Source: Wind Wande

The central government's state-owned enterprise reform policy initiatives continue to deepen

Since the end of January this year, the central government's policies and initiatives related to the reform of state-owned enterprises have continued to be deepened. On January 24, the State Assets Administration Commission announced “Further research to include market value management in the performance assessment of central enterprise heads”. On January 29, the State Assets Administration Commission further proposed that “all central enterprises should give more prominence to accuracy and effectiveness, promote the full implementation of the 'One Enterprise, One Policy' assessment, and comprehensively implement the market value management assessment of listed companies.” What impact will the “market value management assessment” have on the value of central state-owned enterprises?

Judging from the current situation of central enterprises, the current equity risk premium of central enterprises has risen to a historically high score, and there is room for reshaping valuations. As of January 29, 2024, the total market value in circulation of central enterprises was 20.8 trillion yuan, accounting for 28.6% of the total market value of A-shares in circulation, which is close to one-third of the total market value of A-shares. However, in terms of valuation, the price-earnings ratio of the China Securities Central Enterprise Index is 10.1 times, which is significantly lower than 15.8 times that of all A-shares. Furthermore, in terms of equity risk premiums, the equity risk premium in the China Securities Central Enterprise Index has been at the 76.9% level since 2010, which indicates that the cost performance ratio of current central enterprise allocations is prominent.

At the end of January this year, the China Special Valuation Index showed a wave of upward trend. Regarding the current round of the “China Special Valuation” market in 2024, the SDIC Securities Research Report shows that an important catalyst was the inclusion of market value management in the assessment of state-owned enterprise management. It is worth noting that in the first half of 2023, the “mid-term special evaluation” once became one of the main directions in the market. However, the “China Special Valuation” was first proposed on November 21, 2022 when Chairman of the Securities Regulatory Commission Yi Huiman proposed a “valuation system with Chinese characteristics.” In 2023, the “China Special Price” market experienced three waves of market growth, namely in late November 2022, mid-February to mid-March 2023, and early April to mid-May 2023, respectively.

How do you view future investment opportunities in the central state-owned enterprise sector

According to data from the State Council's State-owned Assets Administration Commission, in 2023, central enterprises achieved operating income of 39.8 trillion yuan, total profit of 2.6 trillion yuan, net profit of 1.1 trillion yuan to mother, and an average return on net assets of 6.6%, maintaining a high level.

Looking at market performance, the Galaxy Securities Research Report shows that since 2022, China Securities state-owned enterprises have performed significantly better than China Securities private enterprises, and from November 2022 to May 2023, they were mainly driven by the “China Special Evaluation” market.

In the future, under ROE improvement requirements, Zhongtai Securities indicated that the “value creation” capacity of state-owned enterprises may continue to improve as they enter the implementation stage of profit improvements; at the same time, under institutional catalysts such as the construction of a valuation system with Chinese characteristics and comprehensive registration system reform, the pricing system for listed state-owned enterprises will be further improved, and “value realization” for listed state-owned enterprises will eventually be achieved. On the other hand, market value management incorporates the performance assessments of central enterprise heads or effectively enhances the determination and motivation of state-owned enterprise management to carry out market value management, and repairs the valuation of state-owned enterprises. Currently, a number of central enterprises have indicated that they will further strengthen market value management, place importance on shareholder returns, and strengthen market value maintenance through actions such as increasing the majority shareholders' holdings, repurchasing shares of listed companies, and increasing the dividend payout ratio. Combined with the construction of the “China Special Assessment”, the agency believes that deepening the reform of state-owned enterprises, the release of central enterprise performance, superposition active market value management, or spawning the dual catalyst of “valuation+performance” in the central state-owned enterprise sector.

Looking ahead to future investment opportunities in the sector, Galaxy Securities said that state-owned enterprises have high profit stability and profitability. Compared with private enterprises, which have long-term characteristics of undervaluation, high dividends, and high dividends, the investment value of central state-owned enterprises is becoming more and more prominent. It is recommended to focus on (1) thematic investment opportunities. As a new round of deepening state-owned enterprise reform is carried out, the future investment value of central state-owned enterprises in the field of national security, infrastructure, and scientific and technological innovation is expected to gradually increase. (2) Structural investment opportunities. First, central state-owned enterprises in the petroleum and petrochemical, environmental protection, pharmaceutics, communications, decoration, transportation and other industries have obvious performance advantages, low valuation, and high dividend rates compared to the industry as a whole, and have relatively high investment value; secondly, the investment value ranking of coal, computers, basic chemicals, machinery and equipment, automobiles, etc. also ranks high; in addition, judging only from the growth rate of net profit growth and return on net assets, state-owned enterprises in the military, utility, food and beverage industries are also worth paying attention to.

Editor/Jeffy