Source: Wall Street See

Since the middle of last year, Chinese stocks have been in a continuous weak shock. Dividend assets have always maintained a relatively outstanding performance in the market rotation. In particular, high dividend concepts such as energy and utilities have been favored by investors, due to the outstanding profit stability and profitability of central-state-owned enterprises and the large dividend payout, the stock price has also been more strongly supported.

Goldman Sachs analyst Kinger Lau and others pointed out in a report released on June 24 that Chinese dividend assets have not been fully valued. Under the catalysis of policies, free cash flow and interest rate cuts, the high dividend concept is expected to continue to rise, and dividend assets may become a structural long-term trend.

Dividend assets - the emerging theme of China's capital markets.

In the past three years, Chinese listed companies have returned more than 2 trillion yuan in cash to shareholders through dividends and buybacks each year.

Goldman Sachs pointed out that since 2021, due to overseas interest rates being at high levels, the dividend theme of A shares has always been a lucrative strategy. The excess return of high dividend over low dividend strategies is as high as 70%, and the total return of high dividend yield is 22% higher than that of MSCI China index.

Goldman Sachs believes that the excellent performance of the high dividend concept is expected to continue, for the following five reasons:

a) In line with the 'Nine Articles' and the goal of the new round of state-owned enterprise reform, the policy promotion and implementation of improving shareholder return are strong;

b) 47% of the market capitalization of listed SOEs is held by government-related entities. For every 1% increase in the dividend payout ratio, there will be an increase in fiscal revenue of 23 billion yuan;

c) The prospect of listed companies returning cash to shareholders is good - the dividend payout ratio is low (more than 30%), but both cash balance (180 billion yuan) and free cash flow (fiscal year 23: 26 billion yuan) are at a historical high;

d) Domestic interest rates in China are falling, which has increased the attractiveness of immediate cash returns;

e) Domestic institutional investors with low stock weightings in their portfolios may have structural demand for stable income.

According to Goldman Sachs' best-case scenario assumption, if Chinese companies can significantly improve their policies on shareholder return, corporate governance and institutional investor participation, and reach a globally leading level, the Chinese stock market may achieve significant valuation appreciation, and the average revaluation return may be about 38%.

Chinese companies have the ability to increase dividend payout ratios.

By 2023, Chinese companies will return 2.4 trillion yuan in cash to investors through dividends. Although this number looks high, the fact is that the dividend payout ratio of Chinese companies ranks extremely low globally, falling behind the average levels of emerging markets and developing countries outside of China by 15 and 20 percentage points, respectively (calculated according to the median of the past 10 years).

Goldman Sachs emphasizes that Chinese companies actually have sufficient capital to distribute dividends:

Contrary to popular belief, with the help of declining capital expenditures and still-loose financing channels (especially state-owned enterprises), Chinese companies' free cash flow (FCF) reached a record high last year (2.6 trillion yuan, excluding financial enterprises).

Chinese listed companies (excluding the financial industry) sit on 18 trillion yuan in cash on their balance sheets, accounting for 23% of their market capitalization. In other words, there is a lot of space for companies to optimize their balance sheets and release value to shareholders.

In addition, analysts believe that with the influence of factors such as deleveraging of real estate and declining interest rates, institutional investors need more stable income, and long-term funds such as insurance may increase their allocation to high dividend stocks.

Overall, Goldman Sachs believes that the high dividend theme is in its early stages in China and still has a large development space. With the promotion of relevant policies and the improvement of market mechanisms, this theme is expected to become an important investment direction in China's capital markets.

Editor/tolk