“Around half of the 5,000 companies in our [China A-shares] universe have pre-announced their annual results. Based on the bottom-up analysis underpinning our proprietary FCFF framework, we believe that fundamentals are reaching the trough, and our hopes of a recovery are rising,” Value Partners says.
A second major reason to consider China A-shares is the mainland’s version of Japan and Korea’s “value up” programme which was announced last year as part of the government’s stimulus and in January.
A refinancing policy by the People’s Bank of China (PBoC) as part of the government’s stimulus package last year provides listed companies and their largest shareholders with a lending facility to be used to buy back shares on the open market. The current quota is RMB500 billion.
The facility allows companies with good cashflow and high dividend yields to undertake a carry trade where the company borrows at 2% from the PBOC’s facility, and then receive a dividend of 3% or 4%. “The policy offers a healthy arbitrage for companies with sustainable, quality dividends and their institutional shareholders. We expect that there will be incremental capital flowing into stocks with higher and stable dividend yields. This is likely to promote re-rating opportunities for quality dividend-paying companies,” Value Partners suggests.
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Secondly, in January, the CSRC announced measures to encourage long-term funds into the equity market. For instance, insurance firms are required to invest at least 30% of their new-premium income into the stock market. “Given the inherently conservative nature of the insurance industry, most of these inflows are expected to be directed into high-quality, high-dividend stocks,” Value Partners reckons.
The third is to encourage people with private pension plans through a tax incentive to invest in high-quality stocks. Value Partners believes that dividend stocks are likely to benefit here as well.
