On January 19, the red chip index of Hong Kong stocks rose more than 1%, the highest level since late June last year. Among the constituent stocks, China Resources Power Holdings and China Resources cement Holdings rose more than 4%, while China Overseas Land & Investment and China Jinmao rose more than 3%.

Cathay Pacific Securities said in a research report earlier this month that the "Spring Market" is optimistic about the main line of state-owned enterprise reform, and the leaders of central enterprises are particularly worthy of attention. As the examination year of the three-year action plan in 2022, the relevant state-owned enterprises will have more motivation to actively manage market value and transmit company value.

First, what stage has the current reform of state-owned enterprises reached?

The reform of state-owned enterprises has been developing in depth for more than 40 years, and it has entered the stage of full implementation since the two sessions put forward a three-year action plan for the reform of state-owned enterprises in 2020.

Second, what is the progress of the three-year action plan for the reform of state-owned enterprises (2020-2022)?

70% of the three-year action plan has been completed in 2021, and in the year of the decisive victory in 2022, the three-year action on the reform of state-owned enterprises must be completed with high quality. In 2022, we should focus on the "three obvious achievements", that is, we have achieved remarkable results in building a modern enterprise system with Chinese characteristics, achieved remarkable results in promoting the optimization of industrial layout, and achieved remarkable results in improving the vitality and efficiency of enterprises.

Third, why is the Spring Market optimistic about the main line of state-owned enterprise reform?

In 2022, market capitalization may become an important indicator of concern.Under the goal of "managing capital", the reform demands of "preventing the loss of state-owned assets" and "improving the asset securitization rate of state-owned enterprises" have been reflected in the reform goals of various regions. We believe that in 2022, as the examination year of the three-year action plan, the relevant state-owned enterprises will have more motivation to actively manage market value and transmit company value.

In 2022, real estate, private enterprises and other main bodies may face some downward pressure, and state-owned enterprises are relatively dominant.The real estate downturn is the biggest potential challenge to the macro-economy next year. Under "housing speculation", it is more difficult to restart the real estate cycle. And the base in the first half of 2022 is relatively high, the current mainstream private real estate enterprise model of high debt, low cash flow and low profit margin is more difficult to sustain. In this context, the market blue chip and state-owned enterprises are relatively dominant.

Fourth, can the reform of state-owned enterprises bring excess benefits?

At the index level, the theme of state-owned enterprise reform has obvious excess returns. The "double hundred Index" rose 32.9% in 2021, significantly outperforming the Shanghai Composite Index (3.9%) and the Shanghai and Shenzhen 300 (- 6.2%). The "State-owned Enterprise Reform Index" rose 21.1% in 2021, significantly outperforming the Shanghai Composite Index.

5. What are the excess returns of the three ways of state-owned enterprise reform?

(1) reorganization and merger: the first forecast day of reorganization information has a strong profit-making effect, and there is excess income as a whole after the completion of reorganization.The five companies that reorganized in 2021 rose significantly on the day of the announcement of the restructuring information, while the moneymaking effect near the date of the announcement of the completion of the restructuring was not obvious. The 2020 restructuring index rose 17.0 per cent in 2021, while Shanghai and Shenzhen fell 6.2 per cent over the same period.

(2) introduction of war investment: the excess return of strategic investors introduced by state-owned enterprises and central enterprises is significant.After 2020, the number of state-owned enterprises and central enterprises with war investment in A-share announcement increased significantly from 14 in 2019 to 36 in 2020 and 26 in 2021. The "War Investment Index", which is based on 36 equal weights in 2020, rose 16.3% in 2021, while the Shanghai and Shenzhen 300 fell 6.2% over the same period.

(3) Equity incentive: the implementation of equity incentive in state-owned enterprises and central enterprises can significantly improve their performance.Since 2018, the central state-owned enterprises that announced the equity incentive plan (excluding the unapproved) will hold the plan for two weeks after the announcement, and the median annualized excess return relative to the Shanghai and Shenzhen 300 can reach 15.7%, but the excess return will fall back quickly one month later. Therefore, for institutional investors, the maneuverability of buying according to the announcement date of the plan is not big, and the focus on equity incentive is mainly on the realization of performance after implementation.

Equity incentive will lock in the company's profit / revenue growth in the next three years, and the launch and completion of the program will play an obvious positive role in promoting the performance of the company.For the central and state-owned enterprises that implemented equity incentives in 2018, the median growth rate of revenue and net profit in 2018 (19%) was significantly better than that in 2017 (13%), and significantly better than the average level of their Shenwan secondary industry. The performance of the central and state-owned enterprises that implemented equity incentives in 2019 and 2020 also improved significantly in the following years.

How to select the investment targets for the reform of state-owned enterprises?

We maintain the characteristic judgment that the spring market will be based on undervalued blue chip repair, in which the leaders of central enterprises are particularly worthy of attention, focusing on equity incentives in 2020-2021 and benefiting from high dividend (dividend index) central enterprises in the areas of intensive central finance.In the past two years, the default rate of state-owned enterprises deviated from that of private enterprises, the default rate of state-owned enterprises was significantly lower than that of private enterprises, and the leaders of state-owned enterprises had a higher dividend yield. Based on the logic of steady growth and low valuation repair, state-owned enterprises are expected to be the first to benefit.

Three-factor screening:

(1) selection of state-owned enterprises and central enterprises that completed restructuring and merger in 2021, or introduced strategic investors, or implemented equity incentive programs in 2022.

(2) screen high prosperity industries and racing tracks. Select new energy infrastructure and power operation, military industry, medicine, new materials and other high prosperity track.

(3) screen the enterprises with high valuation and price, and select the targets whose valuation is lower than the 50th quartile according to the quantiles of PE and PB in the past ten years. According to the key industries of state-owned enterprise reform, the target of 2022 state-owned enterprise reform is selected from the bottom up.

Risk Tips:Policy implementation is not as expected, and historical returns do not represent the future.