The Shanghai Stock Exchange (SSE) would step up blue-chip market construction by both fostering new blue chips and improving existing ones as Shanghai securities market has gained momentum for two decades since its birth, especially this year, the best time for assets securitization, SSE Vice President Zhou Qinye said in his keynote speech at the "Forum on Shanghai Multi-layer Blue-chip Market Construction" on April 15.
From SSE 50 to SSE 380
"After 20 years' growth, especially the recent five years after the launch of equity division reform, Shanghai blue-chip market gradually comes into being." Zhou said. As of April 14, 2011, the SSE had boasted 905 listed companies with the market capitalization of RMB19.8 trillion (The average market capitalization of a single company is over RMB20 billion) from 834 with that of RMB2.3 trillion before equity division reform. However, there is a big difference in the market capitalization of listed companies. At present, 32% (or 293) companies boast market capitalization of over RMB10 billion and their market value accounts for 85.6% of the total of SSE-listed companies. In contrast, 19% (or 171) companies have market capitalization of less than RMB3 billion and their market value is only 1.7% of the total. The remaining 441 companies with market capitalization between RMB3 billion and RMB10 billion account for 12.7% of the total market value.
To mirror the characteristic of its blue-chip market, the SSE created in succession "SSE 50", "SSE 180" and "SSE 380" indices. Different from the "SSE 50" reflecting mega caps, the "SSE 180" traces listed companies with market capitalization of over RMB10 billion. In 2010, the SSE introduced the "SSE 380", which is made up of 380 "emerging blue-chip" firms handpicked from 725 companies excluding those in "SSE 180", to portray the market in an all-around manner. So far, the market capitalization and trading volume of "SSE 380" have hit 18% and 33%, respectively.
Prominent Trend in Blue-chip Market This Year
Since the beginning of 2011, the trend in blue-chip market has become increasingly noticeable. According to the recent disclosure of listed companies' annual reports, the overall performance of SSE-listed blue-chip firms in the whole year of 2010 was beyond expectations.
By April 14, 631 out of a total of 905 SSE-listed companies, specifically 42 out of SSE 50 index constituent companies, 136 out of SSE 180 index constituent companies and 284 out of SSE 380 index constituent companies, had disclosed their annual reports. The 42 out of SSE 50 index constituent companies realized the total net profit of RMB1,090.3 billion, a year-on-year jump of 35%. Back in 2009, the nearly 900 SSE-listed companies created the net profit of over RMB80 billion. The 136 out of SSE 180 index constituent companies and the 284 out of SSE 380 index constituent companies saw net profits of about RMB1.2 trillion and RMB84.8 billion, or 38% and 37% increases year on year, respectively. The above performances were all beyond the expectations of the market.
The uprising performances of blue chips bring the valuation upwards, which in turn drives the P/E ratio of the whole SSE market. Zhou stressed that the P/E ratio of SSE Composite Index at the end of 2010 was 17.4, while by April 14, 2011, it had risen to 18. Similarly, the P/E ratios of SSE 50 and SSE 180 climbed from 13 and 14.8 to 13.5 and 15, respectively, thus boosting the overall increase in SSE-listed companies' P/E ratios. Meanwhile, as of April 14, 2011, the market capitalization proportions of SSE 50, SSE 180 and SSE 380 had all witnessed significant improvement.
Besides, the inflow and outflow of institutional investors' capital also embodied the features of blue-chip market this year. From January 1 to April 14, 2011, the top five industries attracting institutional investors' capital were banking, building materials, oil and coal, securities and chemicals, while the industry of pharmaceutical biology, a magnet for net capital inflow in the first half of 2010, faced capital outflow and great capital outflow also occurred in such sectors as machinery, insurance, commercial trade and transport equipment. "All these data send a strong signal of a robust blue-chip market. The stronger get stronger and the weak get weaker." Zhou summed up.
Best Time for Assets Securitization
"In the next stage, the SSE will promote the blue-chip market construction by both fostering new blue chips and improving existing ones." Zhou explained that the SSE hopes that an array of backbone enterprises may go listed on SSE 50, SSE 180 and SSE 380 and grow from emerging blue chips to real ones. On the other hand, it is also crucial to improve the performances of existing ones. Due to the big difference on the current market, there is a lot of work to do in boosting the growth of the existing 171 blue chips with market capitalization of less than RMB3 billion. Restricted by the size of then capital market, some enterprises went listed with a small portion of its assets, thus leaving many problems in horizontal competition and connected transaction. "The SSE is also facing the issue of structural improvement, that is how to help the 1/5 companies lagging behind catch up. If all these listed companies realize the market capitalization of over RMB10 billion, the ranking of the SSE in terms of total market capitalization would be better than the sixth in the world."
Now is the best time for assets securitization, Zhou added. After the decline from the record high of 6,214 points of SSE Composite Index on October 16, 2007 and till the end of 2007, the total market capitalization of SSE-listed companies stood at nearly RMB28 trillion, with the average stock price of RMB19.04 per share, the earning per share of each company of RMB0.42, the average P/E ratio of nearly 42, the average net asset value per share of RMB2.72 and the P/B ratio of 7. By April 14, 2011, the average stock price of SSE-listed companies had been RMB8.91 per share, with the P/E ratio of 18 and the P/B ratio of about 2.8. Due to the current advantages in average stock price and P/B ratio, enterprises intending to make assets securitization may obtain more shares of listed companies according to market price after assets appreciation upon appraisal. "Even though now is not the best timing, it is at least the second best one."
Zhou concluded that after listing, enterprises could realize the best value for shareholders through effective and rational usage of capital operation platform. For those poorly-run ones, return on net assets could also be shared after transfer of controlling rights and introduction of well-established firms. Therefore, the SSE would actively boost blue-chip market construction by both fostering new blue chips and improving existing ones.
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Shanghai Stock Exchange Vice President Zhou Qinye: Boost Blue-Chip Market Construction
Date 20/04/2011