Understanding the Market | The explosive growth of "A+H shares" in the Hong Kong stock market, where is the logic?

On Thursday, January 25th, "A-share" stocks in Hong Kong experienced a surge.

At the close of trading, CHALIECO rose 78.4% to HKD 2.23; CHINA COAL rose 11.44% to HKD 8.57; CHINA RAILWAY rose 8.9% to HKD 3.67; and PetroChina rose 8% to HKD 5.67.

On the news front, a relevant person from the State-owned Assets Supervision and Administration Commission (SASAC) stated for the first time in January 2024 that the effectiveness of market value management will be included in the assessment of leaders of central enterprises. Previously, the operating indicators of central enterprises had already been included in the performance evaluation system, which would indirectly increase the value of central enterprises by improving their operating efficiency and safety.

Why can the inclusion of market value management in the assessment of central enterprises significantly boost the stock prices of "A-share" stocks? What is the logic behind it?

According to the analysis by Founder Securities:

First, the transition from "scale assessment" to "market value assessment" will accelerate the revaluation process of monopolistic scarce assets of state-owned enterprises.

(1) In the past, "scale assessment" led to the investment impulse of state-owned enterprises, resulting in excessive investment. Even if monopolies were formed in the public utility sectors (water, electricity, coal, transportation, and communication), the production factors provided could only be "monopoly at a low price" and would remain in a long-term "valuation discount" state.

(2) The current "ROE and market value assessment" will constrain the investment impulse of state-owned enterprises. The supply side of public utility sectors of state-owned enterprises will gradually achieve clearance, and this will bring the production factors back from "monopoly at a low price" to "balanced prices". This price regression will accelerate the revaluation process of monopolistic scarce assets of state-owned enterprises.

Second, the transition of the assessment model of state-owned enterprises reflects the historical mission transition from "development" to "safety".

(1) "Scale assessment" has driven the monopolistic production factors (water, electricity, coal, transportation, and communication) of state-owned enterprises to remain in a "monopoly at a low price" state for more than 20 years. This has allowed private enterprises to participate in international trade with a low-cost advantage and gradually upgrade China's applied industrial system through a large amount of trade. This is the historical mission undertaken by state-owned enterprises during the "development" process over the past 20 years.

(2) "ROE and market value assessment" will drive the monopolistic production factors of state-owned enterprises to gradually achieve "price increases" and "valuation uplift" in the future. In this process, "price increases" can bring about excess profits, and "revaluation" can achieve equity financing. These funds can serve as financial subsidies under the "new national system" to support the transformation and upgrading of "hard technology" for high-quality development. This is the new mission that state-owned enterprises need to undertake in the process of consolidating "safety" under the trend of deglobalization in the future.

Third, the transition of the assessment model will also strengthen the high dividend trend of monopolistic "scarce assets" of state-owned enterprises.

Investors are not concerned about the absolute level of dividend yield of companies, but rather the future monopolistic advantages behind high dividends. The downward cycle of the real estate market will bring about a secondary decline in expected returns, and the profitability and valuation level of "core assets" in consumption will shift downwards. Meanwhile, the comparative advantages of high dividends from "scarce assets" with medium to low expected returns will gradually become prominent, leading to a medium to long-term revaluation. According to Fangzheng Securities, compared to the previous "scale assessment", the current "ROE and market value assessment" not only restrains the investment impulse of state-owned enterprises, but also enhances the scarcity of state-owned enterprises in the general public utility sector, and strengthens their "monopoly advantage". This "monopoly advantage" is a guarantee of long-term high dividends in the general public utility sectors of state-owned enterprises (water, electricity, coal, transportation, and communication).