Government policy, semiconductors, defense, shipbuilding and nuclear power plants seen driving market rally; Kospi PBR estimated at 1.9x — still below India and Taiwan; BCG calls for capital efficiency and shareholder returns to power second re-rating

Employees work at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Wednesday. The Kospi opened down 197.16 points, or 2.43 percent, at 7,899.77, while the won-dollar exchange rate started at 1,525.0 won, up 12.9 won. [Yonhap]
Employees work at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Wednesday. The Kospi opened down 197.16 points, or 2.43 percent, at 7,899.77, while the won-dollar exchange rate started at 1,525.0 won, up 12.9 won. [Yonhap]

South Korea's stock market needs undervalued companies to improve their capital efficiency and shareholder value if it is to reach the next level, according to a new analysis. While government policies to invigorate capital markets and leading sectors — semiconductors, defense, shipbuilding and nuclear power plants — have driven a broad re-rating, a large number of listed companies still trade below their book value.

Boston Consulting Group laid out the argument Wednesday in a report titled "From Discount to Premium: Recommendations for Enhancing the Value of Korea's Low-PBR Companies."

BCG attributed the Kospi's surge — from around 2,400 at end-2024 to roughly 4,200 by end-2025 and above the 8,000 mark in May this year, a more than threefold gain in just 18 months — to government capital market activation policies and rising earnings and valuation expansion across four key sectors: semiconductors, defense, shipbuilding and nuclear power plants.

According to BCG, the Kospi's price-to-book ratio stood at 1.4 times as of end-2025 and is estimated at 1.9 times by end of this year — still well below the United States at 4.9 times, Taiwan at 4.0 times and India at 2.8 times. Excluding the four leading sectors, the projected PBR for this year falls to just around 1.0 times.

The number of Kospi-listed companies with a PBR below 1.0 times edged down from 553 in 2024 to 541 at end of last year, but 64 percent of all listed companies still trade below their book value.

The recent rally in South Korean equities has in fact been concentrated in a handful of leading sectors. Semiconductor stocks — led by Samsung Electronics and SK Hynix — along with defense and shipbuilding names have driven index gains, while a large number of other stocks have been left behind, widening the performance gap across the market.

"If the first re-rating was driven by the government's institutional reforms and earnings improvements in the four key sectors, it is now time for the remaining companies to take concrete action — improving capital efficiency and shareholder value — to lead a second re-rating," BCG said.

BCG also said that managing total shareholder return, or TSR, has become increasingly critical. With growing retail investor participation raising attention to the market and activist funds gaining influence, failure to manage TSR can go beyond weak share price performance and translate into direct pressure on management control, the group said.

BCG identified capital efficiency as the key to improving TSR, pointing to Japan as a leading example. Over the past decade or so, South Korean companies posted average annual net profit growth of 4.9 percent, yet return on equity improved by only 0.4 percentage point — from 7.3 percent to 7.7 percent. Japan, by contrast, achieved similar average annual net profit growth of 4.7 percent over the same period while lifting ROE by 2.1 percentage points, from 8.7 percent to 10.8 percent.

"This was the result of a structural shift toward generating the same level of profit with less capital — through divesting non-core businesses, share buyback and cancellation, and dividend expansion," BCG said, adding that the Nikkei 225 had risen more than fourfold from around 15,000 at end-2013 to roughly 62,000 in May this year.

BCG said Korean companies should first accurately diagnose the root causes of their undervaluation, then pursue measures such as divesting low-profitability or strategically peripheral businesses, deploying idle cash and non-core assets, and implementing consistent and transparent shareholder return policies. "Companies must set corporate value maximization as their strategic north star and drive change across capital allocation, shareholder returns, market communication, and organizational and incentive systems," BCG said.

BCG added that just as the Japanese government spent a decade refining its institutional framework to build a corporate culture in which shareholder value sits at the heart of management, South Korea must move beyond its reliance on a handful of sectors and pursue sustained improvements in capital efficiency across the broader market.


hajun825@heraldcorp.com