Korean companies' preferred shares are trading at a discount of 45%, the widest in ten years. Samsung's 110 trillion won buyback program may alleviate the "Korean discount."

Samsung Electronics' highly anticipated stock buyback plan has led investors to expect that the Korean giant will purchase non-voting preferred shares, thereby narrowing their significant discount and setting a precedent for other companies. Over a hundred Korean companies, including Hyundai Motor and LG Chem, have issued preferred shares to raise funds without diluting the voting rights of the founding families. Although these preferred shares enjoy a small dividend premium over common shares, their trading prices average a discount of up to 45%, becoming a typical representation of capital misallocation, according to Sachin Mistry, portfolio manager at Londons Palliser Capital. Market observers expect that Samsung will target discounted preferred shares in any buyback actions, a move that would not only save funds but also help avoid a rule that might force affiliates to reduce their holdings. The undervaluation of preferred shares has become a focus for investors, coinciding with Korea's push for corporate governance reforms to eliminate the Korean discount, a systemic undervaluation phenomenon that has long plagued the Korean stock market. The momentum for narrowing the discount gap is building, said Han Sangkyoon, CIO of Quad Investment Management. The company sold Samsung common shares earlier this year and increased its holdings in preferred shares, betting that the valuation gap would converge. The discount on preferred shares has been excessive, he noted. Last month, Samsung Electronics announced it would invest up to 110 trillion won (approximately $81.8 billion) to share the AI dividend with shareholders, marking one of the largest shareholder return plans in global history. While the company did not specify the buyback amount, a 26% price difference currently exists between preferred and common shares. According to compiled data, this price gap has widened to its largest extent in over a decade, even as it has recently narrowed from 37% due to buyback expectations. Hyundai Motor also announced a stock buyback plan in August that includes preferred shares. The current premium of common shares over preferred shares exceeds 50%. If companies buy back and cancel preferred shares, they can save on future dividend expenses, said Kang Dong-oh, a personal investor who initiated the movement to raise preferred share valuations. The more preferred shares companies buy back, the greater the benefits for all shareholders. Additionally, under Korean law, Samsung's financial affiliates cannot hold more than 10% of the voting common shares. A large buyback of common shares would push the affiliates' stake (associated with the founding family) beyond this limit, forcing them to divest. By repurchasing preferred shares, Samsung can avoid disrupting the existing equity structure while boosting valuations. The 10% shareholding limit may restrict the number of common shares the company can repurchase, hence it could buy back more preferred shares, said Molly Pieroni, president of Yacktman Asset Management in Texas. This could lead to a narrowing of the discount. Through buybacks, Samsung will also enhance the per-share value, helping to gradually eliminate the Korean discount. Yacktman Asset Management and other investors expect that Samsung's buyback actions could trigger a comprehensive reassessment of preferred shares in the Korean corporate sector. We see the discount on preferred shares as a symptom of the Korean discount the limited market access has affected normal price discovery, Pieroni of Yacktman stated. As Korea continues to open its market to international investors, we anticipate this discount will gradually narrow.