1. Under the valuation system with Chinese characteristics, central enterprises are expected to achieve valuation reshaping
Listed companies of central enterprises are the foundation and ballast of the capital market
Central enterprises bear important responsibilities such as serving social development, ensuring industrial safety, and solving social employment, and are the core enterprises in the A-share market.
As of December 31, 2022, among the 5,061 A-share listed companies, 372 were listed by the State-owned Assets Supervision and Administration Commission (SASAC), and 12 were listed with actual control or the largest shareholder attributable to the SASAC, accounting for about 7.6% in total.
In 2022, the total revenue of the central enterprises of the SASAC will be 24.59 trillion yuan, the total annual net profit will be 1.30 trillion yuan, and the cumulative cash dividend will be 480.3 billion yuan, contributing 34% of the revenue of A-shares, 23% of the net profit and 25% of the cash dividend with a market value of 18%.
Source: Wind, as of December 31, 2022, dividends refer to cash dividends implemented in 2022 (from the 2022 annual report)
The valuation of listed companies of central enterprises is lower than the market average, and it is expected to usher in a reshape
As of April 17, 2024, the price-to-earnings ratio of the CSI Central Enterprises Index is 10.75, which is lower than the 15.78 of the CSI All-China Index in the whole market, which is significantly lower than the 31.65 of the CSI Private Enterprise Index.
Since its listing, the valuation level (P/E ratio TTM) of the CSI Central Enterprises Index has been at its 50.82% percentile level. Regardless of horizontal or vertical comparison, the overall valuation level of central enterprises and their economic status need to be improved, and it is expected to usher in a reshaping with policy support.
Chart: P/E ratio TTM trend of central enterprise index (%)
Source: Wind, as of April 17, 2024
There is a mismatch between the value realization and value creation of central enterprises, and the establishment of a valuation system with Chinese characteristics should be explored
The realization of value creation and value realization will be listed as the key assessment content of the reform of central enterprises. On May 27, 2022, the State-owned Assets Supervision and Administration Commission (SASAC) issued the "Work Plan for Improving the Quality of Listed Companies Controlled by Central Enterprises", focusing on the unclear positioning, scattered distribution and weak strength of the internal listing platforms of some central enterprises.
Explore the establishment of a valuation system with Chinese characteristics. On November 21, 2022, Chairman Yi of the China Securities Regulatory Commission made an important speech on the construction and development of China's capital market at the annual meeting of the 2022 Financial Street Forum, and elaborated on how to build a "modern capital market with Chinese characteristics" in combination with the "improvement of capital market functions and increase the proportion of direct financing" proposed by the 20th National Congress of the Communist Party of China. In particular, the speech pointed out that "explore the establishment of a valuation system with Chinese characteristics and promote the better performance of the function of market resource allocation".
The central enterprises will establish a performance appraisal index system represented by "one profit and five rates". At the 2023 meeting of heads of central enterprises, the State-owned Assets Supervision and Administration Commission (SASAC) will further optimize the operating index system of central enterprises from "two interest and four rates" to "one interest and five rates". Among them, "one profit" refers to the total profit, and the "five rates" refers to the asset-liability ratio, return on net assets, R&D investment intensity, total labor productivity and operating cash ratio. In contrast, the "one profit and five ratio" replaces the previous net profit with the return on net assets, and the operating income margin with the operating cash ratio, focusing more on efficiency and cash flow.
Figure: Methods and paths for central enterprises to achieve valuation restructuring
Data sources: "Work Plan for Improving the Quality of Listed Companies Controlled by Central Enterprises", 2023 Press Conference on the Economic Operation of Central Enterprises, Industrial Securities Economics and Finance Research Institute
From "two interest rates and three rates" to "one interest rate and five rates", pay attention to the profit quality and cash flow security of central enterprises
In 2020, the "two profits and three rates" were proposed, and the overall idea is to guide enterprises to focus on improving operational efficiency and increasing the layout in the field of scientific and technological growth.
In 2021, the indicator system will be changed to "two profits and four rates", and a new labor productivity index will be added to guide enterprises to improve the efficiency of labor allocation and the level of human capital.
In 2022, the "two profits and four rates" will be refined into "two increases, one control and three improvements".
In 2023, the operating index system of central enterprises will be optimized to "one profit and five rates", and more attention will be paid to the profit quality and cash flow security of central enterprises.
Chart: Historical changes in the assessment indicators of central enterprises
Source: Wind
Strengthen investor relations management, optimize shareholder returns through dividend buybacks, and help reshape the valuation of central enterprises
In recent years, the implementation of equity incentives for A-share state-controlled listed companies has become more and more common, and the number of market cases has shown an overall upward trend.
The dividend performance of central and local state-owned enterprises is generally better than that of other types of enterprises. According to the data of China Securities Index, the total dividends of central and local state-owned enterprises in 2022 will be 1.09 trillion yuan, accounting for nearly two-thirds of the total dividends in the market.
In the future, there is still a lot of room for improvement in equity incentives, share repurchases, and dividends. Many state-owned enterprises are adjusting their dividend strategies, such as changing dividends once a year to dividends twice, and the level of dividends has also increased.
Table: Equity incentive policies of central state-owned enterprises
Source: Wind, CSI Index
Table: Overview of dividends of listed companies of central state-owned enterprises
Source: Wind, CSI Index
The new "National Nine Measures" are expected to enhance the momentum of dividend and market value management of central enterprises
The State Council issued the new "National Nine Articles", requiring to strengthen the supervision of cash dividends of listed companies, increase incentives for high-quality companies with dividends, and take multiple measures to promote the increase of dividend yields. In 2023, the dividend rate of some central enterprises has increased significantly, and under the policy constraints, the dividend momentum is expected to increase, and the dividend rate is expected to be further increased.
In addition, the "National Nine Articles" also proposed to "formulate guidelines for the market value management of listed companies, and study the inclusion of market value management of listed companies in the internal and external assessment and evaluation system of enterprises". At the beginning of the year, the State-owned Assets Supervision and Administration Commission also required that the market value management effectiveness be included in the assessment of the heads of central enterprises, and it is expected that the subsequent market value management measures of listed central state-owned enterprises are expected to be introduced one after another to promote the accelerated recovery of valuations.
Table: The new "Nine Articles of the People's Republic of China" involve the combing of provisions
Source: Wind, Guosheng Securities
Second, the dividend strategy is effective for a long time and has a high degree of adaptability with central enterprises
Investment philosophy and market policies jointly drive domestic dividend investment
Listed companies with high dividends selected through dividend yields have medium and long-term investment value. Dividend yield is the core element of the dividend discount valuation model, and it is also an important measurement indicator of value investment strategy.
With the development of the domestic market, changes in the structure of investors, and the influence of foreign capital, the concept of value investment has gradually been accepted by the market. Policies related to dividends of domestic listed companies have been introduced one after another, and the quantity and stability of cash dividends of listed companies have been greatly improved, creating conditions for dividend investment.
Chart: Dividend compounding effect of the SOE Shareholder Return Index
Source: Wind, official website of the Securities Regulatory Commission
Table: Compilation of relevant dividend policies of listed companies
Source: Wind, official website of the Securities Regulatory Commission
With policy support, the dividend level and stability of central enterprises have been steadily improved
Under the support and guidance of regulatory policies, listed companies pay attention to investor returns and promote listed companies to continuously improve the level of cash dividends, among which central enterprises have a significant advantage in the scale and sustainability of dividends.
From the perspective of dividend scale, the dividend amount of all A-shares has continued to increase in the past five years, and central enterprises have contributed nearly half. The cash dividends of all state-owned enterprises and central enterprises in 2022 will be 1.49 trillion yuan and 1.06 trillion yuan respectively, accounting for about 70% and 50% of the total dividends of all A-shares, respectively, with a compound annual growth rate of 15.6% and 15.9% in the past five years, respectively.
In terms of the number of dividend companies, more than 60% of A-share companies will implement dividends in 2022, and the willingness and sustainability of central enterprises to pay dividends are more advantageous. In 2022, the number of companies with cash dividends from all state-owned enterprises and central enterprises will be 935 and 351 respectively, accounting for 68% and 78% of the number of listed companies respectively, of which the number of companies with cash dividends by central enterprises will increase significantly from 66% in 2018.
Chart: From 2018 to 2022, about 50% of central enterprises achieved continuous dividends
Source: Wind, Ping An Securities
The dividend strategy has stable long-term returns, strong effectiveness, and high adaptability with central enterprises
From the perspective of international experience, the dividend factor is a long-term effective strategy that can bring stable excess returns. Dividend ETFs account for the highest proportion of overseas SmartBeta ETFs, and the development trend and development prospects are good. As of the end of 2022, the global dividend strategy index product size exceeded 400 billion US dollars, making it the largest tracking strategy index type outside of style indexes.
From the perspective of the domestic market, the effectiveness of the dividend factor is strong, in the context of the valuation reconstruction of central enterprises, central enterprises focus on improving the quality of profits, pay attention to cash flow security, and have a tendency to gradually expand dividends, "central enterprises" and "dividends" have a high degree of adaptability, and are expected to achieve the "1+1>2" effect.
Chart: Effectiveness of offshore dividend indexes
Source: Wind, CSI Index
Chart: Effectiveness of dividend indices of domestic central enterprises
Source: Wind, CSI Index
Overseas experience: share buybacks play a role as a substitute for cash dividends
In the 50s of the 20th century, it originated in the United States, and in the early stage of development, due to suspected insider trading and market manipulation, the scale of repurchase was small; in 1982, the US Securities and Exchange Commission formulated the 10b-18 rule, which made regulatory provisions on the method, time, quantity and price of repurchase; after 2000, it ushered in great development, and the repurchase amount of the S&P 500 rose to 500 billion US dollars in 2007, and the dividend level rose to a new level.
The total amount of buybacks in the U.S. market exceeds the total amount of dividends, and share buybacks have really played a role in replacing cash dividends.
Chart: S&P 500 dividends and buybacks
Source: Wind, CSI Index
Chart: S&P 500 Repo Index vs. S&P 500 Index returns
Source: Wind, CSI Index
The inclusion of share repurchase in dividends in the domestic market has the background and development conditions of the times
At present, the repurchase policy has been continuously improved, the repurchase environment has improved, and the addition of repurchase is expected to improve the performance of the dividend factor.
In May 2022, the State-owned Assets Supervision and Administration Commission (SASAC) issued the Work Plan for Improving the Quality of Listed Companies Controlled by Central Enterprises, encouraging central enterprises to use share buybacks and other methods to guide the reasonable return of the value of listed companies, and optimize shareholder returns through cash dividends and other methods for eligible listed companies, so as to enhance the market recognition and value realization of listed companies.
In 2018, the China Securities Regulatory Commission issued the "Opinions on Supporting Listed Companies to Repurchase Shares", and in 2019, the Shanghai and Shenzhen Stock Exchanges respectively issued the "Implementation Rules for the Repurchase of Shares by Listed Companies", giving more support to the stock repurchase behavior of listed companies, and the number of repurchases and repurchase amounts of listed companies in Shanghai and Shenzhen began to rise, with the amount of stock repurchases from 2019 to 2021 being around 60 billion yuan, and the repurchase amount exceeding 100 billion yuan in 2021.
Chart: Share buybacks and dividends in the Shanghai and Shenzhen markets
Data source: Wind, China Securities Index, scale unit is 100 million yuan
Share buybacks can be used as a dividend substitute to send a positive signal to the market
Source: Wind
Bonus style current market view
The strength of the dividend style stems from the top-down adaptation of the environment, not only its own dividend attributes. At present, institutions believe that the dividend style will remain strong in April, and there are three specific reasons:
(1) Interest rates are difficult to loosen, and the duration is shortened. U.S. inflation is high, and the yield on 10-year U.S. Treasury bonds has continued to rise, rising from 3.95% at the beginning of the year to 4.62%.
(2) The nine articles of the country highlight the importance of dividends, and the pricing system is being reformed. The weight of dividends in the A-share pricing system has been increased, and compared with stocks that do not pay dividends or pay less dividends before, stocks with high dividends will be more adaptable to the new regulatory environment, especially in the context of highly changing regulatory environments, and the stable attributes of dividend styles are more prominent.
(3) Risk appetite has fallen during the earnings season, and the risk of high dividends is low. As the earnings season continues to be disclosed, the market's full-year earnings expectations have been revised downward, risk appetite continues to decline, and high dividends have been structurally benefited. Among them, analysts' 2024 net profit forecast is 42% lower than 1 month ago, and 13% is raised.
Data source: Zheshang Securities
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