Reform lifts valuations, equities of listed SOEs

Stock-market investors in China are favorably disposed toward State-owned enterprises listed in the A-share market as "the valuation system with Chinese characteristics" has become a buzz phrase among market mavens, following the advanced state of SOE reform, experts said.

Although the benchmark Shanghai Composite Index shed 1.1 percent on Tuesday, shares of A-share SOEs such as Sinotrans Ltd, China International Capital Corp Ltd and AVIC Industry-Finance Holdings surged by the daily limit of 10 percent.

China Securities, China CITIC Bank and Dawning Information Industry Co Ltd closed more than 4 percent higher.

The sub-index themed on "the valuation system with Chinese characteristics" compiled by market tracker Wind Info, shed 1.27 percent on Tuesday but is up more than 31 percent this year, while the SCI climbed 7.7 percent since Jan 1.

Yi Huiman, chairman of the China Securities Regulatory Commission, told a forum in late November that efforts should be made to "explore a valuation system with Chinese characteristics" so that the market can play a bigger role in allocating resources.

Xiang Pengfei, a researcher at Guosheng Securities, said A-share SOEs with special industry backgrounds are often evaluated by investors using what has come to be known as "the valuation system with Chinese characteristics". But, in the past, although these companies used to provide high dividends and stable profitability, they had long been undervalued and overlooked by equity investors.

Now, however, perceptions are changing, thanks to effective supportive policies. So, the bullish performance of certain SOEs may continue in anticipation of more supportive policies, Xiang said.

The rally in A-share SOEs comes ahead of a business exchange meeting to be held by the Shanghai bourse on Thursday. Industry insiders will likely discuss "the valuation system with Chinese characteristics" and promote exchange traded fund or ETF products themed on the SOE stakeholder return index, according to the meeting's invitation letter.

China Reform Holdings Corp Ltd, which compiles the SOE stakeholder return index, is the joint organizer of the Thursday meeting.

In late April, the CSRC approved the release of the first three ETFs based on the SOE stakeholder return index. The funds will be launched by China Universal Asset Management, GF Fund Management and China Merchants Fund. The three ETFs will open for subscription from Monday to May 19, with the combined financing totaling 6 billion yuan ($866 million).

Analysts from Industrial Securities said the ETFs will introduce incremental capital for SOEs, which will facilitate the expansion of quality SOEs and their high-quality development. Investors will be provided with more asset allocation tools, benefiting from the ongoing SOE reform.

The Government Work Report released in March stressed the SOE reform should be deepened to improve the core competitiveness of these companies. The State-owned Assets Supervision and Administration Commission of the State Council also emphasized during a meeting in early March that SOEs should look up to world-leading companies in terms of value creation.

According to Dai Kang, chief strategist of GF Securities, SOEs shoulder much responsibility in the development of key industries like military, electricity, telecommunications and engineering equipment.

A-share SOEs with huge growth potential and Hong Kong-listed SOEs with high dividends will gain increasing attention from investors, he said.

But Dai also hastened to add that SOEs' investor relations management is still suboptimal while institutions' surveys on SOEs are inadequate, which affects SOE valuations, he said.