeing reflected expectations for growth at core affiliates in defense, space, and energy.
Analysts say expectations for a group restructuring lifted SK's share price. As the sale of SK Siltron is being pursued and the possibility of restructuring equity in SK ecoplant is discussed, governance issues related to SK Group Chairman Chey Tae-won's divorce suit have also added to flows volatility. The rise in the value of SK Square's equity, following a sharp jump in SK hynix, also had an impact.
Not all holdings are moving the same way. CJ's share price has been treading water around 170,000 won, a level set early this year. The reason is weak results at major subsidiaries and a slowdown in content and retail. In fact, CJ ENM posted results below market expectations due to weak TV ads, and CJ CheilJedang also saw profitability deteriorate due to weakness in its bio division.
Accordingly, experts say investors should approach the recent rally in holdings by individual company rather than as a simple "holding company theme." In the past, holdings were regarded as typical defensive stocks thanks to stable cash flows, but recently, expectations for subsidiary business conditions and earnings have been driving share prices, widening differences in volatility by stock. In fact, when the KOSPI fell more than 3% on the day, major holdings such as LG (-8.75%), Doosan (-5.84%), and Samsung C&T (-4.76%) also saw steep corrections.
Policy expectations remain intact. Domestic holdings have long traded at a chronic discount due to conflicts of interest between owner families and general shareholders, concerns over duplicate listings, and controversy over "pressing down share prices" stemming from inheritance tax burdens.
Recently, with the enforcement of amendments to the Commercial Act that include mandatory cancellation of treasury shares, the political sphere is also discussing a so-called "anti–price suppression law." If regulations on duplicate listings are strengthened going forward, mergers or additional listings that leverage undervalued subsidiary assets may become difficult, potentially narrowing the holding company discount.
However, analysts say policy benefits will also vary by company. Given that holdings typically have a high proportion of treasury shares, most are expected to benefit from the third round of Commercial Act amendments that mandate treasury share cancellation, but regulations on duplicate listings are likely to be most effective for corporations that own unlisted subsidiaries with potential for future initial public offerings (IPOs).
In practice, companies such as CJ and LS, whose subsidiaries have been consistently cited as potential IPO candidates, may see concerns about dilution of holding company value ease if regulations are tightened. On the other hand, some holdings such as SK and Doosan have already seen their PBRs rise significantly, so policy effects may be limited.
Park Geon-young, an analyst at KB Securities, said, "The trend of resolving holding company discounts is likely to continue, but now we will see differentiation centered on corporations where subsidiary earnings improvement and the capacity for shareholder returns go hand in hand, rather than simply low PBR."