What are the real differences between A-shares and US stocks?

In 2021, both the Chinese and American stock markets have reached new highs after a three-year consolidation. The U.S. stock market has experienced a rebirth and achieved new records, while the A-share market in China is still lingering at the bottom. Previously, an article titled "The Illusion of Dividends and Buybacks in Annual Reports" analyzed that buybacks in the A-share market are mostly fake. The low dividends and buybacks have resulted in lower actual shareholder returns in the A-share market compared to the U.S. market. This is because the dividend yield in the U.S. is higher, making the new highs in the U.S. market reasonable. However, is the difference between the A-share market and the U.S. market only in dividends and buybacks? This is a typical case of only seeing the surface and not the core. The real difference between the A-share market and the U.S. market lies in the gap in market capitalization. There are 5 companies in the U.S. with a market capitalization of over $2 trillion, while in China, there are only 3 companies with a market capitalization exceeding 2 trillion RMB, and only two of them are listed in the A-share market. Currently, China's GDP is 64% of the U.S., and the per capita income is only about 5 times different. Why is the gap in market capitalization of leading companies much larger than the exchange rate difference? After deduplication, there are actually only 11 trillion-dollar companies. The large gap in market capitalization represents the difference in the speed of market capitalization expansion, which is the difference in growth rates. Because all large companies have grown from small companies, generally the company with the largest market capitalization will have the highest long-term growth rate, and can drive common prosperity. These large companies support the long bull market in the U.S. So, why is there such a huge gap? The key lies in insufficient globalization, as most Chinese companies still focus on domestic market competition.

1. Dispersed and Inefficient Internal Competition

Taking the example of the manufacturing industry, consumer electronics is a representative area of strength for China. Over 50% of the global industry chain is in China, with top Chinese smartphone manufacturers such as Huawei, Xiaomi, Oppo, and Vivo. Combined, these Chinese smartphone manufacturers account for nearly 60% of global smartphone shipments, with the remaining share held by Samsung and Apple.

However, Where are the profits? The combined profits of all Chinese mobile phone companies still fall far short of Apple's. The leading domestic company Xiaomi's profit is only 2.5% of Apple's, not to mention market value - one Apple is worth the entire Hong Kong stock market. Despite such high sales volumes, the total profits of these companies are far behind. Globalization, technology, brand - every aspect shows a gap. What would happen if these companies were to merge into a representative Chinese mobile phone group? Firstly, the domestic market would be completely unified, competition among these companies would disappear, eliminating redundant investments in promotion. R&D and production costs would be shared, with over 50% reduction in offline stores in major cities. With scale, the total profits would inevitably increase compared to before the merger. Generating profits is not just for capital appreciation or boosting stock prices. The key is that a large amount of profits can be used for overseas R&D, production, channel promotion, and driving large-scale innovation that was previously impossible. With the domestic market almost monopolized, natural growth relies on globalization. This group could compete head-to-head with Apple. It may not necessarily surpass Apple, but in terms of competitiveness and global penetration, a much larger scale than now can be expected, creating a 1+1>2 effect. Of course, critics may argue: after the merger, phones may not be as affordable, affecting consumers, suppliers, retailers, advertisers, researchers, factory workers, and shop rentals - what about employment? This involves the interests of many. Secondly, after the merger, without competition, a monopoly lacks innovation. However, these views clearly overlook whether the profits snatched from Apple and Samsung through overseas expansion will outweigh the losses. Moreover, these losers do not lose everything; by participating in the group's shares, they can share the profits, which is also a consideration. American giants monopolize their own fields in the US, and no one seems to mind. Technology does emerge from competition, but any research requires investment. In the current environment of overcompetition, as company profits decline, it will inevitably affect R&D output, leading to a vicious cycle. Currently, the pace of innovation of each domestic mobile phone manufacturer is constrained by scale, no longer daring to make major investments in hardware innovation or product overhauls, with innovation mainly at the software level. Meanwhile, Apple's self-developed chip strategy has gradually taken shape in recent years, widening the gap rather than narrowing it. When profits of companies in the industry are growing, overcompetition is good. But when everyone starts to decline and R&D efficiency turns negative, it is necessary to quickly stop ineffective, low-quality overcompetition. It's not just the mobile phone industry; almost every industry is experiencing this trend of excessive overcompetition. II. Declining Mergers and Acquisitions Integrating to form globally competitive groups and sharing profits with global giants is a major way for various industries to break free from overcompetition. Integration naturally requires restructuring and mergers. Looking at the merger and acquisition data in A-shares in recent years, it is evident that A-shares are on a downward trend. In 2023, transaction volume plummeted, the stock market was sluggish, company valuations dropped, and the amount of mergers and acquisitions decreased - a slight decline also seen in the US stock market in 2023, but the problem lies in the fact that the current level of A-shares is not even as good as it was 10 years ago. The decline in the quality of mergers and acquisitions is more severe, with A-to-A mergers in 2023 sharply reduced to two, dominated by big companies picking up bargains and weak alliances As a comparison, the trading volume of US stocks in 2023 also declined, mainly due to the decline in small company mergers, while there are still many mega mergers and acquisitions taking place.    Some notable merger and acquisition cases from 2022 to date include: Microsoft's acquisition of Activision Blizzard, Broadcom's acquisition of VMware, UFC's acquisition of WWE, Pfizer's acquisition of Seagen, Cisco's acquisition of Splunk, Nvidia's acquisition of Arm, ConocoPhillips' acquisition of Marathon Oil, ExxonMobil's acquisition of Pioneer Natural Resources. There are acquisitions within the same industry as well as upstream and downstream acquisitions. Almost every industry has representative acquisitions, including internet, gaming, semiconductors, cloud computing, sports and entertainment, pharmaceuticals, telecommunications, software, and energy. Regardless of new or traditional industries, strong alliances are formed. Let's continue to look at the data here. In the history of A-shares, it is rare to see alliances between giants, and there are few restructurings over one hundred billion, mostly involving small-scale activities. Moreover, the restructuring is not complete, and many mergers and acquisitions involve the acquisition of partial equity, and there are even methods such as issuing new shares to acquire shares without reducing the market's circulating shares, such as Midea's acquisition of a portion of KUKA's equity. After the acquisition, there are still two listed companies, and the circulating shares remain unchanged. In the US stock market, the acquired companies are often delisted directly, and a complete acquisition is needed to form a unified strategy. In the stock codes of the US stock market, there are too many delisted giants, even if it is not a complete cash acquisition, it is a partial cash + stock merger, leaving only one code As a result, the market has less liquidity, the same amount of funds, fewer chips, and it is easier to rise than to fall. Secondly, the restructuring and mergers of private enterprises in A-shares are not active, while state-owned enterprises prefer restructuring and mergers. In history, there have been large-scale mergers of state-owned enterprises in energy, aviation, and chemicals. For example, the merger of China CNR and CSR, the acquisition of China Eastern Airlines by China Southern Airlines, and the restructuring of China COSCO Shipping with China Shipping Overseas are all considered successful merger cases that have strengthened the competitiveness of enterprises. Currently, the stable performance of state-owned enterprises, high dividend yields, and the concentration of the market are attributed to years of restructuring of state-owned enterprises. There are not many successful cases of large-scale mergers between private and A-share companies. The only one that comes to mind seems to be Midea's acquisition of Little Swan. Lastly, what is even more difficult to accept is that there are cases of large A-share companies being acquired, but by foreign capital. Well-known cases include Carlsberg's acquisition of Chongqing Brewery, Diageo's acquisition of Shuijingfang, and SEB's acquisition of Supor. These companies were considered consumer companies with excess returns in the A-share market in the past. This reflects many issues. III. Urgent Need for Conceptual Change The current dilemma of restructuring and mergers is influenced by certain era and macro factors. Since the bull market of the Belt and Road Initiative in 2015, many companies have been speculating in the market under the guise of acquisitions and mergers to improve operations. The result is that massive acquisitions have become targeted interest transfers, and after restructuring and acquisitions, performance not only did not improve but instead collapsed. Therefore, the reputation of restructuring and mergers is not good. In addition, the continuous promotion of anti-monopoly in recent years has also led to a decrease in the willingness of many companies to engage in restructuring and acquisitions. However, the blame cannot be solely placed on the overall environment; there are also significant issues with the mindset of private enterprises. Firstly, most entrepreneurs lack ambition for global competition but are obsessed with defeating domestic competitors. They are submissive externally but aggressive internally. They believe that as long as competitors exit the market, replacing their profits and market share is simply a matter of adding some capacity and manpower within their own company. They find it unworthy to spend a large sum of money on acquisitions, giving a large amount of cash to competitors of many years, which they cannot accept psychologically, considering it as spending a lot of money on trivial matters. Secondly, most mergers and acquisitions are trend-driven. A suitable merger is based on the right price and business needs. However, looking at the history of A-shares, the hottest trend in restructuring and mergers was in 2015, where it was common to see acquisitions with premiums of over 100%. It was mergers for the sake of mergers because stocks would soar after the merger, driven entirely by speculative fervor. Currently, market valuations are not unreasonable, and there are even target companies trading below book value, with acquisitions sometimes even at a discount. However, companies with cash are waiting to pick up the pieces, hesitating to make a move when necessary. Is restructuring and mergers based on stock price movements or on the company's business operations? This is very puzzling. Moreover, Domestic enterprises generally prefer overseas mergers and acquisitions, which is reasonable. Starting globalization from scratch takes too much time, and successful overseas M&A is more meaningful than domestic M&A. However, common types of overseas acquisitions include two categories: technology-driven acquisitions, where the acquired company generally has low financial returns and is acquired solely for learning the technology of the other party; and introduction-driven acquisitions, where overseas brands are acquired to bring back to the domestic market catering to the trend of foreign worship. Midea's acquisition of KUKA and Anta's acquisition of Fila are representatives of these two types of acquisitions. The strategic goals of these acquisitions are still focused on the domestic main business. Overseas acquisitions face issues such as policies, integration, and premiums. Moreover, overseas acquisitions do not improve the competitive landscape of the main business or the acquired company. Attempting to skip the 0-1 stage of going global through overseas acquisitions is unrealistic. There are not many successful cases of overseas acquisitions, with more cases of being deceived, or even after acquisition, failing to generate overseas revenue. On the other hand, industry consolidation and mergers in the domestic market to improve the competitive landscape are relatively easy, which is an advantage that is often overlooked. However, the positive trend of overseas M&A in recent years has not been sustained. There was a rebound in 2023, but prolonging this trend would be a step backward. Lastly, what is the antonym of restructuring and mergers? It is spin-off listing. In restructuring and mergers, the acquiring party pays to buy part or all of the equity of the acquired party. On the other hand, spin-off listing involves a company releasing part of the equity of its subsidiary on the market to raise funds. It can be said to be moving backward. Hong Kong stocks are heavily affected, although there are more private enterprise restructuring and mergers in Hong Kong stocks compared to A-share companies, they also tend to spin-off. The result of a spin-off is an increase in market liquidity, which relatively reduces market capital, to some extent causing strategic separation. It also faces issues such as the proportion of profits handed over by subsidiaries, tax burdens, and dividend distribution. This also involves the pursuit of listing status, with many companies believing that the more subsidiaries they have listed, the better. Spin-offs not only do not require spending money but also generate income. Ironically, companies that love to spin-off basically do not see long-term growth in their parent company's stock price. The classic spin-off paradox: if a good company is spun off, it harms old shareholders, if a poor company is spun off, it harms new shareholders. It's a lose-lose situation. Major U.S. giants do not like to leave subsidiary stocks in the market, even if they lack funds, they prefer to take on debt or engage in stock swaps, prolonging the process, which is reflected in the long-term rise in stock prices. Moreover, many U.S. companies specialize in mergers and restructurings. Their strengths lie in seizing the timing and price of mergers and restructurings, understanding business overlaps and complementarity, and integrating and optimizing costs for enterprises. This has created numerous giants worth hundreds of billions or trillions: Berkshire Hathaway, Procter & Gamble, Johnson & Johnson, Broadcom, Thermo Fisher Scientific, Danaher, each with countless subsidiaries. The rapid growth of these companies is not based on core operations but on continuously seizing opportunities to acquire other companies. Clearly, Chinese companies still have a long way to go to keep up with the mindset of these U.S. management teams. IV. Conclusion To break free from the current trend of internal competition, giant restructuring, and forming strong alliances to establish international competitiveness is an important means. Continuing to stay in the low-dimensional internal competition is meaningless and may even hinder innovation efficiency, leading to small gains at the expense of larger losses, allowing foreign lagging companies to catch up Of course, if the merger turns into a monopoly, raising prices and exploiting consumers, yet still unwilling to compete overseas, such a merger is meaningless. Therefore, appropriate restructuring and mergers of giants require the participation of four forces: the acquirer, the target company, the affected parties, and the supervisory party. The affected parties include employees and various service providers. The supervisory party, such as pension funds, assesses the monopolistic behavior of enterprises and the growth potential of global markets through controlling interests. It should not be a transaction between two companies. Overseas mergers driven by globalization should also be encouraged, but considering the current decline in the Chinese market and the high growth of other global stock markets, it is more appropriate now to focus on internal restructuring and mergers rather than bottom-fishing overseas. Currently, A-shares, H-shares, and even the turning point of the domestic economy urgently need a major strategic restructuring. Three mediocre craftsmen can never match up to a Zhuge Liang