Value-up index gets dressing down from market over selection criteria

The Korea Value-up Index, intended to overcome the "Korea discount," is facing criticism over its selection criteria, prompting the Korea Exchange to concede that a reshuffle may be in order.

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The Korea Value-up Index, a key element of the government-led Corporate Value-up initiative, is off to a rocky start, facing criticism over its selection criteria for constituent stocks.

Critics are pointing out that the index, modeled after its Japanese counterpart, went significantly off-track from its intended purpose of resolving the chronic undervaluation of the Korean stock market. Amid growing skepticism over whether the index would be able to attract investors, the Korea Exchange (KRX) indicated that it may revise the index's composition sooner than originally planned.

“We will actively consider changing the constituent stocks, taking into account expert opinion, submissions for corporate value enhancement plans in the future and other factors,” said Yang Tae-young, head of the Kospi market division at the KRX, during an emergency press conference held at the bourse operator’s office in western Seoul on Thursday.

Yang Tae-young, head of the Kospi market division at the Korea Exchange, speaks during a press conference held at the bourse operator's office in western Seoul on Thursday. [NEWS1]

The KRX announced on Sept. 24 the 100 stocks included in the Korea Value-up Index that were selected based on five main criteria: market cap, profitability, shareholder return performance, price-to-book (P/B) ratio and return on equity (ROE).

Eyebrows were raised when Hana Financial Group and KB Financial Group — both high-dividend stocks and active participants to the Corporate Value-up program — were excluded from the index, while SK hynix, despite failing to meet the revenue criteria, made the list as an exemption case.

Hana Financial Group fell short of the P/B ratio threshold as it failed to make it into the top 50 percent within the industry or the whole market, while KB Financial Group missed the ROE standard. SK hynix, on the other hand, was granted inclusion in consideration of “various factors such as its representativeness of the industry and the market, its weight within the index composition, the recent and future earnings forecast, and feedback from the industry,” according to the KRX.

Questions arose about whether shareholder return performance was sufficiently reflected in its selection, as the KRX only verified if companies paid dividends for two consecutive years or canceled treasury stocks, without considering the actual shareholder return rates.

"Given that the index focused on P/B ratio or ROE, similar to the Japanese index, despite the key challenge of Korea's Value-up program being the enhancement of shareholder returns, it is questionable whether [the index] will be able to gain traction in the future,” said Kim In, an analyst at BNK Securities.

The KRX's Yang defended the selection criteria by saying, “Considering only the amount of shareholder returns could have disadvantaged high-growth companies that need to focus on expansion rather than dividend payments.”

Moreover, some pointed out that overvalued stocks with high P/B ratios may lack the growth potential in the stock market, which could further deter investors from the index.

“The reality of the Korea Value-up Index was far different from expectations, and may further drive up interest in stocks with high profitability, ROE and P/B ratios,” said Lee Kyung-soo, an analyst at Hana Securities, suggesting that companies with low P/B ratios might continue to struggle with undervaluation.

Addressing the criticism, Yang said, “The main purpose of developing the Korea Value-up Index was not to identify undervalued, high-dividend stocks, but to enhance the overall value of the Korean stock market by aggregating the stocks of companies with outstanding qualitative indicators.”

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]