Investors in China’s Non State Owned Enterprises (NSOEs) have been keelhauled in recent years.
Starting with scorched-earth in the for-profit-education sector the shellacking continued through the New Economy cabal and most recently portfolios exposed to the property sector have been hammered.
Not unnaturally, there’s a growing sense that State Owned Enterprises (SOEs) may be a safer and better bet long term. They’re also, in many cases, cheaper than NSOEs making the switch easier still.
Yuanlan Cao, Xuewei Yang and Peng Zhu, all from the School of Management and Engineering at the Nanjing University, wanted to better understand SOEs persistently cheap valuations and the paper highlighted today is the product of their work.
In a nutshell they conclude there’s no magic to lower SOE valuations. They’re cheaper for reasons which can be understood through the lens of established valuation techniques rather than being the product of factors unique to China.
As they sum up “Our work provides favorable evidence for the applicability of classical valuation theories in the China stock market.” Which is an important conclusion as it suggests non-domestic investors should have no fear tackling SOE valuation work; existing analytical toolboxes contain all that’s necessary to make sense of the space.
Specifically, the work debunks the myth that SOEs’ low valuations are a product of the sectors in which most of them are found. Instead the explanatory variables that count more are: earnings uncertainty, liquidity, speculative interest (or general lack thereof) and growth.
I’ve had an SOE preference for a very long time based on earnings reliability, management stability and valuation. Always nice to have ‘science’ to back up practices established based on long term observation 🙂
The work in full can be accessed here Are Chinese State-Owned Enterprises Undervalued?
Happy Sunday