Shinhan Investment Corp. recently evaluated on the 11th that the 'mandatory treasury stock cancellation' bill proposed by the Democratic Party of Korea could be a way to resolve the undervaluation of the domestic stock market.
Lee Jae-won, a researcher at Shinhan Investment Corp., said, "While dividends are subject to income tax, the cancellation of treasury stocks is a tax-free means of enhancing shareholder value," adding, "If the mandatory cancellation is realized, the concerns about the overhang of existing treasury stocks in the domestic stock market will also be resolved." He noted, "Ultimately, the mandatory cancellation is positive in terms of enhancing shareholder value and improving investor sentiment."
Shinhan Investment Corp. explained that the cancellation of treasury stocks has the effect of increasing return on equity (ROE). In this process, the price-earnings ratio (PER = market capitalization ÷ net income) decreases, and the price-to-net worth ratio (PBR = market capitalization ÷ net worth) increases.
The researcher stated, "Assuming that KOSPI-listed companies canceled all treasury stocks as of the end of last year, the PBR would have increased by 3.3% solely from cancellation," adding, "Purchasing treasury stocks reduces the number of circulating shares, thereby increasing earnings per share (EPS)."
He further emphasized, "There are concerns about the overhang caused by the disposal of treasury stocks, potential block deals for third parties (reducing effectiveness), and criticisms of excessive infringement on management rights. However, the direction itself is aimed at resolving the Korea Discount."
Considering the recent short-term surge, Shinhan Investment Corp. judged that among the top 10% of stocks by treasury stock ratio, those with relatively low trading ratios have significant upside potential due to their low transaction turnover (transaction volume/market capitalization).
He listed Samsung Fire & Marine Insurance, KT&G, HD Hyundai, NCSOFT, HUGEL, and SKC as stocks with upside potential.