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观点 | 国企估值未来或有修复空间,有望带来中期投资机遇

Opinion | There may be room for recovery in the valuation of state-owned enterprises in the future, which is expected to bring medium-term investment opportunities

中金點睛 ·  Mar 20, 2023 08:59

Source: Zhongjin Dim Sum
Authors: Li Qiusuo, Huang Kaisong, etc.

Important meetings such as the 20th National Congress Report and the two sessions put forward new requirements for the reform of state-owned enterprises.The Twenty National Congress Report profoundly explains the meaning of Chinese modernization, and also places higher demands on deepening the reform of state-owned enterprises. The Central Economic Work Conference at the end of last year and the reports on the work of the two sessions of the government this year further clarified the focus of “improving the modern corporate governance of state-owned enterprises with Chinese characteristics and truly operating according to a market-based mechanism”. State-owned enterprise reform may enter a new stage of solving deeper problems. In the early stages, the Securities Regulatory Commission expressed the idea of building a “modern capital market with Chinese characteristics” in line with the spirit of the Party's top 20, and specifically pointed out “exploring the establishment of a valuation system with Chinese characteristics.” The most prominent of these was the imbalance in the valuation structure. High or low valuations directly reflect the degree of market acceptance of listed companies. In the Chinese capital market, some banks and state-owned enterprises have been undervalued over a long period of time and are generally underestimated. We believe that with the further deepening of the reform of state-owned enterprises and the formation of a modern capital market construction concept with Chinese characteristics, the future undervaluation of state-owned enterprises is expected to receive more attention and improvement. From the perspective of the capital market, it can also be seen to a certain extent as a litmus test for the effectiveness of future state-owned enterprise reforms.

The overall market capitalization of central state-owned enterprises is large, but multi-dimensional indicators reflect that valuations are still low.The number of state-owned enterprises listed on A-shares is about 1,400, with a cumulative total market capitalization of over 46 trillion yuan. Moreover, the overall market capitalization of state-owned enterprises is large. Among central enterprises, the number of companies with a market value of 100 billion yuan or more accounts for 12%. In terms of valuation, since 2010, the overall stock prices of central state-owned enterprises have been weaker than non-state-owned enterprises, and the central valuation trend has declined. As of March 17, the PE (TTM) /PB valuation of state-owned enterprises was 12.1x/1.15x, and the PE (TTM) /PB valuation of central enterprises was 10.2x/0.98x. The recent valuation has been corrected, but it is still lower than 36.6x/2.72x of non-state-owned enterprises. In particular, the PB valuation of large central enterprises such as banks, construction, petroleum and petrochemicals has been below 1 times for a long time. State-owned enterprises in most industries also have valuation discounts compared to non-state-owned enterprises, and the extent to which the price-earnings ratio is discounted is more obvious than the price-earnings ratio. Compared with first-class enterprises in various overseas industries, the market capitalization scale of large central enterprises in the above industries is not low, but net market ratio valuations are generally discounted, and from the perspective of PB-ROE, undervaluation is also common.

The undervaluation of central state-owned enterprises has both overall factors and industry factors.On the one hand, in terms of industry distribution, state-owned enterprises account for a relatively high proportion of traditional old economic industries. The share of innovative businesses is lower than that of non-state-owned enterprises, and their performance is highly cyclical. Differences in perception of the book value of some industries have also led to the suppression of valuations; on the other hand, central state-owned enterprises themselves also have room to improve their corporate governance and incentive efficiency, and the degree of marketization needs to be further improved. External factors at the investor level also influence the valuation of central state-owned enterprises to a certain extent. Although the institutionalization rate of A-shares is rising year by year, individual investors still account for about 60% of transaction volume. Their willingness to invest in large, stable state-owned enterprises is also relatively limited, and long-term feedback with low return on investment also limits the valuation of state-owned enterprises. Specific to different industries, such as the high degree of homogenization of bank operations; the profitability of petroleum and petrochemicals and efforts to give back to shareholders; industry-specific factors such as insufficient recognition of the effectiveness of telecommunication innovation and the need to improve profit margins and cash flow in the construction industry may limit the valuation of corresponding large state-owned enterprises.

The main results of state-owned enterprise reform over the past ten years are reflected in the improvement in the fundamentals of state-owned enterprises, and subsequent positive developments are expected to lead the valuation center to rise.In terms of operating efficiency, state-owned enterprises in some traditional industries were plagued by overcapacity before 2015. After state-owned enterprise reform and supply-side reforms were strengthened in 2016, overall operating performance improved, and the revenue growth gap between state-owned enterprises and non-state-owned enterprises narrowed; since 2016, the compound profit growth rate between central enterprises and local state-owned enterprises was 13.8% and 18.7%, higher than that of non-state-owned enterprises. Profit margins increased markedly, and ROE centers gradually caught up and surpassed non-state-owned enterprises; although the capital expenditure of state-owned enterprises grew more slowly than non-state-owned enterprises, the background may reflect the optimization of capacity utilization efficiency and an obvious improvement in free cash flow, for The conditions for future increases in dividend levels will be created. In terms of debt pressure, state-owned enterprises generally faced the problem of high debt pressure in 2014, but after years of state-owned enterprise reform, the overall balance ratio of state-owned enterprises did not continue to expand. The balance ratio of central enterprises declined markedly, and the net debt ratio also improved a lot. In particular, the debt pressure in the upstream petroleum and petrochemical, building materials, coal and other industries was clearly resolved. In terms of innovation capacity, the proportion of R&D personnel and R&D expenses of state-owned enterprises have both increased. Although the absolute level of R&D intensity is lower than that of non-state-owned enterprises, the R&D expenditure ratio of central enterprises increased from around 0.4% in 2010 to around 1.8% in 2021, especially in fields such as computers and telecommunications. Ten years of state-owned enterprise reform have had an obvious effect on improving the fundamentals of operation, debt, and innovation of listed state-owned enterprises.

Thoughts on optimizing the valuation of state-owned enterprises in the future.Valuations reflect future fundamental expectations, but improvements in the performance of state-owned enterprises and limited valuation boosts may be due to investors' considerations of medium-term growth, governance mechanisms, and information asymmetry. In the future, we need to pay attention to whether the policy level can support the efficiency improvement and transformation of state-owned enterprises, further optimize corporate governance, increase market-based mechanism construction, and whether central enterprises of listed countries can usher in improvements at the level of value creation, valuation, and market capitalization with the introduction of “modern corporate governance of state-owned enterprises with Chinese characteristics” and “valuation systems with Chinese characteristics.” Areas of focus may include: 1) optimizing the operation methods of various types of capital to increase factor productivity and obtain new growth points, such as strategic restructuring, specialized integration, and spin-off listing; 2) improving incentive efficiency through more market-based methods, such as equity incentives, employee shareholding, etc.; 3) increasing the layout of national strategies and international fields clearly defined in the top 20 reports to play the role of industry chain leaders under a new national system; 4) focusing on shareholder returns and moderately increasing dividend levels and stock buybacks, which is conducive to boosting market confidence and optimizing the capital structure. Furthermore, active communication with capital markets by listed state-owned enterprises and improving the quality of information disclosure can also help improve investor awareness.

There may be room for recovery in the valuations of state-owned enterprises in the future, which may bring about medium-term investment opportunities.We believe that the fundamentals of central state-owned enterprises have continued to improve in recent years, and it is expected that in the future, issues such as their own growth, governance mechanisms, and information exchange will be properly optimized under policy guidance and support. If the factors that suppress valuations can be gradually resolved, the current undervaluation phenomenon is expected to continue to be repaired and bring good relative benefits. The future focuses on the following main investment lines of state-owned enterprises: 1) state-owned enterprise leaders with strong competitiveness in core technology fields; 2) state-owned enterprises with low valuations but with expectations for reform and capital operation; 3) thematic opportunities to benefit from national strategies, etc.; 4) high-quality state-owned enterprises with abundant cash flow, strong potential dividend and repurchase capabilities, and high dividend ratios. We have also sorted out the state-owned enterprise targets worth paying attention to from multiple dimensions. Please refer to the main text of the report.

Editor/jayden

The translation is provided by third-party software.


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