As Korea Exchange (KRX) is set to release the first list of low price-to-book ratio (PBR) corporations on Nov. 2, analysis said the system will prompt participation in value-up disclosures by corporations and expand shareholder returns.
SK Securities on the 14th analyzed the impact and expected effects of implementing the low PBR corporations disclosure system in a report titled "Countdown to the low PBR corporations disclosure system."
The low PBR corporations disclosure system is part of capital market overhaul measures announced in March. Based on the Global Industry Classification Standard (GICS), it discloses through Korea Exchange (KRX) and broker HTS/MTS the list of corporations whose relative PBR within their industry ranks in the cumulative lower tier over the past three years (six half-years). The disclosure covers the bottom 25% on KOSPI and the bottom 10% on KOSDAQ.
When selecting the list, eligibility is determined using semiannual and annual report results based on financial figures audited or reviewed by an external auditor. Market capitalization uses the average of the most recent 20 trading days, with the base date set seven trading days before the disclosure date. With the first disclosure slated for Nov. 2, the base date is Oct. 22, and the market cap averaging window is expected to start roughly from Sept. 21.
This system also includes a special provision. Corporations that disclose a plan to enhance corporate value, including a PBR improvement plan, by seven business days before the disclosure date are exempt from the low PBR corporations disclosure for the first year. However, this special provision does not apply if a corporation has been in the lower tier for a cumulative six years (12 half-years) in its market/industry.
SK Securities assessed that the expected effects of implementing this system are clear. Na Seung-du of SK Securities said, "Since May 2024, the value-up disclosure system has been in place, but participation by KOSDAQ corporations has been low because it is voluntary," and added, "If corporations disclose plans to enhance corporate value before the Oct. 22 disclosure base date, they can be exempted from the list, so we expect many corporations to participate in value-up disclosures."
Na also projected that capital efficiency efforts and shareholder return policies will move into full swing. Because PBR is calculated in relation to the stock price and total equity, in a situation where stock prices are hard to predict, corporations are likely to focus on improving the quality of the denominator—capital (net worth).
Measures such as increased share buybacks and cancellations and larger dividends are also expected to follow. By contrast, rights offerings or issuance of convertible bonds (CB), which weigh on PBR, are likely to be limited.
Na said, "Corporations that have had limited communication with investors should keep in mind that if they do not prepare in advance, the implementation of the disclosure system is highly likely to lead to a direct increase in expenses."