Preferred shares of South Korean companies are trading at a record 45% discount in ten years; Samsung's 110 trillion won buyback plan may help eliminate the "Korea discount"

According to sources from Zhihui Finance APP, Samsung Electronics’ highly anticipated stock buyback plan is raising investor expectations that the Korean giant will purchase non-voting preferred shares, thereby narrowing their deep discount and setting a precedent for other companies.

More than one hundred Korean companies, including Hyundai Motor and LG Chem, have issued preferred shares to raise funds without diluting the founding families’ voting rights. Although these preferred shares enjoy a small dividend premium over common shares, their trading prices are on average discounted by as much as 45%, which exemplifies a typical capital misallocation, according to Palliser Capital’s portfolio manager, Sachin Mistry, in London.

Market observers anticipate that Samsung will target discounted preferred shares in any buyback activity, a move that would both save funds and help avoid a rule that could force affiliates to reduce their holdings. The undervaluation of preferred shares has become a focus for investors, coming as Korea advances corporate governance reforms to eliminate the “Korea discount”—a systemic undervaluation that has long plagued Korean equities.

“Momentum for narrowing the discount gap is building,” said Han Sangkyoon, Chief Investment Officer at Quad Investment Management. The firm sold Samsung common shares earlier this year and increased holdings in preferred shares, betting on a convergence in valuations. “The preferred share discount has become excessive,” he noted.

Last month, Samsung Electronics announced it would spend up to 110 trillion won (about $81.8 billion) to share AI gains with shareholders, making it one of the largest shareholder return plans in the world’s history. While the company did not specify the buyback amount, there is currently a 26% price gap between preferred and common shares.

Compiled data shows that this gap has widened to its highest level in over a decade, even after narrowing from 37% in recent weeks due to buyback expectations.

Hyundai Motor also announced a stock buyback plan that includes preferred shares in August. The premium for Hyundai common shares over preferred shares currently exceeds 50%.

“If companies buy back and cancel preferred shares, they can save on future dividend payments,” said Kang Dong-oh, an individual investor who initiated a push to boost preferred share valuations. “The more preferred shares firms repurchase, the greater the benefit to all shareholders.”

Additionally, under Korean law, Samsung’s financial affiliates are not permitted to hold more than 10% of voting common shares. Large-scale common stock buybacks would push affiliate (family-related) ownership above this limit, forcing reductions. By buying back preferred shares, Samsung can avoid disrupting the existing ownership structure while enhancing valuations.

The 10% ownership cap “may limit the amount of common shares the company can repurchase, so it may buy back more preferred shares,” said Molly Pieroni, President of Yacktman Asset Management in Texas. “This could trigger the narrowing of the discount.”

Through buybacks, Samsung will also boost per-share value, helping gradually resolve the “Korea discount.”

Yacktman Asset Management and other investors anticipate that Samsung’s buyback move could lead to a broad revaluation of preferred shares across Korean corporations.

“We consider the preferred share discount to be a symptom of the ‘Korea discount’—restricted market access has impacted ‘normal’ price discovery,” said Pieroni of Yacktman. “As Korea continues to open its market to international investors, we expect this discount to gradually narrow.”