Homepage
PR Newswire
29-08-2014, 10:14 AM
http://bambooinnovator.com/2014/08/28/th...investors/
The Purging Rain on Asia’s SOEs and Implications for Value Investors
They say reform is the painful rain that purges the ills; the resilient one emerges stronger and purified, while the corrupt dissolves under the cleansing process.
No one knows such pain more deeply than Deng Xiaoping, the reformist leader credited with opening up and transforming the Chinese economy. Deng’s 110th birthday last week on Aug 22 was celebrated by a poignant scene reacted and broadcast on national TV: Deng was drawing water in the rain to swab his disabled son who was tortured and thrown out of the window of a three-storeyed building at Beijing University by the Red Guards during the Cultural Revolution, when Deng was purged.
State broadcaster CCTV has produced the 48-part drama Deng Xiaoping at History’s Crossroads 《历史转折中的邓小平》 in honor of Deng, with the propaganda campaign eclipsing the official remembrance of the 120th anniversary of Mao’s birth last December. While washing his son’s back, Deng asked, “Son, what is your level of competency in wireless telegraphy?” Deng’s son replied, “Dad, you don’t worry, if the policy permits, I can repair radios. Not only can I be independent, but I can also earn a living for the family.” Deng was comforted and said, “Good, to rely on real knowledge and capability to earn a living, it’s definitely reliable” (“靠真本事吃饭，靠得住”).
Come September, the final plan for the state-owned enterprise (SOE) reform in China will be published, a move to reform bloated inefficient SOE to rely on its own capability to compete. The pilot plan to improve corporate governance and attract private investment includes (1) “mixed ownership,” the Communist Party jargon for introducing more private capital into government assets in a partial privatization, (2) major asset restructuring such as asset purchases, sales and swaps can proceed without approval from the CSRC, (3) curbs on “unreasonably high” executive pay and perks such as spending on cars and accommodations, (4) board-led human resources management, which will allow the boards of directors to hire, evaluate and pay top executives, rather than SASAC (State-owned Assets Supervision and Administration Commission) to appoint senior management and set performance metrics. The goal is to reduce political interference in the management of SOEs by designing the holding companies to focus purely on maximising shareholder value rather than advancing the government’s policy goals and political agenda that seeks to first and foremost legitimize the party in power. The reform process is described in one of Deng’s immortal words: “crossing the river by feeling for the stones.” The launch of the pilot and implementation work is likely to start next year.
What are the implications for value investors in China and Asia? Will the valuation pendulum shift back in favor of selected SOEs? Will this be a re-run of the last round of SOE reform in the late 1990s? Between 1997 and 2003, premier Zhu Rongji oversaw China’s last round of SOE reform. Under the mantra of “Grasp the large, release the small,” thousands of poorly performing SOEs were privatised or liquidated. Stronger firms were restructured and often listed on the stock market. But since 2003 the government has drifted away from this model and shown unwillingness to exit from weak SOEs. Loose monetary policy during the 2008 economic stimulus plan, along with political directives for SOEs to support the economy with new investment, caused many state firms to become bloated and return on assets to decline. SOEs in Shanghai introduced management shareholding arrangements as incentive measures in 2000, but state assets were being lost. A case is Shanghai Lianhua Supermarket (980 HK, MV $676m) which was preparing for a listing in Hong Kong. More than 50 managers set up a company that was suspected of conducting illegal trading with Lianhua, causing the government a loss.
In China companies in which the state is a majority shareholder account for 60% of stockmarket capitalisation. SASAC is the powerful body who controls 113 central SOEs, compared to 98,554 companies owned at the local level, and central SOEs control 53% of overall SOE assets totalling RMB95.7tn. Chinese economists have estimated that the entire Chinese SOE sector – around half of China’s output – actually subtracts six to eight times as much economic value as it produces. SOEs are “value-subtractors” in the economy and would be only 30% as profitable as they are today if not for direct government subsidies, “Implicit guarantees” on cheap loans made to SOEs, trade protection and preferential government procurement deals.
China’s huge SOEs are seen by the public as both too corrupt to save and too powerful to fail. The latest crackdown on SOE corruption to clear obstacles in the push to reform wasteful and inefficient SOEs offers some hope for change. Former head of the SASAC…
<Article snipped>
China’s strategy for “indigenous innovation” has been to employ its organs of the state to tempt and coerce leading foreign firms to part with world-class technologies so that local firms can copy, adopt or steal them. Multinationals have poured in with Deng’s welcome to foreign firms, especially more so after…
This development caught our attention to explore the rise of selected Chinese automotive component suppliers, both SOE and privately-owned entrepreneurial companies. They are helped not only by the lost in trust with the price cartel breakup but also a Chinese rule: 40% of the components in cars produced in China had to be made by local companies. It is generally understood that aftermarket service and part contribute more than half of the profits to the global automotive industry. China is a bustling market for auto parts. In 2012, auto suppliers’ output in China totaled RMB2.2tr ($360bn), up from about RMB1.6tr yuan in 2010. The sector was dominated by foreign players. We believe that the domestic auto parts proportion will be higher in China going forward. To achieve economies of scale, the government is accelerating domestic consolidation and major vehicle manufacturers are restructuring their component operations to improve investment efficiency and accelerate development. One automotive component SOE beneficiary is… The other automotive component company that we find interesting isFuyao Glass (600660 CH, MV $3.2bn), the Fujian-based entrepreneurial firm founded by Cao Dewang in 1987 that has a 50% domestic market share in automotive glass and is the world’s second largest auto glass firm by unit volume behind Saint-Gobain and after Japan’s Asahi Glass, supplying everyone from Toyota, Honda, VW, GM, Ford, BMW, Audi, Bentley….
Interestingly, Fuyao’s Cao credits his rise to Deng’s economic reform which allowed enterprising personalities to express themselves. After the Cultural Revolution, Fuyao’s Cao found a job at a factory that made…
Fuyao Glass (600660 CH) - Stock Price Performance, 1993-2014
Cao has an interesting view about competitive advantage:
“I always think good faith is a kind of competitive ability. I carefully studied the Japanese industry development history in the 1960s. Many Japanese companies also once appeared to seek short-term profits and use unscrupulous tactics to make money. But a mighty wave crashing on a sandy shore calls their bluff and deceitful businesses have disappeared. Those that survive are truly honest business with integrity. Fuyao always adhere to the integrity of business as the basic operating principle. For example, the most expensive cost in making automotive glass is the PVB film (windshield consists of two glass pressed into a thin film). PVB film thickness of the automotive glass is 0.76 mm, and the price is very high, about $5 per square metre. Many accessories manufacturers feel that users simply do not see the importance of film thickness, and in the process, will make the film into only 0.38 mm thick (this thickness is usually used for architectural glass). A square meters can save more than $2. While the price is lower by around half, it will give the user hidden trouble. We never do such a wicked thing. In my opinion, in the competition between enterprises, not only do we just compete in the strategy, technology and innovation, but the final decisive key often lies in character. The integrity of the enterprise is unable to quantify in terms of the competitive advantage. Entrepreneurship, in my opinion, not only means starting from scratch to create a career spirit, but also it includes “integrity management”. If you do not adhere to integrity as a business principle, regardless of how much money you earn, you also cannot say you have the entrepreneur’s spirit. You can only be at most a profiteer. I think all the time that the responsibility of entrepreneur has three areas: towards the country, towards social progress, and towards people. Carry out these three responsibilities in order to be worthy of the title of entrepreneur.”
Deng famously justified China’s capitalist path with the saying, “It doesn’t matter whether a cat is white or black, as long as it catches mice.” With the emergence and rise of selected SOE innovators and entrepreneurial firms such as Fuyao Glass, the resilient Chinese cat is able to have nine lives in bouncing back from reform purges and be the intrepid explorer and fearless acrobat to dance in the rain and create value in uncertain times.
Warm regards,
KB
Managing Editor
The Moat Report Asia
www.moatreport.com
SMU: http://accountancy.smu.edu.sg/faculty/pr...oon%20Boon
To read the exclusive article in full to find out more about the stories of the SOE automotive component company and Fuyao Glass and the implications of the SOE reform in Asia for value investors, please visit:
The Purging Rain on Asia’s SOEs and Implications for Value Investors, Aug 25, 2014 (Moat Report Asia, BeyondProxy)
The Purging Rain on Asia’s SOEs and Implications for Value Investors
They say reform is the painful rain that purges the ills; the resilient one emerges stronger and purified, while the corrupt dissolves under the cleansing process.
No one knows such pain more deeply than Deng Xiaoping, the reformist leader credited with opening up and transforming the Chinese economy. Deng’s 110th birthday last week on Aug 22 was celebrated by a poignant scene reacted and broadcast on national TV: Deng was drawing water in the rain to swab his disabled son who was tortured and thrown out of the window of a three-storeyed building at Beijing University by the Red Guards during the Cultural Revolution, when Deng was purged.
State broadcaster CCTV has produced the 48-part drama Deng Xiaoping at History’s Crossroads 《历史转折中的邓小平》 in honor of Deng, with the propaganda campaign eclipsing the official remembrance of the 120th anniversary of Mao’s birth last December. While washing his son’s back, Deng asked, “Son, what is your level of competency in wireless telegraphy?” Deng’s son replied, “Dad, you don’t worry, if the policy permits, I can repair radios. Not only can I be independent, but I can also earn a living for the family.” Deng was comforted and said, “Good, to rely on real knowledge and capability to earn a living, it’s definitely reliable” (“靠真本事吃饭，靠得住”).
Come September, the final plan for the state-owned enterprise (SOE) reform in China will be published, a move to reform bloated inefficient SOE to rely on its own capability to compete. The pilot plan to improve corporate governance and attract private investment includes (1) “mixed ownership,” the Communist Party jargon for introducing more private capital into government assets in a partial privatization, (2) major asset restructuring such as asset purchases, sales and swaps can proceed without approval from the CSRC, (3) curbs on “unreasonably high” executive pay and perks such as spending on cars and accommodations, (4) board-led human resources management, which will allow the boards of directors to hire, evaluate and pay top executives, rather than SASAC (State-owned Assets Supervision and Administration Commission) to appoint senior management and set performance metrics. The goal is to reduce political interference in the management of SOEs by designing the holding companies to focus purely on maximising shareholder value rather than advancing the government’s policy goals and political agenda that seeks to first and foremost legitimize the party in power. The reform process is described in one of Deng’s immortal words: “crossing the river by feeling for the stones.” The launch of the pilot and implementation work is likely to start next year.
What are the implications for value investors in China and Asia? Will the valuation pendulum shift back in favor of selected SOEs? Will this be a re-run of the last round of SOE reform in the late 1990s? Between 1997 and 2003, premier Zhu Rongji oversaw China’s last round of SOE reform. Under the mantra of “Grasp the large, release the small,” thousands of poorly performing SOEs were privatised or liquidated. Stronger firms were restructured and often listed on the stock market. But since 2003 the government has drifted away from this model and shown unwillingness to exit from weak SOEs. Loose monetary policy during the 2008 economic stimulus plan, along with political directives for SOEs to support the economy with new investment, caused many state firms to become bloated and return on assets to decline. SOEs in Shanghai introduced management shareholding arrangements as incentive measures in 2000, but state assets were being lost. A case is Shanghai Lianhua Supermarket (980 HK, MV $676m) which was preparing for a listing in Hong Kong. More than 50 managers set up a company that was suspected of conducting illegal trading with Lianhua, causing the government a loss.
In China companies in which the state is a majority shareholder account for 60% of stockmarket capitalisation. SASAC is the powerful body who controls 113 central SOEs, compared to 98,554 companies owned at the local level, and central SOEs control 53% of overall SOE assets totalling RMB95.7tn. Chinese economists have estimated that the entire Chinese SOE sector – around half of China’s output – actually subtracts six to eight times as much economic value as it produces. SOEs are “value-subtractors” in the economy and would be only 30% as profitable as they are today if not for direct government subsidies, “Implicit guarantees” on cheap loans made to SOEs, trade protection and preferential government procurement deals.
China’s huge SOEs are seen by the public as both too corrupt to save and too powerful to fail. The latest crackdown on SOE corruption to clear obstacles in the push to reform wasteful and inefficient SOEs offers some hope for change. Former head of the SASAC…
<Article snipped>
China’s strategy for “indigenous innovation” has been to employ its organs of the state to tempt and coerce leading foreign firms to part with world-class technologies so that local firms can copy, adopt or steal them. Multinationals have poured in with Deng’s welcome to foreign firms, especially more so after…
This development caught our attention to explore the rise of selected Chinese automotive component suppliers, both SOE and privately-owned entrepreneurial companies. They are helped not only by the lost in trust with the price cartel breakup but also a Chinese rule: 40% of the components in cars produced in China had to be made by local companies. It is generally understood that aftermarket service and part contribute more than half of the profits to the global automotive industry. China is a bustling market for auto parts. In 2012, auto suppliers’ output in China totaled RMB2.2tr ($360bn), up from about RMB1.6tr yuan in 2010. The sector was dominated by foreign players. We believe that the domestic auto parts proportion will be higher in China going forward. To achieve economies of scale, the government is accelerating domestic consolidation and major vehicle manufacturers are restructuring their component operations to improve investment efficiency and accelerate development. One automotive component SOE beneficiary is… The other automotive component company that we find interesting isFuyao Glass (600660 CH, MV $3.2bn), the Fujian-based entrepreneurial firm founded by Cao Dewang in 1987 that has a 50% domestic market share in automotive glass and is the world’s second largest auto glass firm by unit volume behind Saint-Gobain and after Japan’s Asahi Glass, supplying everyone from Toyota, Honda, VW, GM, Ford, BMW, Audi, Bentley….
Interestingly, Fuyao’s Cao credits his rise to Deng’s economic reform which allowed enterprising personalities to express themselves. After the Cultural Revolution, Fuyao’s Cao found a job at a factory that made…
Fuyao Glass (600660 CH) - Stock Price Performance, 1993-2014
Cao has an interesting view about competitive advantage:
“I always think good faith is a kind of competitive ability. I carefully studied the Japanese industry development history in the 1960s. Many Japanese companies also once appeared to seek short-term profits and use unscrupulous tactics to make money. But a mighty wave crashing on a sandy shore calls their bluff and deceitful businesses have disappeared. Those that survive are truly honest business with integrity. Fuyao always adhere to the integrity of business as the basic operating principle. For example, the most expensive cost in making automotive glass is the PVB film (windshield consists of two glass pressed into a thin film). PVB film thickness of the automotive glass is 0.76 mm, and the price is very high, about $5 per square metre. Many accessories manufacturers feel that users simply do not see the importance of film thickness, and in the process, will make the film into only 0.38 mm thick (this thickness is usually used for architectural glass). A square meters can save more than $2. While the price is lower by around half, it will give the user hidden trouble. We never do such a wicked thing. In my opinion, in the competition between enterprises, not only do we just compete in the strategy, technology and innovation, but the final decisive key often lies in character. The integrity of the enterprise is unable to quantify in terms of the competitive advantage. Entrepreneurship, in my opinion, not only means starting from scratch to create a career spirit, but also it includes “integrity management”. If you do not adhere to integrity as a business principle, regardless of how much money you earn, you also cannot say you have the entrepreneur’s spirit. You can only be at most a profiteer. I think all the time that the responsibility of entrepreneur has three areas: towards the country, towards social progress, and towards people. Carry out these three responsibilities in order to be worthy of the title of entrepreneur.”
Deng famously justified China’s capitalist path with the saying, “It doesn’t matter whether a cat is white or black, as long as it catches mice.” With the emergence and rise of selected SOE innovators and entrepreneurial firms such as Fuyao Glass, the resilient Chinese cat is able to have nine lives in bouncing back from reform purges and be the intrepid explorer and fearless acrobat to dance in the rain and create value in uncertain times.
Warm regards,
KB
Managing Editor
The Moat Report Asia
www.moatreport.com
SMU: http://accountancy.smu.edu.sg/faculty/pr...oon%20Boon
To read the exclusive article in full to find out more about the stories of the SOE automotive component company and Fuyao Glass and the implications of the SOE reform in Asia for value investors, please visit:
The Purging Rain on Asia’s SOEs and Implications for Value Investors, Aug 25, 2014 (Moat Report Asia, BeyondProxy)
