The corporate reforms agenda in South Korea is coming to an important test this week with the announcement by Samsung Electronics and SK Hynix of their intention to pay back significant cash to shareholders. The two tech giants have been reaping the rewards of the AI craze, improving their books and growing impatient for investors to see it return. The amounts of the dividends are substantial but investors aren’t sure that paying out larger distributions will be enough to overcome the longstanding valuation shortfall that has plagued South Korean stocks.
Samsung Electronics and SK Hynix are forecast to bring in over 130 trillion won – about $97 billion – during the year. The opening seemed to be solid proof that companies were meeting shareholder demands. The big picture, however, has been a bit more subdued in the stock market. Despite the country’s big chip makers enjoying a strong earnings cycle fueled by artificial intelligence, the KOSPI, South Korea’s main stock index, has held steady around 26% shy of the record high it had hit in June.
This discrepancy is of special significance as Samsung and SK Hynix account for a significant share of the weighting in the KOSPI. They have a huge market influence, so the sentiment of investors regarding the two companies can significantly affect the entire Korean market. But even their aggressive shareholder-return plans have failed to alter perceptions on South Korean stocks.
It’s not a question of dividends or stock buybacks. For years, South Korean stocks have been selling at lower valuations than other international stocks, known as the Korea discount. The discount has long been associated with investor worries over corporate governance, capital allocation, and shareholder rights, as well as the power wielded by controlling shareholders.
In 2024 the government launched a Value-Up programme, which sought to tackle some of these issues and incentivize companies to deliver better returns to shareholders. So Samsung and SK Hynix’s newest statements give a preliminary glimpse of whether the reform is making a headway in curbing corporate behavior.
Samsung and Hynix are expected to bring back even more money, but will the “Korea discount” go away in the short term? “Not anytime soon,” said Clarence Li, T. Rowe Price’s lead portfolio analyst.
The plans were a step in the right direction, but it’s still “partly structural and will need sustained evidence from a much broader range of companies to participate,” Li said.
The South Korean shares, however, have rallied impressively this year. The market is up approximately 67% on the promise of AI, better earnings growth and the incredibly bright prospects for memory-chip makers. Nevertheless, Korean stocks have not yet priced in as high as other markets in the Asia-Pacific region.
According to the Goldman Sachs data in the original report, the KOSPI is trading at approximately 4.3 times expected 2027 earnings. This is significantly lower than the ~11 times wider APAC multiple. The low valuation shows that investors are not only continuing to put a risk premium on Korean stock, but are also doing so in the face of the country’s biggest businesses churning out record cash.
This makes an important difference for investors between good corporate performance and good structural reform. Ironically, Samsung and SK Hynix are enjoying a very strong memory-chip cycle that can yield huge returns for shareholders. It doesn’t mean that all the root causes of poor corporate governance in South Korea have changed.
Sammy Suzuki, head of emerging markets equities at AllianceBernstein, would split out the big performance of Samsung and Hynix from the success of the Value-Up programme in Korea.
Much of the size of these payouts is due to the extraordinary memory cycle and consequently cash generated but not to a fundamental shift in capital-return philosophy. That is in part why investors continue to wonder, ‘Is this enough??’
Samsung’s plans have been the target of special attention due to their size. It is estimated to pay out an estimated total of 30 trillion won in cash dividends in the quarter, with a total shareholder return of between 90 trillion won and 110 trillion won. The payments would be substantial and would be made to shareholders—a commitment the firm has been reluctant to make—and the form of those payments has been subject to debate as well.
In the eyes of some investors and analysts, Samsung must be more transparent on the portion of return to shareholders that will be regular dividends and the portion that will be special dividend payouts. Special dividends may be more closely associated with short-term phases of unusually high profitability, whereas recurring dividends may give investors more assurance that cash returns will be forthcoming.
But there is uncertainty as to whether large distributions are necessarily equally advantageous to minority shareholders as well. Historically, corporate governance has been a key consideration for investors, especially in light of Samsung’s ownership structure and its controlling family. A bigger payout can be good for everyone, but investors are keen to see if companies are establishing a steady system of capital allocation, instead of making the very big payouts only when earnings are good.
The case of SK Hynix is somewhat similar. The memory-chip maker has been among the big winners of the fast-growing AI infrastructure boom. The need for high-performance memory products has grown with the surge in investments in data centres and AI computing power from technology firms. This has definitely boosted the company’s cash flow and reinforced the company’s capacity to pay dividends to investors.
South Korea’s question is whether the actions of its semiconductor giants trickle down to the rest of the business world. Even a group of a few high profit technology firms are insufficient to fix the structural factors behind the Korea discount. Investors will be keen to see if banks and industrial firms such as consumer businesses and other large South Korean enterprises start to implement more shareholder-friendly strategies.
This is also why the government’s reform programme is likely to be a more protracted and arduous process than merely getting companies to pay out more dividends. Better transparency and clearer capital-allocation policies are needed, and it may be necessary to give minority holders more protection and to build more confidence that the companies are acting in the best interests of all shareholders.
