With South Korea's sole bourse operator set to introduce this month a stock index comprised of Korean companies well complying with the government-led corporate value-up program, the market expects bank shares and large-cap stocks to make the list.

As part of the value-up program announced earlier this year, Korea Exchange is to launch the Korea Value-up Index in September, enlisting “best practice” companies to boost the appeal of the local stock market.

Though the bourse operator is yet to release a detailed roadmap on the launch, the index is likely to evaluate companies based on profitability, capital efficiency and shareholder returns.

The local authorities anticipate institutional investors, including pension funds, to use the index as a benchmark for their investments. Exchange-traded funds that track the Korea Value-up Index will also be listed within this year to attract retail investors.

The market expects the Korea Exchange is likely to roll out two indices in its Korea Value-up Index initiative, one consisting of listed companies that have proven records of profitability, and the other of those anticipated to boost their corporate value.

“With the stress on enhancing shareholder values to resolve the Korea Discount, the index for profitable companies will measure companies' shareholder return rate,” analyst Ko Gyeong-beom from Yuanta Securities said.

“The index of companies expected to excel is likely to select companies based on metrics of return-on-equity and price-to-book value, similar to the Japan’s JPX Prime 150, which is bench-marked by the Korea Exchange,” Ko said.

The Korea Value-up Index is expected to have taken a hint from Japan’s JPX Prime 150, an index rolled out by the Japanese authorities in July 2023 to introduce leading Japanese companies that are estimated to create value.

JPX Prime 150 consists of companies with high capital efficiency and market evaluation, measured through a return on equity of 8 percent or above, and price book-value ratio above one.

Yet the JPX Prime 150 index has been outperformed by Japan’s benchmark Nikkei 225 in its profitability. The introduction of related ETFs has been limited with only two products listed for the time being.

Yuanta Securities projected Hyundai Motor Group, Celltrion, KB Financial Group, Shinhan Financial Group, Posco Holdings, Hana Financial Group -- companies with high dividend rate -- to make the Korea Value-up Index.

Yet, considering the market’s lukewarm response to JPX Prime 150, the Korea Value-up Index could have a limited impact on the local stock market, experts viewed.

“Though anticipation gathers on the launch of the value-up index, the similar ETFs introduced in Japan were not very attractive,” analyst Yeom Dong-chan at Korea Investment & Securities said.

“Theoretically, the value-up program is about enhancing shareholder values in the long term through improving returns, not boosting stock prices in the short term.”

Limited participation in the corporate value-up program also remains a hurdle.

While the bourse operator plans to enlist 100 to 150 listed companies on the index, only nine companies have released value enhancement disclosures and around 20 firms have preannounced disclosures for the time being, according to Korea Exchange data.

“Excessive expectation on the value-up index should be lowered,” analyst Ko said.

Local authorities have sought to encourage companies' participation in the program by offering tax incentives.

"In Japan, various companies, including ones with large market caps, participated in releasing value enhancement disclosures, boosting the overall participation," Financial Services Commission Chairman Kim Byoung-hwan said during a meeting held in Tokyo with his Japanese counterpart Ito Hideki, commissioner of Japan's Financial Services Agency, Tuesday.

"Large companies in Korea are expected to serve their role in that aspect, and the government will continue to communicate and support companies."