The historical context and current progress of the reform of state-owned enterprises: from the top-level design to the promotion of pilot projects, 2022 is the final year of three-year action (full implementation).

The reform of state-owned enterprises since 2014 can be roughly divided into four stages:

1) 2014-2016: top-level design stage. In August 2015, the State Council issued a programmatic document "guidance on deepening the Reform of State-owned Enterprises" to build a "1N" policy system.

2) 2016-2018: local pilot stage. In February 2016, the "implementation Plan" for the ten pilot reforms of "state-owned enterprises" was issued, and the pilot project of mixed reform in important areas (natural monopoly) was launched.

3) 2018-2020: extensive pilot stage. In August 2018, the work Plan of "two hundred actions for the Reform of State-owned Enterprises" was issued and extended to more than 100 central enterprises and more than 100 local backbone state-owned enterprises on a pilot basis.

4) 2020-2022: the stage of full implementation. In June 2020, the three-year Action Plan for the Reform of State-owned Enterprises (2020-2022) was issued, marking the stage of full implementation of the reform of state-owned enterprises. At present, the reform of state-owned enterprises has been progressing smoothly in the past three years, with the target of 70 per cent in the first two years successfully completed, and the progress made in completing the main tasks of local state-owned enterprise reform in the first half of 2022 exceeded 90 per cent.

The key tasks of the reform of state-owned enterprises focus on eight aspects, and there are three main ways to implement them at the enterprise level: asset restructuring, the introduction of war investment, and equity incentive.

1) reorganization is to optimize the business, lighten the burden and improve the competitiveness of state-owned enterprises through the reorganization of business, assets, debts and other elements.

2) the introduction of war investment can promote the integration of resources and business between investors and invested enterprises, and realize the promotion of enterprise value.

3) Equity incentive is the most widely used way of state-owned enterprise reform, and it also plays a significant role in improving the performance and stock price of listed companies. According to the announcement of listed companies, the number of cases disclosed by listed state-owned enterprises has increased significantly since 2020, in which the state-owned enterprises that carry out restructuring and introduce war investment are mostly distributed in traditional industries, and the state-owned enterprises that set up equity incentives are mostly distributed in emerging industries.

Valuation perspective: the reform of state-owned enterprises promotes the growth of enterprise value, the current valuation is low, and the ratio of allocation performance to price is prominent.

1) analyze the value-added reform of state-owned enterprises from the perspective of DCF model. The numerator side: through asset restructuring, the introduction of war investment, equity incentives and other ways, the state-owned enterprises help to improve their free cash flow; the denominator side: through the introduction of war investment, debt replacement, asset restructuring and other ways, help to reduce the cost of debt capital and equity capital of state-owned enterprises, and finally achieve long-term internal value-added within state-owned enterprises.

2) the valuation of state-owned enterprises is low. As of early November, the PE quantile of CSRC central enterprises was 12.77 per cent, while the PE quantile of CSI real estate enterprises was 4.10 per cent, with the overall valuation at the bottom of history.

State-owned enterprise reform from a strategic perspective: from valuation-driven to profit-driven, state-owned enterprises are expected to become one of the main forces of stable growth.

1) before 2020, there is no significant difference between the state-owned enterprise reform index and the all-A profit growth rate of Wind, and the excess return mainly comes from the increase in risk appetite brought about by the introduction of policies.

2) from 2020 to now, the performance of the reform of state-owned enterprises represented by the double 100 Index has been gradually realized, and the profit growth rate has been significantly higher than that of Wind, driving the index to continue to rise in 2021, when the heat of state-owned enterprise reform is low.

3) looking to the future, based on the pattern of profit distribution and leverage, state-owned enterprises are more willing and able to carry out credit expansion, and are expected to become one of the main forces of stable growth.

The reform of state-owned enterprises has returned to the stage: the plight of traditional industries has reversed, and emerging economies have braved the wind and waves. The report of the 20th CPC National Congress emphasizes that promoting the modernization of national security system and capacity, and the construction of energy resources and important industrial chain supply chain will be the key direction of the reform of state-owned enterprises.

Taking into account the high dividend, low valuation and steady growth direction, focus on military industry, communications, high-end equipment, building materials, energy resources and other areas.

01 reform of state-owned enterprises, braving the wind and waves

1.1. State-owned Enterprises are the Stabilizer of China's economy

State-owned enterprises play an important role in ensuring employment and stabilizing people's livelihood. In 2020, 55.6298 million people were employed in cities and towns of state-owned enterprises, accounting for 12 percent of the country's urban employment. In 2021, state-owned enterprises should pay 5.35599 trillion yuan in taxes and fees, an increase of 16.6 percent over the same period last year, accounting for 31 percent of the country's total tax revenue. Of this total, central enterprises totaled 3.62341 trillion yuan, up 14.0 percent over the same period last year, while local state-owned enterprises totaled 1.73258 trillion yuan, up 22.6 percent over the same period last year.

The enterprise climate index of state-owned enterprises is higher than that of private enterprises, but the job market climate index of state-owned enterprises is generally lower than that of private enterprises. The Enterprise Prosperity Index is an index compiled according to the judgment and expectation of the person in charge of the enterprise on the comprehensive production and operation of the enterprise, which is used to comprehensively reflect the production and operation of the enterprise; the Employment Market Prosperity Index (CIER) is jointly launched by the China Employment Research Institute of Renmin University of China and Zhaopin recruitment platform to reflect the prosperity of the labor market and the employment situation. Since 2016, the prosperity index of state-owned enterprises has been higher than that of private enterprises; since the outbreak of the COVID-19 epidemic in 2020, the prosperity index of state-owned enterprises has declined, but the fluctuation is smaller than that of private enterprises and remains strong. Since 2020, the climate index of the employment market of state-owned enterprises has remained below 1, the competition in the employment market of state-owned enterprises is still fierce, and the public still pays more attention to the jobs of state-owned enterprises.

The number of listed companies of state-owned enterprises in A shares is less than 1/3, with a market capitalization of nearly half. As of November 21, 2022, there were 1331 state-owned enterprises in A-share listed companies, accounting for 27% of the total, including 435 central state-owned enterprises and 896 local state-owned enterprises. In terms of market capitalization, the market capitalization of state-owned enterprises of A-share listed companies reached 41.23 trillion yuan, accounting for 47%.

State-owned enterprises are mainly located in the middle and upper reaches of the industrial chain, dominated by the financial cycle, and control important technologies and core resources. Divided by style: in private enterprises, consumption and growth account for nearly 60%, while finance only accounts for less than 6%; in state-owned enterprises, finance and cycle account for 27% and 53% respectively, while growth and consumption only account for about 20%. According to the Wind industry classification: finance and energy belong to upstream industries, accounting for only 3% of private enterprises, while state-owned enterprises account for nearly 35%; industry, materials and other middle industries account for the same proportion; information technology, consumption and health care belong to the lower reaches, accounting for more than 50% of private enterprises, while only about 15% of state-owned enterprises.

1.2. The development context and reform process of the reform of state-owned enterprises

1.2.1 looking back: the reform of state-owned enterprises has gone through five stages

Since more than 40 years of reform and opening up, the reform of state-owned enterprises in China has mainly experienced the following five stages.

▶ 1978-1984: in the stage of enlightenment and exploration, the expansion of power was carried out to make profits. Adjust the relationship between the state and enterprises, break the previous pattern of no distinction between government and enterprises, at the same time allow state-owned enterprises to retain part of the profit funds, expand the operational autonomy of enterprises, so as to mobilize the enthusiasm and initiative of enterprises and staff and workers.

▶ 1985-1992: the preliminary exploration stage, the implementation of the separation of the two rights. Establish the correct relationship between the state and enterprises owned by the whole people, and the correct relationship between workers and enterprises, and ensure the status of workers as the masters of the enterprise. Specific measures include the general establishment of a contract management responsibility system in state-owned enterprises, to improve the operational efficiency of enterprises by means of contract management.

▶ 1993-2002: the system innovation stage, carries on the property right reform. The property rights of state-owned enterprises are clear, the rights and responsibilities are clearly defined, and the joint-stock cooperation system has become the main form to promote the reform of state-owned enterprises. Through the transformation of local small and medium-sized state-owned enterprises into private enterprises to enhance their degree of marketization and operational vitality, the proportion of private economy in the national economy began to increase rapidly.

▶ 2003-2013: the stage of regulatory reform, improving the reform of state-owned assets and the regulatory system. It has further promoted the reform of the management system of state-owned assets, set up a state-owned assets supervision and management committee, strengthened the supervision of state-owned assets as the owner, and continued to improve the layout of the state-owned economy and reform the management system of the state-owned economy. reduce direct intervention in the operation and management of enterprises, and gradually transition from "asset management" to "capital management".

▶ 2013 to the present: comprehensive reform phase, omni-directional, multi-field to promote the reform of state-owned enterprises, reform and development of state-owned enterprises follow the top-level design → promotion pilot → fully implemented. In 2013, it was clearly put forward that the new round of reform of state-owned enterprises should "actively develop the economy of mixed ownership", "improve the management system of state-owned assets", "transfer some state-owned capital to enrich the social security fund", "promote state-owned enterprises to improve the modern enterprise system", "accurately define the functions of different state-owned enterprises", "improve the corporate governance structure of coordinated operation and effective checks and balances". In 2015, 22 documents were issued as the supporting "1n" policy system, the implementation of classified reform, classified development, classified supervision, classified responsibility, classified assessment; and the introduction of the three-year Action Plan for State-owned Enterprise Reform (2020-2022) in 2020 to further provide basic compliance for the reform of state-owned enterprises.

1.2.2 based on the present: the three-year action of state-owned enterprise reform has entered the final year.

In the first two years of the three-year action on the reform of state-owned enterprises, progress was relatively smooth, and 70% of the targets and tasks were successfully completed. 1) successfully eliminate inefficient and ineffective assets and achieve the goal of substantial loss reduction. By the end of 2021, the divestiture completion rate of central enterprises'"non-main business" (non-main business, non-advantage) reached 86.9%, and the local "two non -" and "two capital" (inefficient assets and invalid assets) clean-up and exit rate reached 87.9%. Central key deficit subsidiary enterprises reduced their losses by 83.8% over the past three years, and the completion rate of special governance of local key deficit subsidiary enterprises reached 90.1%. 2) the market-oriented mechanism is gradually improved. On the one hand, the reform of the corporate system has been basically completed, and the construction of the board of directors has been continuously improved. By the end of 2021, the proportion of corporate enterprises in central and local state-owned enterprises was as high as 97.7% and 99.9% respectively. On the other hand, the three institutional reforms have broken the ice on a large scale, and the marketization of employment has been gradually deepened. the subsidiary enterprises that the central enterprises have carried out medium-and long-term incentives account for 85.9% of the subsidiary enterprises with conditions. 3) carry out a number of major strategic restructurings and deepen professional integration. In 2021, there were a total of 861 mergers and acquisitions involving state-controlled listed companies, which strongly promoted the optimization of the layout and structure of state-owned capital, improved the efficiency of resource allocation, and specialized integration became the trend of the times.

2022 is the decisive year for the three-year reform of state-owned enterprises. as of the third quarter, the completion rate of the reform desk accounts of all central enterprises and localities exceeded 98%, and the operating efficiency of central enterprises improved steadily in the first three quarters. By the end of July, the proportion of mixed ownership enterprises belonging to central and local state-owned enterprises exceeded 70% and 54% respectively. Central enterprises introduced 67.65 billion yuan of non-state capital through mixed ownership reform. In the first three quarters, central enterprises achieved a cumulative operating income of 29 trillion yuan, an increase of 10.9% over the same period last year. The accumulated profits totaled 2.1 trillion yuan, up 5.7% from the same period last year, and the growth rate rebounded 0.7% from January to August. The profit margin of operating income was 7.2%, which remained at a high level as a whole. By the end of September, a total of 99 state-owned enterprises had entered the world's top 500 in 2022, including 47 central enterprises under the supervision of the State Council SASAC and 39 enterprises under the supervision of the local SASAC.

From a specific point of view, the end of the three-year operation focused on five major areas.

1) the deepening of mixed reform, including the innovation of the way and path of mixed reform, the boundary of the proportion of equity transfer, the national special stock system, and the exploration of the internal reform of mixed reform enterprises.

2) continue to promote the system of professional managers in state-owned enterprises

3) the construction of diversified incentive mechanism to realize the market-oriented incentive of the responsible persons of state-owned enterprises.

4) accelerate the establishment of state-owned capital investment and operation companies, and take this as a starting point to further promote the merger and reorganization of state-owned enterprises

5) the steady progress of the securitization of state-owned assets to create more high-quality state-controlled listed companies.

1.2.3 looking to the future: the report of the 20th CPC National Congress focuses on five aspects of the future reform of state-owned enterprises.

The report of the 20th CPC National Congress pointed out: "deepen the reform of state-owned enterprises, speed up the layout optimization and structural adjustment of the state-owned economy, promote the strengthening, optimization and expansion of state-owned capital and state-owned enterprises, and enhance the core competitiveness of enterprises." Specifically, the report of the 20th CPC National Congress focuses on five major aspects of future national reform:

1) the keynote of reform: more emphasis is placed on the importance of state-owned capital. At present, the reform of state-owned enterprises has entered the "deep water area", and we will continue to pay attention to the reform of state-owned capital investment companies in the future.

2) Reform the system: put more emphasis on the importance of perfecting the modern enterprise system. Establish and improve the modern enterprise system.

3) Reform culture: put more emphasis on carrying forward the entrepreneurial spirit and giving full play to the leading and exemplary role of excellent entrepreneurs.

4) Reform objectives: more emphasis should be placed on enhancing the core competitiveness of enterprises, breaking through the bottleneck of industrial scientific and technological development, and tackling key problems in innovation. Central enterprises and other state-owned enterprises should courageously shoulder heavy responsibilities and continue to pay attention to the implementation of the results of the "scientific reform and innovation" action in the future.

5) Reform process: more emphasis is placed on the transformation of world-class enterprises from "cultivating" to "speeding up construction", and will continue to pay attention to the implementation of the results of the "benchmarking and upgrading" action in the future.

1.3. Key tasks and implementation methods of the reform of state-owned enterprises

According to the three-year Action Plan for the Reform of State-owned Enterprises (2020-2022), the three-year action focuses on eight key tasks, involving enterprises, supervision, market mechanism and other aspects. The task requirements for state-owned enterprises mainly include:

1) optimizing the layout and structural adjustment of state-owned capital, focusing on the main business

2) promote the reform of mixed ownership and promote enterprises of all forms of ownership to learn from each other's strengths to offset their weaknesses and develop together.

3) strengthen positive incentive and improve efficiency. The main implementation methods of the above three key tasks are asset restructuring, the introduction of war investment, equity incentives, and can carry out high-frequency tracking in the secondary market.

02 reform dividend gradually shows that the future growth potential of state-owned enterprises will rise steadily

2.1. State-owned Enterprise Reform and value growth from the Perspective of DCF Model

Through asset restructuring, the introduction of war investment, equity incentives and other ways, state-owned enterprises can improve their free cash flow and reduce the comprehensive cost of capital, so as to achieve the goal of long-term value-added within state-owned enterprises. The DCF model estimates the enterprise value by calculating the total present value of all future cash flows discounted at a reasonable discount rate. This perspective is helpful to analyze the reform of state-owned enterprises to promote the improvement of their own enterprise value.

2.2. The valuation of state-owned enterprises is low and has a high performance-to-price ratio.

At present, the valuation of state-owned enterprises is still low and has a high performance-to-price ratio. The CSI is composed of the stocks and depositary receipts of all central enterprises holding listed companies listed in Shanghai and Shenzhen stock markets, reflecting the overall performance of central enterprise holding listed companies in Shanghai and Shenzhen stock markets; the CSI local state-owned enterprises composite index is composed of all local state-owned enterprises listed companies in Shanghai and Shenzhen stock markets, which aims to comprehensively describe the overall performance of local state-owned enterprises listed companies in Shanghai and Shenzhen stock markets. Up to now, the dynamic price-to-earnings ratio of CSC central enterprises is 8.79%, the PE quantile is 12.77%, and the PE quantile is 15.26%. The overall valuation is low in the market, and the valuation performance price is relatively high.

03 strategy perspective, from the beginning to the end: the excess return from the reform of state-owned enterprises is significant

3.1. The assessment of "two benefits and four rates" has achieved initial results.

Since 2019, SASAC has put forward an assessment index system of "two benefits and three rates" for central enterprises; in 2020, SASAC has put forward an assessment index system of "two benefits and four rates", which pays more attention to improving the operational efficiency and development quality of central enterprises; in January 2022, SASAC set the goal and task of central enterprises in 2022 as "two increases, one control and three improvements". The two benefits are the total profit and net profit of the enterprise, and the four rates are the asset-liability ratio, the profit margin of operating income, the total labor productivity and the intensity of R & D investment. The two increases require an increase in total profits and net profits, and at the same time, the growth rate of the two profits is higher than that of the national economy; first, the asset-liability ratio is controlled within 65%; third, the profit margin of operating income should be increased by another 0.1 percentage point, the labor productivity of the whole staff should be increased by 5%, and the investment of R & D funds should also be further increased.

In 2021, the central enterprises achieved remarkable results in the assessment of the index of "two benefits and four rates", and the growth rate of profits and net profits outperformed the market.

1) in 2021, the operating income of central enterprises increased by 19.5% over the same period last year, profits increased by 30.3%, and net profit increased by 29.8%. The income, profit and net profit indicators reached the best level in history.

2) in 2021, the profit margin of operating income of central enterprises was 6.8%, an increase of 0.6% over the same period last year; the per capita labor productivity of all employees reached 694000 yuan, an increase of 17.5% over the same period last year; 100 yuan of operating income paid costs of 94 yuan, down 0.9 yuan from the same period last year; the asset-liability ratio at the end of the year was 64.9%, successfully achieving the target of less than 65% at the beginning of the year.

3) in 2021, central enterprises invested 904.59 billion yuan in R & D, an increase of 16.1% over the same period last year; investment in fixed assets (excluding real estate investment) reached 3.2 trillion yuan, an increase of 10.1% over the same period last year. With the implementation of a number of digital collaborative innovation platforms such as new energy vehicles, Beidou, e-commerce and block chain, the layout of strategic emerging industries such as new energy and 5G applications has been strengthened.

Since 2021, the profit growth rate of central enterprises and the revenue profit margin of state-owned enterprises are significantly better than those of industrial enterprises. From January to September in 2022, the profits of industrial enterprises above the national scale fell 2.3% from the same period last year, and the cumulative growth rate of revenue dropped to 8.2%, while the total profits of state-controlled enterprises increased by 3.8% from January to September in 2022, showing a reverse trend. The operation quality of state-owned enterprises continued to improve in the first half of the year. The operating income profit margin of central enterprises was 7.4%, and the cumulative revenue profit margin of state-owned enterprises was 8.6%. The overall performance of state-owned enterprises was significantly better than that of industrial enterprises.

3.2. The profit of the double hundred Index outperformed the market.

During the three-year action of state-owned enterprise reform, the double hundred Index grew rapidly and its profits outperformed the market. We match the first batch of "double-hundred enterprises" list selected by the State-owned assets Supervision and Administration Commission of the State Council in August 2018 to construct a double-hundred index to explore the overall profitability of double-hundred state-owned enterprises. After the introduction of the three-year action of state-owned enterprise reform in 2020, the performance of the target of state-owned enterprise reform represented by the double-hundred index has been gradually realized, and the profit growth rate is significantly higher than that of Wind, driving the index to continue to rise in 2021, when the heat of state-owned enterprise reform is low. Since July 2021, with the steady progress of the three-year action of state-owned enterprises and the gradual fall of the results of scientific reform and innovation actions, the reform index of state-owned enterprises and the double-hundred index have gone up against the trend, and their profit growth has significantly outperformed that of Shanghai and Shenzhen 300, even during the market decline in 2022. The double-hundred index also maintains a strong resilience. As of the third quarter of 2022, the net profit growth rates of the state-owned enterprise reform index and the double hundred index were 9.92% and 6.78%, respectively, significantly higher than that of Wind full A (0.92%).

3.3. Direction 1: introduce war investment to drive the sustained profit growth of state-owned enterprises

The introduction of war investment can promote the optimal allocation of resources and business integration of state-owned enterprises, improve the ability of resource integration, form an inverted effect on the operational efficiency and costs and benefits of state-owned enterprises, and then enhance the operational vitality and profitability of state-owned enterprises. With the advance of the "double hundred Action", the number of war investment cases introduced by A-share listed state-owned enterprises has reached an average of more than 25 cases a year in the past three years. From the perspective of industry distribution, from 2020 to now, the state-owned enterprises that have introduced war investment are mainly distributed in transportation, computer, basic chemical and other industries.

The introduction of war investment index profit growth is rapid, when the market is located at the bottom of the region still maintain a strong resilience. Since the implementation of the "double hundred Action", the number of state-owned enterprises introducing war investment has increased significantly, and the state-owned enterprises after the introduction of war investment have received a certain degree of benefit in the capital market. Based on the 38 A-share listed companies and 13 central enterprises listed companies that implemented the war investment in 2020, we synthesize the war investment index and the war investment index of central enterprises with equal weight method. From 2021 to now, the introduction of war investment index and the introduction of war investment index by central enterprises have continued to achieve excess returns, and their profits have significantly outperformed those of Shanghai and Shenzhen 300. As of October 31, the introduction of the war investment index and the war investment index of central enterprises still achieved excess returns of 28.59% and 25.88% compared with the Shanghai and Shenzhen 300, and were more resistant to risk when the market was at the bottom.

3.4. Direction 2: equity incentives give full play to the role of corporate performance incentives

Equity incentive is the most widely used way of state-owned enterprise reform. Through equity incentive, it can make the interests of human capital owners and enterprise owners converge, promote the initiative and creativity of state-owned enterprise employees, help to improve the performance and stock prices of listed companies, and ensure the full play of corporate performance incentives. As equity incentives generally set exercise conditions for corporate performance, equity incentives can better stimulate the enthusiasm of management, and also significantly improve the performance and stock price of listed companies. Since 2015, the number of equity incentives in state-owned enterprises has increased steadily, and the industries are mainly distributed in electronics, pharmaceutical biology, computer, power equipment, basic chemical industry and other industries.

The equity incentive index continues to outperform Shanghai and Shenzhen by 300, and profits have grown rapidly since 2021. Based on 36 A-share listed companies implementing equity incentive in 2020 and 8 listed companies of central enterprises, we synthesize equity incentive index and central enterprise equity incentive index with equal weight method. As of early November, the equity incentive index and the central enterprise equity index have achieved excess returns of 45.02% and 67.60% respectively compared with the Shanghai and Shenzhen 300, and the profit growth is significantly higher than the overall market performance.

3.5. Direction 3: asset restructuring helps state-owned enterprises integrate resources, improve quality and increase efficiency.

Restructuring is to optimize the allocation of business and resources, lighten the burden and improve the competitiveness of state-owned enterprises through the reorganization of business, assets and debts. As of early November, the number of restructuring of state-owned enterprises had exceeded 60. From the perspective of industry distribution, most of the restructuring events from 2020 to the present have occurred in public utilities, basic chemical, electronics and other industries, and the purpose of the reorganization is to integrate industry resources, increase environmental protection investment, enter the field of new energy and so on.

The asset restructuring index has continued to achieve excess returns since 2021. Based on 14 of the 38 A-share state-owned enterprises listed companies that implemented asset restructuring in 2020, we have synthesized the asset restructuring index and the central enterprise asset restructuring index with equal weight method. As of early November, the excess returns of the asset restructuring index and the central enterprise asset restructuring index compared with the Shanghai and Shenzhen 300 reached 35.12% and 30.74%, respectively. When the market is at the bottom of the region, the central enterprises have a stronger ability to resist risk.

04 State-owned enterprise reform returns to the stage: the plight of traditional industries reverses and emerging economies set sail

The report of the 20th CPC National Congress emphasizes that promoting the modernization of national security system and capacity, and the construction of energy resources and important industrial chain supply chain will be the key direction of the reform of state-owned enterprises. Taking into account the high dividend, low valuation and steady growth direction, focus on military industry, communications, construction, building materials, energy resources and other areas.

4.1. Military industry: the magnificent demeanor continues, and the main line of national reform continues to advance.

At present, China's military industry is in a period of rapid growth, and the degree of industry concentration is low. As of early November 2022, 57% of the listed companies in the military sector were private enterprises, and the proportion of state-owned enterprises was 32%. In terms of market capitalization, there is a significant gap in the average market capitalization between central state-owned enterprises and private enterprises.

The valuation of the military industry plate has fallen, the undervalued has a high performance-to-price ratio, and the high dividend highlights the magnificent demeanor. At present, the valuation of the military industry plate has fallen, and the configuration is cost-effective. As of early November, the dynamic price-to-earnings ratio of the Shenwan military industrial index was 56.72, corresponding to 32.97% of the PE quantile, with a high performance-to-price ratio. Over the past three years since the reform of state-owned enterprises, the cumulative military industrial dividend has continued to grow steadily, reaching 9.612 billion yuan by the end of 2021, a year-on-year growth rate of 37.23%, of which the military industrial central enterprise dividend reached 5.559 billion yuan, an increase of 30.07% over the same period last year.

The national reform has promoted the improvement of quality and efficiency of state-owned military enterprises, and the net profit has continued to rise. As of 2021, the net profit of central military enterprises reached 21.468 billion yuan, and the net profit has increased steadily since the three-year reform of state-owned enterprises. As of September 30, 2022, the net profit of central military enterprises reached 18.51 billion yuan. With the promotion of the 14th five-year Plan and the effective implementation of the achievements of national reform in the future, the expected profit level still has a lot of room for growth.

Since the three-year action of state-owned enterprise reform, the number of companies implementing equity incentives in the military industry has increased rapidly, and the asset securitization rate of major military industrial groups has increased steadily. On May 30, 2020, SASAC issued the guidelines on the implementation of Equity incentives in Central Enterprise holding listed companies, which provides systematic and comprehensive policy guidance and practical guidance for central enterprise holding listed companies. In 2020, a total of 16 military enterprises implemented equity incentives, a new high in nearly a decade. As of 2021, the asset securitization rate of six groups, namely, China Shipbuilding Corporation, China Aviation Industry Corporation, China Nuclear Industry Corporation, Arms equipment Corporation and China Electronic Information Corporation, has exceeded 50%. The China Aerospace Science and Technology Corporation and the China Aerospace Science and Industry Corporation are temporarily less than 30%, and it is expected that there will be more room for improvement in the future.

The specific reform measures of the recent reform of state-owned enterprises in military industry mainly include equity incentive, asset injection and asset replacement. 1) Equity incentive: during the 13th five-year Plan period, the number of equity incentive of military state-owned enterprises increased continuously, and it is expected that equity incentive of state-owned military listed enterprises will become the norm during the 14th five-year Plan. 2) Asset injection: asset injection will help to improve the conversion rate of scientific research achievements, invigorate capital operation, and then improve the asset securitization rate of military industrial groups. 3) Asset replacement: military state-owned enterprises clean up non-performing assets through asset exchange to improve asset quality and profitability.

4.2. Communication: the development of digital economy and the reform of state-owned enterprises are accelerated.

At present, the concentration of the communication industry in China is high, and the head enterprises occupy the main market share. As of November 21, 2022, 70% of the listed telecom companies are private enterprises, and the proportion of state-owned enterprises is only 19%. In terms of market capitalization, the market capitalization gap between central state-owned enterprises and other enterprises is very obvious. The average market capitalization of central state-owned enterprises reached 126.6 billion yuan, of which China Mobile Limited, China Telecom Corporation and China Unicom were 1.4133 trillion yuan, 355.9 billion yuan and 118 billion yuan respectively, ranking in the top three, while private telecommunications enterprises had an average market capitalization of 6.7 billion yuan.

Under the background of the scale growth of digital economy, the undervaluation of communication has high potential. By 2021, the scale of China's digital economy has reached 45.5 trillion yuan. On October 28, 2022, the State Council's report on the development of the digital economy made it clear that we should firmly grasp the initiative in the development of digital technology and vigorously develop the digital economy. Under the background of strong policy, it corresponds to the undervalued area. As of November 1, 2022, Shenwan Communications PE TTM is only 26.67 and the PE quartile is only 0.22%, and the bottom area is waiting to rebound.

With the rapid growth of the net profit of the central communication enterprises, the central enterprises represented by the three major operators have opened high dividends one after another. Since 2018, the profitability of central communications enterprises has remained high. By 2021, the net profit of central telecom enterprises reached 157.288 billion yuan, significantly higher than that of local state-owned enterprises and other private enterprises. Among them, the cumulative dividends of the communications sector reached 68.516 billion yuan, of which China Mobile Limited 44.732 billion yuan, China Telecom Corporation 15.556 billion yuan, China Telecom Corporation 2.679 billion yuan, the three major operators of central enterprises ranked in the top three of the industry dividend list.

The equity incentive of the communications sector has accelerated, and the process of national reform has continued to move forward.

1) implementation of equity incentive: since 2022, major telecom state-owned enterprises have issued equity incentive plans to release positive growth signals and demonstrate their confidence in future development.

2) mixed signal enhancement: according to the document issued by the State Administration of Market Supervision on October 27th, the new joint venture case between Unicom Venture Capital and Tencent Industrial Capital has been approved. It is expected that in the future, the three major operators will continue to promote the process of enterprise mixed reform, and the industrial Internet business is expected to get new development.

4.3. Coal: the key point in the reform of state-owned enterprises, enterprise integration helps to improve profitability

The number of state-owned enterprises in the coal industry accounts for 79%, and the market capitalization of central state-owned enterprises is much higher than that of private enterprises. As of November 21, 2022, there are 38 coal listed enterprises, including 5 central state-owned enterprises, 25 local state-owned enterprises and only 8 private enterprises. The average market capitalization of central and local state-owned enterprises is 143.8 billion yuan and 31.3 billion yuan respectively, and there is a significant difference between state-owned enterprises and private enterprises.

The profitability of coal state-owned enterprises has improved significantly in the past three years since the reform of state-owned enterprises. By 2021, the net profit of the coal industry reached 201.777 billion yuan, including 86.004 billion yuan for central state-owned enterprises, an increase of 42.41% over the same period last year, and 108.799 billion yuan for local state-owned enterprises, an increase of 145.49% over the same period last year. As of September 2022, the net profit of coal state-owned enterprises in the first three quarters reached 250.531 billion yuan, including 104.168 billion yuan for central enterprises and 146.363 billion yuan for local state-owned enterprises.

The valuation of the coal industry has been low in the past three years, and the dividend has reached its peak in nearly a decade. As of early November, the dynamic price-to-earnings ratio of the Shenwan coal index was 7.51, with a PE quartile of 0.87%, which was at the lowest 10-year valuation and had a high margin of safety. In 2021, the cumulative dividends of the coal industry reached 102.749 billion yuan, of which the dividends of central state-owned enterprises reached 55.711 billion yuan, an increase of 43.59 percent over the same period last year, and those of local state-owned enterprises reached 45.787 billion yuan, an increase of 125.42 percent over the same period last year.

The reform of state-owned enterprises promotes the reform and reorganization of the Gas Group to speed up and increase efficiency, and the policy is conducive to the development of the coal industry. Taking Shanxi Province as an example, since the three-year action of the state reform, the Shanxi provincial government has put forward requirements for the overall listing of state-owned enterprises in the province, asset securitization rate, asset quality and other aspects, actively give play to the guiding role of the listing platform of coal enterprises, introduce high-quality assets of group companies, and improve the asset securitization rate of listed companies of state-owned enterprises, which adds a new driving force for the growth of coal state-owned enterprises. From April 2020 to June 2021, seven major coal groups in Shanxi have issued announcements for asset restructuring, and the pace of state-owned reform of coal enterprises in the province has been accelerating.

05 State-owned enterprise reform and individual stock recommendation list

Risk hint

1) geopolitical risks are intensified; 2) downstream demand is lower than expected.