More than half of my money invested in China is in the stocks of either State Owned Enterprises (SOEs) or quasi-SOEs. Their earnings are more reliable, the managers are more transparent, the operations tend to be more stable and they’re mostly better financed than private sector peers. Observable facts I’d strongly argue, not just my opinion.
I’m surprised when I tell people this how often I get a reflexive push-back; but below is a great example of the benefits of this approach in a real-world context.
[I own neither CM nor BABA. Chart: webb-site.com]
There’s dull-as-ditch-water China Mobile (CM) versus ‘The Amazon of China’ Alibaba since the latter’s listing in Hong Kong in 2019. Your ride in CM would have given you a nearly 100% outperformance, preserved your capital and produced a net gain of 35%. Another round of ditch-water if you please!, and I rest my case.
The paper highlighted today, from Liu Wang and Kenneth Yung of the Providence College School of Business and Old Dominion University, takes a look at who manipulates earnings more, SOEs or private sector companies.
From the preamble you’ll have guessed the answer. Yup, its those private sector rascals not the elbow-patched SOE dullards who are more consistently guilty of trying to mislead investors.
However, this effect was pronounced in the early part of the study but tailed off some at the end. [The study only covers the period 1998~2006 but was chosen as, being a period of intense market reform, it allowed for better before and after comparison.]
Moreover, as the researchers conclude, less earnings manipulation is not the same as ‘good’ or ‘better’ corporate governance and the study doesn’t tell us the mechanism causing the different behavior.
One size doesn’t fit all and, sure, the study was a while back; but the work still has merit and my experience is the distinction continues today.
You’ll find the work in full via this link Do State Enterprises Manage Earnings.
Happy Sunday.