Source: Broker China Author: Chang Liu

As a new round of state-owned enterprise reform is progressing, a special valuation system is also being actively constructed. Against the backdrop of a lack of incremental capital in the market, the market stock selection paradigm has shifted to the two main lines of the digital economy AI+ and the revaluation of central state-owned enterprises. These two main lines have also become the main directions for institutional investors to adjust their positions.

It is worth noting that in the A-share market, the China Securities Central Enterprise Structural Adjustment Index has accumulated a cumulative increase of nearly 15% this year, while in the H-share market, the Hang Seng Hong Kong Stock Connect Mainland Bank Index has a cumulative increase of 11.96% this year; the Hang Seng Hong Kong Chinese Enterprises Index has a cumulative increase of 10.62% this year.

Bank stocks are “boiling”, and specials continue to deepen in the A+H market

On May 4, the A-share banking sector collectively surged. By the close, 41 out of 42 stocks in the banking sector were “flourishing”. Among them, Minsheng Bank went up and down, Bank of China surged 7.36%, China CITIC Bank soared 6.77%, Bank of Communications surged 6.28%, and shares of Agricultural Bank and Bank of China hit new phased highs.

Obviously, under the catalytic valuation system of Chinese characteristics (that is, “special valuation”), the revaluation of central state-owned enterprises is continuing to deepen. In the A-share market, the “China Special Assessment” index product that has received high market attention is the China Securities Central Enterprise Structural Adjustment Index. The top ten weighted stocks of central state-owned enterprises bring together industry leaders in various fields of central state-owned enterprises. The characteristics of undervalued and high dividends are obvious, and they are heavily allocated by public funds.

The index has accumulated a cumulative increase of nearly 15% since the beginning of the year, surpassing the Shanghai and Shenzhen 300 and China Securities 500 indices, while the “Central Enterprise Reform ETF” (512950), the index fund that tracks this index, recently estimated the size of over 6 billion yuan. Among the main index products in the H-share market, the Hang Seng Hong Kong Stock Connect Mainland Bank Index has a cumulative increase of 11.96% this year; the Hang Seng Hong Kong Chinese Enterprises Index has a cumulative increase of 10.62% this year, ranking first among the major stock indexes in the Hong Kong stock market.

“The original discounts of central enterprises must at least be fixed. As to whether it's a premium, the market may revisit the discussion.” Guo Xichun, chief equity investment officer and deputy general manager of Starstone Investment, said that the current restoration in the valuations of many large central enterprises is also related to the global political and economic environment. Trade frictions previously talked more about globalization. Globalization means having a very important industrial position, but the current era may be different. There are more and more discussions about anti-globalization. Apart from the value of one's own profit, the strategic value of all key links should be re-evaluated. The background of the times was different from before the trade frictions, so that the strategic value that was ignored by the market in the past has now been re-discovered.

Chongyang Investment believes that the Hong Kong stock double counter system implemented this year may indicate that the Hong Kong capital market will become an important tool for the preservation and appreciation of the offshore RMB in the future. It is an important part of expanding the RMB offshore market and accelerating the internationalization of the RMB. The position of the Hong Kong market is more important than in the past, and at the same time, valuations are cheap enough. As the number of countries participating in RMB pricing and trading increases dramatically this year, investors from these countries will hold more and more RMB assets in the future.

Where are the opportunities? Central enterprise valuation advantage+high dividend characteristics+digital transformation

According to survey data from third-party platforms, with regard to future promising investment opportunities, 43% of private equity believes that the main line of the digital economy deserves continued attention after the holiday; 37% of private equity believes that blue-chip stocks represented by central enterprises and state-owned enterprises are worth paying attention to; 11% of private equity believes that individual stock differentiation is already extreme, that the later market style will balance, and low-level new energy sources are expected to recover; 9% of private equity indicated that the digital economy may be adjusted in the medium term. After the holiday season, there will be more opportunities for rotation in the consumer, pharmaceuticals, real estate, cycles and other sectors.

Pan Yajun, chairman of Junmao Capital, said that in a context where economic recovery is not strong, undervalued state-owned enterprise stocks that benefit from a valuation system with Chinese characteristics are another direction that is highly recognized by the market other than AIGC (artificial intelligence). In the past, there were many problems with the governance structure of state-owned enterprises (especially central enterprises). The interests of small to medium shareholders and the interests of management were not consistent, and the incentive mechanisms and operating efficiency of state-owned enterprises were generally not high. Under the new requirements of the State Assets Administration Commission, these matters are undergoing favorable changes. The State Assets Administration Commission's assessment indicators are beginning to gradually get closer to the indicators that small and medium shareholders in the capital market are concerned about. This provides a basis for improving the operation and valuation of central enterprises in the country. Therefore, the rise of central enterprises in China in this round is inherently reasonable, but we need to be wary of simple valuation-based increases. Only companies that continuously improve their performance and ROE (return on net assets) can be expected to receive continuous recognition.

Currently, the profit stability and cash flow improvement of central state-owned enterprises are financial indicators that investors focus on. According to the calculation of the CITIC Construction Investment Strategy Team, in the first quarter of this year, the operating cash flows of central state-owned enterprises, local state-owned enterprises, and private enterprises accounted for 44.3%, 5.3%, and 8.2% of operating income respectively. Compared with the same period last year, they rose 17.5, 8.5, and 2.5 percentage points respectively. The relative improvement trend is obvious.

Performance stability supports an upward trend in the share of operating cash flow, creating a certain foundation for central enterprises to further increase dividend ratios. Relevant statistics show that the total dividends of central enterprises and local state-owned enterprises in 2022 totaled 1.09 trillion yuan, accounting for nearly two-thirds of total market dividends. The role of “ballast stone” is prominent. Among them, central enterprises performed extremely “brilliantly”. More than half of the listed companies paid dividends for 5 consecutive years, and one-fifth of the listed companies continued to increase their dividends for 3 years, reflecting the high quality of their dividends.

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