On November 12, Liu He, a member of the Political Bureau of the CPC Central Committee, vice premier of the State Council and head of the leading group of SOEs reform of the State Council, presided over the third meeting of the leading group of SOEs reform of the State Council and delivered a speech, www.gov.cn reported. 

At this meeting, the spirit of the Fourth Plenary Session of the 19th CPC Central Committee was conveyed and studied, and the following tasks of SOEs reform were also studied and deployed. 

The market players anticipate that the reform of state-owned enterprises will speed up in an all-round way. In response to this news, the SOEs reform index moved higher in the afternoon, and rose by 0.09% by the end of the day, up 1.31% in the whole day. 

Liu He: Efforts should be made to develop the three-year action plan for the SOEs reform. 

Liu He said at the meeting that the next three years are a critical historical stage and we should do a good job in the top-level design of SOEs reform, study and formulate the three-year action plan for the SOEs reform, and clearly put forward the reform objectives, schedule and roadmap. 

The meeting also urged to propose clear tasks and measures, and quantitative and assessable specific indicators in key areas and key links, such as promoting the reform of mixed ownership, strengthening the regulation of state-owned enterprises and state-owned assets, enhancing R&D and innovation capabilities, strengthening rigid financial constraints, cutting down and regulating subsidies, improving incentive mechanisms, and improving labor productivity and capital return. 

Policies of mixed-ownership reform of central enterprises are implemented in batches. 

The SASAC delegated its examination and approval authority for the mixed-ownership reform of central enterprises. 

Since this year, the policies of mixed-ownership reform of central enterprises have been carried out in batches. 

Recently, the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council issued the Guidelines for the mixed-ownership reform of central enterprises (the Guidelines for short below). These Guidelines clarified the basic operation process, explained the relevant regulations, working procedures and key concerns of the asset audit and evaluation in the process of "hybrid capital" and the implementation of the mixed-ownership reform of central enterprises through the equity and stock markets, made clear the main contents to transform the corporate operation mechanism  and detailed the major contents, relevant regulations and guidelines. 

According to these Guidelines, after the formulation of the mixed ownership reform plan, central enterprises should implement the internal decision-making procedures in line with the "Three Importance and One Greatness" decision-making mechanism. In other words, If the planned enterprises in the mixed-ownership reform of central enterprises are subsidiaries to undertake major special tasks whose main business belongs to any important industry and key field related to national security and national economy, their mixed ownership reform plan shall be submitted to the SASAC for examination and approval after reviewed by the state-owned enterprise. In case of need to be submitted to the State Council for examination and approval, the SASAC shall perform the corresponding procedures in accordance with the relevant laws, administrative regulations and documents of the State Council. If the planned enterprises in the mixed-ownership reform of central enterprises are subsidiaries with other functional orientation, their mixed ownership reform plan shall be approved by the state-owned enterprise. 

This means that the SASAC delegates its examination and approval authority of the mixed ownership reform plan of some enterprises affiliated to central enterprises to the group company and the examination and approval of the SASAC is not required. 

Relax equity incentives for listed companies controlled by central enterprises. 

The performance evaluation becomes more resilient. 

State-owned enterprises are anticipated to have increased equity incentive willingness. 

In order to comply with the Guidelines for the Mixed-ownership Reform of Central Enterprises, the SASAC issued the Notice on Further Improving the Equity Incentive Work of Listed Companies Controlled by Central Enterprises on November 11. 

Zhou Lisa, a researcher at the Research Center of the SASAC, told the reporter of Securities Times that the introduction of the document would scale up incentives and broaden authorization, and as a result will actively promote listed companies to carry out equity incentives. 

The Notice intensifies the positive incentive orientation from three aspects. 

First, the proportion of the number of grants should be increased, the number of shares granted by the equity incentive plan of listed technology innovation companies for the first time increased to 3% from 1% of the total equity, and the cumulative number of grants increased to 5% in two full years for listed companies with special needs such as major strategic transformation. 

Second, the equity grant value should be raised and the proportion of equity incentive value of directors and senior managers to 40% of the total compensation at the time of grant. 

Third, the actual income of equity incentive objects will not be put under regulation. 

At the same time, the Notice stipulates that, in addition to overall listed companies of their main business, the SASAC will no longer examine and approve the phased implementation plan of equity incentive. The phased implementation plan formulated by the listed company in accordance with the equity incentive plan shall be submitted by the controlling shareholders of the state-owned enterprise to the group company of the central enterprise prior to review and determination of the Board of Directors. 

This means that the SASAC only reviews the overall equity incentive plan and that the phased implementation plan will be reviewed and approved by the group company of the central enterprise. 

Huatai strategic team believes that this move will help raise the willingness of state-owned enterprises to implement equity incentive, and that the implementation of equity incentive will help state-owned enterprises to establish long-term development goals. 

State-owned enterprises of science and technology innovation are expected to take on important missions. 

According to the Notice, in order to encourage central enterprise-holding listed companies in the Sci-Tech Innovation Board to implement equity incentive, the Notice almost completely follows the listing rules of the Sci-Tech Innovation Board, allows to incorporate core talents holding more than 5% shares to be included in the incentive, supports listed companies that have not yet made profits to implement equity incentive, and permits the grant price of restricted shares to be lower than 50% of the fair market price. 

At the same time, in order to safeguard the rights and interests of shareholders and prevent the loss of state-owned assets, the Notice advanced supplementary requirements for two special circumstances. 

First, when the grant price of restricted shares is lower than 50% of the fair market price, the unlocking period of shares shall be properly extended. 

Second, when listed companies that have not yet made profits implement equity incentive, corresponding restrictive rules shall be made in terms of the share grant price and the effective proportion of equity, etc. 

According to the Report on High-quality Development of Central Enterprises issued by the Research Center of the SASAC on November 2, traditional industries account for more than emerging industries in the income structure of state-owned enterprises in China. 

At present, 92 listed companies held by 45 central enterprises have implemented equity incentive plans, accounting for 22.8% of listed companies held by central enterprises at home and abroad. These enterprises are mainly engaged in strategic emerging industries such as communication and information technology, medicine, machinery, military industry and energy. 

Huatai strategic team believes that in the future, through a range of modern enterprise system reforms such as equity incentive, state-owned enterprises of science and technology innovation are expected to take on important missions such as independent control and technology upgrading in this round of science and technology cycle. With well-designed incentive mechanism, the research and development strength of state-owned enterprises of science and technology is expected to be improved and growth potential to be created for these enterprises. 

Some shares of enterprises after the SOEs reform have stepped out of the "secular bull trend". 

According to data released by the SASAC, since the 18th National Congress of the CPC, central enterprises have reformed over 3,700 items of mixed ownership and introduced more than RMB1 trillion of non-public capital. Besides, the number of mixed ownership enterprises accounts for more than 70%, up nearly 20% compared with that at the end of 2012. 65% of the total assets of central enterprises have been acquired by listed companies, and 61% of the operating revenue and 88% of the total profits come from listed companies. 

Amongst others, many shares after SOEs reform have been the first to benefit and stepped out of the "secular bull trend". 

As the first share of the SOEs reform in Shanxi Province, Shanxi Fen Wine has risen 170% this year and has its total market value go beyond RMB80 billion. 

In 2017, Shanxi Fen Wine seized the initiative of the SOEs reform in Shanxi Province, took the lead in completing the reform, and concluded a three-year operation goal with the State-owned Assets Supervision and Administration Commission of Shan Xi Provincial Government. 

According to Shanxi Fen Wine's report of Q3 2019, it finished the sales target of 10 million ahead of schedule. 

According to data, the company achieved revenue of RMB9.127 billion in the first three quarters, up 25.72% year on year; achieved a net profit of RMB1.696 billion, an increase of 33.36% on a year-on-year basis. 

Among them, the net profit index has reached the target that "by the end of 2019, the total profit of alcohol of the group will reach RMB1.638 billion" proposed in the Letter of Responsibility for Assessment of Three-year Term Business Objectives.  Its revenue got quite close to the target of "wine revenue reaching RMB10.374 billion". 

At the same time, the share price of Shanxi Fen Wine has increased by nearly 300% in three years. 

Shengyi Technology, a leading share in Dongguan's local SOEs reform, has its share price rise by nearly 400% in four years after the SOEs reform in 2015. 

Further, CSSC, which took the initiative in the SOEs reform in 2019, has its shared increase by nearly 100% this year. Changchun High & New Technology Industries (Group) Inc., once the leading share of the SOEs reform, has its share rise by nearly 200% this year. Many listed companies that have completed the SOEs reform have gradually stepped out of the "secular bull trend". 

Source | www.chnfund.com