Economic Research NYGS China 50 - Implications of State Ownership II: Management and Performance

Transcription

1 Market Strategy September 22, 26 Economic Research NYGS China 5 - Implications of State Ownership II: Management and Performance Companies Mentioned Philip L. Miller philip@nygsresearch.com Summary: In this report, we follow up our initial report from last week on the implications of state ownership with another comparison of the state-owned companies and the non-state-owned companies. We find that the senior executives at the non-state-owned companies have greater amounts of international education and prior work experience than those of the state-owned companies. We interpreted this to imply a greater exposure to capitalist economies. Despite this fact, we find that since the beginning of 23, the performance of the state-owned companies was superior to that of the non-state-owned companies, leading us to categorize the state-owned as corporatist companies and the non-state-owned companies as capitalist companies. Corporatism is here defined loosely as those companies that merge corporate interests with those of the state and in which the state has greater involvement in the affairs of the business. Key Points: The state-owned, or corporatist, companies' executives were less likely to have studied or worked overseas than the counterparts in the non-state-owned, or capitalist, companies. The corporatist executives were predominately educated in mainland China and worked the vast majority of their careers within China. The capitalist executives had a predominance of their education and prior work experience outside of China and as a consequence were more exposed to capitalist enterprise. Despite these factors, since the beginning of 23 the state-owned companies have outperformed the non-state-owned companies in stock price performance, leading us to believe that closer ties to the government were instrumental in the ability of these companies to succeed. The investment implications of these findings are that as a possible secondary set of considerations when investing in China-based, U.S.-traded companies, it may be informative to consider the intangible aspects of the level of government ownership of the companies. To be added to the Economic Research distribution list, research@nygsresearch.com or contact your NYGS sales representative. See important disclosures and analyst certification on pages 6-7 of this report. 1

2 Introduction Last week, we reported on the implication of split-share ownership (NYGS China 5 - Special Report: Implications of State Ownership, September 13, 26). We found that within the China 5, there are 15 companies for which over 5% of their shares are non-trading, government-owned shares. This report will extend those findings by looking at the level of education, prior work experience, and level of prior government participation of the major executives of the government-owned companies as opposed to those which are majority shareholder-owned. We conceptualize these companies as corporatist companies and pure capitalist companies, respectively, defining corporatism loosely as those companies that merge corporate interests with those of the state and in which the state has greater involvement in the affairs of the business. Based on an analysis of company reports, we find that the executives at the corporatist, state-owned companies are more provincial than the those at the capitalists companies, which have broader Western backgrounds through their education and work experience. The corporatist companies also have much closer ties to the government through prior government service. With regard to performance, among the NYGS China 5, the stocks of the corporatist companies have outperformed the capitalist companies since the beginning of 23. We believe that the corporatist group benefits from its close ties with the government relative to the capitalist group which does not enjoy those ties. We believe the difference in performance gives some guidance to the relative importance of these various issues, with the ultimate objective being to provide the reader with a greater understanding of the China landscape. September 22, 26 2

3 NYGS China 5 - By State Ownership As shown in Table 1, last week we highlighted the percentage of those companies that are state-owned. We find that of the 5 companies, there are 15 that have ownership control by the state government. The remaining 35 have less than a majority interest by the Chinese government. Table 1: China 5 by Market Capitalization and Percentage of Government Ownership Symbol Company Name Industry Market Cap ($MM) Share Split PTR PETROCHINA CO LIMITED Basic Materials 192, % CHA CHINA TELECOM CORP LTD ADR Telecom 27, % CHL CHINA MOBILE LIMITED Wireless 132, % LFC CHINA LIFE INSURANCE CO LTD ADR H Healthcare 49, % SNP CHINA PETE & CHEM CORP ADR H Basic Materials 55, % CN CHINA NETCOM GROUP CORP HK LTD Telecom 11, % HNP HUANENG POWER INTERNATIONAL INC Services 7, % GSH GUANGSHEN RAILWAY LIMITED ADR Services 1, % CEO CNOOC LIMITED ADR Basic Materials 35, % CEA CHINA EASTERN AIRLINES ADR CL H Services % ACH ALUMINUM CORP CHINA LIMITED Basic Materials 7, % SHI SINOPEC SHANGHAI PETROCHEM ADS Basic Materials 3, % YZC YANZHOU COAL MINING CO LTD Basic Materials 3, % CHU CHINA UNICOM LIMITED Wireless 11, % ZNH CHINA SOUTHERN AIRLINES LTD Services 1, % CBA BRILLIANCE CHINA AUTO HLDG ADR Consumer Goods % PCW PCCW LIMITED ADR Telecom 4,195 2.% SMI SEMICONDUCTOR MFG INTL CORP ADR Semiconductor 2,33 1.1% CHINA CDC CORPORATION Internet % HTX HUTCHISON TELECOMM INTL LTD Telecom 8,561.% STP SUNTECH POWER HLDGS CO LTD ADR Telecom 3,831.% FMCN FOCUS MEDIA HOLDING LIMITED Services 3,36.% BIDU BAIDU.COM INC SPON ADR A Internet 2,674.% SNDA SHANDA INTERACTIVE ENTMT LTD ADR Internet 2,297.% NTES NETEASE.COM INC ADR Internet 2,21.% CTRP CTRIP.COM INTERNATIONAL LTD ADR Services 1,667.% SINA SINA CORPORATION Internet 1,41.% UTSI UTSTARCOM INCORPORATED Wireless 1,2.% SOHU SOHU.COM INCORPORATED Internet 858.% TOMO TOM ONLINE INCORPORATED ADR Wireless 734.% CMED CHINA MED TECHOLOGIES INC ADR Healthcare 713.% ACTS ACTIONS SEMICONDUCTOR CO LTD ADR Semiconductor 686.% SAT ASIA SATELLITE TELECOM Diversified Communication 652.% NCTY THE9 LIMITED ADR Services 597.% NTE NAM TAI ELECTRONICS INCORPORATED Consumer Goods 512.% CNTF CHINA TECHFAITH WIRELESS COMM Diversified Communication 394.% COGO COMTECH GROUP INCORPORATED Diversified Communication 394.% JOBS 51JOB INCORPORATED ADR Services 393.% VIMC VIMICRO INTERNATIONAL CORP ADR Semiconductor 388.% ICAB I-CABLE COMMUNICATIONS LIMITED Services 386.% LONG ELONG INCORPORATED Services 347.% AOB AMERICAN ORIENTAL BIOENGINEERING Healthcare 343.% CBAK CHINA BAK BATTERY INC Wireless 288.% KONG KONGZHONG CORPORATION ADR 27.% RADA RADICA GAMES LIMITED Consumer Goods 223.% TBV TIENS BIOTECH GROUP USA INC Healthcare 22.% BBC BODISEN BIOTECH INCORPORATED Basic Materials 211.% ASIA ASIAINFO HOLDINGS INCORPORATED Internet 186.% XING QIAO XING UNIVERSAL TELEPHONE Diversified Communication 17.% SEED ORIGIN AGRITECH LIMITED Services 83.% Source: Company Reports and Reuters Stockval. This report looks more closely at the background characteristics of the senior management of these companies, dividing them into 15 corporatist and 35 capitalist companies. The intent is to determine if there is a significant difference in the background of these senior executives. Table 2 reports these findings. In terms of education, more of the corporatist executives have been educated in China only, September 22, 26 3

4 with only 24% having been educated outside of China. This is contrasted to the capitalist group, where 63% of the executives have some education outside of China. The data shows a similar pattern with respect to work experience. 88% of the corporatist executives have worked only in China, whereas 75% of the executives in the capitalist group have some work experience outside of China. With regard to having a previous position in the government, 8% of the corporatist companies have at least one of their senior executives with senior government service, whereas it is only 29% in the capitalist group. Table 2: Comparison of Executives at the Corporatist and Capitalist Companies in the NYGS China 5 Category Corporatist Capitalist Education China Only 76% 37% Asia and Western 24% 63% Work Experience China Only 88% 25% Asia 7% 19% Western 5% 57% Prior Government Position 21% 9% At Least 1 Government Official in Senior Management 8% 29% Source: Company Reports. The table indicates that the corporatist companies are much more provincial in that they are predominately educated and have the vast majority of their work experience in mainland China, while the capitalist companies have greater international education and work exposure. September 22, 26 4

5 Relative Performance of the Corporatist and Capitalist Companies To test the relative performance, we created separate indexes for the corporatist companies and capitalist companies. Figure 1 plots the relative performance of the two groups from the beginning of 23 to the present. Chart 1: Relative Performance of Corporatist and Capitalist Companies in NYGS China 5 (January 23 = 1) 3,5 3, 2,5 2, 1,5 1, 5 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Majority State-Owned Majority Non-State-Owned The data reveals that the corporatist stocks outperformed the capitalist stocks during the time period. We believe this is an indication that the close relationship to the government may benefit the corporatist companies more than the pure profit maximization principle helps the capitalists. While we believe these findings need to be further explored, the initial indication is that on a relative performance basis, the state-owned group has outperformed the non-state-owned group over the long run. Investment Implications The obvious initial investment implication is that when investing in these China-based, U.S.-traded companies, it may be advisable to consider the level of government involvement in these companies and use this information as a significant secondary indicator for investment. The primary indicator of course being the expected revenue stream and growth potential of the company in question. By secondary indicator we mean the host of intangible indicators than many investors often consider. Risk Considerations We have made comparisons about two groups of companies one identified loosely as corporatist companies and the other loosely defined as capitalist companies. We showed different background characteristics of the senior executives of these companies and indicated that the performance of the corporatist companies outperformed the capitalist companies. We, however, did not consider the size of the companies in question, nor did we control for performance by industry; both of these issues can cause distortions in our findings. September 22, 26 5

6 Important Disclosures and Certifications Distribution of Ratings/IB Services IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [Buy] HOLD [Neutral] SELL [Sell] Ratings Definitions: Buy: We have a positive outlook on the stock and expect it to outperform the implied one year discount rate of the broad U.S. equity market. We believe that investors should be long this stock based on expected stock and/or sector catalysts over the coming year. Neutral: We expect the stock to perform in line with the implied one year discount rate of the broad U.S. equity market. Sell: We have a negative outlook on the stock and expect it to underperform the implied one year discount rate of the broad U.S. equity market. We believe that investors should reduce their current holdings of this stock based on expected stock and/or sector catalysts over the coming year. Prior to August 25, NYGS used the following the ratings: Buy: We believe the company has strong fundamentals and is undervalued relative to its market, and we expect the stock to deliver returns of at least 2% in a 12 month time horizon. Accumulate: We believe the long run prospects of the company are positive, but short term visibility is still uncertain so there is more investment risk relative to companies with the buy rating. Stocks under the accumulate rating are expected to generate returns of at least 1% in a 12 month time horizon. Hold: We believe the company's long term fundamentals are stable, but we can not identify any meaningful catalysts that can drive the stock higher. Stocks under the hold rating ire expected to show no substantial price movement in a 12 month time horizon. Sell: We believe the company's fundamentals are poor and we expect minimal or negative stock returns over a 12 month time horizon. Analyst Certification - According to Reg AC, I/we, as (a) research analyst(s) of NYGS, certify that the research opinion(s) expressed in this research comment/report accurately reflect(s) my/our personal view(s) and that no specific payment was received for this particular research product. Other Disclosures Disclaimer Additional information on recommended securities is available upon request. The information in this report has been obtained from sources deemed reliable, but it is not guaranteed, and it, together with all estimates and forecasts, is subject to change without notice. This report does not purport to be a complete analysis of any security, issuer, or industry, and it is not an offer or a solicitation of an offer to buy or sell any securities. This research report is prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. Investors should note that each security's price or value may rise or fall and that income from such securities, if any, may fluctuate. Copyright 26, Inc., member NASD and SIPC. analysts do not own securities issued by companies in the industries they cover. NYGS analysts are compensated in part on the basis of overall company revenue generation. Analysts do not receive direct compensation for specific investment banking transactions. September 22, 26 6

7 The technical patterns and price targets mentioned in this report are for general information purposes only and are not intended as a solicitation to take action. Investors who are considering buy and sell transactions of securities mentioned in this report should not do so based solely on the information contained in this report. Prior to making an investment decision about an equity security, investors should review with their Financial Advisors information concerning the issuer's fundamentals. September 22, 26 7