70% of Preferred Stocks at Record Discounts... Will Treasury Share Cancellation Drive a Rally?

79 Out of 114 Preferred Stocks Undervalued Compared to Common Shares
Recent Focus on Treasury Share Cancellation Amid Ongoing Undervaluation
Companies Including Hanwha and Hyundai Motor Extend Treasury Share Cancellation to Preferred Shares
Rising Market Expectations for Samsung Electronics’ Preferred Share Cancellation

It has been found that 7 out of 10 preferred stocks listed on the Korean stock market are trading at about half the price of their common shares, indicating a severe undervaluation. However, amid the government's recent value-up initiative and the onset of large-scale treasury share cancellations by companies, attention is being paid to whether preferred stocks can leverage these developments to overcome their undervaluation.

According to the Korea Exchange on the 17th, an analysis of the premium/discount rates for 114 listed preferred stocks showed that, based on closing prices as of the 15th, 79 stocks—or 69.3% of the total—are trading at a discount compared to their corresponding common shares. The average discount rate of these stocks is 41.37%, meaning preferred stocks are trading at roughly 60% of the price of common shares.

Notably, even the representative large-cap preferred stocks in Korea are being heavily discounted. Preferred shares of Doosan Fuel Cell recorded the largest discounts: Doosan Fuel Cell 1 Preferred’s discount rate compared to common shares stood at 87.0%, and for Doosan Fuel Cell 2 Preferred B, it was 84.98%. Hanwha 3 Preferred B (70.09%), Amorepacific Preferred (68.19%), LG Electronics Preferred (65.94%), and Samsung Electro-Mechanics Preferred (63.55%) are also trading around the 30% level of their respective common shares. The Hyundai Motor 2 Preferred B, along with the broader Hyundai Motor series of preferred shares, are priced at less than half of their respective common share prices, with the Hyundai Motor 2 Preferred B at 52.67%. Samsung Electronics Preferred is also trading at a 24.71% discount to the common shares, which exceeds the 18% average discount rate between Samsung Electronics and its preferred shares over the past three years.

As this undervaluation persists, preferred stocks are emerging as a useful instrument in parallel with efforts to boost corporate value, particularly as a means for companies to cancel treasury shares.

Cancelling preferred shares, like common share cancellations, reduces the number of outstanding shares and increases earnings per share (EPS). By purchasing and cancelling preferred shares that are 20% to over 50% cheaper than common shares, companies can cancel a far greater number of shares for the same budget. In addition, since preferred shares are non-voting, their cancellation does not impact the major shareholder’s ownership ratio.

Indeed, there has recently been an increase in cases of preferred share cancellations. Hanwha purchased and cancelled all of its Series 3 Preferred (Hanwha 3 Preferred B) shares in 2024, and in March this year, also cancelled all of its Series 1 Preferred shares. At the end of last month, Hyundai Motor cancelled all of its treasury shares, including about 91.29 million common shares and 1.21 million preferred shares. Daishin Securities, which is scheduled to cancel treasury shares on the 29th, plans to cancel 1,553,637 common shares, 808,333 Series 1 Preferred shares, and 196,667 Series 2 Preferred shares. Mirae Asset Securities, which acquired approximately 300 billion won worth of treasury shares over three months since June, allocated 10 billion won for Series 1 Preferred shares (Mirae Asset Securities Preferred) and 90 billion won for Series 2 Preferred shares (Mirae Asset Securities 2 Preferred B) out of the 100 billion won designated for preferred shares. This is the first time Series 1 Preferred shares have been included in a treasury share buyback and cancellation plan. Both common and preferred stocks purchased will be completely cancelled after acquisition.

In particular, market expectations are rising for Samsung Electronics to cancel its preferred shares. Recently, Life Asset Management suggested that Samsung Electronics should use this year's remaining shareholder return funds to prioritize the repurchase and cancellation of preferred shares. This issue is also tied to regulations on corporate governance. As of now, both Samsung Life and Samsung Fire & Marine Insurance each hold common shares in Samsung Electronics at a ratio close to 10%. If Samsung Electronics cancels common shares, the stake held by the two financial affiliates would exceed 10%. Under the Korean Financial Industry Restructuring Act (FIRA), any stake exceeding 10% must be divested. Thus, if the company cancels common shares, it would force these affiliates to sell off some of their holdings. In contrast, since preferred shares do not carry voting rights, they are exempt from these regulatory restrictions, making preferred share cancellation an attractive alternative for Samsung Electronics to conduct shareholder return initiatives without triggering the FIRA issue.

Suhyun Kim, head of the research center at DS Investment & Securities, said, "Since the stakes in Samsung Electronics held by Samsung Life and Samsung Fire & Marine Insurance are close to the 10% threshold under the FIRA, it is difficult to significantly increase the volume of common share cancellations. This is why, of the 90 to 110 trillion won planned for shareholder returns, only about 10 to 20 trillion won will likely be allocated to treasury shares. Within that, the proportion for preferred shares is bound to rise. In fact, during its first treasury share program in 2015, Samsung allocated 30% of the repurchases to preferred shares, and subsequently the discount rate narrowed to the 10% range," he explained.

This content was produced with the assistance of AI translation services.