(Report Producer/Author: Soochow Securities, Yao Pei)
1. Portrait of A-share private enterprises: an important subject of the market, partial growth, excellent efficiency, and many incentives
1.1. The important composition of A-shares: the number of private enterprises/ market value / transaction proportion ranks first, and the stock price performance is eye-catching
Private enterprises have become an important component of the A-share market, ranking first in terms of quantity/market value/transaction ratio. As of 2022/01/18, there are 2874 private enterprises in A-share, accounting for 62% of all listed companies, far exceeding local state-owned enterprises (857) and central state-owned enterprises (422); in terms of market value, private enterprises are 40.4 trillion yuan, accounting for 41% less than the proportion of the number, indicating that the market value of private enterprise companies is generally small; in terms of transactions, the average daily turnover of private enterprises in 2021 is 621.9 billion yuan, accounting for 55%. Judging from the three major indicators of quantity, market value, and transactions, the proportion of private enterprises ranks first and has become a key entity in A-shares.
Since 2020, the stock prices of high-quality private enterprises have been eye-catching, significantly outperforming the market. We selected the leading 100 index of state securities private enterprises as the representative of high-quality private enterprises, and the index screened private enterprises with indicators such as comprehensive liquidity, equity pledge, capital loss ratio, and market value. Since 2020 (as of 2022/01/19), the 100 index of private enterprises has risen by 50%, and the CSI 100 and Shanghai Composite Index have risen by 7% and 15% respectively in the same period, and high-quality private enterprises have significantly outperformed the market. From the perspective of index industry distribution, the top three weighted industries of private enterprises 100 are power equipment, electronics and medicine, of which Catal times, LONGi shares, Hengrui Pharmaceutical, Lixun Precision, etc. are all high-quality private enterprise leaders, and the rapid development of the new economy industry provides fundamental support for stock price increases.
1.2. Characteristic advantages: the industry is growing, the efficiency is excellent, and the incentive is more
A-share private enterprises are mostly distributed in growth industries, contributing more than 80% of the new specialized specialties. From the perspective of industry distribution (cut to 2022/01/19), A-share private enterprises are mainly concentrated in machinery (335), medicine (301), electronics (238), basic chemical (237), power equipment (211) and other growth industries, and the growth-technology and growth-consumer industries account for a total of 53%, far exceeding central state-owned enterprises (41%) and local state-owned enterprises (29%), but lower than the number of other attribute enterprises. From the perspective of specialized and special new companies representing the direction of policy support, there are 351 A-share specialized special new companies, of which 302 are private enterprises accounting for 86%, and private enterprises have become the main force of domestic innovation.
The high per capita profit creation of A-share private enterprises shows the advantage of efficiency, and actively implements the incentive mechanism for employee stock ownership optimization. In 2020, the median per capita revenue generation of A-share private enterprises was 890,000 yuan, which was lower than that of other types of companies, but the median per capita profit creation reached 87,000 yuan, which was only lower than that of foreign-funded enterprises, showing better cost control ability and certain efficiency advantages. From 2017 to 2021, a total of 2237 companies in A shares announced the implementation of equity incentives, of which private enterprises accounted for 80%, not only far more than other types of companies, but also higher than their own proportion in the total A, flexible incentives will effectively help private enterprises bind core employees, and further enhance innovation ability and efficiency.
Note: According to the characteristics of the industry, we divide the Shenwan first-level industry into six major types. (1) Cycle: agriculture, forestry, animal husbandry and fishery, construction materials, coal, iron and steel, basic chemicals, petrochemicals, nonferrous metals; (2) growth - technology: machinery, power equipment, military, communications, media, electronics, computers; (3) growth - consumption: beauty care, medicine; (4) stock - consumption: retail, automobile, social services, food and beverages, home appliances, light industry, textile services; (5) stock - finance: non-banking, banking; (6) stock - real estate infrastructure: public utilities, construction, environmental protection, real estate, transportation.
1.3. Outstanding issues: Internal governance still needs to be improved
The internal governance of private enterprises still needs to be optimized. The major shareholders and actual controllers of private enterprises are generally individuals, and the limited amount of funds leads to a significantly lower shareholding ratio, the average shareholding ratio of the largest shareholder is 30%, which is only higher than that of public enterprises and other enterprises, while 45% of the major shareholders of private enterprises have equity pledges, which is the highest in various types, and the average proportion of equity pledges in the shares held is 47%, which is at the middle level of each type. In addition to the shareholding structure, the most prominent problem of private enterprises is the imperfection of internal governance, the founder of a word is often easy to lead to the failure of internal governance, the current number of private enterprise boards and independent directors average 8 people, 3 people, are the lowest in each type. In addition, from the perspective of the ESG rating score of China Securities, the average score of the private enterprise governance rating of 7.2 is also low, compared with the score of central enterprises and local state-owned enterprises reaching 8.2 and 7.6. (Source: Future Think Tank)
2. The turnover of the founders of A-share private enterprises may be accelerated
The transfer of founders is a topic that private enterprises cannot avoid, and in the next few years, A-share private enterprises may enter an intensive replacement period. More than 40 years after the reform and opening up is a period of rapid development of the domestic private economy, and many entrepreneurs and founders have promoted the listing of companies to form a huge group of private enterprises with A shares. For private enterprises, the founder's age shift is a topic that cannot be avoided, and whether it is internal inheritance or external professional managers will have a major impact on the development of the enterprise. We regard the companies in A-share private enterprises whose actual controller is also the director of the board of directors as a sample of future replacement needs, and statistics find that 58% of them are over the age of 55, 60-65 years old account for 14%, and 65 years old account for 12%. The average retirement age of private enterprise founders who have retired since 2010 is 59 years old, which means that a large number of private enterprises will face founder turnover in the next few years. Among the top 20 companies in the market with replacement needs, the average age of the chairman is 59 years old, of which the directors of Zhifei Biological, Rongsheng Petrochemical and Haitian Flavor Industry are the oldest at 69, 67 and 66 years old, respectively.
Taking the actual controller and the chairman of the board of directors as the two dimensions of measuring the company's power, the current intergenerational inheritance of private enterprises in Shanghai is divided into 7 categories. We regard the actual controller and the chairman as the two symbols of the company's power, and statistically classify the changes in the two positions of the private enterprise since 2010: (1) the actual controller has changed, we are deemed to have done the transfer of power, of which the same surname of the actual controller before and after the change is regarded as the handover within the family, if the surname of the actual controller before and after the change is different, it is regarded as an external transfer of equity; (2) the actual controller has not changed, but the chairman has changed and the actual controller has changed to others, we are deemed to have made the transfer of power. Among them, the same surname before and after the change is regarded as a handover within the family, otherwise it is regarded as an external manager; (3) the actual controller and the chairman have not changed, and the actual controller has not served as the chairman after 2010, we regard it as having done the transfer of power before 2010; (4) the actual controller and the chairman have not changed, and the actual controller is still the chairman, and we regard that the power has not yet been handed over. In the following, we will conduct a statistical analysis of the two types of companies that have had family inheritance after 2010 and companies with external managers, and study the fundamentals and stock price performance of private enterprises after the replacement. (Source: Future Think Tank)
3. Create a second-generation succession: Profit stock prices are generally weakening
3.1. Creation of the second generation of succession: diversified business, slowing profitability, weak stock prices
Creation of the second generation of succession: the business tends to be diversified, the profit growth rate slows down, and the profitability declines. We take the two types of companies identified in Chapter 2 as a sample, determine that their replacement year is t years (take t≤2018), and count the fundamental changes in the years before and after. At the business level, 51% of the sample companies changed their first major business after the handover (the annual report disclosed different expressions are regarded as changes, and the actual proportion of changes should be less than 51%), and the average proportion of revenue of the first largest business decreased from 64.4% in t-1 years to 60.2% in t+3 years, which means that new leaders will generally expand their business after taking office, and the diversification tendency is strong, reflecting the change ideas of the second generation. In terms of profitability, 61% of the sample companies experienced a decline in the profit growth center after the replacement, and the average net profit attributable to the mother basically did not increase after t+1 years; the net interest rate and ROE after the replacement of 63% and 74% of the samples declined, and the average overall net interest rate and ROE average decreased from 11.4% and 13.4% in t-3 years to 7.4% and 6.8% in t+3 years, respectively, which means that the company's fundamentals continued to weaken after the second generation took over, failed to continue performance growth and reverse the decline in profitability.
The market is generally cautious about the second generation of succession and does not recognize the subsequent achievements. We nettitulate the stock price movements of each sample company and average them to reflect the overall stock price performance. In the first year of the second generation of succession, the price of t-year began to weaken, and then continued to decline, until t+3 years the stock price did not recover but did not exceed the previous high. Judging from the stock price performance after the replacement, the market is generally cautious about the succession of the second generation, on the one hand, the company's strategy and business ideas may change, on the other hand, the ability to create the second generation needs to be verified, some investors withdraw from the wait-and-see, but the slowdown in the growth rate of follow-up performance and the decline in profitability have further reduced market recognition.
Declining revenue growth and rising expense ratios are the main reasons for the stagnation of profit growth. We compare the median revenue growth rate of the sample companies before and after the replacement with the median revenue growth rate of their respective secondary industries, and the revenue growth rate of the company after the second generation of the succession generally declines with the industry, and it is impossible to clearly judge the role played by the second generation, but from the data, it has not been able to reverse the industry trend. From the cost side, the cost rate after the second generation of succession has increased significantly compared with before, possible reasons include business diversification and increased investment, or the decline in cost control capabilities. The stall in revenue growth and the increase in expense ratio have led to stagnation in profit growth, and the overall probability of the company's fundamentals weakening after the second generation of succession is large.
3.2. Case 1 - Spring Airlines: Continuing the core strategy of low cost and actively exploring business increments
Spring Airlines' performance and stock price continued to show bright performance after the internal handover. Not all second-generation successions are reflected in weaker fundamentals and lower stock prices, and Spring Airlines is a typical positive case. In 2017, Wang Yu, the son of the company's founder Wang Zhenghua, took over as chairman, and the growth rate of revenue and net profit attributable to the mother in 2018-19 remained high, and there was a loss in 2020 due to the impact of the epidemic, but in 2021, the rapid turnaround and the overall performance was better than that of the industry as a whole; the company's stock price flattened in 2017-18, and after 2019, it opened an upward trend, and greatly outperformed the industry index, and the market recognition was high.
The reasons for the smooth succession of Spring Airlines: continuing the low-cost strategy, maintaining business expansion, and improving the incentive mechanism. The most important reason for the smooth handover of Spring Airlines is the continuation of the company's core strategy, the company is the first low-cost airline company in China, the new chairman still adheres to this strategy and further optimizes after taking over, the company's unit cost dropped from 0.29 yuan in 2017 to 0.26 yuan in the first half of 2021, which is not only far lower than the industry leader Air China, but also the advantages of comparable company Juneyao Airlines (also positioned low cost) have expanded. In addition to the continuation of the strategy, the new chairman has steadily promoted business expansion, the number of operating aircraft has increased from 76 in 2017 to 113 in 2021, a compound growth rate of 10%; the number of routes has increased from 159 in 2017 to 219 in 2020, a compound growth rate of 11%; attaches great importance to OTA channels and cooperates, and the proportion of e-commerce direct sales (including OTAs) in 2017 has increased significantly from the previous 70% to more than 90%, conforming to the development trend of the industry. In addition, the company has launched an employee stock ownership plan every year since 2018, effectively binding core employees and improving the level of corporate governance.
3.3. Case 2 - Wanxiang Money Tide: Limited innovation, slow transformation under the major changes in the industry
The performance of the actual controller of Wanxiang Qianchao continued to weaken after the replacement, and the stock price fell sharply. After the death of founder Lu Guanqiu in October 2017, Wanxiang Qianchao, a well-known auto parts manufacturer in China, took over as the actual controller, but the chairman was taken over by an external manager. In 2018-20, the company's revenue growth stagnated, the net profit attributable to the parent continued to decline, and the ROE fell from 14.1% to 6.3%, weakening the fundamentals to reflect the impact of the industry downturn cycle and the pressure on the company's internal operations. The company's stock price fell sharply after the replacement of the actual controller, and basically maintained the bottom shock since the second half of 2018, and the proportion of public fund holdings in the outstanding shares fell from 1.6% in the middle of 2017 to 0.7% in 2021, and the recognition and attention of institutions also weakened.
The reason for the weakening performance of Wanxiang Qianchao: limited innovation and slow transformation under the major changes in the industry. The company has long focused on the auto parts business, and the proportion of revenue has remained above 70% despite the decline in recent years, and the proportion of gross profit has remained above 90%. The company's R&D intensity (R&D expenditure/revenue) is lower than the industry average, but slightly higher than the industry median, and the overall innovation is limited. Under the great changes in the industry electrification and intelligence, the company's new business expansion is slow, although as early as the 2016 annual report has been proposed "around the intelligent, new energy direction of electronic product research and development and industrialization", but according to the company's research announcement shows that the current new energy vehicle revenue accounted for only 5%-10%, the business sticks to the tradition not only makes the fundamentals not get rid of the industry cycle impact, but also the stock price valuation is also dragged down. In addition, the proportion of the company's executive compensation revenue and the shareholding ratio of senior executives (except the chairman) are in the 5% and 16% of all private enterprises, respectively, and the incentive mechanism is lacking; the major shareholders hold up to 64%, the voice of small and medium-sized shareholders is weak, and the level of corporate governance ranks low among private enterprises.
4. Succession of external managers: stable profitability and recovery of stock prices
4.1. Succession of external managers: business concentration, stable profitability, stock price recovery
External manager succession: business is more concentrated, profitability is stable and growth resumes, and stock prices have rebounded significantly. Taking the type of foreign manager in Chapter 2 as a sample, we also set the transition year as t year (take t≤2018). At the business level, 63% of the company's first major business changes (the annual report discloses different expressions are regarded as changes, and the actual proportion of changes should be less than 63%); the average proportion of revenue of the first largest business increased from 63.4% of t-1 to 68.3% of t+3, and the company's business concentration increased after the professional manager took over. In terms of profitability, 49% of the companies experienced a decline in the center of profit growth after the handover, which is significantly less than 61% of the second-generation succession, and overall, the net profit after the succession of professional managers broke through stagnation and resumed growth; 60% and 71% of the samples fell after the replacement of the net profit margin and ROE average, but from the overall median point of view, the profitability of managers after the succession was basically stable.
After the professional manager took over, the stock price rose significantly. According to the method used in the second-generation succession analysis, the average value of the stock price trend of each stock is obtained after the net value is processed to reflect the overall stock price performance. The sharp decline in stock prices in the year of professional manager succession seems to reflect market concerns about the uncertainty brought about by the retirement of founders, but the strong and continuous rebound of stock price performance in the following 3 years may be related to the improvement of fundamentals after the manager takes over. Overall, the market for the founder retirement has always been cautious, whether the successor is a family member or a professional manager, the stock price of the replacement year has fallen, and then the market returns to the pricing of the fundamentals, under the leadership of the manager, the company's profitability is stable and the performance growth rate is rising, the market will give positive feedback on this, on the contrary, the second generation of succession, its operating results can not be recognized by the market.
After the professional manager took over, the revenue growth rate rebounded slightly, and the expense ratio was stable and declined. Judging from the key indicators of the income statement, although the growth rate of the secondary industries to which the company belongs has continued to decline, the median growth rate of the company's revenue has still rebounded after the professional managers have taken over; at the same time, the average expense rate during the period is basically stable, the median has declined significantly, and the improvement of the ability to control expenses has played an important role in the recovery of profit growth. Professional managers have better grades than the second generation after succession, and in addition to professional ability, incentive and supervision mechanisms may also play a key role. In our sample, professional managers take over as chairman, but founders generally continue to serve as actual controllers and can still be supervised and motivated through personnel appointments.
4.2. Case 3- Tongwei shares: grasp the opportunities of the industry's great development, and actively expand to seize the opportunity
External managers took over, actively expanded to seize industry opportunities, and the performance and stock price rose twice. Founded by Liu Hanyuan, Tongwei Co., Ltd. currently forms a business model of "agriculture (fishery) + photovoltaic" dual main business, of which the photovoltaic business involves the production of silicon materials and cells. In 2019, founder Liu Hanyuan stepped down as chairman and was succeeded by professional manager Xie Yi, and the company's net profit growth rate increased significantly after the new chairman took office, and since 2020, with the help of market style advantages, the stock price has risen sharply, and the transition to the transition has been successfully completed. As early as 2013, Xie Yi led the company's acquisition of Hefei Saiwei and built the main body of the photovoltaic cell business, which belongs to the excellent management talents cultivated internally, while the founder still serves as a director, ensuring the coherence of the company's strategic thinking. Tongwei co., Ltd. has maintained high capital expenditure for a long time, and the capital expenditure/depreciation amortization of 2020 and 2021H1 remains the first place in comparable companies, actively expands the production capacity of silicon materials and cells, and grasps the opportunities for the great development of the industry under the dual carbon target. According to the company's 2021 interim report, by the end of 2022, the company's silicon production capacity will increase from 80,000 tons (as of 2021/06) to 330,000 tons, and the battery production capacity will increase from 35GW to 55GW, and we expect to further consolidate the company's industry leading position.
4.3. Case 4 - Sifang Shares: Falling into the trap of diversification, high R&D conversion rate is low
After the professional manager took over, the company's diversification and high research and development effect were not good, dragging down the fundamentals and stock price. Sifang Co., Ltd. is a leading enterprise in the field of energy and industrial automation in China, and the founders Wang Xuzhao and Yang Qixun are well-known experts in the field of electric power. In 2013, founder Wang Xuzhao stepped down as chairman and was succeeded by Zhang Weifeng, who was replaced by Gao Xiuhuan in 2018. After 2014, the company's revenue and profit growth rate fell sharply, and profits continued to increase negatively in 2016-2019, and the fundamentals weakened dragged down the stock price Since 2015, it has fallen sharply and fluctuated at the bottom, and the proportion of fund holdings has almost dropped to 0. After the change of founders, the reason for the continuous deterioration of the company's performance is due to the improper diversification strategy, in addition to the traditional relay protection and substation automation equipment, actively expand new businesses such as rail transit, HVDC transmission, security, new energy, etc., but the synergy between the various businesses is not strong, resulting in stagnant revenue growth. In addition, the company has always adhered to high R&D investment, and the proportion of total R&D expenditure to revenue has further increased in 2014-2017, but the high R&D conversion rate is poor, which in turn drags down profit performance.
5. Focus on corporate governance to reduce the risk of intergenerational inheritance
Focusing on corporate governance is the most effective way for external investors to reduce the risk of intergenerational inheritance investment. Whether it is an internal family or an external professional manager, the ability of the successor is the most core factor influencing the smooth transition, but the portrayal of ability has different dimensions and takes time to verify. For external investors, it is impossible to obtain timely and accurate information on the handover method and the ability of the successor, and perfect corporate governance will help reduce the investment risk of intergenerational inheritance.
5.1. Establish an evaluation system for corporate governance levels
Construction of an evaluation system for the governance level of private enterprises: 8 major indicators. In order to quantitatively evaluate the governance level of private enterprises, we screened 8 major indicators from the aspects of equity, incentives, and board of directors: the proportion of independent directors, the shareholding of senior executives, whether the chairman is also the general manager, the size of the board of directors, the compensation of senior executives, institutional shareholding, equity checks and balances, and third-party ratings, and scored each company, and gave weight to each indicator to calculate the comprehensive score. Among them, "whether the chairman of the board of directors concurrently serves as the general manager" is a reverse indicator, if not concurrently, it is convenient to strengthen the supervision function of the board of directors, we assign a value of 6, otherwise the value is 4; the rest of the indicators are positive indicators, we are sorted in the total sample, from high to low into 10 files, respectively assigned 10-1 points. For the determination of the weight of the indicator, we refer to the "deleveraging, who is more active and prudent?" (Zhou Qian, Xu Xiaofang, Lu Zhengfei) The load coefficients (similar weights) of the first 7 indicators above calculated using principal component analysis are used, and appropriate adjustments are made to finally determine the index weights. Among them, the proportion of independent directors (20%), executive shareholding (20%), whether the chairman is also the general manager (15%), and the size of the board of directors (15%) have the greatest impact on the overall score.
5.2. Who scores high on governance in star private enterprises?
What is the score of the governance level of the star private enterprises that have not yet been handed over? From the current private enterprises that are actual controllers and chairmen (regarded as those who have not yet been handed over), the top 20 companies with the largest market capitalization are screened, and the average ranking of the comprehensive score of governance level among all private enterprises is 1190/2398, which does not show obvious advantages for large companies. Among them, WuXi AppTec, Great Wall Motors, and Aier Ophthalmology scored higher, while Zhifei Bio, Oriental Fortune and Weier shares scored lower. Sany Heavy Industry announced on 2022/01/20 founder Liang Wengen stepped down as chairman, by the former president Xiang Wenbo to take over, according to our evaluation system, Sany Heavy Industry governance level score ranked in the top 20% of all private enterprises, we believe that excellent governance will help the company smooth transition.
Private enterprises with a market value of more than 20 billion yuan, who scored high? In the whole private enterprise sample, we screen companies with a market value of more than 20 billion. Among them, the 20 companies with the highest scores are mostly concentrated in the pharmaceutical, machinery, computer, and communication industries, with Livzon Group, Aopt, and Aimei Ke ranking in the top three; the 20 companies with the lowest scores have the largest number of electronics and power equipment, and Jebsen Shares, MuLinsen, and Jianyou have the lowest scores.
(This article is for informational purposes only and does not represent any of our investment advice.) For usage information, see the original report. ）
Featured report source: [Future Think Tank]. Future Think Tank - Official website