Source: Yi Bin Strategy Research
Author: Western Strategy Team

State-owned enterprises play an important role in the national economy, yet their valuations are still undervalued.State-owned enterprises are the ballast stone of the national economy, dominating fields such as coal, utilities, petroleum and petrochemicals, and building decoration. But state-owned enterprises exist”Value realization does not match value creationOther questions”. As of March 2, 2023, the median PETTM of state-owned enterprises and central enterprises was 18.25 times and 25.81 times, respectively, significantly lower than the PE level of 30.81 times for private enterprises.

The low pricing of state-owned enterprises mainly comes from several pain points:

1) State-owned enterprises are mainly distributed in traditional upstream and midstream industries, and have certain administrative barriers, and growth is slightly low;

2) The scale is large, the debt is high, and the company's ownership mechanism and governance mechanism are not marketable enough, resulting in low operating and management efficiency;

3) The state-owned economy undertakes a “national mission” and is different from the values of private enterprises whose core task is to create profit, and the market does not fully understand the reform of state-owned enterprises;

4) State-owned enterprises have the advantage of relatively good resource integration, but currently their ability to innovate and develop is not strong.

2023 is the first year since implementing the spirit of the Twenty National Congress and the three-year action plan for state-owned enterprise reform came to an end. A new round of state-owned enterprise reform actions is being planned.In the context of the “1+N” policy system and the three-year action for state-owned enterprise reform, comprehensive and deepening reforms of state-owned enterprises have already been carried out. In the context of Chinese-style modernization, high-quality development is a top priority, and state-owned enterprises have an arduous task as “the heavy equipment of a great country.” The Twenty National Congress Report has proposed the key reform direction of “improving the modern enterprise system with Chinese characteristics” and the goal of “speeding up the construction of world-class enterprises”; the new round of state-owned enterprise reform tasks focuses on improving the core competitiveness and enhancing core functions of state-owned enterprises, and the starting point is to improve quality and efficiency through innovation and integration.

With the establishment of a valuation system with Chinese characteristics, the valuation of state-owned enterprises is expected to usher in a reasonable revaluation.Chairman of the Securities Regulatory Commission, Yi Huiman, stated at the Financial Street Forum on November 21, 2022, that “it is necessary to explore the establishment of a valuation system with Chinese characteristics.” High and low valuations directly reflect the degree of market recognition of listed companies. On the one hand, it is about “practicing internal skills”, strengthening specialized strategic integration, and enhancing core competitiveness; on the other hand, it is necessary to further strengthen public corporate awareness.Historically, state-owned enterprise reform policies have been quite consistent. The meaning of the next stage of state-owned enterprise reform policy is to improve state-owned capital by increasing the endogenous value of state-owned enterprises and thereby reshaping the valuation of state-owned enterprises. This has positive significance for state-owned enterprises and listed companies of central enterprises in the capital market.

Looking at the policy direction, future growth in the value of state-owned enterprises and structured investment opportunities will mainly revolve around the following directions:

1) Resource integration type:Focus on strategic restructuring and professional integration of central enterprises; as well as sectors and targets where asset injection or restructuring is anticipated.

2) Leading science and innovation:“Stuck neck” key core technology areas/strategic emerging industries, or “chain owner” enterprises that match the national security background.

3) Revaluation type:Sectors with clearly undervalued valuations, and high-quality sectors and targets with “core competitiveness” from a financial perspective.

Editor/Somer