Ping An Securities: Policies have been released one after another to form a resonant proposal layout around the three major directions

The Zhitong Finance App learned that Ping An Securities released a research report saying that on August 27, the China Securities Regulatory Commission further implemented the active capital market policy. Macroeconomic policies and capital market policies work together to help the market bottom up. The bank believes that after the Politburo meeting, policies were released one after another to form a resonance, and the effects of the policy are expected to gradually become apparent. The equity market is expected to bottom out after experiencing sufficient risk release. The proposed layout revolves around the three major directions of fundamental benefits (real estate/non-banking), rising dividend premiums (bank/energy), and benefiting from reduced holdings (science and technology innovation board/growth TMT).

Incident: On August 27, the China Securities Regulatory Commission further implemented the active capital market policy. The first is to coordinate the balance and optimization of IPO and refinancing supervision arrangements in the primary and secondary markets; the second is to further regulate share holdings reduction; and the third is to reduce the financing guarantee ratio to support moderate financing needs. Meanwhile, the Ministry of Finance and the State Administration of Taxation issued the “Notice on Halving the Collection of Stamp Duty on Securities Transactions”. In order to revitalize the capital market and boost investor confidence, it was decided to halve the collection of stamp duty on securities transactions starting August 28, 2023.

Ping An Securities's main views are as follows:

Policy background: Policy resonance strengthened after the Politburo meeting. On July 24, the Politburo meeting mentioned “it is necessary to activate the capital market and boost investor confidence”, and the Securities Regulatory Commission made optimal adjustments to a series of capital market policies. On August 18, “Relevant Officials of the Securities Regulatory Commission Answer Reporters' Questions on Activating the Capital Market and Boosting Investor Confidence” detailed a package of specific policy measures on the financing side, transaction side, and investment side to boost investor confidence. The implementation of subsequent policies is still worth looking forward to. On the other hand, macroeconomic policies also continued to gain strength after the Politburo meeting. Policies such as optimizing real estate policies (optimizing purchase restriction policies in various regions, adjusting stock interest rates, not accepting loans, etc.), mitigating local debt risks, and MLF interest rate cuts continued to be implemented to jointly increase support for the real economy.

Policy impact: Macroeconomic policies and capital market policies work together to help the market bottom up and recover. The bank believes that after the Politburo meeting, policies were released one after another to form a resonance, and the effects of the policy are expected to gradually become apparent. The equity market is expected to bottom out after experiencing sufficient risk release. The proposed layout revolves around the three major directions of fundamental benefits (real estate/non-banking), rising dividend premiums (bank/energy), and benefiting from reduced holdings (science and technology innovation board/growth TMT).

Policy priority 1: Stamp duty reduced by half. Stamp duty was specifically mentioned in an article issued by the Securities Regulatory Commission. “The bank has taken note of the market's appeals and concerns about reducing the stamp duty rate for securities transactions. Judging from the historical situation, the adjustment of stamp duty on securities transactions has played a positive role in reducing transaction costs, stimulating market transactions, and reflecting the inclusive effect. It is recommended to check with the competent authorities about the specific situation.” The smooth implementation of stamp duty once again shows the height and strength of the policy. This is the first time since 2008 that the stamp duty on securities transactions has been adjusted in China. It has been adjusted from a one-sided rate cut in half to 15,000. Judging from past historical experience, the reduction in stamp duty has indeed catalyzed the short-term market.

Policy focus 2: Optimizing the balance of investment and financing, the phased slowdown of IPOs, and the strengthening of refinancing regulations, but real estate is not affected. The balance of investment and financing was a major priority in the previous document issued by the Securities Regulatory Commission. On the one hand, it stated that it is necessary to fully consider the dynamic and positive balance between investment and financing, and establish a “green channel” for listing and financing, bond issuance, mergers and acquisitions and restructuring of technology-based enterprises that break through key core technologies; on the other hand, deepen market-based reforms of mergers, acquisitions, restructuring, and appropriately increase the inclusiveness of asset-light technology-based enterprise restructuring, and push central enterprises to increase the integration of mergers, acquisitions, and restructuring of listed companies.

The implementation direction was further clarified in this round of policies. One is to gradually tighten the pace of IPOs; the second is to implement a pre-communication mechanism for large-scale refinancing of listed companies in the financial industry or listed companies with large market capitalization in other industries; and third, restrictions are placed on the refinancing of listed companies with breakouts, bankruptcy, continuous loss in operating performance, and high financial investment ratios (but it is particularly clear that the real estate industry is not affected). Funding restrictions have been reflected in recent practice. As of August 25, there were zero IPOs declared on the Shanghai and Shenzhen Exchange in July-August; as of August 25, 33 refinancing projects had been terminated in the Shanghai and Shenzhen markets, while 21 refinancing projects were terminated throughout the year last year.

Policy key point 3: The reduction of holdings is linked to dividends. The Securities Regulatory Commission further clarified that if a listed company has a bankruptcy or liquidation situation, or if no cash dividends have been paid in the last three years, and the cumulative cash dividend amount is less than 30% of the average annual net profit for the last three years, the controlling shareholder or actual controller shall not reduce the company's shares through the secondary market. There are more restrictions on dividends in the holdings reduction conditions. As of August 27, 2023, the number of listed companies that have not paid cash dividends in the last three years reached 1,075, and the cumulative amount of cash dividends is 30% lower than the average annual net profit of the last three years to 1,337. Furthermore, in 2023, a total of 1985 listed companies reduced their A-share holdings, with a total reduction of 346.8 billion yuan.

Policy key point 4: Reduce the financing guarantee ratio. The Shanghai Stock Exchange, Shenzhen Stock Exchange, and Beijing Stock Exchange issued a notice to revise the “Implementation Rules on Securities Financing Transactions” to reduce the minimum financing deposit ratio for investors to buy securities from 100% to 80%. This adjustment will be implemented after the market closes on September 8, 2023. As of August 24, 2023, the balance of on-market financing and securities lending was 1567.8 billion yuan. The margin ratio remained high, and the overall risk of the business was manageable. On the basis that leverage risk is generally manageable, moderately relaxing the financing guarantee ratio is conducive to promoting the functioning of the financing and securities lending business and revitalizing existing capital.

The bank believes that the implementation of the active capital market policy is still worth looking forward to. In “Relevant Officials of the Securities Regulatory Commission Answer Reporters' Questions on Invigorating the Capital Market and Boosting Investor Confidence” on August 18. First, on the financing side, it favors key core technology and technology-based enterprises, and increases incentives for listed companies to pay dividends and repurchases. Second, transaction side costs have been further reduced and convenience has been increased, such as increasing derivative investment instruments and increasing transaction time. Third, the investment side has further increased the attractiveness of capital, making it clear that insufficient capital in the medium to long term is still a prominent problem limiting the healthy development of the capital market. On the one hand, it is proposed to vigorously develop equity funds, especially index fund products. On the other hand, it is necessary to increase the investment ratio of various types of medium- and long-term capital. On August 24, Chairman Yi Huiman held a symposium with institutional investors to work together to resolve institutional barriers to medium- and long-term capital entry into the market, and worked with relevant departments to ease investment ratio restrictions on stocks such as insurance funds and pension funds, injecting fresh water into the high-quality development of the capital market.

Taken together, the bank believes that strong policy resonance will reverse the market decline, and the A-share market has bottomed out and rebounded. The proposed layout revolves around the three major directions of fundamental benefits (real estate/non-banking), rising dividend premiums (banks/energy), and benefits from reduced holdings (science and technology innovation board/growth TMT). The bottom characteristics of the A-share market were further strengthened last week. The historical valuation score was at the bottom of 20%-30%. The equity and bond yield ratio also showed a further strengthening of attractiveness, which ushered in upward momentum due to strong policy resonance. In terms of the impact of active capital markets, there are three main beneficiary lines.

First, fundamentals directly benefit real estate companies that resonate with policies, “the refinancing of listed real estate companies is not restricted by breakouts, breakdowns, or losses”, and the non-bank sector directly benefiting from active capital markets;

Second, industries and enterprises benefiting from rising dividend premiums under capital market reforms. In 2022, industries with high concentrations of central state-owned enterprises, such as banking, petroleum and petrochemicals, coal, communications, transportation, and non-bank finance, will have larger dividends;

Third, growth sectors that benefit from limited holdings reduction and a positive long-term direction, especially sectors represented by science and technology innovation boards and growth sectors dominated by AI styles. Furthermore, in the medium term, the bank is still optimistic about enterprises in the energy, chemical, and non-ferrous minerals sectors that benefit from the mergers, acquisitions and restructuring policies of central enterprises with supply-side policy changes.

Risk warning: 1) macroeconomic recovery falls short of expectations; 2) financial supervision policies have been tightened beyond expectations; 3) fluctuations in overseas capital markets have increased.