Samsung Electronics has found a novel way to address one of South Korea's most persistent stock-market problems: buy back more shares—and potentially target the stock that trades at the steepest discount.
The semiconductor giant is facing growing investor expectations that its enormous new shareholder-return program will include a substantial purchase of preferred shares.
That matters because Samsung's preferred stock currently trades at a roughly 45% discount to its common shares.
For investors, the gap has become a symbol of the so-called “Korea discount,” a long-running phenomenon in which South Korean companies trade below what international investors believe their fundamentals deserve.
Samsung could soon become the company that shows how to close it.
Last month, Samsung announced plans to spend as much as 110 trillion won—approximately $81.8 billion—on shareholder returns, one of the largest programs of its kind globally. The scale of the program immediately attracted attention, but investors are now focusing on an important detail: where exactly Samsung might deploy the money.
The preferred shares are an obvious target.
Preferred stock generally pays investors a slightly higher dividend than common shares but carries limited or no voting rights.
In South Korea, that structure has long allowed founding families and controlling shareholders to preserve voting power while companies raised capital.
But it has also produced a peculiar market consequence.
Preferred shares can trade at enormous discounts to common shares even when the underlying economic rights are broadly similar.
Samsung's discount has become particularly striking.
Palliser Capital portfolio manager Sachin Mistry described Korean preferred shares as suffering from capital misallocation, with the average discount across more than 100 South Korean companies estimated at roughly 45%.
That is a huge gap.
And it creates a mathematical opportunity for Samsung.
If the company buys preferred shares trading significantly below the value investors place on common stock, Samsung can potentially retire shares relatively cheaply while simultaneously reducing the discount between the two classes.
There is also a regulatory angle.
The company may be able to use the buyback to help navigate rules that could require affiliates to reduce their ownership stakes.
That makes preferred shares potentially attractive from both a valuation and corporate-governance perspective.
But the story is bigger than Samsung.
South Korea has been trying to reform its corporate-governance environment and eliminate the structural issues behind the Korea discount.
Investors have long complained that Korean companies can have world-class assets and strong profitability while their shares remain undervalued compared with peers elsewhere.
The problem is not necessarily the businesses themselves.
It is the relationship between shareholders, controlling families, boards and capital allocation.
Foreign investors have frequently questioned whether management teams prioritize minority shareholders sufficiently.
Preferred shares illustrate the problem perfectly.
A company can have two share classes representing similar economic exposure but radically different market valuations.
That tells investors something.
The market is pricing governance risk.
Samsung now has an opportunity to challenge that assumption.
A buyback of discounted preferred shares could theoretically create value in several ways.
First, the company removes undervalued shares from circulation.
Second, earnings are spread across a smaller share count.
Third, the discount itself could narrow as investors become more confident that Samsung is taking shareholder returns seriously.
Fourth, the move could demonstrate that Korean companies have mechanisms available to unlock value without sacrificing control.
That last point is particularly important.
Corporate governance reform is often treated as an abstract political issue.
But investors experience it directly through stock prices.
A company can be profitable while shareholders receive poor returns if excess capital is allocated inefficiently.
By contrast, a company that generates strong cash flow and consistently returns capital can command a higher valuation even without explosive growth.
Samsung is increasingly operating in the second category.
The company has benefited enormously from the artificial-intelligence boom.
Its memory-chip business is benefiting from intense demand for advanced memory used in AI servers.
Its semiconductor operations are becoming more strategically important.
And the company's stock has already experienced a remarkable rally.
Yahoo Finance data show Samsung shares up more than 130% year to date as of Sept. 8, while the broader KOSPI has gained about 70%. Samsung's one-year return has been even more dramatic, with the stock up more than 300%.
That performance creates an interesting backdrop for the buyback.
The company is not buying back shares from a position of weakness.
It is doing so after a spectacular appreciation in its market value.
Investors could interpret that as a sign that management believes the company's future cash generation remains strong.
Or they could question whether Samsung is returning too much capital when the semiconductor industry requires enormous investment.
The balance between shareholder returns and capital expenditures is therefore important.
Samsung has to invest in advanced manufacturing.
It needs new semiconductor equipment.
It needs memory production capacity.
It needs to stay competitive against TSMC in logic manufacturing and against other memory producers in AI-related markets.
That means every won returned to shareholders is a won that cannot be spent elsewhere.
But Samsung's enormous scale gives it more flexibility than most companies.
The company can invest tens of billions in semiconductor infrastructure while still returning substantial sums to shareholders.
That is a luxury created by the AI-driven semiconductor boom.
The preferred-share issue also highlights how South Korean markets are changing.
For years, investors tolerated substantial discounts because they believed corporate-governance problems were difficult to solve.
Now the government is pursuing reforms designed to improve transparency and shareholder protections.
As the market adjusts, investors who identify unusually wide discounts could potentially benefit from normalization.
That is exactly what Quad Investment Management appears to be betting on.
The investment manager previously sold Samsung common shares to buy preferred stock, wagering that the valuation gap would narrow. Chief investment officer Han Sangkyoon said the preferred shares were trading at an excessive discount and that momentum was building toward a reduction in the gap.
It is a classic convergence trade.
If the two share classes should have more similar valuations based on their economic rights, the cheaper one has more room to appreciate.
But there is no guarantee.
A discount can persist for years.
Preferred shares may remain less attractive to investors because of their limited voting rights.
And broader Korean governance reforms could take longer than markets expect.
Samsung also has to consider what its capital-allocation decisions communicate to international investors.
A giant buyback can signal confidence.
But an enormous buyback paired with aggressive semiconductor investment sends a more nuanced message: management believes the company can finance the AI opportunity and still return massive amounts of money to shareholders.
That is a powerful statement.
The most intriguing consequence may be what happens to other Korean companies.
More than 100 publicly traded South Korean companies have preferred shares outstanding, according to data cited by Bloomberg.
If Samsung takes steps to narrow the discount, other companies may face pressure to follow.
Investors could start demanding more aggressive capital-return policies.
Boards could face greater scrutiny.
And controlling shareholders could find it harder to justify enormous gaps between common and preferred valuations.
The Korea discount would then become less of a permanent feature and more of a temporary inefficiency.
For South Korea's stock market, that would be transformative.
The country's companies already possess enormous global businesses in semiconductors, automobiles, chemicals, batteries and electronics.
What they have lacked, in the eyes of some investors, is consistent shareholder-friendly capital allocation.
Samsung may now be preparing to change that narrative.
The headline figure is enormous: up to 110 trillion won in shareholder returns.
But the more important figure may be the 45% discount attached to preferred shares.
If Samsung uses its buying power to attack that discount, the move could reverberate far beyond Samsung.
It could become a test of whether South Korea can finally turn corporate governance reform into actual shareholder value.
And that would make one of the world's biggest technology companies an unlikely pioneer in fixing one of Asia's oldest market problems.