Why Samsung’s record profits weren’t enough for investors

Image: Samsung Samsung Electronics reported the most profitable quarter in its history on Thursday, with operating profit of 107.4 trillion won on revenue of 195.3 trillion won, and still watched its shares close more than 4% lower. At one point they were down 6.6%. The KOSPI, which had broken above 6,000 the day before, slipped back under it. Investors had been expecting Samsung to spell out how it would return cash to them. It confirmed a 30 trillion won dividend and an overall budget of up to 110 trillion won for the year, but left the remaining 55 trillion to 75 trillion won to a board meeting in late January. After a quarter like this one, a promise to decide later was a long way short of what the market had priced in. The contrast with SK Hynix made it worse. On Wednesday it delivered blockbuster results alongside a commitment to return around $45 billion more to shareholders, and the KOSPI rose 6.6%, its biggest gain in three months. Both companies are riding the same surge in memory demand, yet a day later investors were buying one and selling the other, almost entirely on how clearly each had explained what it would do with its money. Global investors should read this as a sign of how far Korea has come. For most of the past 30 years, owning Korean equities meant accepting a discount. The big groups were run by founding families, outside shareholders came a distant second, and cash and treasury shares piled up on balance sheets with little prospect of being handed back. Investors priced that in, and, of course, they were right to do so. Reform has worn much of that logic away. Last year’s amendment to the Commercial Act extended directors’ duties to shareholders, and the government has made higher corporate valuations an explicit policy goal. Foreign investors have responded with real money. Even during Thursday’s morning slide they were net buyers on the KOSPI while domestic institutions sold. The upshot is Korea’s biggest companies are now judged the way the best-run businesses in America or Europe are judged. Strong earnings are expected as standard. As ever, investors reward a credible, specific policy on capital returns, and they punish vagueness quickly. Samsung has run into this twice since the summer. In August, when it first outlined the 90 trillion to 110 trillion won range, its shares fell 9% and the KOSPI dropped more than 3%, partly because it said nothing about canceling treasury shares. Two months later it offered the same range and asked for more time. Samsung’s caution has its logic. Its ownership structure makes large buybacks harder to arrange than at SK Hynix, and it’s spending heavily to regain ground in advanced memory chips, with capital expenditure rising and chip profits short of forecasts this quarter. A firm facing those pressures has good reason to want flexibility. Shareholders who were promised a new era of returns have simply run out of patience with that argument. Japan is the obvious comparison. Regulatory pressure on companies trading below book value led Japanese boards to sell cross-shareholdings, raise dividends and buy back stock, and global funds rerated the market accordingly. Korea, it seems, is going through a similar process, only faster and with far bigger daily swings. My current view is the discount will likely keep narrowing, but unevenly. Companies that commit early and in detail should continue to be rewarded, while those that keep deferring are likely to be marked down even when their earnings are excellent. For anyone investing in Korea from abroad, governance has become as important a driver of returns as the chip cycle, and the gap between leaders and laggards will probably grow. Samsung’s January board meeting will probably be the most important event for Korean equities this winter. If it announces substantial buybacks and share cancellations, Thursday’s fall will be forgotten quickly. If it produces another range and another deadline, investors who’ve spent this year rotating toward SK Hynix will have little reason to come back. Korea’s reformers wanted a market where shareholders could hold even the biggest companies to account. On Thursday, they got a clear demonstration that it works. Nigel Green is the deVere Group’s CEO and founder.