Source: CITIC Construction Investment Securities Research

Market value management is included in the performance assessment of central enterprise leaders, which is beneficial to central enterprises to optimize market value management

On January 24, at a press conference held by the Information Office of the State Council, Xie Xiaobing, head of the State Council's State-owned Assets Administration Bureau, explained that the State Council's State-owned Assets Administration Commission will further study the inclusion of market value management in the performance assessment of central enterprise heads. On the basis of early promotion of central enterprises to include factors related to the price achievement of listed companies into the performance evaluation system of listed companies, the State Council's State-owned Assets Administration Commission will include market value management results in the assessment of central enterprise leaders, guide central enterprise leaders to pay more attention to and pay more attention to the market performance of listed companies they control, and promptly use market-based methods such as increasing confidence, stabilizing expectations, and increasing cash dividends to better return investors. Since '22, relevant departments have successively introduced relevant policies such as one-profit and five-rate ratio, and state-owned enterprises benchmarking to develop world-class enterprise value creation. Represented by high-quality central enterprises such as three barrels of oil and China Chemical, the upstream and downstream industrial chains involve all aspects of social production and are basic industries related to the national economy and people's livelihood. This time, the State Assets Administration Commission proposed further research to include market value management in the performance assessment of central enterprise leaders, which will help central enterprises further optimize market value management, and also promote the increase in the value of chemical and energy-related state-owned enterprises and sectors.

Risk warning: (1) The rise or decline in crude oil prices exceeds expectations: crude oil prices are highly correlated with the international political and economic situation. When crude oil prices fluctuate greatly, they will affect the price difference and profit stability of the downstream industry chain, which in turn affects the profitability of some sectors or companies; (2) Changes in the industry competition pattern: there are many domestic refining and chemical supporting projects, which may cause partial overcapacity in certain product sectors, thereby increasing competition in the industry and squeezing profit space within the industry; (3) macroeconomic fluctuations, global economic downturn: refining products have many downstream branches and distributions Broad, and macro The economic situation is highly correlated, and the economic downturn may affect product demand in the industry.

Market value management of central enterprises is included in the performance assessment, focusing on the communications industry

Recently, relevant officials of the State Council said that further research will be carried out to include market value management in the performance assessment of central enterprise heads to guide central enterprise leaders to pay more attention to the market performance of the listed companies they control. This change can raise the attention of central enterprises to market performance and help increase the valuation level of central enterprises. There are a large number of listed companies related to central enterprises in the communications industry, including the three major operators, as well as companies under China Telecom and China Telecom. Tianfu Communications and Zhongji Xuchuang released performance forecasts, showing that the strong demand brought about by overseas AI computing power construction continues to be fulfilled, and at the same time, they have a positive outlook on future demand. Stable delivery of 800G, rapid development of 1.6T, and breakthroughs in new technologies such as silicon light and thin-film lithium niobate are still important investment directions this year.

Risk analysis: Changes in the international environment have an impact on the security and stability of the supply chain, affecting the progress of related companies' overseas expansion; the development of the artificial intelligence industry falls short of expectations, affecting the needs of companies related to the cloud computing industry chain; market competition intensifies, leading to a rapid decline in gross margin; exchange rate fluctuations affect exchange earnings and gross profit margins of export-oriented enterprises, including enterprises in ICT equipment, optical modules/optical devices; the digital economy and digital China's construction and development fall short of expectations; telecom operators' cloud computing business development falls short of expectations; operators' capital expenses fall short of expectations; cloud manufacturers' capital expenses fall short of expectations It falls short of expectations; the demand in the communication module and intelligent controller industry falls short of expectations.

Real estate and central enterprise valuations still have room for repair

The focus this week is that real estate and central enterprise valuations still have room for repair. At the level of market performance, Chinese state-owned enterprises and real estate led the way. At the profit level, the Shenwan Tier 1 industries with the highest increase in Wind's profit expectations for January 24 are commercial, retail, and automobiles. At the economic level, a new round of real estate supply and demand policy combinations are gaining strength; the central bank announced a downgrade, and social finance stabilized in December; pig prices rose sharply before the holiday season. In terms of valuation and transaction popularity, the popularity of financial real estate and central enterprises with Chinese characters is clearly rising, and US stock valuations are close to the high in early 2022.

Market performance: This week (1.20-1.26), the low price-earnings ratio, large market, and financial real estate style showed the highest performance; the high price-earnings ratio, small market, and consumer style showed relatively poor performance. Among the major stock indexes, the Dividend Index, the Shanghai Stock Exchange 50, and the Shanghai Composite Index performed higher; the Ning Group, Science and Innovation 50, and the GEM Index performed lower. In terms of the rise and fall rate of the industry, real estate/building decoration/petroleum and petrochemicals had the highest growth rate, while beauty care/power equipment/electronics had the highest declines. Among popular concepts, the central central enterprise's rise was absolutely remarkable.

Changes in profit forecast: In January 24, Wind agreed that Shenwan's first-tier industries with the highest increase in profit were commercial and retail (+2.24%) and light manufacturing (+0.75%); the industries with the highest decline were real estate, agriculture, forestry, animal husbandry and fishing, and social services. In terms of the digital economy industry chain segmentation, based on Wind's unanimous expectations, the 24-year profit forecast is ranked: display panel (292%) > optical module (68%) > semiconductor packaging (67%) > semiconductor materials (48%) > SAAS (46%) > data security (45%) > cybersecurity (44%) > digital government (42%).

Changes in core indicators of industry sentiment: 1) Price increase: steel, aluminum, glass, coke, oil, etc.; price decline: coking coal, cement, copper, etc.; 2) Big finance: in real estate, a new round of supply and demand policy combinations are gaining strength. The use of operating property loans has been broadened; the General Administration of Financial Supervision has deployed a coordination mechanism to promote the implementation of urban real estate financing; the Ministry of Housing and Construction said that cities will be given full autonomy to regulate urban real estate, that each city can adjust real estate policies according to local conditions, and that on January 27, Guangzhou lifted purchase restrictions on housing above 120 square meters. On the banking side, the central bank announced a downgrade, and social finance stabilized in December; 3) High-end manufacturing: In terms of automobiles, excluding the base figure affected the weakening of the car market sales growth rate. According to the Passenger Federation, from January 1 to 21, the passenger car market retailed 1,227,000 vehicles, up 46% from the same period last year, down 4% from the same period last month; the NEV market retailed 380,000 units, up 56% from the same period last year, and a decrease of 21% from the same period last month. Excluding the impact of the base figure, sales volume from January 15 to 21 was about 12.1% lower than in 2022, and the decline increased. In terms of photovoltaics, price increases in the middle and upper reaches are brewing. 4) Consumption: On the mandatory side, pig prices rose sharply before the holiday season. On the optional side, pre-holiday sales are at their peak.

Valuation level and trading popularity: The equity risk premiums of major broad-based indices are above the 7-year 90% quantile; the full A/A non-financial oil and Shanghai Composite Index valuations are near the 5-year 2.7%/6.6%/14.5% quantile, respectively; the GEM Index/Ning portfolio is near the 5-year 0.0%/0.0% quantile of the price-earnings ratio, respectively. In terms of the popularity of transactions, there is a clear rise in the popularity of financial real estate and central enterprises with Chinese characters. In terms of global valuation levels, the current Dow Jones Industrial Index and S&P 500 valuations are close to the level at the beginning of 2022.

1) Data statistics are erroneous: Report data is exported from databases such as Wind databases and Datayes, and there may be discrepancies in caliber between third-party databases. At the same time, due to data lag, for example, the data disclosed on October 25 only reflects the September industry situation, so the guiding significance of drawing conclusions based on historical data analysis is relatively limited. 2) Domestic and international economic recession: Currently, overseas economies are in a recession cycle, and the poor domestic and foreign economic environment will affect the demand performance of some industries. 3) Market liquidity risk: Stock prices need to be supported by capital market liquidity. Liquidity risk may cause valuation to decline.

Market value management is included in the assessment of central enterprise heads, and it is recommended to focus on undervalued construction state-owned enterprises

Multiple factors favored the sector this week. The construction index rose 6.9%, outperforming the market by 4.9 percentage points. On January 23, the State Assets Administration Commission stated that it will further study and include market value management in the assessment of central enterprise leaders. We believe that this move will fully motivate enterprises and is expected to launch a new round of state-owned enterprise reform. At the same time, the central bank downgraded 0.5 percentage points this week. Guangzhou relaxed restrictions on the purchase of properties above 120 square meters. There are frequent favorable government policies at all levels, and economic recovery is expected to accelerate. We recommend focusing on undervalued state-owned construction state-owned enterprises that are also benefiting from state-owned enterprise reforms and favorable policies.

Industry dynamic information

Market review: The CITIC Construction Index rose 6.9% this week, the Shanghai and Shenzhen 300 rose 2.0%, and the sector index outperformed the market by 4.9 percentage points. In the construction sub-sector, infrastructure construction saw the biggest increase, outperforming the market by 8.9 percentage points. The top three companies with this week's gains were Huajian Group (+37.0%), China Haicheng (+25.2%), and China Alcoa International (+22.6%).

Financing situation: 1) Special debt: This week, the total amount of local government special debt financing was 163.9 billion yuan, maturing local government special debt was 35.4 billion yuan, and the net amount of special debt financing was 128.5 billion yuan. Among them, a total of 26.1 billion yuan was added to the total issuance of special bonds in 2024, with an issuance schedule of 0.7% in 2024. 2) Urban Investment Bonds: The total amount of CITI bond financing this week was 76.39 billion yuan, with net financing amount of 4.59 billion yuan, an increase of 24.50 billion yuan over last week. 3) Land concession funds: Land transactions in 100 cities this week amounted to 22.8 billion yuan, a cumulative year-on-year decrease of 59% in 2024.

Industry highlights: 1) State Assets Administration Commission: Strengthen investor returns, further study incorporating market value management into the performance assessment of central enterprise leaders, speed up the construction of new power systems, promote the construction of peak-shifting power sources such as gas power, pumped energy storage, and electrochemical energy storage according to local conditions, and accelerate the commencement of construction of approved power generation projects; (Financial Federation) 2) Ministry of Housing and Construction: Give full autonomy to urban real estate regulation and implement affordable housing construction, dual-use public infrastructure construction, and urban village renovation; (Financial Association) 3) Central Bank: Reduce deposit reserve ratio by 0.5 from February 5 One percentage point, starting January 25, Interest rates for agricultural reloans, small reloans, and rediscount were lowered by 0.25 percentage points respectively. Monetary policy has sufficient room to maintain reasonable and abundant liquidity, support large-scale centralized issuance of government bonds, and support centralized project construction; (Financial Federation)

Industry view: This week, the State Assets Administration Commission stated that it will further study and include market value management in the assessment of central enterprise leaders, which will further motivate enterprises and is expected to launch a new round of state-owned enterprise reform. There are frequent favorable government policies at all levels this week. We recommend paying attention to undervalued state-owned enterprises that also benefit from state-owned enterprise reforms and favorable policies.

Risk warning: 1. Construction progress is greatly affected by funding, natural conditions, etc., and delays may occur, which in turn affect revenue recognition; overseas project construction progress is also affected by the local political and safety environment. 2. The continued downturn in the real estate market may adversely affect construction companies in many ways. The impact of real estate on construction companies is mainly reflected in: 1) the current slump in the land market, with a sharp decline in local government land concession revenue, which adversely affects infrastructure funding sources; 2) the real estate market continues to be sluggish, with commercial housing sales and construction starts falling sharply, affecting new orders from housing construction companies, and the decline in completed area affects orders from decoration companies, and the business development of enterprises in related construction sectors is adversely affected; 3) The storm in real estate enterprises has put depreciation pressure on construction companies with real estate companies' accounts receivable and real estate development project inventory. 3. New energy business expansion may fall short of expectations. Some traditional construction companies are deploying new fields such as new energy consulting, engineering, and operation, but this field is more dependent on government resources and its own professional strength, and there may be a risk that expansion will fail.

How do you view the new round of opportunities for central enterprise reform?

Core view: Central enterprises are leaders in stabilizing the economy and stabilizing the capital market. Market value management is included in the performance assessment of central enterprise leaders. It is an important step for central enterprises to attract capital markets following the “one profit and five rate”, and is expected to start a new round of market conditions. This requires timely transmission of confidence and stable expectations through market-based holdings growth and repurchases, increasing cash dividends, and better returns to investors. At the same time, the central bank downgraded it by 0.5 percentage points to provide the market with long-term liquidity of 1 trillion yuan. Under the catalyst of multiple policies, we recommend focusing on the new round of “mid-term special valuation” opportunities, and strategically focusing on ideas such as dividends, stock repurchases, mergers, acquisitions, and restructuring.

Incident: 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 leaders. 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.”

Risk warning: 1) Geopolitical risk. If Sino-US relations are not managed well, it may lead to an intensification of confrontation between China and the US in the fields of politics, military affairs, technology, and diplomacy. At the same time, geopolitical hot spots such as the Russian-Ukrainian conflict and the Middle East issue may face the risk of worsening, and if a crisis occurs, it may adversely affect the market.

(2) Domestic economic recovery or policy implementation results fall short of expectations. If subsequent central enterprise reforms are more cautious, the transmission effect of domestic downgrades falls short of expectations, domestic macroeconomic data is slow to recover, and economic recovery is ultimately falsified, then the overall market trend will be under pressure, and overly optimistic pricing expectations will face correction.

(3) The degree of tightening of the overseas Federal Reserve has exceeded expectations. If the US economy continues to be resilient and economic data such as the labor market and retail sales perform well, then the risk of a US recession may face revaluation, and the risk of inflation will also face a rebound. The Federal Reserve's path of austerity against inflation continues, global liquidity easing falls short of expectations, and the domestic equity market's denominator side will inevitably also be under pressure.

Editor/Jeffrey