The 6124 point may be an eternal pain for A-share investors. For most listed companies, the price at this point is like Mount Everest, insurmountable. Among them, the 'height difference' of large state-owned enterprises is the most striking.

The Tragedy of Large State-Owned Enterprises

China Business News (Weibo) Daily compiled statistics on the A-share market value of all continuously traded listed companies since the end of 2007. Among the top 10 companies with the largest evaporated market value, 8 are state-owned enterprises: PetroChina (601857.SH) evaporated 3.79 trillion yuan, Sinopec (600028.SH) 1.17 trillion yuan, ICBC (601398.SH) 1.13 trillion yuan, China Life (601628.SH) 921.857 billion yuan, China Shenhua (601088.SH) 839.888 billion yuan, Bank of China (601988.SH) 670.367 billion yuan, Aluminum Corporation of China (601600.SH) 322.838 billion yuan, Ping An (601318.SH) 319.061 billion yuan, China COSCO (601919.SH) 302.525 billion yuan, China Pacific Insurance (601601.SH) 269.113 billion yuan. Including Bank of Communications (601328.SH), Baosteel (600019.SH), and Air China (601111.SH), the evaporated market value of over a dozen state-owned enterprises totals nearly 10 trillion yuan.

On January 22 this year, the State-owned Assets Supervision and Administration Commission (SASAC) released the 2013 performance data of Chinese enterprises. Last year, central enterprises achieved a cumulative operating revenue of 24.2 trillion yuan, a year-on-year increase of 8.4%; paid total taxes and fees of 2 trillion yuan, up 5.2% year-on-year; and realized total profits of 1.3 trillion yuan, up 3.8% year-on-year. Compared with the 2012 performance of central enterprises, in 2013, the growth rates of operating revenue and taxes paid decreased by 1 percentage point and 7.8 percentage points respectively, but the profit growth rate increased by 1.1 percentage points year-on-year.

Previously, SASAC had adjusted the profit growth target for state-owned enterprises this year from 10% to 5%, but many state-owned enterprises still lack confidence in this.

However, attributing the shrinkage in market value solely to poor performance growth is too one-sided. The Shanghai Composite Index has also fallen from 6000 points in 2007 to 2000 points now, a drop of two-thirds. But the magnitude of market value evaporation for the top ten listed companies still far 'outpaces' the index decline, such as PetroChina's market value shrinking by 80%.

From another perspective, the listed companies with the lowest A-share prices are currently: Shandong Iron and Steel (600022.SH) 1.56 yuan, Maanshan Iron and Steel (600808.SH) 1.58 yuan, *ST Nangang (600282.SH) 1.60 yuan, Hainan Airlines (600221.SH) 1.68 yuan, China Metallurgical (601618.SH) 1.71 yuan, Shaoguan Iron and Steel (000717.SZ) 1.71 yuan, Meihao Group (000667.SZ) 1.72 yuan, Anyang Iron and Steel (600569.SH) 1.85 yuan, Hebei Iron and Steel (000709.SZ) 1.85 yuan, Valin Steel (000932.SZ) 1.88 yuan. In addition, China First Heavy Industries (601106.SH) at 1.94 yuan. Most of the companies with share prices below 2 yuan are state-owned enterprises.

Why do state-owned enterprises, which have policy support and are called the 'sons' of the national economic sequence, perform so unsatisfactorily in the capital market?

Lack of Competition

Looking at the state-owned enterprises ranked high in market value evaporation and low prices, they are mainly concentrated in traditional industries such as petrochemicals, shipping, finance, and steel. These industries have high entry barriers and are almost monopolized by state-owned enterprises.

Monopoly can initially ensure that industry profits flow maximally to a very few companies, but due to the lack of competition, it also lacks vitality and evolutionary drive.

Take the steel industry as an example. An investment professional from a securities firm's proprietary trading department once held heavy positions in steel but ultimately chose to sell. He analyzed: 'The homogenization among steel companies is too serious.' It is really difficult to find differences among listed companies such as Shandong Iron and Steel, Maanshan Iron and Steel, and Anyang Iron and Steel. Steel companies generally stick to their own territories, mind their own business, and lack the motivation to reform and evolve. In fact, steel is a traditional industry, and the space for innovation itself is not large.

The person believes that the only solution to the mismatch between market value, performance, and status of state-owned enterprises is to hope that state-owned enterprise reform can bring vitality.

In the 'Opinions on the Key Tasks for Deepening Economic System Reform in 2014' approved by the State Council and the National Development and Reform Commission, there are detailed plans and descriptions for state-owned enterprise reform. These include distinguishing types such as those providing public welfare products or services, natural monopoly links, and general competitive industries, improving the classified assessment methods for state-owned enterprises, promoting strategic adjustments of the state-owned economy, and enhancing the market vitality and international competitiveness of the state-owned economy. Strengthen state-owned asset supervision with capital management as the main focus, and advance pilot projects for state-owned capital investment and operation companies. Follow the laws of the market economy and technological economy, and orderly advance reforms in industries such as telecommunications, electricity, petroleum, and natural gas.

In addition, accelerate the development of a mixed-ownership economy. Advance the reform of diversifying the equity of state-owned enterprises and establish cooperation mechanisms between the government and social capital. Except for a few enterprises involving national security and investment operation companies that can adopt a wholly state-owned form, state-owned capital in other industries and fields may participate in operations in the form of holding or sharing.

Capital Outflow

If the observation period is extended, state-owned enterprises were actually the main contributors to the 2007 bull market. 'The peak market value at that time was largely due to the accumulation of funds. Large funds cannot find small stocks to buy and sell; they can only choose targets among blue chips.' The person analyzed the reason for the high market value at that time.

The situation based on capital fundamentals has greatly changed, so the funds that were originally in state-owned enterprises have gradually withdrawn. The withdrawal brought changes in stock prices, ultimately leading to a decline in market value.

In today's environment where capital is not abundant, if state-owned enterprises do not show outstanding performance, how much value do they still have?

The person believes that the current investment value of state-owned enterprises lies in: first, dividends; second, valuation correction opportunities brought by low valuations; and third, reforms in market trading varieties, such as preferred stocks, Shanghai-Hong Kong Stock Connect, individual stock options, etc. Especially the last reform of trading varieties is almost purely at the trading level rather than fundamental value.

Appendix: Top 15 Listed Companies by Evaporated Market Value in the Past 7 Years

Company Name

Evaporated Market Value (100 million yuan)

PetroChina

37900

Sinopec

11700

ICBC

11300

China Life

9218.57

China Shenhua

8398.88

Bank of China

6703.67

Aluminum Corporation of China

3228.38

Ping An

3190.61

China COSCO

3025.25

China Pacific Insurance

2691.13

China Merchants Bank

2655.88

Bank of Communications

       2519.47

Baosteel

2382.04

Daqin Railway

2376.14

Air China

1871.62