On January 24, the State-owned Assets Supervision and Administration Commission of the State Council first proposed that it would further study the inclusion of market value management in the performance appraisal of the heads of central enterprises. Market value management is an important part of the reform of state-owned enterprises, and the path to achieve this is to focus on improving core competitiveness and enhancing core functions. This move may further promote the return of the common value of central enterprises and their listed subsidiaries.
The issuance of version 3.0 of the National Nine Articles has set a new timetable and roadmap for deepening the reform of the capital market, which will improve the quality of listed companies, enhance the investment value and enhance investors' sense of gain in the medium and long term. This requires enterprises to look at the global market and learn from others while practicing their internal skills.
This paper takes the experience of the U.S. capital market as a comparison, combined with the market value management model, advantages and disadvantages of listed companies, and relevant case analysis, in order to provide reference.
According to data released by City Index, a financial service provider, a total of 8 American companies will enter the top 10 in the global market capitalization ranking in 2023, including many well-known companies such as Apple, Microsoft, and Amazon.
Top 10 global market capitalization in 2023 Data source: City Index
Entering 2024, the global market capitalization ranking has changed further, but the top 10 is still basically dominated by American companies, with a total of 6 US companies with a market value of more than $1 trillion so far.
In terms of the stock market, driven by AI technology, technology stocks represented by the "Big Seven" (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, and Tesla) shined. At present, the stocks of the "Big Seven" account for about half of the weight of the Nasdaq index; For the whole year of 2023, the "Big Seven" of U.S. stocks contributed two-thirds of the gains in the S&P 500 index. Both the Nasdaq Composite Index and the S&P 500 Index are market capitalization-weighted indices.
At the same time, the United States has the largest capital market in the world, with a total market capitalization of nearly half of the world's. The EU and Chinese markets each account for about 10%, and their influence still needs to be improved.
So, how did the U.S. grow into the largest capital market today? What can you learn from your experience in market capitalization management?
Market value management depends on itself
According to the World Federation of Exchanges (WFE) and the Securities Industry and Financial Markets Association (SIFMA), the size of the global stock market has almost tripled since 2003, with the total market capitalization climbing to $109 trillion.
The U.S. has the world's largest capital market, and the combined market capitalization of U.S. companies is approaching 50% of the world's total, and the concentration of U.S. equities has reached its highest level in about 20 years. Global investors' money is flowing to the United States on a massive scale.
This did not happen overnight.
At the end of the 18th century, Hamilton, then Minister of the Treasury, issued bonds on a large scale, which directly led to the activity of the securities market; During the Civil War, the federal government financed military spending, the securities market developed unprecedentedly, and stock issuance increased rapidly; From 1860 to 1870, railroad stocks were listed in large numbers in the United States, and a railroad stock bubble appeared, and the U.S. stock market began to shift from the bond market to the stock market in the past.
For most of the period before 1886, the U.S. stock market was dominated by the trading of Treasury bonds, local government bonds, and corporate bonds, and it was only in the latter decades of the 19th century that the stock market began to develop rapidly and became the main player on Wall Street. In the 20th century, with the expansion of free trade after the war, the emergence of new inventions and new technologies, the improvement of the management ability and competitiveness of American enterprises, and the influx of international capital, the US economy and securities market also experienced an unprecedented boom.
The growth of the U.S. market has been accompanied by the emergence of bubbles and the occurrence of market manipulation and speculation.
The stock market panic of 1907 led to the U.S. government's concern for stock market manipulation and speculation, and the Hughes Commission began investigating manipulation of U.S. securities markets, including futures markets, in 1908. The commission's investigative report noted that there was manipulation and speculation on the New York Stock Exchange, but recommended that the U.S. government refrain from drastic action to change the trading rules on Wall Street, and only called on exchange participants to strengthen self-discipline.
This development process reflects the "high degree of freedom" of the U.S. economy and securities market, and the measures related to market value management are more dependent on the companies themselves than on government supervision.
"From the perspective of the SEC and the US regulators, they will not overemphasize the concept of market value management, because this is a market-oriented means and does not need the regulator to intervene." Chen Xin, a professor at Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, told the International Finance News that the behavior of similar market value management may be more dominated by the management of American companies, and external shareholders are more likely to get feedback on the company's demands. "Therefore, the share repurchase and cash dividend ratio of listed companies in the United States are relatively high, and the equity incentives for executives are also relatively in place, and there will even be criticism of excessive incentives."
"Therefore, this market value management in the United States tends to be a spontaneous behavior and is more active in the entire U.S. market." Chen Xin said.
The two sides of "shareholder first".
However, Chen Xin also stressed that U.S. companies are not so much "market value management" as "shareholder first".
"The U.S. and the U.K. system as a whole are basically shareholder-first, unlike Japan and Germany. The stock prices of Japan and Germany have been very low in the past, and only recently have they been speculated, and one important reason is that it is not shareholder supremacy, especially external shareholder supremacy; On the contrary, the United States has a relatively mature legal system to protect investors, and the protection of external investors is relatively in place. ”
Indeed, after a long period of development, the capital market in the United States has become relatively mature, and it can prompt it to spontaneously act of attaching importance to the interests of shareholders and protect the rights and interests of shareholders to a greater extent. However, too much capital flows into the pockets of investors, which will also lead to enterprises not having enough R&D funds to invest in manufacturing.
"This is also one of the reasons for the frequent Boeing accidents in recent years." Chen Xin told reporters, "From the perspective of the Chinese market, we should not copy the American experience. ”
It can be said that R&D investment reflects the scientific and technological content of enterprises to a certain extent. The market value of those technology companies that accurately grasp the "outlet" has also risen all the way, not to mention those manufacturing-based enterprises, if they do not pay attention to research and development, they can only "kill themselves".
Nvidia's market capitalization more than tripled last year, jumping to sixth place; Meta's market capitalization has almost tripled, ranking in the top 10; The combined market capitalization of the "Big Seven" such as Microsoft and Apple even exceeds the market value of the stock market of any single country except the United States.
At present, the European company with the highest market value is the Danish pharmaceutical company Novo Nordisk, which has benefited from the huge benefits of the development of semaglutide injection, a weight loss drug. Needless to say, the R&D investment behind this is self-explanatory.
Last year, the market capitalization of the world's 100 most valuable publicly traded companies increased by 29% to about $36.5 trillion, a record high, according to an assessment by consulting firm Ernst & Young. In its analysis, EY pointed out that the boom in the technology industry has further strengthened the dominance of the United States: 62 of the 100 most valuable companies in the world in 2023 are located in the United States; In 2007, before the global financial crisis, 46 of the world's top 100 companies by market capitalization were headquartered in Europe, and only 32 were headquartered in the United States.
Henrik Ahlers, EY's business manager, said European capital markets were currently "too fragmented" and that the barriers to raising capital through listings were too high, especially for new, aspiring companies.
This confirms the concentration, convenience and openness of the U.S. capital market.
"The U.S. approach is to make money, to give it to shareholders, if the company wants to invest, it has to go to the market to raise funds, and the market will judge whether the investment project is good or not." Chen Xin pointed out.
The path of "market capitalization management".
On January 24, 2024, the State-owned Assets Supervision and Administration Commission of the State Council proposed that it would further study the inclusion of market value management in the performance evaluation of the heads of central enterprises, and guide the management to pay attention to stock price changes. At present, the core indicators of the performance evaluation of the heads of central enterprises by the SASAC are "one profit and five rates", specifically the total profit, asset-liability ratio, return on net assets, operating cash ratio, R&D investment intensity and labor productivity of all employees.
With the increasing market attention of market value management, the understanding of listed companies on market value management is also deepening. In addition to doing a good job in the main business, the introduction of technical market value management measures such as increasing the holdings of important shareholders, repurchasing shares, equity incentives, and increasing dividends at an appropriate time has also been accepted by more and more listed companies. Many listed companies have also stated that they will increase dividends and actively return to shareholders.
Although market capitalization management has only recently come into our field of vision, in fact, it is not a very new term.
"In the past, from the perspective of central state-owned enterprises and the government, market value management was not as important as it is now. Now it is because the stock price fluctuates too much, so it is starting to pay attention to market value management. Why is this problem existing? It is because the large shareholders and the small and medium-sized shareholders are not consistent. Large shareholders control the enterprise, and the control will bring some spillover effects, and these spillover effects are not reflected in the small and medium-sized shareholders. ”
Chen Xin said, "For this type of enterprise, it may be that the state hopes to promote the release of the value of these companies through various methods, and then the price of the stock can better reflect its intrinsic value." ”
It is important to note that market capitalization management does not mean raising the share price. "It's not that pulling up is called management, but that it is necessary to make the stock price more stable, which is also a kind of management." Chen Xin stressed to reporters that specific problems should be analyzed on a case-by-case basis. "If it is undervalued, the purpose of management is to pull up [the stock price]; If it is appropriate now, then from the perspective of major shareholders, it may be more desirable to stabilize the stock price."
As for how to do a good job in managing the market value of enterprises, Chen Xin pointed out that "it is necessary to improve the return of external shareholders through some real money, so that the stock price will react." For example, if it is a company with particularly good profitability and a lot of cash on the account, it is necessary to pay dividends and repurchase shares, which are also two common ways of market value management. ”
Strengthening information disclosure and enhancing communication with investors is also an effective way to manage market capitalization. Chen Xin pointed out that sometimes companies are undervalued precisely because investors do not know enough about the value of the company.
The market value management of American companies is often reflected in investor relations processing, Chen Xin told reporters, "They generally have an investor relations department, which is responsible for dealing with investors and influencing investors' views on the company's stock price." ”
In addition, it is also a kind of strengthening the incentives for management and employees to make the interests of management and shareholders more consistent.
The scale of dividends needs to be grasped
If we focus on the behavior of individual companies, taking Boeing as an example, the fundamentals of these years have not been optimistic.
On January 31, Boeing's U.S. stock released its fourth quarter and full-year 2023 results before market trading. In the fourth quarter of last year, the revenue was 22.018 billion US dollars, a year-on-year increase of 10.2%; the net loss attributable to the parent company was US$23 million, a year-on-year decrease of 96.37%; Adjusted loss per share was $0.47 and free cash flow was $3.0 billion.
Last year's performance improved due to the increase in sales, and Boeing achieved revenue of $77.794 billion in 2023, a year-on-year increase of 16.79%; The net loss attributable to the parent company was 2.222 billion US dollars, a year-on-year decrease of 54.97%.
On April 25, Moody's Ratings downgraded Boeing's credit rating to Baa3 from Baa2, just one notch above "junk" and gave a negative rating outlook. Moody's expects Boeing to face financial difficulties in the coming years, with free cash flow not reaching the level Moody's previously expected, Boeing may need to address cash flow shortfalls by issuing new debt, and the headwinds for Boeing's commercial aircraft division will persist until at least 2026.
In terms of stock price, Boeing's stock price rose sharply at one point, reaching an all-time high of $446 per share in early 2019; In 2019, the Boeing 737 MAX was grounded globally, and the impact of the new crown epidemic outbreak in early 2020 caused its stock price to plummet to $89 per share in March 2020. At present, the company's stock price is still fluctuating further due to events such as the "bolt door".
These operational problems are actually the result of the company's excessive pursuit of "shareholder first" and short-term profits.
From 2013 to 2019, Boeing spent a total of $43.4 billion to buy back shares, while the company's cumulative accounting profit was less than $38.8 billion. At the same time, Boeing also paid a high cash dividend, with a dividend ratio of more than 40% at one point. Even in 2019, when the 737 MAX was grounded and the company lost money, Boeing insisted on a large dividend of $4.63 billion, while also buying back $2.65 billion in shares.
As a direct consequence, Boeing's shareholders' equity has fallen rapidly from $15 billion in 2013 to $400 million in 2018, to -$8.3 billion in 2019, and even to -$18.3 billion in 2020. It was not until 2021 that the company stopped carrying out share buybacks and cash dividends.
The stock price has been pushed up by large buybacks over a long period of time, and Boeing's shareholders have also received high returns through cash dividends and stock appreciation, but behind this is a huge debt and operational risk.
In addition, as more funds are distributed to shareholders, Boeing's investment in technology optimization and innovation is relatively insufficient, and Boeing 737 aircraft accidents are endless: emergency hatch dislodgement, rudder pedal failure, engine fire and other accidents are all severely damaging Boeing's stock price and reputation.
According to an article published on the VOX website in the United States, in order to increase profits and raise stock prices, Boeing has reduced R&D and manufacturing, cut the number of employees, and outsourced a large number of operations to substandard suppliers while buying back a large number of shares.
"The key is to grasp the problem of degree." Chen Xin pointed out.
Reporter Wang Zhexi