After yet another big tumble in the A-share market, Chinese stocks look like a good trade for 2013. But appearances can be deceptive.
“Share price valuations may be cheap but their dividend payout is relatively low,” said Edward Huang, strategist at Haitong Securities International. “A low dividend payout ratio of around 30% doesn’t make the low valuation attractive.”
China’s equity markets have long favoured issuers over investors, with little transparency and a poor track record of dividend payments. Many of the more than 2,000 A-share companies do not pay dividends on a regular basis, or have never shared earnings with investors at all.
Chinese investors call such companies “iron roosters” — because they refuse to give up their feathers. The growing number of these iron roosters is reckoned to be one of the key reasons for the loss of interest in the A-share market.
“Domestic listed companies need to increase their dividend payments to at least 50% to keep investors’ interest,” said Huang. “In Hong Kong, listed companies generally share about 50% to 60% of their profits with shareholders.”
He added: “There are many wealth-management products offering attractive investment returns. The current market condition doesn’t encourage investors even to hold their shares, let alone investing further.”
Huang noted that retail investors make up more than 80% of market turnover, and tend to focus more on short-term speculation rather than long-term capital gains.
China’s stock exchange officials have also noted the problem. Huang Hongyuan, president of Shanghai Stock Exchange, said at a financial forum in Shenzhen last Sunday that the dividend payment system affected A-share valuations.
“In recent years, companies have become more enthusiastic to share their earnings, but the overall dividend payout is still unstable and unpredictable,” Huang said.
According to data from the China Securities Regulatory Commission, there are more than 800 issuers waiting in the IPO pipeline — about a third of the number of companies that are currently listed on the A-share market.
Many are only planning to raise small amounts, and some are pursuing alternative fund-raising channels, but the potential influx of new equities is weighing on demand.
The Shanghai Composite Index fell to below 2,000 points last week, the lowest level since 2009, despite the recent spate of positive economic news in China.
Expectations of a market rebound have been mounting since the end of last year, but share prices have continued falling.
Even so, some analysts are now predicting an improvement. Goldman Sachs estimated that earnings per share in the A-share market will grow by 9% in 2013 and 11% in 2014.
Timothy Moe, chief Asia-Pacific strategist at Goldman, said it is common for listed companies in immature markets to pay lower dividends.
“If investors are very confident in a company, it doesn’t matter if it pays dividends. Shanghai stocks have had strong rallies in the past, when many companies didn’t pay dividends at all.”
