Industrial: Three stock selection strategies for mergers and acquisitions in state-owned enterprises

1. Central state-owned enterprises are becoming the dominant force in this round of M&A and reorganization. On December 17, the State-owned Assets Supervision and Administration Commission of the State Council issued the "Opinions on Improving and Strengthening the Management of Market Value of Central Enterprises' Controlling Listed Companies" (hereinafter referred to as the "Opinions"), explicitly encouraging central enterprises to "actively carry out mergers and reorganizations that are conducive to increasing investment value." The "Opinions" put forward specific requirements for the direction of mergers and reorganizations of central enterprises: (1) "Focus on accelerating the integration of high-quality assets in key links of the industry chain and supply chain"; (2) "Pay close attention to core technology resources and actively carry out investment and mergers"; and (3) "Through mergers and reorganizations, accelerate the layout of strategic emerging industries and future industries, and cultivate new productive forces." At the same time, central enterprises are encouraged to inject off-market assets: "Promote the further convergence of high-quality internal resources to controlling listed companies" and "explore the independent internal businesses with good quality, good growth prospects, and industry differentiated competitive advantages, and standardly and prudently implement split listings." Since the beginning of this year, policies encouraging mergers and reorganizations have been continuously introduced from the State Council to local governments, from the China Securities Regulatory Commission to stock exchanges, guiding central enterprises and local state-owned assets to actively engage in mergers and reorganizations as important contents. Since the beginning of the year, new policies supporting mergers and reorganizations such as the "Nine Measures of the State", "Six Measures of Mergers and Acquisitions", and "Eight Measures of the Science and Technology Innovation Board" have been successively introduced. The State-owned Assets Supervision and Administration Commission has further strengthened its support for central state-owned enterprises to participate in mergers and reorganizations, especially since "9.24," local governments in Shanghai, Shenzhen, Zhejiang, and other regions have successively issued policies to support mergers and reorganizations, making "enhancing the leading role of state-owned listed companies" an important direction. Under the positive guidance of policies, the activity of central state-owned enterprises in mergers and reorganizations has significantly increased, becoming the dominant force in this round of mergers and reorganizations: On the one hand, as of December 20 (still the same later), the scale of mergers and reorganizations in which central enterprises and local state-owned listed companies participated as the bidding party has exceeded 580 billion yuan, accounting for 76%, the highest level since 2012. On the other hand, local governments are also actively participating in the acquisition and controlling of listed companies. In the year, at least 29 listed companies have changed their controlling shareholders from individuals or no controlling shareholders to local state-owned assets, in preparation for introducing industries or further integrating local resources through mergers and reorganizations. 2. What are the characteristics of central state-owned enterprise mergers and reorganizations this year? (1) Quantity and scale: "Few but refined," Traditional industry consolidation mergers and reorganizations still dominate, and mergers in new productive sectors are also accelerating. The proportion of central state-owned enterprise mergers and reorganizations is relatively low, but the scale is relatively high. So far this year, the number of mergers and reorganizations led by central state-owned enterprises as the bidding party has reached 431 cases, accounting for 31.1% of the total, while the scale has exceeded 580 billion yuan, accounting for 75.1%. Overall, central enterprises and local state-owned enterprises play important roles in large, high-value, and key sector mergers and reorganizations, showing a more obvious "few but refined" characteristic. In terms of industry distribution, traditional industry integration remains the main focus of central state-owned enterprise mergers and reorganizations, while mergers and reorganizations in new productive sectors are also accelerating. Both in terms of quantity and scale, central state-owned enterprise mergers and reorganizations in industries such as non-banking finance, utilities, transportation, basic chemicals, and non-ferrous metals are among the forefront. The integration of high-quality assets in traditional industries still dominates, but at the same time, mergers and reorganizations in industries related to new productive forces such as pharmaceuticals, new energy, automobiles, defense, electronics, and computers are also increasing. (2) Types of mergers: Industry mergers and cross-border mergers are advancing simultaneously. This year, central state-owned enterprises have been advancing industry mergers and cross-border mergers simultaneously, with a slightly higher proportion of industry mergers. Observing the first and second-level industries to which the bidding party and the target belong, mergers and reorganizations where the first and second-level industries are the same as well as where the first-level industry is the same but the second-level industry is different are defined as industry mergers, while those with different first and second-level industries are defined as cross-border mergers. So far this year, the proportion of industry mergers by central state-owned enterprises is slightly higher, at about 55%, while the proportion of cross-border mergers is about 45%. Looking at the types of mergers in each industry: The energy, real estate, retail, and consumer services industries have a relatively high proportion of cross-border mergers by central state-owned enterprises. In terms of the distribution of industries targeted for acquisition, one type focuses on integrating resources through mergers and reorganizations of high-quality companies in the upstream and downstream of the industry chain to enhance their core competitiveness, while the other type focuses on new productive sectors, accelerating the layout and cultivation of strategic emerging industries and future industries through mergers and reorganizations, promoting industrial upgrading, and creating a second growth engine. The transportation, finance, food and beverage, durable consumer goods, capital goods, materials, and utilities industries have a higher proportion of industry mergers by central state-owned enterprises. These industries still have room for further consolidation, mainly through industry mergers to improve the industry competition layout and create leading enterprises. New productive sectors such as TMT, pharmaceuticals, and automobiles are also actively promoting industry consolidation and resource integration. (3) Market value characteristics: More mergers and reorganizations of small and medium market value companies, and higher scale of mergers and reorganizations of large market value companies. So far this year, a higher proportion of mergers and reorganizations by central state-owned enterprises are of small and medium market value companies below 50 billion, while the scale of mergers and reorganizations of large market value companies above 500 billion is higher. In central state-owned enterprise mergers and reorganizations this year, companies with a total market value of over 500 billion account for only 14.4% of the total number, but account for 85.6% of the total scale. Looking at the distribution of industries, in industries dominated by central state-owned enterprises such as non-banking finance, banks, transportation, coal, defense, and military industries, mergers and reorganizations led by large market value central state-owned enterprises are more active, with relatively higher proportions of both number and scale, while in industries such as TMT, pharmaceuticals, and power equipment, mergers and reorganizations are mainly led by small and medium market value central state-owned enterprises. (4) Stock price performance: Industry mergers outperform cross-border mergers, with new productive sectors showing the most apparent excess returns. This year, the market is more inclined to give positive pricing to central state-owned enterprises engaged in same-industry mergers or cross-border acquisitions of companies in new productive sectors. Looking at the stock price performance in the 10 trading days after the disclosure of mergers and reorganizations, central state-owned enterprises participating in mergers and reorganizations this year have shown temporary excess returns, with those engaging in same-industry mergers showing the most significant excess returns, while those engaging in cross-border mergers have a weaker performance. However, if the acquisition is for a...New quality production capacity-related targets will also receive positive pricing from the market.From the industry perspective, the excess returns of centrally owned enterprises in new quality productive industries such as computers, machinery, pharmaceuticals, biotechnology, and media are more pronounced after participating in mergers and acquisitions. Additionally, centrally owned enterprises that participate in major mergers and acquisitions events have higher excess returns. When grouped based on the proportion of merger and acquisition sizes to net assets, the median excess returns relative to the industry in the first 10 trading days after the merger and acquisition were significantly higher when the proportion exceeded 40%. Three stock selection strategies for centrally owned enterprise mergers and acquisitions: 1. Injection of unlisted high-quality assets: Injecting high-quality assets that are not listed directly into listed platforms is the most direct way to channel internal high-quality resources of centrally owned enterprises to capital markets. The merging of internal business units with excellent quality and industry differentiation with growth potential into separate listed entities is also recommended. 2. Industry consolidation: Industry consolidation is an important way to improve the efficiency of state-owned capital operation and is the main way for centrally owned enterprises to participate in mergers and acquisitions, especially for those in traditional industries. Focusing on increasing industry concentration and resolving competition issues through mergers and acquisitions in traditional areas such as securities, thermal power, steel, rare earths, ports, and construction can be effective. 3. Cultivation of new quality productive forces: State-owned capital plays a key role in developing and nurturing new quality productive forces. The mergers and acquisitions of centrally owned enterprises in new productive areas have been one of the most focused directions in the market this year. Strategies include investing in and acquiring core technology resources to empower small and medium-sized enterprises, as well as accelerating the layout of strategic emerging industries through mergers and acquisitions. Risk warning: Economic data fluctuations, policy easing below expectations, unexpected cuts by the Federal Reserve, etc.