Samsung Electronics (005930.KS) preferred shares are excessively undervalued compared with common shares, and the price gap could narrow going forward, according to an analysis.
Will the Widened Gap Narrow?
The narrowing of the discount on Samsung Electronics preferred shares has been picked as an investment idea worth watching in the second half of this year, according to DS Investment & Securities on Monday. With recent ETF inflows concentrated in common shares, the price gap between common and preferred shares has widened to the largest on record, but the grounds to justify this are instead losing strength, the brokerage noted.
Samsung Electronics common shares are trading at a price roughly 54% higher than preferred shares. This is the result of a growing supply-demand imbalance as large-scale ETF inflows have flowed only into common shares for several months.
"The value of the voting-rights premium, which has been cited as the key factor behind the preferred-share discount, has also fallen from the past," said Kim Soo-hyun, head of the research center. "There is a mechanism that revives voting rights if preferred dividends are not paid, and the revised Commercial Act has expanded directors' duty of loyalty to all shareholders, strengthening the institutional foundation for checking controlling-shareholder risk." He added, "Samsung Electronics preferred shares have sufficient trading volume, so the liquidity-discount logic is also becoming less persuasive."
He also cited overseas cases as supporting evidence. The preferred-share discount rates of Alphabet and Berkshire Hathaway in the United States and major German companies were found to be only in the 1-5% range. His explanation is that preferred-share buybacks and shareholder-protection mechanisms serve to narrow the price gap.
Kim noted that a similar trend is emerging domestically. He cited Mirae Asset Securities, which recently pursued buybacks and cancellations of treasury stock including preferred shares, and set easing the price gap between common and preferred shares as a shareholder-return goal.
"If Samsung Electronics also expands large-scale shareholder returns and treasury-share cancellations going forward, the current excessive preferred-share discount rate is likely to narrow," he said. "In the second half, there is a need to focus on the possibility of a relative re-rating of preferred shares over common shares."
Q2 Operating Profit Effectively Surpasses 100 Trillion Won
Meanwhile, Samsung Electronics disclosed the same day that its preliminary operating profit for the second quarter this year came in at 89.4 trillion won. The figure reflects about 17 trillion won in provisions for performance-based bonus payments. Excluding this, the amount stands at about 106.5 trillion won, marking the first time the combined first-half figure has surpassed 100 trillion won.
Even on the basis that reflects the provisions, this second-quarter operating profit exceeds the combined operating profit of 82.9 trillion won for the three years from 2023 to 2025.
An assessment follows that, as the memory supply-demand imbalance driven by expanded artificial intelligence (AI) investment has translated into earnings, the investment capacity to pursue production-capacity expansion has also grown considerably.
With memory prices soaring, demand for high-margin memory products centered on high-bandwidth memory (HBM) is expected to increase further in the second half as Nvidia launches its new chip "Vera Rubin." As a result, forecasts have emerged that Samsung Electronics will continue stable earnings for the time being.
Samsung became the No. 1 tech company by posting quarterly operating profit of 89 trillion won.
