Samsung Electronics' "1 Trillion Won Sell-off" Coming? ... What Is the Market Capitalization Cap?

[Image source=Yonhap News]

[Asia Economy Reporter Koh Hyung-kwang] As Samsung Electronics' stock price rises, its market capitalization has increased, bringing the issue of the market capitalization cap (CAP) within the KOSPI 200 index back into focus. There are concerns that if the market cap cap is applied to Samsung Electronics, a sell-off worth around 1 trillion KRW could flood the market all at once.

The market cap weight cap system limits the weight of a specific stock within the KOSPI 200 to 30%, and was introduced by the Korea Exchange in June last year. Based on the average weight of a specific stock over the previous three months as of the end of May and November each year, if it exceeds 30%, the weight must be reduced to 30% by the expiration dates in June and December of the following month to comply with the cap.

When the system was first introduced last year, Samsung Electronics' market cap weight did not exceed 30%, so there was no significant issue. However, since the end of last year, Samsung Electronics' stock price has started to rise, recently accounting for more than 30% of the total market capitalization, raising the possibility of applying the market cap weight cap. There are even speculations that the Korea Exchange may introduce the KOSPI 200 market cap weight cap for Samsung Electronics next month.

Currently, the securities industry believes that early implementation of the KOSPI 200 market cap weight cap for Samsung Electronics is unlikely. Kang Song-cheol, a researcher at Shinhan Financial Investment, said, "Applying the weight cap to Samsung Electronics could have a bigger impact than the regular KOSPI 200 index rebalancing," but added, "Since various index users' interests are involved, it is unlikely to be implemented in the short term."

The biggest concern if the system is introduced is the large-scale capital outflow due to funds reducing their Samsung Electronics holdings. While some outflow is inevitable, the consensus is that it will not be significant enough to have a major impact at this time.

According to a recent scenario on expected capital outflow if the market cap cap is applied, released by Korea Investment & Securities, a sell-off worth around 1 trillion KRW from Samsung Electronics would require the average market cap weight over the three months prior to the cap's expiration date to exceed 30%.

The most likely ad hoc application dates mentioned by the Korea Exchange are the expiration dates in March or April. As of the 20th, Samsung Electronics' weight within the KOSPI 200 was 33.51%. If the closing weight on the ad hoc application expiration date is 33.0%, the expected outflow amount would reach 1.46 trillion KRW.

However, Korea Investment & Securities also expressed the opinion that worrying prematurely about a sharp drop in Samsung Electronics' stock price is premature. The average market cap weight over the previous three months calculated as of the 20th was 29.8%, slightly below 30%, so it is uncertain whether the cap will actually be applied.

Song Seung-yeon, a researcher at Korea Investment & Securities, said, "Considering that Samsung Electronics' average daily trading value is about 780 billion KRW, the possibility of an immediate shock to supply and demand is low, and since the market cap cap does not apply to foreign investors, the intensity of capital outflow due to CAP application is not a level of concern."

Shinhan Financial Investment also estimated that the funds tracking the KOSPI 200 amount to around 20 to 30 trillion KRW, and if Samsung Electronics' weight is reduced by 1.5 percentage points, the theoretical sell-off volume would be 300 to 400 billion KRW.

This content was produced with the assistance of AI translation services.