Asia: On the path to becoming more investor and income friendly

Value investors look for companies whose shares are trading at less than their fundamental value. In the past, fundamental value tended to be measured in relation to a company’s physical assets, such as factories and stock. Increasingly, this includes other company assets such as its products’ brand strength and patents for inventions.

However, in some parts of Asia, shares in many companies are trading at prices below the book value of their assets – and have been for some time. This isn’t always because the companies are performing worse than those listed in the US, UK and Europe. Instead, a key reason is that the corporate culture in some economies may prioritise other stakeholders and a company’s objectives more highly than shareholder returns. This behaviour can, for example, take the form of holding large cash balances for stability, diversifying into unrelated businesses and having substantial shareholdings in other companies.

Policy changes are improving investor relations and shareholder rewards

Economists often argue that a healthy stock market is essential for a healthy economy, which gives governments a clear incentive to take action. Over the last year, Japan and South Korea have taken steps to address stagnating market valuations that have depressed returns for domestic investors.

In 2023, the Tokyo Stock Exchange asked all listed companies to introduce policies focused on improving profitability, long-term returns and valuations. This step aligns with the first Japanese Corporate Governance Code introduced in 2015, which requires companies to commit to higher governance standards.

Meanwhile, South Korea’s Financial Services Commission recently introduced its “Corporate Value-Up Programme”. This initiative aims to raise the attractiveness of the Korean stock market by improving shareholder returns and weak governance structures. More companies are paying out dividends than before, showing a willingness to consider the demands and requirements of their shareholders.

The opportunity for income investors

We often say that it is important for value investors to have patience. This is because it can take months or years for a company’s stock market fortunes to significantly improve – dividends make being patient easier because they essentially pay investors to wait for returns from increased share prices.

A positive cultural change in Asian businesses is on its way. Dividends have risen in the region in recent years. In Hong Kong and South Korea, some companies that are still controlled by their founding families have introduced dividends and share buybacks – even before government policies were changed, in a bid to boost low valuations. For example, Samsung Electronics recently announced its January 2024 Shareholder Return Programme for 2024-2026. This programme reiterated that the company was “… committed to delivering sustainable shareholder value,” and continuing “… to enhance long-term value creation and enhance shareholder value.” Samsung’s commitments include continuing to return 50% of free cash flow (FCF) generated via regular dividends, as well as any remaining portion of the 50% of FCF after dividend payouts.

Another example is Taiwan Semiconductor Manufacturing Company (TSMC), a leading player in the semiconductor space. TSMC has been a committed dividend payer since 2004, even during the downturn in the semiconductor industry in 2023, when high inflation and rising rates led to weaker corporate and consumer spending.

In the minds of some investors, Asian company culture in some markets is linked to a lack of transparency and inefficient corporate practices, making it less desirable to invest in the region. While evolutions and boardroom practices don’t often go hand-in-hand, over the past decade a quiet corporate revolution has been taking place in Asia, creating multiple investment opportunities and improving potential rewards for the patient investor.