SSE Updates Three-year Action Plan for Advancing Quality Improvement of SSE-listed Companies

Aimed at implementing the directives at the Central Economic Work Conference and the Central Financial Work Conference, as well as the State Council's Several Opinions on Strengthening Supervision, Preventing Risks and Promoting High-Quality Development of the Capital Market, Shanghai Stock Exchange (SSE), under the supervision of China Securities Regulatory Commission (CSRC), has formulated a new Three-year Action Plan for Advancing the Quality Improvement of the Companies Listed on Shanghai Stock Exchange (referred to as the "Three-Year Action Plan").

Quality improvement is the foremost objective of listed company regulation and service.Guided by the CSRC, the SSE has introduced two editions of Three-Year Action Plan in recent years. Through joint efforts by all stakeholders, various initiatives have been effectively rolled out, and a strong momentum of quality enhancement has shown among SSE-listed companies.

First, the market structure is enhanced. In the past three years, the number of manufacturing companies listed on the SSE increased from 1,237 to 1,469, resulting in a rise of 2 percentage points in market share. The number of technology firms grew from 483 to 651, adding 5 percentage points in market share. Private enterprises expanded from 1,231 to 1,480, lifting 3 percentage points in market share. Companies with over 100 billion yuan in market capitalization jumped from 86 to 100, and the median P/E ratio surged from 10.13 to 16.21, marking a compound annual growth rate of 26%. Across sectors, a set of top-tier listed companies with international competitiveness emerged, as the median P/E ratio of industry leaders climbed from 14.97 to 18.78.

Second, the corporate fundamentals are more stable. On growth stability, over the past three years, SSE-listed companies recorded compound annual growth rates of 8.44% and 8.87% in operating income and net profit, respectively, with companies listed on the SSE STAR Market realizing 24.26% and 10.19% respectively. On investment stability, the net cash inflow from operating activities of real economy-based enterprises have more than doubled their net profit, while capital expenditure grew from 2.57 trillion yuan to 3.39 trillion yuan. On consumption stability, industries such as automotive, home appliances, and beauty care reported annual net profit growth in 2023 of 17.14%, 8.18%, and 17.36% respectively; meanwhile, sectors like tourism attractions, hotels, restaurants, and cinema chains turned from losses to profits, indicating an initial release of consumer potential. On employment stability, the job opportunities offered by SSE-listed companies increased from 17.09 million to 18 million, which is expected to indirectly offer over 270 million jobs. Employment uptick in emerging sectors such as power equipment, computing, and electronics grew by 51.58%,16.35%, and 13.18% respectively. On risk prevention, there has been a reduction of over 90% in the balance of occupied funds and unauthorized guarantees from their peak levels. Companies with high proportion of pledges saw a near 80% decline from peak figures, reflecting a steady decrease in risks.

Third, the growth drivers of the real economy are more innovative. SSE-listed companies are diligently implementing the innovation-driven development strategy. In the last three years, their total research and development (R&D) investment reached 2.7 trillion yuan, with a compound annual growth rate surpassing 17%. Among these, companies listed on the SSE STAR Market have recorded a compound annual growth rate in R&D investment exceeding 28%. In the first three quarters of 2024, their R&D investment surpassed 100 billion yuan, more than doubling the net profit within the same period. The SSE STAR Market boasts over 100 companies in both integrated circuits sector and in biomedicine sector. Industries focused on new energy, new materials, and high-end equipment manufacturing are taking shape. Emerging sectors such as artificial intelligence, genetic technologies, and quantum information are rapidly advancing, featuring comprehensive value chains and collaborative innovation. The Eight Measures on Deepening the SSE STAR Market Reform and Supporting Scientific and Technological Innovation and the Development of New Quality Productive Forces (STAR Market Eight Measures) and the Opinions on Deepening Market Reform in Mergers and Acquisitions of Listed Companies (M&A Six Opinions) provide policy support for listed companies to leverage mergers and acquisitions (M&A) to cultivate new growth drivers. Since the release of the M&A Six Opinions, nearly 500 asset transactions have been initiated, with material asset restructurings increasing by nearly 300% year on year. About 60% of these transactions involve new quality productive sectors like semiconductors, biomedicine, and new energy.

Fourth, listed companies are more investable. The concept of rational investment, value investment, and long-term investment has gradually been accepted and proven effective. Over a three-year span, the stock prices of companies with a market capitalization exceeding 100 billion yuan have risen by 38%. Companies rated A on information disclosure have experienced a 15% increase in stock prices within the evaluation period. Investor returns have seen a significant enhancement. Cumulative cash dividends over the past three years amounted to 5.2 trillion yuan, equivalent to 171% of the total funds raised from initial public offerings (IPOs) and follow-on offerings within the same period. Nearly 150 companies’ dividend yields exceed 3% for three consecutive years. The investor relations are improved. Annual report performance briefings have realized full coverage for three years running. The 2023 annual report briefings gathered nearly 40 million views, reflecting a 2.3-fold year-on-year increase. Committed to sustainable development, nearly 1,200 companies listed on the SSE released their 2023 reports on environmental, social and governance (ESG). Furthermore, 342 companies were included in the MSCI ESG ratings, with 100 of these companies receiving rating upgrades. There has been an acceleration in long-term capital inflow into the market, with the market value held by institutional investors increasing from 34.33 trillion yuan to 39.35 trillion yuan, representing an annual compound growth rate of over 7%. With the rapid advancement of index investing, the SSE equity ETFs have covered all key broad-based indices and primary sectors of the China Securities Index Co., Ltd. (CSI). Their market value has surpassed 2 trillion yuan, marking a growth of almost 200%. There are currently 66 STAR Market ETF products on the SSE, with the STAR 50 ETFs alone reaching nearly 180 billion yuan in market value.

While progress is made, the foundation for SSE-listed companies to sustain high-quality development is not strong enough, and it still falls short of investor expectation. To follow through on the decisions at the Third Plenary Session of the 20th Central Committee of the Communist Party of China, the Central Economic Work Conference, and the Central Financial Work Conference, by maintaining a people-centric approach, focusing on capacity-building of listed companies and adhering to strong risk prevention measures, the SSE has drew experience from past practice and formulated the new Three-Year Action Plan, in a bid to enhance the quality of listed companies. Compared to the previous edition, the new Three-Year Action Plan pays more attention to the following aspects.

The first focus is to leverage stringent oversight and management to advance comprehensive punishment and prevention measures with collaborative efforts against financial fraud. Financial fraud is a scourge of the capital market that severely hinders the quality of listed companies. The Three-Year Action Plan focuses on problem-solving and takes a close look at the bottlenecks that undermine the quality and efficiency of current anti-fraud initiatives. It explicitly calls for full-on implementation of the guideline to further prevent and punish financial fraud in the capital market, enhance the ability to detect fraud indications, and align information across issuance review, continuous oversight, on-site inspection and accounting supervision, among other segments. It is essential to effectively leverage technologies such as artificial intelligence. In conjunction with stringent measures against financial fraud, a consolidated approach will be adopted to address issues including capital misappropriation, unauthorized guarantees, and unauthorized reductions of shareholding.

The second focus is to enhance investment value by consistently boosting return for investors. Quality is the cornerstone of listed companies' investment value, and a distinctive feature of corporate quality is investor return. The Three-Year Action Plan zeroes in on the vital element of investment value and promotes in-depth advancement of the "Corporate Value and Return Enhancement" action. It seeks to reinforce the primary responsibility of listed companies for market value management, guide well-considered cash dividend distributions and share repurchase strategies, and bolster the awareness and abilities of listed companies to effectively deliver returns to investors. Efforts should be made to utilize the primary role of M&As in the capital market, develop the ESG ecosystem, improve the mechanism for delisting, and attract medium- to long-term funds into the market.

The third focus is to strengthen listed companies' sense of principal responsibility to enhance quality through corporate governance. Effective corporate governance is crucial to the sound growth of listed companies and is the linchpin of corporate quality. The Three-Year Action Plan, focusing on corporate governance, aims to coordinate the implementation of reforms in the independent director system. It guides the audit committee in enhancing its financial and accounting oversight functions, encourages various shareholders to engage in corporate governance, steadily enlarges the coverage of "one-click access" (online voting reminder service) voting at shareholders' meetings, and stimulates the intrinsic drive to elevate the company's quality. Additionally, there is a need to reinforce regulatory constraints on the actions of controlling shareholders and actual controllers, harshly crack down on significant violations, and establish a solid mechanism to ensure the improvement of the company's quality.

The fourth focus is to pool resources and expedite the construction of a market ecology that satisfies the requirements of high-quality development. Enhancing the quality of listed companies is a complex and systemic project that requires common understandings and joint efforts among listed companies, regulatory authorities, and market participants. The Three-Year Action Plan maintains a systemic approach and suggests significantly expanding the scope of visits and surveys into listed companies. It emphasizes strengthening information exchange with local governments, bolstering joint supervision and law enforcement with relevant departments, and supporting the media and the public in actively participating in societal oversight.

The fifth focus is to proactively provide comprehensive services aimed at facilitating high-quality development. Improving the quality of listed companies is an essential task of the capital market as it plays the role of serving the real economy. To ensure the execution of the Three-Year Action Plan, the SSE will fully leverage its advantages of the scale effect of pooling large-cap blue-chip companies, leadership in hard technologies, and diverse product offerings including stocks, bonds, funds, derivatives, and public REITs. The SSE will enhance its regulatory services, innovate bond financing products, diversify the index product lineup, and assist listed companies in strategically utilizing M&As, follow-on offerings, technological innovation bonds, and green bonds. These efforts seek to accelerate the transformation and upgrading of traditional industries and boost the growth of emerging sectors, and work for higher quality and efficiency of these companies.

Going forward, the SSE, guided by the CSRC, will meticulously implement the specific tasks outlined in the Three-Year Action Plan, working collaboratively with market participants to tackle issues of mutual interest. The goal over the next three years is to foster a wider range of listed companies that demonstrate high-quality development by contributing to China's broader reform and development agenda, maintaining good performance, outstanding capability in technological innovation, substantial investor returns, and active social responsibility engagement.