[Today's Guide]
○ To grasp investment opportunity in reform of SOEs with small market value
○ Promotion of SOEs reform quickens
○ A-share market turns to normal condition from crisis mode
○ Listed insurance funds may pay less-than-expected settlement of claims for Tianjin blasts
[Focus Investigation]
To grasp investment opportunity in reform of SOEs with small market value
------
In the previous week, the state-owned assets and enterprises reform concept has become the mainstream hotspot after the market stabilization. Local state-owned enterprises (SOEs) reforms in Shanghai, Guangdong Province and Fujian Province stood out one after another, which reflects that the market are strongly optimistic towards the investment opportunities triggered by the increasing securitization ratio of local state-owned assets.
Based on the incomplete statistics of XFA, the average gross profit ratios of the SOEs in communication devices, semiconductor, electronic manufacturing, computer, package printing, shipbuilding and spinning ＆ home textiles reached 22 percent, 16 percent, 21 percent, 17 percent, 17 percent, 10 percent and 10 percent, respectively, in 2014, far below those of private enterprises in the same industry, which were 30 percent, 20 percent, 22 percent, 25 percent, 24 percent, 21 percent and 30 percent. It is urgent to improve the competitiveness and operating efficiency through business transformation, assets injection, market-oriented management and internal incentive.
Moreover, it is also the most important theme for this round of the state-owned assets and enterprises reform. It is widely believed in the market that the transformation and restructuring of the SOEs with small market value are relatively easier and more likely to start first. It is known that there are many SOEs, especially those with small market value, are under asset restructuring and business transformation, which have been prepared for a long time. Some SOEs propose to fully implement the mixed ownership system reform after the top design is finalized.
Based on the comprehensive situation of all respects, the SOEs with small market value expected to conduct reform include:
◆The actual controller of the Liaoning Shidai Wanheng Co., Ltd. (600241.SH) is the State-owned Assets Supervision and Administration Commission of Liaoning Provincial Government. The company, principally engaged in the import and export of textile and garments, is likely to benefit from the depreciation of RMB. It is positively transforming into the new energy industry. It rapidly enters into the field of nickel-metal hydride and lithium batteries through the acquisition of Liaoning Jiuyi Energy Technology Co., Ltd. It is known that the net asset of Shidai Wanheng Group is over three times of that of Jiuyi Energy Technology.
◆ Shanghai Huahong (Group) Co., Ltd., the actual controller of Shanghai Huahong Jitong Smart System Co., Ltd. (300330.SZ), is a solution and equipment provider of electronic toll collection and payment system based on the radio frequency identification technology. Besides Hua Hong Semiconductor Ltd. (01347.HK) listed on the HKEx, it still owns a great number of electronics-related assets.
◆ The actual controller of Xinjiang Korla Pear Co., Ltd. (600506.SH) is the Bureau of Comprehensive Development of the Ministry of Water Resources. With the support of agricultural modernization policies in Xinjiang Uygur Autonomous Region, the company saw a stable growth in fruits products in the last three years. Xinjiang Chang Yuan Water Group Co., Ltd. under the company's actual controller planned to exchange in water-related assets of 2.8 billion yuan in 2013 and promised to strip off the hydropower, hotels, wind energy and other assets in order to focus on the principal business of water-related affairs. It was reported recently that with the continuous separation of its assets of non-principal business, Chang Yuan Water is expected to restart preparation for listing with a valuation of more than 4 billion yuan.
[XFA Viewpoint]
Promotion of SOEs reform quickens
------
The consolidation of central enterprises has surged again recently and the promotion of the state-owned enterprises (SOEs) reform is quickened in various regions at the same time. XFA learnt that based on the reform idea, it still emphasizes the development of the mixed ownership system and the improvement capitalization and securitization of state-owned assets.
As a key province of SOEs, Liaoning Province proposed in the government work report in the beginning of the year that it would firmly push forward the state-owned assets and enterprises reform and strive to achieve substantial progress within the year. Currently, various listed companies under the State-owned Assets Supervision and Administration Commission of Liaoning Provincial Government have introduced reform plans or are under trading suspension for mulling significant events. Institutes believe that Zhongxing Shenyang Commercial Building Group Co., Ltd. (000715.SZ) under the State-owned Assets Supervision and Administration Commission of Shenyang Municipal Government operates in the department store industry with full competition. As its sales continued to decline in recent years, it is urgent to introduce strong strategic investors to assist the company in transforming through reform. The company suspended trading and planned to introduce strategic investors.
Jilin Province also considers the SOEs reform as a key driver in boosting economy. It promotes SOEs reform in an enterprise when the conditions are mature and the reform has been accelerated. The controlling shareholder of Ji Lin Ji En Nickel Industry Co., Ltd. (600432.SH) introduced strategic investors in April. Yanbian Shixian Bailu Papermaking Co., Ltd. (600462.SH) with the participation of state-owned assets also suspended trading for mulling significant events. Jilin Expressway Co., Ltd. (601518.SH) disclosed in March of last year that the Jilin Provincial Communication Department issued the Plan on Assets Injection into Jilin Expressway Co., Ltd. to the Jilin Provincial Expressway Group Co., Ltd. According to the plan, it proposes to inject the services areas along the Changping Expressway, the operating rights of advertisement and other assets into the company.
The SOEs reform in Shandong Province is under a new comprehensively deepening stage. Among the state-owned enterprise groups in Shandong, Lushang Group has various high-quality assets and is expected to be deeply participated in this round of the state-owned assets reform. As a key assets operation platform under Lushang Group, Lushang Property Co., Ltd. (600223.SH) may directly play an important role in this round of reform. Lushang Property announced in late April that the Shandong State-owned Assets Investment Holdings Co., Ltd., its shareholder, reduced the shareholding in the company. Its shareholding in the company reduced from 6.67 percent to 4.99 percent after that. The reduction in the proportion of state-owned assets also triggered the expectation on the mixed ownership reform of the company.
As a province involved in SOEs reform earlier, the reform progress of Anhui Province always goes ahead. The SOEs reform of Anhui Province focuses on the promotion of overall listing and enterprise reorganization. The State-owned Assets Supervision and Administration Commission (SASAC) of Anhui Province explicitly indicates for multiple times that it will push forward the overall listing of Anhui Construction Engineering Group (ACEG) which is the substantial shareholder of Anhui Water Resources Development Co., Ltd. (600502.SH). ACEG sees a size 5 times that of the listing company. Upon completion of the overall listing, Anhui Water Resources Development will expand to overseas water conservancy engineering market, and further explore the market of Anhui province, etc. by resorting to the parent company's experience and resources in overseas projects.
[XFA View]
A-share market turns to normal condition from crisis mode
------
The announcement issued by China Securities Regulatory Commission (CSRC) on Aug. 14 claimed that the stocks bought during government bailout have been partly transferred to Central Huijin Investment Ltd. Meanwhile, China Securities Finance Corporation Limited (CSF) will retain functions in maintaining market stability and will not exit the market in the following several years. It means that under the circumstances that liquidity crisis has been basically solved, leverage level of capital has been decreased effectively and irrational fluctuation has been reduced largely, unconventional measures featured with "emergency and rescue" will be adjusted. The market will gradually resume its normal status "oriented in internal rules and mechanism".
It must be admitted that the unconventional measures adopted during government bailout at that time were powerful and decisive, but it is necessary to adjust corresponding measures in accordance with time and situation after the emergency is eased.
Considering that market sentiments may be fickle after the market crash, the regulators have made countermeasures in advance. Firstly, CSF will retain its function as a stabilizer for the stock market and will not withdraw for years. Only when the market becomes extremely and abnormally volatile which may trigger systemic risk, will CSF enter the market again. The rise and fall of stock indexes under a normally-functioned market mechanism is not within the scope of CSF stabilizing capital's responsibility. Secondly, for stocks already bought by CSF, they will not be sold directly in secondary market so as to avoid fluctuation of stock indexes. CSF will transfer some of its stocks to Central Huijin Investment via off-market agreement. Central Huijin Investment will conduct price management and structural adjustment while maintaining the overall balance of its positions.
Meanwhile, issues concerning the deficiencies in market mechanism revealed when the stock index fluctuated dramatically are also on the agenda. Works are expected to be launched to restore and construct the market. The construction of market mechanism is likely to focus on the following aspects: further regulate the use of leveraged fund, strengthen requirements for account's real-name system, crack down illegal actions such as borrowing others' accounts and opening sub-accounts and virtual accounts, timely introduce regulations to normalize program trading, etc.
[Institutions' Movement]
Listed insurance funds may pay less-than-expected settlement of claims for Tianjin blasts
------
Following the blasts in Binhai, Tianjin, insurance funds are urgently reporting their preliminary claims amount. According to the preliminary summary data, dozens of insurance companies, including Ping An Insurance (Group) Company of China Co., Ltd. (601318.SH) and China Pacific Insurance (Group) Co., Ltd. (601601.SH; 02601.HK), will pay over-10-billion-yuan settlement of claims, which are mainly property insurance.
As an established practice, the risk of property insurance will usually be diversified through reinsurance (most of it will be distributed to overseas), and the insurance companies only reserve a small part of it. What's more, since some property insurance businesses like the liability insurance business have a limit on the indemnity of a single accident, the actual amount of settlement of claims born by the listed insurance companies may be less than the amount of market expectation. In addition, the initial settlement of claims will usually be reported earlier than accident liability assessment. Viewed from the compensation for major previous accidents, the anticipatory amount of loss was usually estimated by the insurance company via the most pessimistic calculation.
[Editor's Thought]
Time to consider investment under normal market conditions
------
The announcement of the supervisory authority on Aug. 14 shows that the unconventional bailout measures have been adjusted to a degree because the market is gradually getting stable, China Securities Finance Corporation may end up its bailout mission as a prospective stabilization fund for a while, the market will gradually go back to a status where its own mechanism plays the major role, and it's time for investors to rethink investment under normal market conditions.
Though from a short-term perspective the decision makers will keep paying a considerable amount of attention to the stable operation of A-share market, it's unrealistic to expect that the bailout measures will go on, because the market will anyway go back to the "market-oriented" track. To further comment, the haunting of large-size bailout funds is not really congenial to the normal operation of market, in terms of the mid-to-long term health of the market itself.
So in face of an administration-intervened market that is in an abnormal game playing status, it's better to embrace a law-decided market that is in normal game playing situation. We believe that only by this can most investors be more assured and rational, and off-market funds resume and reenter market step by step.
○ To grasp investment opportunity in reform of SOEs with small market value
○ Promotion of SOEs reform quickens
○ A-share market turns to normal condition from crisis mode
○ Listed insurance funds may pay less-than-expected settlement of claims for Tianjin blasts
[Focus Investigation]
To grasp investment opportunity in reform of SOEs with small market value
------
In the previous week, the state-owned assets and enterprises reform concept has become the mainstream hotspot after the market stabilization. Local state-owned enterprises (SOEs) reforms in Shanghai, Guangdong Province and Fujian Province stood out one after another, which reflects that the market are strongly optimistic towards the investment opportunities triggered by the increasing securitization ratio of local state-owned assets.
Based on the incomplete statistics of XFA, the average gross profit ratios of the SOEs in communication devices, semiconductor, electronic manufacturing, computer, package printing, shipbuilding and spinning ＆ home textiles reached 22 percent, 16 percent, 21 percent, 17 percent, 17 percent, 10 percent and 10 percent, respectively, in 2014, far below those of private enterprises in the same industry, which were 30 percent, 20 percent, 22 percent, 25 percent, 24 percent, 21 percent and 30 percent. It is urgent to improve the competitiveness and operating efficiency through business transformation, assets injection, market-oriented management and internal incentive.
Moreover, it is also the most important theme for this round of the state-owned assets and enterprises reform. It is widely believed in the market that the transformation and restructuring of the SOEs with small market value are relatively easier and more likely to start first. It is known that there are many SOEs, especially those with small market value, are under asset restructuring and business transformation, which have been prepared for a long time. Some SOEs propose to fully implement the mixed ownership system reform after the top design is finalized.
Based on the comprehensive situation of all respects, the SOEs with small market value expected to conduct reform include:
◆The actual controller of the Liaoning Shidai Wanheng Co., Ltd. (600241.SH) is the State-owned Assets Supervision and Administration Commission of Liaoning Provincial Government. The company, principally engaged in the import and export of textile and garments, is likely to benefit from the depreciation of RMB. It is positively transforming into the new energy industry. It rapidly enters into the field of nickel-metal hydride and lithium batteries through the acquisition of Liaoning Jiuyi Energy Technology Co., Ltd. It is known that the net asset of Shidai Wanheng Group is over three times of that of Jiuyi Energy Technology.
◆ Shanghai Huahong (Group) Co., Ltd., the actual controller of Shanghai Huahong Jitong Smart System Co., Ltd. (300330.SZ), is a solution and equipment provider of electronic toll collection and payment system based on the radio frequency identification technology. Besides Hua Hong Semiconductor Ltd. (01347.HK) listed on the HKEx, it still owns a great number of electronics-related assets.
◆ The actual controller of Xinjiang Korla Pear Co., Ltd. (600506.SH) is the Bureau of Comprehensive Development of the Ministry of Water Resources. With the support of agricultural modernization policies in Xinjiang Uygur Autonomous Region, the company saw a stable growth in fruits products in the last three years. Xinjiang Chang Yuan Water Group Co., Ltd. under the company's actual controller planned to exchange in water-related assets of 2.8 billion yuan in 2013 and promised to strip off the hydropower, hotels, wind energy and other assets in order to focus on the principal business of water-related affairs. It was reported recently that with the continuous separation of its assets of non-principal business, Chang Yuan Water is expected to restart preparation for listing with a valuation of more than 4 billion yuan.
[XFA Viewpoint]
Promotion of SOEs reform quickens
------
The consolidation of central enterprises has surged again recently and the promotion of the state-owned enterprises (SOEs) reform is quickened in various regions at the same time. XFA learnt that based on the reform idea, it still emphasizes the development of the mixed ownership system and the improvement capitalization and securitization of state-owned assets.
As a key province of SOEs, Liaoning Province proposed in the government work report in the beginning of the year that it would firmly push forward the state-owned assets and enterprises reform and strive to achieve substantial progress within the year. Currently, various listed companies under the State-owned Assets Supervision and Administration Commission of Liaoning Provincial Government have introduced reform plans or are under trading suspension for mulling significant events. Institutes believe that Zhongxing Shenyang Commercial Building Group Co., Ltd. (000715.SZ) under the State-owned Assets Supervision and Administration Commission of Shenyang Municipal Government operates in the department store industry with full competition. As its sales continued to decline in recent years, it is urgent to introduce strong strategic investors to assist the company in transforming through reform. The company suspended trading and planned to introduce strategic investors.
Jilin Province also considers the SOEs reform as a key driver in boosting economy. It promotes SOEs reform in an enterprise when the conditions are mature and the reform has been accelerated. The controlling shareholder of Ji Lin Ji En Nickel Industry Co., Ltd. (600432.SH) introduced strategic investors in April. Yanbian Shixian Bailu Papermaking Co., Ltd. (600462.SH) with the participation of state-owned assets also suspended trading for mulling significant events. Jilin Expressway Co., Ltd. (601518.SH) disclosed in March of last year that the Jilin Provincial Communication Department issued the Plan on Assets Injection into Jilin Expressway Co., Ltd. to the Jilin Provincial Expressway Group Co., Ltd. According to the plan, it proposes to inject the services areas along the Changping Expressway, the operating rights of advertisement and other assets into the company.
The SOEs reform in Shandong Province is under a new comprehensively deepening stage. Among the state-owned enterprise groups in Shandong, Lushang Group has various high-quality assets and is expected to be deeply participated in this round of the state-owned assets reform. As a key assets operation platform under Lushang Group, Lushang Property Co., Ltd. (600223.SH) may directly play an important role in this round of reform. Lushang Property announced in late April that the Shandong State-owned Assets Investment Holdings Co., Ltd., its shareholder, reduced the shareholding in the company. Its shareholding in the company reduced from 6.67 percent to 4.99 percent after that. The reduction in the proportion of state-owned assets also triggered the expectation on the mixed ownership reform of the company.
As a province involved in SOEs reform earlier, the reform progress of Anhui Province always goes ahead. The SOEs reform of Anhui Province focuses on the promotion of overall listing and enterprise reorganization. The State-owned Assets Supervision and Administration Commission (SASAC) of Anhui Province explicitly indicates for multiple times that it will push forward the overall listing of Anhui Construction Engineering Group (ACEG) which is the substantial shareholder of Anhui Water Resources Development Co., Ltd. (600502.SH). ACEG sees a size 5 times that of the listing company. Upon completion of the overall listing, Anhui Water Resources Development will expand to overseas water conservancy engineering market, and further explore the market of Anhui province, etc. by resorting to the parent company's experience and resources in overseas projects.
[XFA View]
A-share market turns to normal condition from crisis mode
------
The announcement issued by China Securities Regulatory Commission (CSRC) on Aug. 14 claimed that the stocks bought during government bailout have been partly transferred to Central Huijin Investment Ltd. Meanwhile, China Securities Finance Corporation Limited (CSF) will retain functions in maintaining market stability and will not exit the market in the following several years. It means that under the circumstances that liquidity crisis has been basically solved, leverage level of capital has been decreased effectively and irrational fluctuation has been reduced largely, unconventional measures featured with "emergency and rescue" will be adjusted. The market will gradually resume its normal status "oriented in internal rules and mechanism".
It must be admitted that the unconventional measures adopted during government bailout at that time were powerful and decisive, but it is necessary to adjust corresponding measures in accordance with time and situation after the emergency is eased.
Considering that market sentiments may be fickle after the market crash, the regulators have made countermeasures in advance. Firstly, CSF will retain its function as a stabilizer for the stock market and will not withdraw for years. Only when the market becomes extremely and abnormally volatile which may trigger systemic risk, will CSF enter the market again. The rise and fall of stock indexes under a normally-functioned market mechanism is not within the scope of CSF stabilizing capital's responsibility. Secondly, for stocks already bought by CSF, they will not be sold directly in secondary market so as to avoid fluctuation of stock indexes. CSF will transfer some of its stocks to Central Huijin Investment via off-market agreement. Central Huijin Investment will conduct price management and structural adjustment while maintaining the overall balance of its positions.
Meanwhile, issues concerning the deficiencies in market mechanism revealed when the stock index fluctuated dramatically are also on the agenda. Works are expected to be launched to restore and construct the market. The construction of market mechanism is likely to focus on the following aspects: further regulate the use of leveraged fund, strengthen requirements for account's real-name system, crack down illegal actions such as borrowing others' accounts and opening sub-accounts and virtual accounts, timely introduce regulations to normalize program trading, etc.
[Institutions' Movement]
Listed insurance funds may pay less-than-expected settlement of claims for Tianjin blasts
------
Following the blasts in Binhai, Tianjin, insurance funds are urgently reporting their preliminary claims amount. According to the preliminary summary data, dozens of insurance companies, including Ping An Insurance (Group) Company of China Co., Ltd. (601318.SH) and China Pacific Insurance (Group) Co., Ltd. (601601.SH; 02601.HK), will pay over-10-billion-yuan settlement of claims, which are mainly property insurance.
As an established practice, the risk of property insurance will usually be diversified through reinsurance (most of it will be distributed to overseas), and the insurance companies only reserve a small part of it. What's more, since some property insurance businesses like the liability insurance business have a limit on the indemnity of a single accident, the actual amount of settlement of claims born by the listed insurance companies may be less than the amount of market expectation. In addition, the initial settlement of claims will usually be reported earlier than accident liability assessment. Viewed from the compensation for major previous accidents, the anticipatory amount of loss was usually estimated by the insurance company via the most pessimistic calculation.
[Editor's Thought]
Time to consider investment under normal market conditions
------
The announcement of the supervisory authority on Aug. 14 shows that the unconventional bailout measures have been adjusted to a degree because the market is gradually getting stable, China Securities Finance Corporation may end up its bailout mission as a prospective stabilization fund for a while, the market will gradually go back to a status where its own mechanism plays the major role, and it's time for investors to rethink investment under normal market conditions.
Though from a short-term perspective the decision makers will keep paying a considerable amount of attention to the stable operation of A-share market, it's unrealistic to expect that the bailout measures will go on, because the market will anyway go back to the "market-oriented" track. To further comment, the haunting of large-size bailout funds is not really congenial to the normal operation of market, in terms of the mid-to-long term health of the market itself.
So in face of an administration-intervened market that is in an abnormal game playing status, it's better to embrace a law-decided market that is in normal game playing situation. We believe that only by this can most investors be more assured and rational, and off-market funds resume and reenter market step by step.
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