As Beijing pushes for cash return, Chinese firms can unlock 15% valuation boost: report

Chinese companies could unlock a further 15 per cent in equity valuation upside by stepping up share buy-backs and dividend payouts, as Beijing seeks to encourage listed firms to return more cash to investors, according to Goldman Sachs.

The US investment bank said in a report on Wednesday that an increase in corporate payout ratios and share repurchases, in line with policymakers’ efforts to improve shareholder returns, could lift valuations of the MSCI China Index by about 15 per cent from current levels through improved returns on equity and cash distributions to shareholders.

Goldman said Chinese companies had historically favoured issuing new shares over buying them back, with equity issuance outpacing repurchases for most of the past two decades.

The resulting net share issuance had diluted earnings per share by about 15 per cent cumulatively, weighing on shareholder returns, according to the report.

The imbalance has persisted alongside deteriorating corporate profitability. Return on equity among Chinese listed companies had declined for six consecutive years, while realised earnings per share growth had fallen short of market expectations for nine years in a row, the bank said.

Chinese equities had underperformed global markets by 110 percentage points since 2020, reflecting subdued earnings growth and a sharp contraction in valuations, according to the bank. The MSCI China Index’s price-to-earnings ratio has fallen to 9.7 times from 17 times at its previous cycle peak in early 2021.

The report came as Chinese regulators earlier this month sought to encourage companies to buy back shares and support the stock market amid sluggish corporate profitability and weak investor confidence, including lowering the interest rate on a central bank relending programme by 25 basis points to 1 per cent and removing some restrictions on share buy-backs.

On the mainland, the CSI 300 Index slumped 8.5 per cent last month, its biggest monthly decline in more than a decade, while the Shanghai Composite Index dropped 6.3 per cent.

Goldman expected Chinese companies to deliver annualised earnings-per-share growth of about 10 per cent and a normalised return on equity of 12 per cent over the next five years, supported by artificial intelligence, a trend of “going global” and policies aimed at curbing excessive competition.

The bank also saw scope for a valuation re-rating of about 10 per cent as corporate profitability normalises, even without the additional boost from higher shareholder payouts.