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Thursday, October 27, 2016, 23:39

HK ‘poised to ride’ on SOE overhaul

By Duan Ting
HK ‘poised to ride’ on SOE overhaul
China Unicom is among the six pilot State-owned enterprises involved in the first round of the overhaul of companies that have been under the direct management and supervision of the central government. The changes to be made under the “6+1” program are aimed at enhancing corporate efficiency. (Kevin Lee / Bloomberg)

Hong Kong’s equity market, notably H shares, is poised for a big shot in the arm, with the much-awaited reform of the Chinese mainland’s State-owned enterprises (SOEs) on track, market experts say.

It has emerged from Beijing that the first round of the reforms, codenamed “6+1” program and aimed at enhancing corporate efficiency, will involve six major companies under the direct management and supervision of the central government, as well as one province.

The SAR’s equity market set for a boost as long-awaited reform of State-owned enterprises gets under way

Market gurus believe that one key component of the overhaul is to give the enterprises more diverse ownership, featuring larger equity stakes by various investors, instead of having them directly owned by the government.

Analysts say the changes will have a far-reaching and positive impact on Hong Kong’s equity market in the long run, and inject fresh impetus into H-share companies in particular.

At a meeting late last month, Liu He, a senior official of the powerful National Development and Reform Commission, revealed that the “6+1” program will initially cover China Eastern Air Holding Co, China Unicom, China Southern Power Grid, Harbin Electric Corporation, China Nuclear E&C Group and China State Shipbuilding Corp, plus Zhejiang province.

“The key point in mixed ownership reform is to improve the profitability of enterprises, but this will depend on how the government is going to pursue the reforms which, undoubtedly, will spur sentiment in the Hong Kong equity market,” remarked Hannah Li Wai-han, a strategist at UOB Kay Hian (Hong Kong) Ltd.

Basically, there are two elements in SOE reform, she told China Daily.

One is mixed ownership reform, which entails further changes to a company’s shareholding structure, the other being asset restructuring, which calls for more changes in a company’s operations, such as its industry and products.

Li explained that in mixed ownership reform, the market harbors high expectations of the participation of private capital in SOEs, rather than just employee stock ownership. The more quickly an enterprise can go through the reform, the more favors it can abstract from it, she said.

Currently, there are only 103 companies under the central government’s supervision following the decision to merge Wuhan Iron and Steel (Group) Corp with the more well-known Shanghai-based Baosteel Group.

Lu Wenjie, an H-share strategist at UBS Securities, however, described the program as “putting new wine into old bottles” as the general direction for SOE reform has already been set.

But, it would really depend on the details of the overhaul policy to determine its effects and see how the stock market could be influenced.

Lu said the latest policy provides for several companies in seven monopolized industries to be included in the experiment. Most of these pilot firms are not leaders in their respective fields and, therefore, are good targets to assess the effectiveness of the reforms.

Among the selected industries, Lu reckoned that the telecommunication business is the current market focus due to the sector’s low valuation and potentially rapid progress in reform.

Generally, he prefers H-share, State-owned enterprise stocks with a low price-to-book ratio and a good balance sheet.

Hong Kong’s benchmark Hang Seng Index continued its losing streak for the fourth straight day on Thursday, giving up 193.08 points, or 0.83 percent, to close at 23,132.35.

The Hang Seng China Enterprises Index sagged 89.94 points, or 0.93 percent, to 9,608.91.

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