Cracking the value problem in corporate Asia

Below is a commentary I wrote that was published by The Straits Times here.

Despite their commanding positions in local markets and even global niches, Asian corporates still trade at substantial valuation discounts to their US peers. The core issue – they generate lower returns on equity (ROE), reflecting less efficient use of shareholder capital. MSCI Asia’s five-year average ROE is 10 per cent, whereas MSCI US’ is over 19 per cent.

This value gap stems from a web of interlocking issues, including corporate governance gaps, inefficient capital allocation and unfocused balance sheets with non-core assets that drag returns. In South-east Asia, the “conglomerate discount” is well-known – Bain calculates that investors discount the value of large conglomerates by about 7 per cent to 43 per cent versus the sum of their parts.

To their credit, governments, regulators and state-owned firms from Japan to Singapore have pushed for top-down reforms in various ways over the past decades. One early successful wave was led by Temasek-linked companies around the mid-2000s. Singtel divested non-core assets like stakes in Singapore Post and Yellow Pages, while CapitaLand listed CapitaCommercial Trust amid a major asset monetisation push.

In Japan, share buybacks hit record highs on a regulatory push. Meanwhile, Chinese state-owned enterprises (SOEs) responded to government directives by lifting dividend payouts (to 30 per cent-50 per cent) and enhancing disclosures, prompting partial re-ratings. 

Yet with the value problem proving persistent, this top-down drive is quietly gaining a second wind. Japan and Singapore are pushing harder while Indonesia aims to consolidate nearly 900 SOEs into just 200 in the next four years. Notably, South Korea appears poised for its most aggressive set of corporate reforms yet.  

Will this capital market push deliver structurally higher valuation multiples and help unlock Asia’s true value? The heavy lifting has only just begun. 

Japan: ‘Name-and-shame’ yielding results

Historically, Japan was beset with numerous low-ROE companies, as ultra-cheap funding costs disincentivised change and complicated cross-shareholdings deterred activist shareholders. In 2012, Abenomics’ “third arrow” of structural reforms attempted to fix this, with mixed results.

But 2023 marked a turning point. The Tokyo Stock Exchange (TSE) launched a radical “name-and-shame” campaign, publishing monthly lists of firms disclosing their capital efficiency plans, indirectly singling out those that failed the cut.

The pressure worked: the Topix surged over 50 per cent between 2023 and 2024. Japanese corporates are also rapidly undertaking share buybacks and business structure reforms. So far in 2025, over 12 trillion yen (S$105 billion) in share buybacks have been announced, topping 2024’s record. 

Yet even now, there is huge room for improvement. Japanese firms still trade at a price-to-book ratio of 1.4, versus nearly five times for their US counterparts. Many also continue to sit on hefty cash piles – 47 per cent of non-financial firms are in net cash, accounting for some 20 per cent of their total assets.  

With Japan’s trade uncertainty easing following the US deal to lower tariffs on Japanese goods, investors should refocus on bottom-up fundamentals. Key beneficiaries include quality companies with strong ROE initiatives and select laggards among the machinery, healthcare and technology sectors.

South Korea: Force of legislation

Meanwhile, South Korea continues to grapple with a longstanding “Korea discount”, with MSCI Korea trading at a 66 per cent price-to-book discount relative to the MSCI AC World index, even after a recent rally. This valuation gap has often been linked to the same deep-seated issues affecting Japan, especially opaque and inefficient company structures. Without strong board accountability, South Korean firms face less pressure to optimise capital, sinking ROEs further.

This time, the South Korean government is taking a more forceful approach – a “Value-Up” programme backed by legislation. In July, the Korea Commercial Act was amended to make directors accountable to all shareholders, strengthening minority protections.

More are coming. Proposed reforms include mandatory share cancellation, changes to dividend income tax and inheritance tax tweaks – all designed to nudge companies towards higher capital efficiency. These could begin debate in the September legislative session.

Compared to the past, what’s different now is a more unified government, which increases the likelihood of tough reforms. While still early days – around 75 per cent of South Korea’s market capitalisation is tied up in powerful chaebols – high dividend payers and companies with large treasury stock positions should stand to benefit the most. Telcos, with their visible effort to raise dividends and divest non-core assets, are also likely to lead. 

Singapore: Twin catalysts to watch

Despite the re-rating of several corporate stalwarts over the past two years, the value problem still looms over Singapore, especially among the small- and mid-cap stocks. Three-quarters of listed companies on the Singapore Exchange (SGX) have ROEs below 10 per cent, and roughly 60 per cent trade below their book values, with a median price-to-book ratio at just 0.8 times. 

Unlike in Japan or South Korea, part of Singapore’s challenge lies in low trading volumes, due to limited retail investor interest, scarcity of research coverage, and past governance lapses in the small-cap space. A dearth of listings – 2024 saw just four IPOs and 20 delistings – has further sapped trading liquidity. 

To rejuvenate the local equity market, a government task force spearheaded by the Monetary Authority of Singapore (MAS) has been at work since August 2024 to tackle these longstanding issues. Two initiatives stand out. 

First, a $5 billion capital allocation to fund managers for deployment in Singapore-centric equities, with $1.1 billion already assigned to three managers. If executed well, this could kick-start a virtuous circle of improved investor confidence, flows and valuations. 

Second, the MAS’ Equity Market Review Group could unveil specific value-up proposals before year-end. If this catalyses improvements in drivers of corporate returns like asset turnover, margins and financial efficiency, valuations could inflect higher. 

Meanwhile, Singapore equities, which we rate as “Attractive”, are up 16 per cent in 2025. We favour banks, select telcos, while quality small- to mid-caps should benefit from liquidity inflows and eventual reform-driver re-ratings. 

In summary, while Asian corporates have matured and globalised in the past two to three decades, many still critically fall short in creating lasting shareholder value. With governments and regulators re-energising reform agendas, the ball is now in these companies’ court to deliver.

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