China's SOEs bulk up for market heavy lifting

Guotai Haitong Securities Co

29/10/2024 02:01

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
    By Chan Ka Sing
       HONG KONG, Oct 29 (Reuters Breakingviews) - With great
power comes great responsibility. Consolidation among China's
state-owned enterprises have picked up as economic growth slows.
It's part of Beijing's plan to boost market capitalisations and
shore up the $11 trillion stock market. That's the easy part.
Unlocking cost savings and cutting industrial overcapacity will
be the real challenge for these new giants.
    Between May and mid-September, there have been more than 46
M&A deals announced involving mainland A-share firms listed in
Shanghai and Shenzhen, Xinhua news agency reported. Among those
are mammoth mergers, including last month's proposed combination
between Guotai Junan Securities  601211.SS  and Haitong
Securities  600837.SS  that would create China's biggest
brokerage with $230 billion in assets, as well as the union
between China CSSC  600150.SS  and China Shipbuilding Industry
 601989.SS  to form the world's largest shipyard.
    Executives are answering Beijing's call for creating bigger
and more valuable companies. There are only 15 companies with a
$100 billion-plus market capitalisation listed on the mainland,
versus over 100 in the United States. In January, the
State-owned Assets Supervision and Administration Commission, in
charge of managing SOEs, made it clear that it will include
"market value management" as one of the requirements in its
performance appraisal system for officials at listed state
firms. More recently, as part of a policy package to shore up
investor confidence, the stock market watchdog announced new
measures to encourage more M&A and consolidation, including
fast-tracking approvals for large-cap companies; firms in key
stock indices are also urged to establish "market value
management" departments. 
    Anchoring the stock market with larger blue-chip firms could
help bring some much-needed stability. Creating state-owned
giants might also help with industrial overcapacity in sectors
including steel and solar panels. In September, industrial
profit plunged over 27% year-on-year, the steepest decline this
year.
    State-backed groups will face an uphill battle to prove
bigger is better, however. Years of easy credit and preferential
treatment have resulted in many bloated and inefficient
dinosaurs. In the nine months to September, SOEs recorded a 6.5%
slump in profit from a year earlier, grossly underperforming the
0.6% decline at private firms, official industrial data show. 
        Take the $19 billion Haitong, for example. It is
grappling with falling revenue and mounting losses at its
offshore subsidiary. A merged Guotai Junan-Haitong entity will
have more than 28,000 employees - 8% more than current industry
leader, the $54 billion Citic Securities  600030.SS , whose 2023
revenue is 1.2 times the two smaller rivals' combined.
    Engineering larger companies is just the start. Investors
will be closely watching whether these mergers can create value.
  
    CONTEXT NEWS
    Listed companies should use mergers and acquisitions to
improve their asset quality, the China Securities Regulatory
Commission (CSRC) said in a consultation document published on
September 25. In a separate consultation paper, the CSRC also
suggested index constituents should come up with plans to
monitor and boost market caps. 
    State firms have announced a number of multibillion M&A
deals this year, including a merger between Guotai Junan and
Haitong Securities to create China’s largest brokerage by asset
size, as well as combining China CSSC Holdings and China
Shipbuilding Industry to create the world’s biggest shipyard. 

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Graphic: China's SOE stocks are getting a boost from M&A    https://reut.rs/4eTJVpM
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 (Editing by Una Galani and Aditya Srivastav)
 ((For previous columns by the author, Reuters customers can
click on  CHAN/  
KaSing.Chan@thomsonreuters.com))