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Preferred stocks April 15, 2013
Big benefits from policy changes
Market’s disinterest vs. rapid removal of discount The price gap between preferred and common stocks currently stands at 65% with preferred nearing record lows compared to common since the Asian financial crisis in 1997-1998. In the 2002 report, The value of corporate voting rights and control: A cross-country analysis, Tatiana Nenova of the World Bank presented a model to analyze and interpret the security-value differences between share classes, which still proves effective although more than a decade has passed. According to the report, the price gap averaged 48% in Korea and is explained at 17%p law enforcement, 11%p investor protection, 12%p takeover regulations, 3%p power-concentrating corporate charter provisions and 5%p others. A decade after the report’s release, the discount factors have quickly been removed but preferred stocks are still not in the scope of investors’ interest. Prime beneficiaries of the new administration’s policy changes The market has long neglected preferred stocks and their discount is fundamentally owed to the difference in the voting rights value between controlling and minority shareholders. The value represents each party’s accessibility to enterprise value (EV) and is a function of corporate transparency. With greater transparency, controlling shareholders’ private profits shrink and minority shareholders’ profit erosion diminishes. That in turn narrows the difference in EV enjoyed by the two parties and leads to a fast recovery of the value of preferred stocks, which by nature have no attached voting rights. For the past two years, the controlling shareholders’ abusive practice has been curbed by the revised commerce law and gift taxes imposed on the conglomerates’ habit of awarding excessive orders to their affiliates. Moreover, the main idea of the new administration’s proposal of economic democracy as one of its four 2013 economic pillars is to empower minority shareholders and improve corporate transparency by introducing the multiple derivate action and cumulative/electronic voting systems. Second, vigorous holding company transitions by corporations and the resulting stable ownership help ease fears about hostile M&As, which devalued preferred stocks in the past. We believe the falling value of voting rights will lead to a re-valuation of preferred stocks. Assuming the price gap between preferred and common stocks would narrow to 2-20%, on par with the level of advanced countries, preferred stocks’ upside potential would be more than 100%. Preferred stocks deserve fresh attention Preferred stock prices tend to move in lockstep with their associated common stocks. But we believe preferred stocks merit more than being a proxy investment for common stocks for three reasons. First, a thinner price premium for voting privileges is unavoidable given the new government's commitment to improve management transparency. To reflect a narrower premium, preferred stocks now trade at all-time lows. We believe preferred stocks deserve reassessment. Second, there is a list of 39 preferred stocks that offer dividend yields higher than the 2.85% average of corporate bond yields (AA-). With a 5.5% average yield, preferred stocks would make an attractive investment in the low-growth and low-interest rate environment. Third, the preferred stocks' trading liquidity has been undermined by constant share price drops. But considering a large free-float, we expect liquidity to quickly pick up once the stock prices rebound. We selected the top picks among attractive preferred stocks, including Samsung Electronics preferred, considering dividend, valuation, financial stability and market cap.
Contents
I. Preferred stocks were strictly sidelined ..... 2
II. Cross-country comparison of preferred stock discount ............................................................ 6
III. Discount factors are disappearing ....... 10 IV. Merits of preferred stocks to draw
attention ........................................................................ 16
V. Top picks ..................................................................... 20
Hoon Lee, CFA 82-2-3276-6158
JJ Park 82-2-3276-6560
Investment Strategy Issue
I. Preferred stocks were strictly sidelined ................................................................................................................ 2
1. Preferred stocks trading at record lows compared to common
2. Reasons for extreme undervaluation of preferred stocks
II. Cross-country comparison of preferred stock discount ................................................................. 6
1. Causes of discount
2. Case study: Crawford
III. Discount factors are disappearing.......................................................................................................................... 10
1. Shrinking value of voting rights
2. Disadvantages of preferred stocks are not significant
3. Healthy preferred stocks to draw attention with the implementation of unqualified
preferred stock withdrawal system in Jul
IV. Merits of preferred stocks to draw attention ................................................................................................. 16
1. Narrower price gap between preferred and common to 2-20%
2. Attractive dividend yields in the low-growth period
3. Decent investment returns despite de-rating so far
4. Attention to small and mid-cap stocks
V. Top picks ......................................................................................................................................... 20
1. Top pick selecting criteria: Dividend yield, price gap with common stocks,
market cap and financial structure
2. Top 30 preferred stocks by dividend yield
3. Top 30 preferred stocks by price gap
4. Top 30 preferred stocks by market cap
Contents
Issue report
2
I. Preferred stocks were strictly sidelined
1. Preferred stocks trading at record lows compared to
common
The prices of the top 50 preferred stocks by market cap now stand at 35.4% of their
respective common stocks, translating to a 64.6% price gap. Looking at the past 20
years, the price gap between preferred and common stocks was a mere 10-25%
until 1993. But preferred stocks with no voting rights started to lose investor appeal
as concerns grew about hostile M&A attempts on the government’s decision to lift
the ceiling on foreign ownership of Korean companies. Accordingly, the gap
temporarily widened to ~75% right after the International Monetary Fund (IMF)
bailout in 1998. While the price difference briefly narrowed to 20%, the gap moved
to widen in 2007 and after. Except during the IMF bailout, preferred stocks now
trade at record lows compared to common.
Figure 1. Relative price of preferred stocks compared to common
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Apr-93 Apr-96 Apr-99 Apr-02 Apr-05 Apr-08 Apr-11
Note: Relative price of preferred stocks (top 50 by market cap) =preferred stock prices/common stock prices (for preferred stocks in top 50 market cap group)
Source: Korea Investment & Securities
2. Reasons for extreme undervaluation of preferred stocks
Preferred stocks are overly discounted to common due primarily to their features as
being non-voting and non-cumulative. Other reasons include little trading volume,
disinterest among investors and low dividend yields.
Most preferred stocks traded on the exchange are non-cumulative,
non-participating and non-voting equity securities that pay an additional dividend
equal to 1% of par value (e.g., W50 for W5,000 par value). The preferred stocks of
such a nature were first issued by Dongyang Beer (now Oriental Brewery or OB) in
1986. Companies rushed to issue preferred stocks as a way to raise capital with
little worry about having to control stake dilution and dividend. And the vigorous
issuance continued until the government announced plans to amend the regulation
related to non-voting preferred stock issues in Mar 1990.
Non-voting preferred stocks with a fixed additional (1%) dividend were a less
attractive investment compared to bonds due to small dividend payout, and
compared to commons stocks as well due to non-voting status.
Price gap between
preferred and common
stocks stands at 65%
Disadvantages of
non-voting and
non-cumulative
preferred stocks
Issue report
3
Table 1. Preferred stock types
Type Features
Old preferred stock - Senior to common in terms of dividend or distribution of remaining assets - Receives 1%p more dividend than common based on face value - Non-cumulative, non-participating and perpetual
New preferred stocks
- Senior to common in terms of dividend or distribution of remaining assets - Minimum dividend rate is determined at the time of issue in the articles of association;
Converted to common at a 1:1 ratio after a specified period (three to 10 years) - If a dividend is missed, it accumulates and must be paid before the stock can be
converted to common - Cumulative, participating and term-based
Dividend accumulation
Cumulative preferred stock - Unpaid or omitted dividend in any one term is accumulated and paid in any future term
Non-cumulative preferred stock - The right to receive a dividend expires whenever the dividend is not declared - Unpaid or omitted dividend in any one term need not be paid in any future term
Participation
Participating preferred stock - Along with a common stock, a participating preferred has the opportunity to receive an
extra dividend equal to a specified rate
Non-participating preferred stock - Receives only the dividend that equals a specified rate and cannot participate in an extra
dividend
Voting rights Preferred stock with voting rights - Holders have the right to vote
Preferred stock without voting rights - Holders do not have the right to vote (most preferred stocks in Korea are such type)
Convertibility/ redeemability
Convertible preferred stock - Includes the option to convert to common shares at a fixed price after a predetermined
date
Redeemable preferred stock - Holders have the right to redeem the stock at a preset price after a defined date - Has seniority in its right to receive a dividend
Source: Korea Investment & Securities, Analysis of Determinants in Price Gap between Preferred Stocks and Common Stocks by Lee Sang-il (2011)
Table 2. History of preferred stock issues
Period Description
1) Introductory period (pre-1986): Issuance of corporate bond-type preferred stock
- Korea’s first preferred stocks were issued in May 1969 for Jeonju Paper that was fully acquired by Korea Investment Development Corp. (now UBS Hana Asset Management)
- Preferred stocks were more attractive than common in terms of rights as they were issued during times of urgency such as company restructuring
- Companies issued preferred stock that featured voting rights, cumulative, participatory and with a duration of three years to perpetual
- Preferred stock without voting rights was guaranteed a dividend at a level similar to the key interest rate
- The government encouraged the issuance of preferred stock by revising the Furtherance of the Capital Market Act that allowed a company to issue preferred stock without voting rights up to 50% of all shares
2) Active period (1986 to Feb 1990): Emergence of 1% preferred stock without voting rights
- Dongyang Beer (OB) first started issuing 1% preferred stock without voting rights (same type as currently in use) that pay 1%p more dividend based on face value than common stock dividend
- Some scholars challenged the legality of the 1% preferred stock without voting rights but it was widely issued thanks to a booming stock market and positive response from investors
- The government did not place any restrictions regarding issuance other than a 15% discount to the issue price of common shares
3) Regulatory period (Mar 1990 to Dec 1996)
- With the stock market’s drop from 2H89, controlling shareholders first started selling the 1% preferred stock
- As preferred stocks were considered the main culprit behind falling share prices, the Ministry of Finance (now the Ministry of Strategy & Finance) turned toward curbing the issuance of 1% preferred shares, which helped maintain the price gap between preferred and common at a constant level
- Investment sentiment on preferred stocks eroded significantly due to amended related laws in 1994
- The Securities Supervisory Service (now Financial Supervisory Service) reintroduced “measures to stabilize supply/demand of preferred stock without voting rights” in Nov 1994 to promote the stocks
4) Stabilization period (Dec 1996 to present)
- Common stock with voting rights gained more relative value due partly to measures taken by companies to protect management rights with the legalization of hostile takeovers in 1998
- New preferred shares emerged in 1999-2000, the interim dividend payment was introduced and preferred stocks gained strength on economic recovery
- After the price gap between preferred and common stocks repeatedly kept narrowing and widening, the gap has been expanding since 2008
Source: Analysis of Determinants in Price Gap between Preferred Stocks and Common Stocks by Lee Sang-il (2011)
Issue report
4
1) Overly neglected by investors due to non-voting status
Preferred stocks with non-voting rights were very ignored by investors as hostile
M&A attempts and the succession of management rights became headline issues in
Korea’s stock market. Non-voting preferred stocks went through the first round of
de-rating in 1994 when the raised limit on foreign ownership and repeal of the 10%
ownership ceiling in a general corporation upon the amendment to the Securities
and Exchange Act in Jan stoked concerns about hostile M&A attempts. Non-voting
preferred stocks were even considered “non-stocks” by market investors. The price
difference between preferred stocks and common widened to as much as 75%
during the IMF bailout.
After brief ups and downs, the relative price of preferred stocks compared to
common has been on a downturn since 2007. Non-voting preferred stocks were left
out of investors’ interest as corporate governance and stable management rights
became issues in Korea’s stock market.
In reality, there were only limited cases of foreign investors making hostile M&A
attempts toward Korean companies as seen in the management threat to SK Corp.
from Sovereign Asset Management. But voting rights became a very critical concern
for investing in Korean companies, which we attribute to their relatively weak
management transparency.
Table 3. Price gap between preferred and common stocks
Key factors for determining preferred stock’s price gap
Preferred stock’s price gap to common = value of voting rights (corporate transparency) ± dividend yield
Source: Korea Investment & Securities
① Basically, the price gap between preferred and common stocks reflects the value
of voting rights, which is closely correlated with corporate transparency. That is, the
value of voting rights represents different accessibility to EV between controlling
and minority shareholders. With no-voting rights attached, preferred stockholders
have much weaker accessibility to EV than holders of common stocks.
Much research suggests a 2-37% premium is placed on the voting rights in the
global market, or 2-20% in advanced countries where transparent management is in
place. With greater transparency, the controlling shareholders' private profits shrink
and minority shareholders' opportunity costs significantly diminish. That in turn
narrows the difference in EV enjoyed by the two parties.
But the controlling shareholders of Korea’s conglomerates had a habit of awarding
excessive orders to affiliates as a way to maximize private wealth. In addition, the
controlling shareholders took advantage of the circular ownership structure to
control the entire group with a tiny stake and to use the business for private interest.
The abusive practices of the controlling shareholders were a major cause of the
so-called “Korea discount”.
② Minority shareholders can oppose any controlling shareholders’ decision that
may undermine corporate transparency by exercising voting rights at the general
shareholders’ meeting. A lack of the voting rights can put preferred stockholders at a
disadvantage compared to common stockholders, which leads to a price discount.
The concerns are deepening with some companies buying back only common
stocks, not preferred, when they decided to support share prices with buybacks.
Issue report
5
2) Weak appeal as a dividend vehicle
Korea’s preferred stocks lost much of their appeal to investors due to the features
such as fixed additional dividend of 1% (e.g., W50 for W5,000 par value) and
non-cumulative dividend payment. To offset the disadvantages owed to non-voting
rights, it is essential to offer policies to enhance shareholder value, such as a lofty
dividend, but the additional 1% was not attractive enough to draw investors’ interest
to preferred stocks. Furthermore, the old preferred stocks do not ensure a stable
dividend payment due to their non-cumulative feature.
As preferred stocks lost appeal to long-term investors as a dividend vehicle, there
was nothing to buttress the prices when the stock market went through a downturn
period. Common stocks can rebound on bargain-hunting demand although the
stock market is trending downward, but preferred stocks are neglected, resulting in
high price volatility.
Table 4. Key features of old preferred stocks currently in circulation
Description Outcome
1% dividend - When a company decides to pay a common stock dividend, a 1%p based on face value (W5,000 in face
value would see an additional W50 per share) is added to the common stock dividend and then paid Low dividend appeal
Non-cumulative - Holders would not receive missed dividends but they would receive dividends in a given year if the
company decides to pay dividends the same year Low dividend stability
Source: Korea Investment & Securities
3) Limited trading volume and investors’ disinterest not causes but consequences
It is true that small trading liquidity and disinterest among investors have led to a
lengthy de-rating of preferred stocks. But the problems are not causes but the
consequences of preferred stocks’ poor share performance. That is, constant share
price drops undermined trading liquidity and investors’ interest in preferred stocks,
which created a vicious cycle by dragging the prices down further.
Issue report
6
II. Cross-country comparison of preferred
stock discount
1. Causes of discount
Many countries allow preferred stocks to be issued but their features vary by
country. Preferred stocks with different voting privileges than common stocks are
actively issued in Brazil, Canada, Denmark, Finland, Germany, Italy, Norway,
Mexico, Sweden and Switzerland along with Korea. In those countries, the major
shareholders use preferred stocks as a way to raise capital with no threat to
controlling rights. Countries such as Australia, Chile, France, Hong Kong, South
Africa, the UK and US also allow preferred stocks with different voting rights by law
but the actual issue is not as active.
In contrast, discriminatory voting rights are prohibited in some countries such as
Belgium, China, Japan, Singapore and Spain. Preferred stocks offer a fixed
dividend and contain a convertible feature to common stocks in Southeast Asian
countries such as Indonesia, Malaysia, the Philippines, Taiwan and Thailand. In this
report, we narrow our analysis to general preferred stocks traded in Korea’s stock
market, i.e., preferred stocks with discriminatory voting privileges and dividend and
a non-convertible feature. In this section II, we refer to preferred stocks with those
features as “preferred stocks”.
Preferred stocks tend to trade at a discount to common in the world’s stock markets.
In the 2002 report, The value of corporate voting rights and control: A cross-country
analysis, Tatiana Nenova of the World Bank presented a model to analyze and
interpret the security-value differences between share classes.
Figure 2. Preferred stocks’ discount by country
0
10
20
30
40
50
60
US
Ca
na
da
Sou
th
Afr
ica
UK
Austr
alia
Bra
zil
Ch
ile
Fra
nce
Ita
ly
Me
xic
o
De
nm
ark
Sw
ede
n
No
rwa
y
Ge
rma
ny
Kore
a
Common law French civ il law Scandinav ian civ il
law
German
civ il law
(%)
Note: 1) Preferred stock discount=100–(preferred stock price/common stock price*100) 2) Based on 2002 data
Source: Nenova (2002), Korea Investment & Securities
Features of preferred
stocks vary by country
Our analysis is on
preferred stocks with
discriminatory voting
rights and dividend and
non-convertible feature
Generally, preferred
stocks are discounted
to common
Issue report
7
Although more than a decade has passed, Nenova’s report still resonates and
presents important implications. According to the report, first, preferred stocks trade
at a discount to common in most countries. Second, the price gap varies by country.
For example, the gap was less than 5% in the US, Canada, Denmark and Sweden
whereas it was as wide as 50% in Korea. Third, the legal environment appears to
affect the price gap. The magnitude of price difference varied widely even across
developed countries, and the gap was much wider in French civil law countries.
According to Nenova’s analysis, the price gap was lowest for the Scandinavian civil
law group of countries, followed by common law countries, German civil law
countries and French civil law countries. The report says that such a minimal
discount to preferred stocks in Scandinavian civil law countries was because the
legal environment and social norms discourage the controlling parties from abusing
the minority. In contrast, the price gap was wide in French civil law countries where
investor protection is weaker. As such, the legal protection of investors and minority
shareholders would be a key variable to the price gap between preferred and
common stocks.
Figure 3. Price gap between preferred and common
stocks by legal origin
Figure 4. Rank of investor protection in the World
Bank’s Doing Business survey
0
5
10
15
20
25
French civil law German civil law Common law Scandinavian civil
law
(%)
0
10
20
30
40
50
60
70
80
90
France Italy Korea
2012 2013
(rank)
Source: Nenova (2002), Korea Investment & Securities Source: The World Bank, Korea Investment & Securities
Of note, Korea’s legal environment for investor protection has fast improved recently.
The World Bank has worked out an investor protection index in its Doing Business
survey. Korea made a great leap from 79th, similar to France, in 2012 to 49
th in 2013
in terms of investor protection. Although there is a still long way to go, we view such
rapid improvement in Korea as encouraging.
Then to what degree could the legal environment such as a corporate governance
mechanism and investor protection affect the preferred stocks’ discount? Nenova
suggests the legal environment variables explain 68% of the cross-country variation
in the value of preferred stocks. That is, the price gap will narrow when there is a
refined legal framework such as tighter enforcement, better general investor
protection, stricter takeover regulations and less use of corporate charter provisions
concentrating control in the hands of dominant shareholders. For example,
Nenova’s analysis showed that the price gap was largest in Korea at 48%, and the
gap would be reduced by 17%p with law enforcement, 11%p with investor
protection, 12%p by takeover regulations and 3%p by corporate charter provisions
(together 43%p). Given the analysis, the preferred stocks’ discount to common in
Korea could ease from 48% to 5% if the legal environment is improved to match the
level of developed countries.
Price gaps varied by
country: A much wider
gap in French civil law
countries
Governance structure
and investor protection
by law are key variables
to the price gap between
preferred and common
stocks
Korea’s investor
protection is fast
improving according to
World Bank survey
If legal environment
improves dramatically,
Korean preferred
stocks’ discount to
common could ease
from 48% to 5%
Issue report
8
Figure 5. Price gap between preferred and common stocks in Korea and influence
by legal environment variable
0
10
20
30
40
50
60
Price gap
(common stock price-pref . stock price)
Af ter ref ined legal f ramework
(%, %p)
Law enf orcement: 17%p
Inv estor protection: 11%p
Takeov er regulation: 12%p
Corporate charter prov isions: 3%p
Note: 1) Price gap = 1 - (preferred stock price/common stock price) 2) Based on 2002 data
Source: Nenova (2002), Korea Investment & Securities
2. Case study: Crawford
The case of US-based Crawford & Co. also provides some implications of preferred
stock investment. The company processes outsourced insurance claims and is
owned by the Crawfords with a 58% stake. Crawford has two classes of common
stock outstanding: Class A without voting rights and Class B with rights. Instead of
voting rights, Class A Common Stock offers a ~1%p higher dividend yield than
Class B, amounts to 80% of Class B’s market cap and accounts for 30% of the total
EV.
Figure 6. Crawford’s shareholder structure Figure 7. Crawford’s EV
Crawford family
57.9%
Others 24.63%
Suntrust Banks
Inc. 6.11%
Blackrock 6.28%
F&C Asset
5.08%
0
100
200
300
400
500
600
CRD/A CRD/B Market cap Cash Debt Enterprise
value
(USD mn)
Source: Bloomberg, Korea Investment & Securities Source: The World Bank, Korea Investment & Securities
US-based Crawford:
Family-owned company,
Class A (preferred)
value amounts to 80% of
Class B (common)
Issue report
9
Theoretically, Crawford’s Class A Common Stock does not deserve a discount to
Class B Common Stock because of the company’s very stable governance structure
with a near-60% majority shareholder’s stake and a sizable market cap (80% of
Class B) of preferred stocks (Class A). Since Class A shares offer a 1%p higher
dividend yield than Class B, it would be no surprise if the preferred stocks trade at a
premium to the common.
We examined how the price gap between Crawford’s preferred and common stocks
trended since 1991. In 1994-1997 and in 2004-2006, the gap was near zero or
preferred stocks traded at higher prices than common. Interestingly, the two periods
coincide with when the economy was relatively stable after a recession. In contrast,
Crawford’s preferred stocks traded at much lower prices than common when the
economy was shaky in the early 1990s, early 2000s and after 2008.
Then, how does economic instability lead to a discount for Crawford’s preferred
stocks that are the same as common, other than with respect to voting rights,
despite the stable governance structure? The answer lies in the market’s view that
common stocks held by majority shareholders reflect information faster than
preferred stocks at a time of large external uncertainties. Since investors believe a
company’s inside information is faster reflected in common stocks, they pay a
premium over common.
Figure 8. Price gap between Crawford’s preferred and common stocks
(10)
0
10
20
30
40
50
60
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
(%)
Source: Bloomberg, Korea Investment & Securities
Based on Nenovo’s report and Crawford’s example, the price gap between
preferred and common stocks tends to narrow with a better corporate governance
structure, stronger investor protection and less economic uncertainties. If that is true,
then there is a good chance the price gap will likely shrink worldwide. That is
because the uncertainties that have been fueled by the global financial crisis since
2008 are gradually being addressed albeit at a very moderate pace. In particular,
serious consideration is needed for Corporate Korea’s preferred stocks since they
used to post the widest price gap with common due to the conglomerates’
ownership structure and legal and institutional issues. As illustrated by the World
Bank’s Doing Business 2013, Korea is fast improving in terms of its corporate
governance and investor protection. Despite such positive changes, preferred
stocks are now valued less than in 2002 with the price gap expanded to 64.6% now.
Price gap between
Crawford’s preferred
and common stocks
fluctuates along with
market conditions
During economic
instability, Crawford’s
preferred stocks are
discounted due to less
effective reflection of
inside information
Investment on Korea’s
preferred stocks
promising as financial
crisis-related
uncertainties subsided
and the nation’s
institutions are fast
improving
Issue report
10
III. Discount factors are disappearing
1. Shrinking value of voting rights
1) Animated holding company transition and ensuing stable management rights
The practice of valuing preferred stocks less than common originates in the threat of
hostile M&A. At a time of animated M&A activities, voting rights matter and thus
investors turn away from preferred stocks. However, Korea’s top 10 companies by
market cap include five holding firm affiliates (LG Chem, LG Electronics, LG
Household & Healthcare, AmorePacific and Doosan) and three Samsung and
Hyundai Motor affiliates (Samsung Electronics, Samsung F&M and Hyundai Motor).
In effect, a hostile M&A strategy could not be used for the above firms due to the
stable ownership for the former group and the market cap size for the latter. S-Oil
and Shinyoung Securities, the remaining two in the top 10, cannot be deemed as
exposed to any M&A risk.
Moreover, the shift to a holding company is gaining pace among not only
conglomerates but small/midsize enterprises (SMEs). While each company has its
reasons, the transition is taking place mainly to strengthen the share ownership by
spinning off a holding company and an operating entity from a main company then
followed by a share swap. That in turn stabilizes management rights. Indeed, four
(SK, LG, GS and Hanjin) of the 10 largest corporate groups in Korea have
established a holding company, the path taken by 33 listed firms in Korea over the
past five years.
Considering the holding company transition is the most efficient way to secure
stable management rights, more companies will likely follow suit and in turn there
would be less concern about hostile takeover. Then, the threat of M&A should not
further widen the price gap between preferred and common stocks.
Table 5. Listed companies’ holding company transition over the past five years
Holding company Established Subsidiaries Sub-
subsidiaries Sub-sub-
subsidiaries Holding company Established Subsidiaries
Sub- subsidiaries
Sub-sub- subsidiaries
Woongjin Holdings Jan 1, 2008 7 15 1 Daesung Holdings Oct 1, 2009 9 0 0
JW Holdings Jan 1, 2008 6 3 0 Hanjin Shipping Holdings Dec 1, 2009 2 12 1
Chinyang Holdings Jan 7, 2008 9 0 0 KC Green Holdings Jan 1, 2010 12 4 0
S&T Holdings Feb 5, 2008 3 4 0 Wooree Lighting Holdings Jan 1, 2010 3 4 0
SBS Media Holdings Mar 4, 2008 8 9 0 Kolon Corp. Jan 1, 2010 8 20 1
Dongsung Holdings May 14, 2008 7 3 0 CS Holdings Jan 5, 2010 3 0 0
LS Corp Jul 2, 2008 5 21 1 Humax Holdings Mar 31, 2010 4 5 0
Hitejinro Holdings Jul 3, 2008 4 8 0 SJM Holdings Jan 1, 2011 4 1 0
Poongsan Holdings Jul 3, 2008 4 2 0 Hanmi Science Jan 1, 2011 2 1 0
Iljin Holdings Jul 4, 2008 6 5 0 Daesung Group Holdings Jan 1, 2011 9 19 0
KISCO Holdings Sep 3, 2008 3 1 0 BS Financial Group Mar 15, 2011 6 0 0
KB Financial Group Sep 29, 2008 9 6 1 DGB Financial Group May 7, 2011 3 0 0
Pulmuone Holdings Sep 30, 2008 6 9 0 Samyang Holdings Nov 3, 2011 10 3 0
Doosan Jan 1, 2009 9 9 2 InterPark Corp. Jan 1, 2012 11 5 0
Hansae Yes24 Holdings Jun 30, 2009 2 1 0 Nice Holdings Aug 23, 2012 15 4 0
Youngone Holdings Jul 2, 2009 2 1 0 AK Holdings Sep 1, 2012 4 10 0
CNH Sep 30, 2009 6 1 0
Source: Fair Trade Commission, Korea Investment & Securities
Voting rights value
shrinks
Issue report
11
2) New administration’s better transparency policy empowers minority
shareholders
The preferred stock discount is owed to the difference in voting rights value
between controlling and minority shareholders. The value is important for a
company facing a hostile takeover. However, what it fundamentally represents is
each shareholder party’s accessibility to EV that is linked to corporate transparency.
Similar to their peers in developed countries, majority shareholders in Korea
enjoyed surplus profits, which were not shared with minority shareholders, via a
management rights premium when selling their companies. Not only that, controlling
shareholders have often been cited as maximizing private profits through the
practice of unfairly awarding affiliate orders to a company they set up. Such opaque
transparency gave rise to a different level of accessibility between controlling and
minority shareholders. That in turn led to an excessive price plunge for preferred
stocks whose rights are not guaranteed due to the lack of voting rights.
But on Mar 28, the new administration proposed economic democracy as one of the
four economic policy directions along with jobs creation, livelihood security and risk
management. Policies for economic democracy include a ban on conglomerates’
practice of unfair internal trade among affiliates, reinforced measures for
pension/public funds’ voting rights execution, introduction of a multiple derivative
action system and phase-in of the cumulative/electronic voting systems. As the new
administration’s corporate policy focuses on empowering minority shareholders and
improving corporate transparency, such efforts will considerably narrow the price
gap between preferred and common stocks.
Table 6. Four major economic policies
Jobs creation Stabilize public welfare Economic democracy Enhance risk management
Tasks
Aggressive management of macro policies
Stabilize consumer prices Bolster management transparency and responsibility
Strengthen risk response plans
Establish favorable conditions for the dual economic drivers of domestic demand and exports
Ease financial, housing and education burdens of low-income households
Provide a system for fair competition
Provide tools to counter each risk factor
Improve employment-friendly policies Enhance customized welfare system
Protect the economically weak
Source: Korea Investment & Securities
First, the practice of affiliates awarding orders to a company governed by their
controlling shareholder is a good example of controlling shareholders maximizing
their profits at the cost of minority shareholders’ profit erosion. Such a practice will
likely be strictly regulated by imposing gift taxes, expanding the items defined as
unfair affiliate aid and adopting a multiple derivative action system.
Table 7. Multiple derivative actions
Policy Description
Multiple derivative action
- Intended for shareholders that have held more than 5/100,000 of total shares in a parent company for more than six months
- Shareholders of a parent company that suffered losses due to illegal activities by a subsidiary can file a lawsuit against the board directors of the subsidiary
- Under current law, shareholders of a parent company can file a lawsuit against the management of its subsidiary but the multiple derivative action (double derivative action) allows shareholders to bring a derivate suit against a grandchild company as well
Source: Korea Corporate Governance Service, Korea Investment & Securities
Issue report
12
In particular, a derivative action allows shareholders to file a lawsuit against the
company’s directors and/or employees for the company’s losses triggered by their
illegal action. For example, let us say a parent company’s controlling shareholder
established a subsidiary and used it to generate private profits. In that case, a
minority shareholder of the parent company can impose a sanction due to the
practice. The same can be done even if the involved company was a
sub-subsidiary.
At present, a bill to adopt the multiple derivative lawsuit system is being proposed to
the National Assembly. Once the system is introduced, a minority shareholder of a
parent company can file a damages claim on behalf of a subsidiary/sub-subsidiary
against a controlling shareholder’s private profiteering.
Second, the electronic and cumulative voting systems are very effective in
strengthening minority shareholders’ profits. A phase-in of the systems would bring
a significant change to minority shareholders’ participation in the execution of
management rights. 1) The electronic voting system is an alternative to the shadow
system which reflects the voting rights of minority shareholders who are absent at a
shareholders’ meeting in proportion to the votes cast by the shareholders present at
the meeting. The electronic voting system will make it easier for minority
shareholders who are not present at the meeting to exercise their rights. 2) When
electing two or more board directors, the cumulative voting system grants each
share an identical number of voting rights as the number of board directors to be
elected. As the system allows minority shareholders to cast all their votes to a single
candidate, it increases the chance for a candidate who represents minority
shareholders’ profits to win the election. At present, only 34 or 5% of Kospi-listed
firms have adopted the system.
Table 8. Key policy directions of the new administration
Policy Description
Cumulative voting
- When electing two or more directors, shareholders may cast votes equal to the number of shares owned multiplied by the number of directors to be elected
- Minority shareholders can pool their votes to elect a director who can represent their interests - No. of listed companies that have adopted cumulative voting: Kospi 34 (4.79%) and Kosdaq 27 (3.03%) - If policy measures are finalized in 1H13, a public hearing will be held in Aug to enforce the adoption of cumulative voting
Electronic voting
- Allows minority shareholders who cannot attend a shareholders’ meeting to exercise their votes online - Cuts the cost of holding a shareholders’ meeting and can prevent major shareholders from making one-sided decisions by
encouraging shareholders, including minority, to participate in the shareholders’ meeting - No. of listed companies that have adopted electronic voting: Kospi 74 (10.42%) and Kosdaq 71 (7.98%) - If policy measures are finalized in 1H13, a public hearing will be held in Aug to enforce the adoption of electronic voting
Source: Korea Corporate Governance Service, Korea Investment & Securities
Third, the government has amended the Commerce Law over the past two years to
improve corporate transparency. Related efforts include tax revision to levy gift
taxes on controlling shareholders who profited from the practice of unfair internal
trades, prohibiting business opportunity appropriation and expanding the definition
of “directors”2 in restricting trade with their own companies.
2 “Directors” earlier meant only board members but now include major shareholders and special-interest parties. Such measures
have legally stipulated controlling shareholders can no longer seek private profits via affiliates, which before was routine. As minority shareholders’ profits will no longer be eroded by the controlling shareholders’ unfair practices, the difference in the value of their voting rights should narrow considerably.
Issue report
13
Table 9. Deemed gift tax imposed on companies favoring subsidiaries/affiliates
Issues & reasons for revision Revised commercial law
Deemed gift tax imposed on companies favoring subsidiaries/affiliates
Favoritism toward subsidiaries/affiliates allows major shareholders to make unfair profits and erodes the value of minority shareholders
- Establish grounds for imposing a gift tax on profits made from transactions between special-interest parties
- Shareholders subject to the tax are major shareholders (individuals) who are the controlling shareholders (incl. relatives) of a benefiting entity whose stake in the entity (incl. indirect ownership) exceeds the limited ownership stake of 3%
- Conditions for taxation: Percentage of transactions between special-interest parties exceeds the normal transaction percentage of 30% Deemed gift tax on profits: Benefiting entity’s NOPLAT x (transaction percentage with special-interest party - 30%) x (stake ownership - 3%)
Source: Korea Investment & Securities, Presentation of main revisions to the Commercial Law for companies (Ministry of Justice, Apr 2011), Trends in Capital Market System (Capital market analyst Kim Su-yeon, May 2011)
2. Disadvantages of preferred stocks are not significant
A common misconception in the stock market is that companies discriminate
against preferred shareholders. A notable example is the exclusion of preferred
stocks during buybacks. But a closer look at the top 10 preferred stocks by market
cap tells a different story. We found that not all preferred stocks were excluded from
share buybacks and companies just followed different policies when dealing with
their preferred stocks.
Samsung Electronics, commanding the top spot in preferred stock market cap,
carried out three share buybacks since 2005. Every time, it bought back both
common and preferred stocks. It was also true for Samsung F&M. In contrast,
Hyundai Motor started buying back only common stocks since its last simultaneous
repurchase in 2005. LG Chem and LG Household & Health Care have also been
steady buyers of common stocks. On the other hand, Doosan Corp., a long-time
follower of common stocks during buybacks, cancelled preferred stocks along with
common in Mar 2012, resulting in greater preferred shareholder value.
This shows that companies have policy differences in dealing with their preferred
stocks. But it does not necessarily mean preferred stocks are disadvantaged in
shareholder friendly policy due to their low weighting of controlling shareholders.
Table 10. Treasury share purchases by major company (shares)
Company Date Common Preferred
Samsung Electronics
Sep 6, 2005 3,800,000 300,000
Jun 4, 2006 2,600,000 400,000
Mar 21, 2007 2,800,000 400,000
Hyundai Motor
Apr 26, 2005 11,000,000 1,000,000
Oct 18, 2007 1,665,630 -
Jan 21, 2010 2,218,120 -
Sep 1, 2010 1,686,330 -
Oct 28, 2011 1,979,740 -
LG Chem May 18, 2005 568,000 -
LG H&H Sep 28, 2006 937,000 -
Samsung F&M Oct 2, 2012 1,400,000 90,000
Doosan Corp. Jan 27, 2012 300,000 -
Mar 8, 2012 (retired) 4,072,978 373,058
Source: Korea Investment & Securities
Differences exist in
dealing with preferred
stocks but do not
necessarily mean they
are disadvantaged
Issue report
14
3. Healthy preferred stocks to draw attention with the implementation
of unqualified preferred stock withdrawal system in Jul
For investors, preferred stocks have not been an easy investment to trade due to
their poor liquidity even considering their low market cap. But we believe such weak
liquidity is the outcome of the stocks’ pullback. In 1993 and 1997 when preferred
stocks were much favored by investors, their weighting of trading value in the
Kospi’s total was large at 7% and 5%, respectively. But now, the figure is less than
2%.
Given the shallow ownership of preferred stocks among major shareholders, the
weighting of the shares that can be easily put on the market is heavy. Nevertheless,
the trading value of preferred stocks is low for their market cap, and we believe the
main reason is weak share prices. But if the stocks are properly reassessed in line
with share price gains, the liquidity concern should ease substantially.
Figure 9. Trading value: Preferred stocks vs. Kospi
0%
1%
2%
3%
4%
5%
6%
7%
8%
Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11
Pref ./Kospi 52-week av g. trading v alue
Source: Korea Investment & Securities
In addition, preferred stocks with poor liquidity will probably be designated as
administrative issues or even delisted starting from this Jul. At present, some stocks
with low market cap and scarce trading volume are experiencing sharp price
fluctuations, which we believe contributes to investors’ distorted perception of
preferred stocks.
Under the new system, stocks with less than 100 shareholders in the business
report, less than 50,000 listed shares as of the end of half-year, less than 10,000
monthly trading volume in a half-year or market cap remaining below W500mn for
30 straight days would be designated as administrative issues. Conditions for
delisting would be the delisting of common stocks, less than 100 shareholders for
two straight years, less than 50,000 listed shares for two straight half-years, or less
than 10,000 monthly trading volume for two straight half-years. With the new rules,
the overall undervaluation of preferred stocks due to the extreme movement of only
a few should ease considerably.
Introduction of the new
system should prompt
reassessment of
preferred stocks and
shed a new light on
healthy stocks
Issue report
15
Table 11. Conditions for designation as administrative issues or delisting
Type Designated as administrative issues Delisting
Formal requirement
① Common stocks designated as
administrative issues ① Delisting of common stocks
② Less than 100 shareholders in the
business report
② Less than 100 shareholders for two
straight years
③ Less than 50,000 listed shares as of end
of a half-year
③ Less than 50,000 listed shares for two
straight half-years
④ Less than 10,000 monthly trading
volume* in a half-year
④ Less than 10,000 monthly trading volume
for two straight half-years
⑤ Market cap remains below W500mn for
30 straight days
⑤ Unable to meet a specified condition**
after market cap falls short of requirement
- ⑥ In case share transfer is restricted
Qualitative requirement
- ⑦ In case delisting is required to protect
public interests and investors
* (no. of trading days in a half-year / no. of trading days for a given company in a half-year) x total trading volume in a half-year / 6 ** Specified condition: Market cap stays above W500mn for 10 straight days and for more than 30 days during the 90 days after
being designated as an administrative issue Source: KRX, Financial News
Issue report
16
IV. Merits of preferred stocks to draw attention
As preferred stock prices tend to move in lockstep with their associated common,
their correlation coefficient is as high as 0.95-0.98. For preferred stocks to become
attractive, an excess return over common needs to be guaranteed. We believe
preferred stocks merit attention as an alternative investment to common.
First, given the preferred stocks’ undervalued status trading at all-time lows, the
price gap between preferred and common stocks has only limited room to expand.
As the Park administration is committed to improving management transparency,
there will likely be a thinner price premium for voting privileges attached to common
stocks and the resulting re-evaluation of preferred. Second, investment in preferred
stocks can be rewarding given solid dividend yields and gains from share rallies.
Among them, 39 stocks offer dividend yields of more than 2.85%, the average yield
of corporate bonds rated AA-. Third, top-tier preferred stocks in terms of market cap
realized similar returns as their common over the past 13 years even when overall
preferred stocks passed through de-rating phases. Moreover, stocks with dividend
yields of more than 3% performed better than their common. Fourth, investors are
aggressively buying small and mid-cap stocks that have investment appeal. As
such, attractive preferred stocks should also enter the scope of investors’ interest.
1. Narrower price gap between preferred and common to 2-20%
Although there is room for discussion about preferred stocks’ appropriate price
compared to common, the current gap of 64.6% with preferred nearing all-time lows
seems excessive. Given the fundamental reason for the large price gap is preferred
stocks’ discount to common due to no voting rights, the new government’s
commitment to improve management transparency should regulate the profit
erosion among minority shareholders caused by the excessive influence of
controlling shareholders and thus considerably diminish voting privileges. If
corporate transparency improves to the level of advanced countries, the price gap
between preferred and common stocks would narrow to 2-20%. If so, a valuation
re-rating of preferred stocks should drive their upside to more than 100% from the
current price level. As the price gap is more likely to narrow than widen, the room for
a re-rating of preferred stocks seems noteworthy.
Figure 10. Relative share prices of top 50 preferred stocks by market cap to common
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Apr-93 Apr-96 Apr-99 Apr-02 Apr-05 Apr-08 Apr-11
Pref ./Common stock price
Source: Korea Investment & Securities
Reassessment of
preferred stocks to
begin in earnest
Issue report
17
2. Attractive dividend yields in the low-growth period
As the price of preferred stocks is only 35% of their associated common, a 1%p
more dividend policy for preferred stocks is giving them fat dividend yields. Among
preferred stocks, 39 offer dividend yields higher than 2.85%, a level above the
current market interest rate. Moreover, the average yield for the top 10 preferred
stocks by dividend yield is as high as 7.9%.
As the Korean economy has entered the low-growth period and bond yields are
trending down, equity investors are lowering their expected rates of return. In such
circumstances, the fat dividend yields of preferred stocks that beat the market
interest rate would offer sufficient appeal for equity investors.
Table 12. Preferred stocks with higher dividend yields than corporate bond (AA-) yields
Rank Stock Dividend yield Rank Stock Dividend yield
1 Daishin Securities pref. 11.3% 21 Noroo Paint pref. 5.1%
2 Bookook Securities pref. 9.9% 22 Samyang Holdings pref. 4.9%
3 Doosan Corp. pref. 8.3% 23 LG Chem pref. 4.7%
4 Hanyang Securities pref. 8.0% 24 Hanwha pref. 4.6%
5 Kumho Petrochemical pref. 8.0% 25 SK Holdings pref. 4.6%
6 Hyundai Securities 2-pref. B 7.5% 26 Samsung F&M pref. 4.6%
7 Shinyoung Securities pref. 6.8% 27 LG Corp. pref. 4.5%
8 TS Corp. pref. 6.7% 28 S-Oil pref. 4.5%
9 Woori Investment & Securities pref. 6.4% 29 Taeyang Metal Industrial pref. 4.4%
10 Korea Investment Holdings pref. 6.2% 30 Noroo Holdings pref. 4.4%
11 Kolon Industries pref. 6.0% 31 LG Hausys 4.4%
12 Kolon Corp. pref. 6.0% 32 Hanwha Chemical pref. 4.3%
13 Samyang Genex Corp. pref. 6.0% 33 Daewoo Securities 4.1%
14 Yuhwa Securities pref. 5.8% 34 SEMCO pref. 3.7%
15 SK Innovation pref. 5.6% 35 Sebang pref. 3.7%
16 GS Holdings pref. 5.6% 36 Kumkang Kind pref. 3.5%
17 Daekyo pref. B 5.6% 37 Samsung SDI pref. 3.4%
18 Hitejinro Holdings pref. 5.4% 38 SK Chemicals pref. 3.3%
19 Ilsung Construction pref. B 5.3% 39 Green Cross Holdings 1-pref. 2.9%
20 Daeduck GDS pref. 5.2%
Note: 1) 2012 DPS 2) Apr 4, 2013 close
Source: Korea Investment & Securities
3. Decent investment returns despite de-rating so far
The prices of preferred stocks have constantly de-rated but the top 10 stocks by
market cap have delivered similar returns as their common since 2000 (incl. share
price gains and dividend yields). For example, the top 10 preferred stocks in terms
of market cap realized a similar annual average return as their common over the
past 13 years (preferred 26.7% vs. common 25.4%). Furthermore, five delivered
better returns in more years during the period. This shows there is no big difference
between investing in preferred and common stocks.
In comparison, among preferred stocks with dividend yields of more than 3%, all
(except AmorePacific) such as LG Chem, Samsung F&M, S-Oil, Shinyoung
Securities and Doosan Corp. gave better returns than their common. All in all, given
their potential for a valuation re-rating, we believe preferred stocks merit attention
as an alternative investment to common stocks.
Preferred stocks’ fat
dividend yields
Sufficient alternative
investment to common
stocks
Issue report
18
Table 13. Past returns: Preferred vs. common stocks (%)
Samsung
Electronics pref.
Samsung Electronics
Hyundai Motor pref.
Hyundai Motor
LG Chem pref.
LG Chem LG
Electronics pref.
LG Electronics
LG H&H pref.
LG H&H
2000 -64.70 -47.39 -31.24 -38.45 NM NM NM NM NM NM
2001 53.33 54.44 139.38 111.56 86.61 56.92 NM NM 131.01 105.51
2002 28.93 10.40 56.95 7.73 101.01 100.67 -38.91 -30.13 43.93 30.17
2003 56.63 37.52 54.44 66.43 33.51 25.90 32.13 33.88 0.58 -15.47
2004 19.77 -2.54 18.49 0.38 2.59 -26.23 38.59 5.46 18.60 -7.59
2005 64.63 45.16 118.43 70.99 67.73 40.29 64.61 42.84 59.81 103.57
2006 -0.09 -7.96 -42.40 -30.59 -36.49 -25.05 -45.25 -37.99 55.86 124.14
2007 -11.39 -7.76 -7.22 7.55 60.39 109.82 47.61 74.78 32.94 50.98
2008 -34.46 -16.11 -61.23 -44.52 -22.62 -18.33 -37.49 -24.79 -38.44 -9.44
2009 90.62 68.23 231.19 190.17 125.91 112.53 55.05 56.77 84.65 60.11
2010 22.98 15.06 52.91 50.00 104.94 70.31 -15.34 -9.92 15.92 32.36
2011 -4.80 11.27 5.13 21.19 -30.94 -15.49 -43.12 -36.64 30.74 28.64
2012 24.75 36.17 12.54 4.94 -1.42 3.75 -16.16 -5.12 53.47 35.97
Avg. 18.9 15.1 42.1 32.1 40.9 36.3 3.8 6.3 40.8 44.9
AmorePacific
pref. AmorePacific
Samsung F&M pref.
Samsung F&M
S-Oil pref. S-Oil Shinyoung Securities
pref.
Shinyoung Securities
Doosan Corp. pref.
Doosan Corp.
2000 NM NM -58.26 -27.90 4.89 18.14 -42.54 -32.84 -47.37 -32.59
2001 NM NM 89.63 79.05 162.06 95.41 82.13 25.88 34.94 6.28
2002 NM NM 73.91 21.25 -9.44 -11.56 2.26 1.12 -37.11 -52.82
2003 NM NM -2.64 2.25 47.33 86.62 14.68 -6.27 -5.53 29.89
2004 NM NM 28.03 20.78 112.78 122.99 26.09 27.07 44.30 -10.09
2005 NM NM 109.97 54.84 71.17 15.20 116.82 134.39 168.98 183.90
2006 10.41 46.23 -11.04 22.34 -0.64 5.85 -5.11 20.52 45.68 51.96
2007 -5.74 21.31 34.86 59.11 56.39 39.06 47.15 74.60 164.38 232.17
2008 -50.21 -13.78 -31.81 -25.46 -20.01 -8.50 -45.42 -65.52 -73.28 -48.34
2009 91.72 42.48 29.32 8.35 3.95 -8.31 46.73 56.78 41.77 -8.08
2010 4.65 15.18 -2.30 8.05 33.91 70.55 18.63 6.83 77.04 69.23
2011 -12.34 -0.27 -14.42 -3.35 4.81 15.18 -5.97 -22.92 -26.29 -7.94
2012 39.29 16.59 17.11 7.59 11.67 6.50 23.59 23.29 13.90 -14.66
Avg. 11.1 18.2 20.2 17.5 36.8 34.4 21.5 18.7 30.9 30.7
Annual avg. return for the past 13 years
Preferred
26.7
Common
25.4
Note: Annual returns include cash dividends as of Dec 26 of each year Source: Korea Investment & Securities
Issue report
19
4. Attention to small and mid-cap stocks
While large-cap stocks have been the major investment target for domestic and
overseas investors so far, investment in small and mid-cap stocks has been sharply
increasing over the past year. Of note, unlike the past, domestic institutional
investors have remained net buyers of small and mid-caps worth W1.37trn,
breaking away from their usual habit of large-cap-centered investment. Such a net
purchase trend shows the switch of investor interest from market cap to the
investment merit of an individual stock. Although preferred stocks have relatively
smaller market caps on the share pullback so far, we believe they have a rising
chance to be added to investment portfolios given their fat dividend yields and the
falling value of voting rights in line with a greater focus on management
transparency.
Table 14. Institutional and foreign net purchases of small and mid-caps in 2012
(W bn)
Mid-cap net purchase
(A) Small-cap net purchase
(B) Small and mid-cap net
purchase (A+B)
Institutions 1,295.7 77.8 1,373.5
Foreign investors (187.4) 38.5 (226.0)
Source: Korea Investment & Securities
Small and mid-cap
stocks receive more
attention
Issue report
20
V. Top picks
1. Top pick selecting criteria: Dividend yield, price gap with
common stocks, market cap and financial structure
The prices of preferred stocks are closely correlated with their associated common
shares. But we selected attractive preferred stocks considering dividend yield, the
price gap with common stocks and valuation, sufficient market cap for investment
and stable financial structure.
Based on the criteria, we chose the preferred stocks of seven companies –
Samsung Electronics, Doosan Corp., Woori Investment & Securities, SK Innovation,
LG Chem, Samsung F&M and Hyundai Motor – as our top picks. The stocks offer
an average dividend yield of 4.7%, attractive valuation with a 60.4% price gap with
the common stocks and market caps worth W71.3bn-20trn.
Table 15. Top preferred stock picks (W mn)
Code Stock Market cap Dividend yield Price gap Debt-to-equity
005935 Samsung Electronics pref. 20,002,082 0.9% 42.2% 49.05%
005385 Hyundai Motor pref. 2,016,332 2.6% 63.9% 153.64%
051915 LG Chem pref. 682,788 4.7% 64.8% 54.02%
000815 Samsung F&M pref. 263,021 4.6% 62.3% 426.89%
000155 Doosan Corp. pref. 185,927 8.3% 66.9% 85.78%
005945 Woori Investment & Securities pref. 86,618 6.4% 60.1% 618.73%
096775 SK Innovation pref. 71,285 5.6% 62.5% 106.94%
Note: Apr 4 close Source: Korea Investment & Securities
2. Top 30 preferred stocks by dividend yield
Table 16. Top 30 preferred stocks by dividend yield
Rank Stock Dividend
yield Rank Stock
Dividend yield
1 Daishin Securities pref. 11.3% 16 Daekyo pref. B 5.6%
2 Bookook Securities pref. 9.9% 17 Hitejinro Holdings pref. 5.4%
3 Doosan Corp. pref. 8.3% 18 Ilsung Construction pref. B 5.3%
4 Hanyang Securities pref. 8.0% 19 Daeduck GDS pref. B 5.2%
5 Kumho Petrochemical pref. 8.0% 20 Noroo Paint pref. 5.1%
6 Shinyoung Securities pref. 6.8% 21 Samyang Holdings pref. 4.9%
7 TS Corp. pref. 6.7% 22 LG Chem pref. 4.7%
8 Woori Investment & Securities pref. 6.4% 23 Hanwha pref. 4.6%
9 Korea Investment Holdings pref. 6.2% 24 SK Holdings pref. 4.6%
10 Kolon Industries pref. 6.0% 25 Samsung Fire & Marine Ins. pref. 4.6%
11 Kolon Corp. pref. 6.0% 26 LG Corp. pref. 4.5%
12 Samyang Genex Corp. pref. 6.0% 27 S-Oil pref. 4.5%
13 Yuhwa Securities pref. 5.8% 28 Taeyang Metal Industrial pref. 4.4%
14 SK Innovation pref. 5.6% 29 Noroo Holdings pref. 4.4%
15 GS Holdings pref. 5.6% 30 LG Hausys pref. 4.4%
Note: 1) Based on 2012 DPS 2) Apr 4 close 3) Excluded Hyundai Securities 2-preferred B as it has the features of a common stock with voting rights
Source: Korea Investment & Securities
Chose top picks
considering dividend
yield, price gap and
market cap
Issue report
21
3. Top 30 preferred stocks by price gap
Table 17. Top 30 preferred stocks by price gap
Rank Stock Price gap Rank Stock Price gap
1 Daesang Corp. pref. 88.3% 16 LG Electronics pref. 71.6%
2 Korea Circuit pref. 81.8% 17 Samsung C&T pref. 71.3%
3 Nexen Tire 1-pref. 79.9% 18 Kolon Industries pref. 69.9%
4 CJCJ pref. 79.4% 19 Korean Air pref. 69.5%
5 CJ Corp. pref. 77.2% 20 Daeduck GDS pref. 69.3%
6 Daelim Ind. pref. 77.0% 21 LG H&H pref. 69.1%
7 Lotte Chilsung pref. 76.5% 22 Doosan Corp. 2-pref. B 68.4%
8 Hotel Shilla pref. 75.0% 23 Hyundai Motor 3-pref. B 67.1%
9 SK Chemicals pref. 74.5% 24 Doosan Corp. pref. 66.9%
10 Kumho Petrochemical pref. 74.4% 25 Samsung SDI pref. 66.1%
11 Korea Investment Holdings pref. 73.3% 26 SK Holdings pref. 65.9%
12 Sebang pref. 73.3% 27 BYC pref. 65.6%
13 LG Hausys pref. 73.0% 28 AmorePacific pref. 65.4%
14 Namyang Dairy pref. 72.4% 29 LG Chem pref. 64.8%
15 Samsung Electro-Mechanics pref. 71.6% 30 Hyundai Motor pref. 63.9%
Note: 1) Based on 1-preferred share prices 2) Apr 4 close 3) AmorePacific Group excluded due to almost nil trading volume
Source: Korea Investment & Securities
4. Top 30 preferred stocks by market cap
Table 18. Top 30 preferred stocks by market cap (W mn)
Rank Stock Market
cap Dividend
yield Price
gap Rank Stock
Market cap
Dividend yield
Price gap
1 Samsung Electronics pref. 20,002,082 0.9% 42.2% 16 Woori Investment & Securities pref. 86,618 6.4% 60.1%
2 Hyundai Motor 2-pref. B 3,234,792 2.4% 60.8% 17 Samsung Electro-Mechanics pref. 82,704 3.7% 71.6%
3 Hyundai Motor pref. 2,016,332 2.6% 63.9% 18 Daelim Ind. pref. 80,750 2.8% 77.0%
4 LG Chem pref. 682,788 4.7% 64.8% 19 LG Corp. pref. 78,558 4.5% 62.1%
5 LG Electronics pref. 394,419 1.1% 71.6% 20 Kumho Petrochemical pref. 77,704 8.0% 74.4%
6 LG H&H pref. 374,796 2.1% 69.1% 21 Daekyo pref. B 75,668 5.6% 42.3%
7 AmorePacific pref. 335,739 2.0% 65.4% 22 Samsung SDI pref. 75,313 3.4% 66.1%
8 Samsung Fire & Marine Ins. pref. 263,021 4.6% 62.3% 23 CJ Corp. pref. 74,587 2.1% 77.2%
9 S-Oil pref. 241,316 4.5% 34.1% 24 Korea Investment Holdings pref. 72,056 6.2% 73.3%
10 Shinyoung Securities pref. 216,551 6.8% 10.7% 25 SK Innovation pref. 71,285 5.6% 62.5%
11 Doosan Corp. pref. 185,927 8.3% 66.9% 26 Daewoo Securities pref. 64,256 4.1% 60.0%
12 Hyundai Motor 3-pref. B 181,907 2.9% 67.1% 27 Daishin Securities 2-pref. B 58,100 12.4% 39.9%
13 Daishin Securities pref. 166,400 11.3% 34.1% 28 Namyang Dairy pref. 47,665 0.4% 72.4%
14 Samsung C&T pref. 91,811 2.8% 71.3% 29 Kolon Industries pref. 44,701 6.0% 69.9%
15 CJCJ pref. 91,726 2.6% 79.4% 30 GS Holdings pref. 43,639 5.6% 58.9%
Note: Excluded Ssangyong Cement Industry 4-preferred B as stocks were given voting rights due to unpaid dividends Source: Korea Investment & Securities
The contents of this report accurately reflect the analyst’s views. Under no circumstances were there any external pressures or intervention during the analysis process or the preparation of this report. This report was written by Korea Investment & Securities Co., Ltd. to help its clients invest in securities. This material is copyrighted and may not be copied, redistributed, forwarded or altered in any way without the consent of Korea Investment & Securities Co., Ltd. This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. We make no representation as to its accuracy or completeness and it should not be relied upon as such. The company accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. The final investment decision is based on the client’s judgment, and this report cannot be used as evidence in any legal dispute related to investment decisions.
HEAD OFFICE
CHUN SOO LIM, Executive Vice President, Head of Global Institutional Group ([email protected] +822 3276 5800)
PAUL CHUNG, Sales Trading ([email protected] +822 3276 5843)
27-1 Yoido-dong, Youngdeungpo-ku, Seoul 150-745, Korea
Toll free: US 1 866 258 2552 HK 800 964 464 SG 800 8211 320
Fax: 822 3276 5681~3
Telex: K2296
NEW YORK
DONG KIM, Managing Director ([email protected] +1 212 314 0681)
Korea Investment & Securities America, Inc.
1350 Avenue of the Americas, Suite 1110
New York, NY 10019
Fax: 1 201 592 1409
HONG KONG
DANIEL KIM, Managing Director, Head of HK Sales ([email protected] +85202530 8950)
DAN SONG, Sales ([email protected], +852-2530-8900)
JUN HWAN KIM, Sales ([email protected], +852-2530-8912)
Korea Investment & Securities Asia, Ltd.
Suite 2201-2, Jardine House
1 Connaught Place, Central, Hong Kong
Fax: 852-2530-1516
SINGAPORE
SUNG NAMGOONG, Managing Director, Head of Singapore Sales ([email protected] +65 6501 5601)
ALEX JUN, Managing Director ([email protected] +65 6501 5602)
Korea Investment & Securities Singapore Pte Ltd
1 Raffles Place, #43-04, OUB Center
048616 Singapore
Fax: 65 6501 5617
LONDON
JJ MOON, Managing Director ([email protected] +44 207 065 2765)
MINGOO KANG, Sales ([email protected], +44 207 065 2760)
Korea Investment & Securities Europe, Ltd.
2nd Floor, 35 Moorgate
London EC2R 6AR
Fax: 44-207-236-4811
Telex: 8812237
This report has been prepared by Korea Investment & Securities Co., Ltd. and is provided for information purposes only. Under no circumstances is it to be used or
considered as an offer to sell, or a solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained herein is not untrue
or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. This report is provided
solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on this report and the company
accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is not intended for the use of private
investors.
2013. All rights reserved. No part of this report may be reproduced or distributed in any manner without permission of Korea Investment & Securities Co.,Ltd.
