Source: CITIC Construction Investment Securities Research
Author: Chen Guo, Yao Haotian

occurrences

The State Assets Administration Commission will further study the inclusion of market value management in the performance assessment of central enterprise heads

On January 24, relevant officials said at the press conference of the Information Office of the State Council that further research will be carried out to incorporate market value management into the performance assessment of central enterprise heads, guide central enterprise leaders to pay more attention to the market performance of listed companies they control, promptly convey confidence and stabilize expectations through the application of market-based methods such as shareholding and repurchases, increase cash dividends, and better return to investors. This remark caused individual stocks with Chinese characters to rise for a short period of time, and a large number of individual stocks with Chinese characters to rise and stop.

Brief review

On January 24, 2024, the State Assets Administration Commission announced further research to include market value management in the performance assessment of central enterprise heads. Subsequently, the People's Bank of China announced that it would lower the deposit reserve ratio by 0.5 percentage points on February 5 to provide the market with 1 trillion yuan of long-term liquidity. With the intensive implementation of a series of recent measures to accelerate capital entry and improve the A-share market, the market capital is also expected to usher in a turning point under the impetus of the previous Shanghai and Shenzhen 300 ETF volume and the combined downgrading of central enterprise reform policies:

1) The performance assessment system has been improved again to speed up the revaluation of central enterprises: Recently, a spokesperson for the State Assets Administration Commission stated at the State Council press conference that 2024 will continue to adhere to the “one profit, five rate” target system, clearly “one profit will grow steadily, and the five rates will continue to be optimized.” Compared with the 2023 assessment requirements, it was emphasized that net profit and net profit attributable to mother also need to increase in total profit in concert. The current market value management is a major step to improve the assessment system for central enterprises. It will help force central enterprises to speed up specialized operations. The active market value management of central enterprises will be further strengthened, and measures such as cash dividends, repurchases, and asset restructuring will be further strengthened.

Looking at the secondary market, listed companies of central enterprises are expected to be more favored by capital. Central enterprises can then achieve growth in their total net profit and optimization of return on net assets, net profit, and net profit in the “five rate” by increasing the leverage effect and increasing returns to investors. While improving fundamentals, a more complete performance assessment system that is more compatible with the secondary market valuation system will gradually be formed. The capital market investment cycle of “performance improvement - increased return on the secondary market - capital inflow - performance improvement” is expected to drive central enterprises to achieve a positive interpretation on the profit side and end side. Push central enterprises to enter quickly Value realization stage.

2) Further research on incorporating market value management into the assessment standards for central enterprise heads: The concept of market value management in China was first proposed in 2005, and the State Assets Administration Commission first clearly proposed including market value in the “Notice Concerning Issues Relating to Equity Distribution Reform in China's Shareholding Management in China” issued by the State Council in September 2005; on May 8, 2014, the “Certain Opinions on Further Promoting the Healthy Development of the Capital Market” issued by the State Council proposed the development of multi-level stock markets, improving the quality of listed companies, and encouraging listed companies to establish market value management systems to establish market value management systems. Management is an important position in China's capital market; on May 27, 2022, the “Work Plan for Improving the Quality of Listed Companies Controlled by Central Enterprises” issued by the State Assets Administration Commission proposed encouraging central enterprises to explore incorporating value realization factors into the performance evaluation system of listed companies, establish long-term and differentiated assessment mechanisms, and guide listed companies to comply with the law and promote the achievement of market value scientifically and rationally, indicating that the country continues to promote the inclusion of market value management in central enterprise assessment standards. Recently, the State Assets Administration Commission once again sent a signal of “deepening the inclusion of market value management in assessment standards”, representing a shift in the country's attitude of “encouraging and supporting” the inclusion of market value management in the assessment from “encouraging and supporting” to “deepening and demanding,” thus further promoting central enterprise reform.

The special point of this time is that for the first time, market value management results were included in the assessment of central enterprise leaders rather than the enterprise assessments mentioned three times before. It also emphasized the need to increase cash dividends, deeply link the interests of central enterprise leaders to the market value of central enterprises, force managers to efficiently manage enterprises, and gradually form a virtuous cycle of “efficient governance - performance improvement - effective market value management - increase in the interests of those responsible - efficient governance” to enhance the core competitiveness of China and Special Economic Assessment Enterprises.

3) There is plenty of room to increase the scale of cash dividends: The reason behind the dominance of high dividend strategies due to low A-share fluctuations since 2023 is investors' preference for relatively stable returns. The dividend rate of the China Securities Central Enterprise Index in 2023 was 5.38%, which is clearly superior to all other major indices. As the main force in undervalued and high-dividend stocks, central enterprises still have plenty of room to improve their dividend ratio. In addition, the further expansion of state-owned enterprise dividends is also driven by a revaluation of capital market values and a financial demand gap. First, the expansion of dividends by central enterprises is expected to accelerate the market's full recognition of the stability of central companies' profits, thereby stabilizing market expectations. Second, because the process of state-owned enterprise dividends flowing into the “four accounts” of finance has a special secondary distribution system, the systematic increase in the dividend rate of high-quality state-owned enterprises is expected to partially resolve the basic pension gap formed by co-ordinated accounts with pay-as-you-go.

4) Increased holdings and repurchase methods convey confidence and stabilize expectations: The core purpose of stock repurchases is to stabilize stock prices. Most of them are combined with equity incentives and employee shareholding, and as a means for listed companies to stabilize stock prices. Increased repurchases help to convey positive sentiment to the market and demonstrate the market's confidence in economic recovery. The inclusion of market value management in the performance assessment of central government officials is a powerful way for the country to stabilize the stock prices of central enterprises, further stabilize market trends, and have an immediate effect of protecting the market. However, through market-based methods such as increasing holdings and repurchases, it is possible not only to stabilize stock price trends, but also to indicate the confidence of central government officials in the enterprise. Central enterprises have a relatively high market capitalization, and stabilizing their stock prices can iron out sentiment in the stock market and have a certain leading role. Equity incentives and employee shareholding after buyback can further link employee interests to the enterprise, motivate the company's profitability to increase, and stabilize corporate expectations.

5) Improve and expand, step up mergers, acquisitions and restructuring efforts, and give full play to the “backbone” role of central enterprises: In 2023, the State Assets Administration Commission will further step up the restructuring and integration efforts of central enterprises, and stated that it will further promote restructuring and integration with the aim of improving and expanding state-owned enterprises. Through effective restructuring and integration, central enterprises have directly improved the efficiency of resource allocation, gathered and innovated resource strength, and will better serve the national strategy in the future. As far as the stock market is concerned, the effective restructuring and integration of central enterprises will take the lead in promoting the development of industrial clusters, forming a scale effect. The efficient allocation of resources is expected to increase corporate profits, thereby boosting the market market. At the same time, restructuring and integration is conducive to “eliminating its shortcomings and taking advantage of its strengths”, constituting a synergetic advantage. Moreover, the advantage of China's national conditions is to concentrate on major issues. Increased restructuring and integration will further enhance the strength of central enterprises as a “national team” in the stock market. Whether it is promoting industrial development or stabilizing the stock market, the growth of the “national team” is undoubtedly an indispensable part of the country's “financial power” strategy. Mergers, acquisitions and restructuring are expected to become one of the important grippers for central enterprises to further reform in the future, help improve the core competitiveness of central enterprises, and play an important role as a “ballast stone.”

Editor/jayden