Shanghai Securities News | Growth Empowers Value and Propels Simultaneous Rise in Quantity and Quality of SSE-listed Companies

20 Jul 2023

Translated from Shanghai Securities News

With its vast reach across various sectors, the Shanghai Stock Exchange (SSE) connects a myriad of industries and households. It embodies a microcosm of China's economic transformation and development, and serves as a significant platform for the diversified allocation of residents' assets. As the well-established concept of value investing aligns with the increasingly clear logic of high-quality development in the capital market, we can decipher a prevailing trend named "growth" amidst the fluctuating fortunes of stock indices.

Over the past ten years, changes in the SSE reveal a noteworthy trend. The number of SSE-listed companies has increased by 1.48 times since the end of 2012, while the total market value has risen by 1.85 times. Furthermore, the profitability of these listed companies has experienced substantial growth in total operating revenue and net profit attributable to the parent company in 2022, with increases of 194% and 347%, respectively, compared to a decade ago.

In terms of development structure, the proportion of market value in advanced manufacturing, technological growth, modern consumption and other industries has risen from 17.17% to 46.49% over the past ten years. This shared growth has brought a total dividend payout of RMB 10.12 trillion yuan for SSE-listed companies from 2012 to 2022, a figure that is 3.75 times higher than the previous decade.

Observing this decade-long progression, we note that qualitative advancements lie within the accumulation of quantity. The term "value", which highly summerizes this change, has acquired more profound connotations and greater weight within today's capital market.

Larger Quantity

Significant strides have been made in the number of listed companies, which often serve as the most apparent indicator of a securities market's growth.

Statistical data reveals that the number of SSE-listed companies has increased from 897 to 2,224 since the end of 2012, with a growth rate of 1.48 times. Concurrently, the total market value has increased from RMB 19.10 trillion yuan to RMB 54.38 trillion yuan, representing a growth of 1.85 times. Meanwhile, the average and median market values have risen from RMB 21.290 billion yuan and RMB 4.294 billion yuan to RMB 24.431 billion yuan and RMB 6.916 billion yuan, respectively.

Moreover, the ranks of the "RMB 100 billion-yuan array" in the SSE have been rapidly expanding. To date, the number of large-scale SSE-listed companies with market values exceeding RMB 100 billion yuan has increased from 24 at the end of 2012 to 86, marking a growth of 2.58 times. The market value of eighty-nine industry leaders, including Longi Green Energy Technology Co., Ltd. and JCET Group Co., Ltd., have grown by over five times compared to ten years ago.

Particularly this year, with the surge of the valuation system with Chinese characteristics, a considerable number of SSE blue-chip companies, including Petrochina Company Limited, China Petroleum & Chemical Corporation, China Railway Group Limited, China Railway Construction Corporation Limited, China Mobile Limited, and China CSSC Holdings Limited, have seen their market value increase by more than 30%.

Taking China United Network Communications Limited (China Unicom) as an exemplary case, its market value has steadily climbed from approximately RMB 74 billion yuan at the end of 2012 to around RMB 150 billion yuan over the course of ten years.

According to Liu Liehong, Chairman of China Unicom, this progress is not the ultimate expression of the company's value. "The valuation models and disclosure standards of the past two decades are no longer capable of accurately reflecting the true investment value of operators in the 5G era, particularly in the age of the digital economy." Liu Liehong said that China Unicom is no longer a conventional "pipeline operator", but rather a digital enterprise and a sci-tech innovation company that provides digital services to the external market. In his most recent statement, he further underscores the future possibilities for the company, highlighting that "AI industry development will be a focal point for China Unicom, as large models represent a disruptive revolution in the field of human-computer interaction."

Greater Energy

Gauge development momentum from profitability: In 2022, SSE main board companies achieved a total operating revenue of RMB 50.55 trillion yuan, marking an increase of nearly 1.4 times compared to 2013. The net profit also saw a growth of 1.2 times, reaching RMB 4.16 trillion yuan in the same period. Meanwhile, STAR Market companies reported operating revenue of RMB 1.2 trillion yuan and a net profit of RMB 113.589 billion yuan, revealing growth by 7.2 times and 5.4 times respectively when compared to 2019. Notably, the proportion of sci-tech innovation companies on the STAR Market with market values surpassing RMB 100 billion yuan and RMB 10 billion yuan increased from 8% and 24% in the year of its launch to 21% and 41% respectively.

Considering the level of gross profit margin on sales, SSE-listed companies achieved an average of 28.87% in 2022, marking a significant increase of 5.64 percentage points when compared to 2012. Among companies with comparable data, 410 of them achieved a compound annual growth rate of net profit exceeding 5% for the period from 2012 to 2022, while 304 companies achieved over 10%. These companies accounted for forty percent and over thirty percent respectively.

Tongwei Co., Ltd. is a prime example of long-term high growth. Its net profit has grown from less than RMB 100 million yuan annually to RMB 25.7 billion yuan, as disclosed in the latest annual report. Over the past decade, it attained an impressive average annual net profit growth rate of 75%. According to InfoLink Consulting, Tongwei Co., Ltd. maintained its status as the global leader in solar cell shipments in 2022 and became the industry's first battery manufacturer to exceed cumulative shipments of 100 GW. In the first quarter of this year, the company continued its growth trajectory, recording a 34.67% year-on-year increase in operating revenue to RMB 33.245 billion yuan. Meanwhile, its net profit attributable to the parent company also experienced a surge, with a 65.59% year-on-year growth to RMB 8.601 billion yuan.

Enhanced Quality

The further optimization of the structure of listed companies reflects the overall increase in the quality of capital market development.

On the one hand, the proportion of companies in the real economy has further expanded. According to recent data, companies in the real economy now account for 75.98% of SSE's market value, which is an increase of over 18 percentage points since the end of 2012. Among companies with a market value exceeding RMB 50 billion yuan, the proportion of companies in the real economy has also risen from less than 48% to nearly 65%.

On the other hand, industries such as advanced manufacturing, technological growth, and modern consumption have continued to achieve steady growth, leading to an increase in their market value proportions from 17.17% to 46.49%. Specifically, the number of companies in the advanced manufacturing industry has grown from 201 to 731, and the market value proportion has also risen from 9.68% to 20.41%. The number of companies in the technological growth industry has increased from 67 to 400, with the market value proportion increasing from 2.09% to 15%. The modern consumption services industry has seen an increase in the number of companies from 122 to 242, seeing an increase in the market value proportion from 5.39% to 11.07%.

Moreover, among the SSE companies with a market value exceeding RMB 50 billion yuan, over 40% are in the manufacturing sector, which is a significant increase of nearly 24 percentage points when compared to the end of 2012. Notably, among the companies listed since 2020 with a market value exceeding RMB 50 billion yuan, over 50% are in the field of sci-tech innovation sector, with almost 80% concentrated in the advanced manufacturing or electronic information sectors.

The establishment of the STAR Market and the pilot registration system has become a crucial force in driving the growth of sci-tech innovation by capital. Since 2022, more than 30 leading enterprises have emerged on the STAR Market to speed up and increase the efficiency of domestic production and import substitution process, accounting for more than 20% of newly listed companies.

At present, each STAR Market company has an average of 120 invention patents, a total of 84 company-led or participating projects have won major awards such as the National Science and Technology Progress Award, and over 50% of the companies' products or R&D projects are aiming at or have realized import substitution.

Higher Value

As an important channel to meet the demands of residents for increasing property income and wealth management, listed companies have been actively rewarding investors through cash dividends, share repurchases, and other means in recent years.

Data shows that from 2012 to 2022, the total dividend payout of SSE-listed companies reached RMB 10.12 trillion yuan. In contrast, this figure stood at only RMB 2.7 trillion yuan from 2003 to 2012.

Additionally, there has been a notable group of SSE-listed companies that consistently provide high dividends. Among them, 107 companies have distributed dividends exceeding RMB 1 billion yuan for three consecutive years, and 17 companies have distributed dividends exceeding RMB 10 billion yuan for three consecutive years. Moreover, 764 companies have maintained a dividend payout ratio above 30% for three consecutive years, while 117 companies have maintained a dividend payout ratio above 50% over the same period. Notably, in 2022, the amount of cash dividends distributed by SSE companies surpassed the combined total of market equity financing and significant shareholder reductions.

However, while there has been an overall simultaneous rise in quantity and quality of listed companies, many of them are still valued at periodically low levels. According to statistics, the overall price-to-earnings ratio of SSE companies currently stands at around 12.7 times, which is around the lower third among valuation levels over the past decade. Nearly 60% of companies with comparable data have valuation levels lower than those of ten years ago. Furthermore, there are presently 236 SSE companies that are trading below their net asset value, accounting for 10.60% of the total, representing an increase of over 6 percentage points compared to the end of 2012. Looking at the dividend yield, 113 companies have achieved a dividend yield exceeding 3% for three consecutive years, with 35 companies maintaining a dividend yield exceeding 5% over the same period. Ten companies, including Xiamen C&D Inc., Bank of Communications Co., Ltd., and Bank of China Limited, have achieved a dividend yield exceeding 5% for five consecutive years.

As listed companies exhibit unprecedented quantity, energy, quality, and value, they are poised to become the cornerstone of China's economic growth and the high-quality development of its capital market. A logical framework guided by value, fueled by innovation, taking optimized structures as background, driven by supply-side reforms, and based on performance growth and valuation alignment, is expected to become the primary theme of value investments in the future.