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1、,Ben Bei,120,October 25,2012China:Portfolio StrategyCashing in on cash dividendsand share buybacksPortfolio Strategy Research,New guidelines should promote cash dividends and buybacksThe Shanghai Stock Exchange published“Guidelines for Cash DividendDistribution of SSE-listed Companies”in August.The
2、guidelines advocatesignificantly higher cash dividend payout ratios and incentivize sharebuybacks.We expect the guidelines to have a positive impact on cashdividends and share buybacks in the A-share market.,Chenjie Liu+86(10)6627-3324 Beijing Gao Hua Securities Company LimitedHelen Zhu+852-2978-004
3、8,Goldman Sachs(Asia)L.L.C.Firms with sustained,high dividends may generate alpha,Firms paying a high dividend generally outperform the market around theannouncement of a dividend,though the effect is not sustained and isrelated to the market risk appetite.The key is sustaining high dividends.We fou
4、nd that an equal-weighted/market cap-weighted portfolio of stockswith stable and high dividends outperformed the SHCOMP Index by60%/20%since 2008.Our probabilistic choice model indicates that 8areasFCF/earnings,ownership concentration,market cap,ROE,status asa state-owned enterprise(SOE),profitabili
5、ty,demand for refinancing,and atradition of sustained cash dividend paymentscan influence whether afirm maintains stable and high cash dividends.Based on those indicators,we have developed a basket of stocks that could potentiallypay steady and significant dividends and may generate alpha.Stocks typ
6、ically outperform after a repurchase,but the effect fadesThe number of listcos doing share buybacks has increased since thepublication of the new guidelines in August.A stock often outperformsfollowing a buyback,but this momentum tends to subside after 2-3months.We have also put together a basket of
7、 firms that we think are likelyto undertake share buybacks based on P/B,surplus cash,short-term debtpressure,etc.Stocks with stable and high dividends outperformed the SHCOMP IndexStable and high payout ratio listcos basket(market caps-weighted),Timothy Moe,CFA+852-2978-1328 Goldman Sachs(Asia)L.L.C
8、.+852-2978-1220 Goldman Sachs(Asia)L.L.C.,14010080604020,(Jan 1 2008=100),SHCOMP IndexStable and high payout ratio listcos basket(equal-weighted),Jan-08,Jan-09,Jan-10,Jan-11,Jan-12,Source:Wind,Gao Hua Securities Research,Goldman Sachs Global ECS Research.Goldman Sachs does and seeks to do business w
9、ith companies covered in its research reports.As a result,investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in making their investment decision.For Reg AC certification
10、and otherimportant disclosures,see the Disclosure Appendix,or go to Analysts employed bynon-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.,The Goldman Sachs Group,Inc.,Goldman Sachs,2,October 25,2012,China,Firms with sustained and high cash dividends can outpe
11、rformThis report aims to discuss the“Guidelines for Cash Dividend Distribution of SSE-listed Companies(Draft Version)”(referred to below as the“Guidelines”)issued bythe Shanghai Stock Exchange(SSE)on August 16.The guidelines discuss potentialinvestment opportunities by advocating cash dividends and
12、encouraging sharebuyback.These guidelines introduce five new principles:(1)advocate significantly higher cashdividend payout ratios;(2)raise the threshold for obtaining favorable refinancing termsrelated to cash dividends;(3)standardize policies for four types of cash dividends;(4)incentivize share
13、buybacks;and(5)create an index of firms with strong cash dividends.Webelieve that the new guidelines encourage firms to distribute cash dividends,strengthenpolicies incentivizing investors to pay attention to the value of their investments,and willhave a positive influence on A-share dividends and s
14、hare buybacks.Characteristics of A-share market cash dividends and dividend-paying firms.Listed A-share firms dividend payout ratio and yield have risen over the last few years.At the sametime,the number of firms that are paying dividends has grown to 68%in 2011 from 65%in2000.However,the number of
15、companies with a dividend payout ratio(cashdividend/earnings)over 30%and a dividend yield of over 3%remains low.Companies withhigh cash flow,concentrated ownership,and average market cap and ROE are more likelyto pay cash dividends.In addition,state-owned enterprises(SOE)also tend to pay cashdividen
16、ds.Firms that plan to refinance in a coming year are more likely to pay cashdividends for the CSRC,which has made a connection between refinancing and cashdividends,thus benefiting firms that had paid cash dividends in the previous year torefinance.In absolute terms,the capital goods,IT,chemical,hea
17、lth care,and food following an A-share repurchasestocks generally outperform the market,though this momentum then fades.Since 2000,there have only been 71 A-share buybacks,but there have already been 7 since theguidelines were announced in August.Companies generally outperform the marketimmediately
18、following a buyback,but this momentum tends to subside after 2-3 months.We put together a portfolio of firms that we think are likely to undertake an A-sharebuyback based on factors including P/B ratio1,cash availability,short-term debtrepayment pressure,trading volume,and P/E valuation.Goldman Sach
19、s Global Economics,Commodities and Strategy Research,3,October 25,2012,China,Five principles introduced in new dividend guidelinesOn August 16,the Shanghai Stock Exchange(SSE)announced“Guidelines for CashDividend Distribution of SSE-listed Companies(Draft Version),”opening a period of publiccomment;
20、the law is expected to go into effect on January 1,2013.At the same time,therehave been repeated media reports of a policy that would lower taxes on dividends(SINA.com).This announcement from the SSE is a detailed realization of the ideas raisedby China Securities Regulatory Commission(CSRC)chairman
21、 Guo Shuqing in his 2011speech on“defining dividend ratios,and increasing listed companies returns toshareholders.”In an environment where the A-share market has remained volatile,themarket expects the progressive regularization of dividend payouts to help foster a conceptof value investing,increase
22、 stability of listed companies,and encourage investors to focusmore on firms fundamentals.The new cash dividend law will have five key principlesIt advocates significantly increasing the cash dividend payout ratio.Theguidelines require listed companies to pay out over 30%of net profits as cashdivide
23、nds in years of positive earnings.If they fail to do so,companies would haveto publish detailed disclosure of the reasons.Prior regulations(2008s“Decisionon modifying provisions of the listed company dividend,”CSRC)required totalcash dividends over the previous three years to be no less than 30%of a
24、verageannual profits.The new guidelines significantly increase the dividend requirement.It raises the threshold for companies to obtain favorable refinancing termsrelating to cash dividends.The new policy allows a company to enter a refinancingand M and(3)a definite cash derivative policy allowing i
25、nvestors to reasonablyevaluate the sustainability of the first two requirements.The new cash dividend policy has already begun to have an effect.On September 27,theCSRC held a press conference at which those in charge of the relevant departments saidthat the supervisory bodies and the Shenzhen and S
26、hanghai exchanges were activelyworking to implement the new dividend policy.By mid-2012,100 companies planned toissue dividends,+85.2%yoy.In fact,since the CSRC released its“Announcement ofmeasures to further implement listed company cash dividends”in May,relevant CSRCGoldman Sachs Global Economics,
27、Commodities and Strategy Research,1996,1999,2001,2004,2006,2008,2011,2012,4,October 25,2012,China,departments have sent letters of concern to 40 companies that have not issued dividendsover a significant period of time.In addition,the CSRC has ordered companies that it foundin violation of the divid
28、end rules during its special investigation of cash dividend policy torectify the situation,send explanatory letters,and take other measures as appropriate.The new cash dividend policy is an external influence on companies cash dividends,andwe expect it will have a positive effect in the long term.We
29、 believe that whether a firmpays a cash dividend is fundamentally its own choice.Internally,whether a firm pays adividend is related to its earnings,cash flow,shareholder structure,reinvestment spendingplan,etc.External factors include the policy orientation of supervisory bodies,modelingeffects fro
30、m other firms,and public opinion.The new policy is an external influence,andwe expect it will have a positive effect on listed A-share firms decision to pay dividends totheir shareholders.Exhibit 1:Overview of cash dividend policies:Gradually raising cash dividend requirementsA History of China Secu
31、rities Regulatory Commissions Policies on Cash Dividends,Date,Document or SpeechSome Issues with theRegulation of Listed FirmsSome Issues with RightsOfferings by Listed Firms,Key ContentChanged the requirement for firms applying for a rights issue from anaverage net ROE in excess of 10%in the past t
32、hree years to a net ROEannually of 10%or higher in the past three years.To be qualified to make a rights offering,a listed firm must have 3-yearaverage ROE of at least 10%,with a minimum of 6%in any given year.,CommentsCash dividends can help a firm whose net ROE isclose to 10%to make the cutoff.Fir
33、ms with significant net assets could use cashdividends to raise their ROE.,When a listed firm applies for refinancing,if it has not paid dividends in,Management of New EquityIssues by Listed Firms(alreadyrevoked)Regulations to StrengthenProtection of the Interests ofRetail InvestorsManagement of Sec
34、uritiesIssues by Listed FirmsRevisions of Regulations forCash Dividends by Listed FirmsSpeech by the director of theCSRCCash Dividend Guidelines forFirms Listed on the ShanghaiStock Exchange(Draft forCommenting),the past three years,and the board of directors has not given areasonable explanation wh
35、y,then the securities firm serving as the leadunderwriter shall give extra scrutiny to the situation and give anexplanation in the due diligence report.Listed firms that have not paid cash dividends in three years cannot issueadditional shares or convertible corporate bonds to retail investors orpla
36、ce additional shares with original shareholders.One of the Conditions for an Public Offering:Cumulative profitsdistributed as cash or stock dividends over the past three years cannotless than 20%over the average distributable profits realized over the pastthree years.1.The firm shall have a clear ca
37、sh dividends policy;2.Listed firms canimplement mid-cycle cash dividends;3.Cumulative profits distributed ascash dividends over the past three years cannot be less than 30%of theaverage distributable profits realized over the past three years;4.Firmsthat were profitable during a reporting period but
38、 have not proposedplans for a cash dividend shall make a detailed explanation of why theydo not plan a dividend and how the retained earnings will be used.Emphasized that dividend ratios should be made explicit and that listedfirms should deliver greater returns to shareholders.1.Encourages annual d
39、ividend ratios of 30%or higher;2.Firms withdividend ratios of 50%or higher may receive faster service whenrefinancing or for M&As.,The first time dividends and refinancing wereconnected.Made a direct connection between dividends andrefinancing for listed firms.The first time that public offerings an
40、d dividendswere connected.Strengthened regulation of cash dividends andraised the dividend ratio to 30%of averagedistributable profits over the past three years.Policy encouraging listed firms to increase theirdividend ratios could be imminentFurther increased and institutionalized cashdividends at
41、listed firms.,Source:CSRC,Gao Hua Securities Research,Goldman Sachs Global ECS Research.Goldman Sachs Global Economics,Commodities and Strategy Research,5,October 25,2012,China,The current state of A-share cash dividendsThe dividend payout ratio and dividend yield of A-share firms have risen in rece
42、ntyears.At the same time,the number of firms paying dividends has increased to 68%in 2011 from 65%in 2000.However,the number of firms with dividend payout ratios(cash dividends/profits)above 30%and dividend yields above 3%remains low.Investors of firms listed on the SME board and GEM board pay close
43、 attention to cashdividends.Firms with strong cash flow and high ownership concentration,averagemarket cap,and ROE are more likely to pay cash dividends.State-owned firms andfirms planning to refinance in the following years are also more likely to pay cashdividends.When broken down by sector,insura
44、nce,banking,infrastructure,petroleum,telecoms,and public utilities are more inclined to pay cash dividends.Inabsolute terms,firms in the capital goods,IT,chemicals,healthcare,and food&beverage sectors pay cash dividends.The proportion of firms paying cash dividends has increased,butthose with both h
45、igh payout ratios and yields remain lowThe proportion of A-share firms paying cash dividends is gradually increasing.In 2000,about 65%of A-share firms paid cash dividends(Exhibit 2).However,some of those firmswere forced to pay those dividends in order to comply with the CSRCs requirements onROE for
46、 refinancing(Lu Changjiang,An Empirical Analysis of Listed Firms DividendPolicies,Economic Research Journal,2000).After 2001,the CSRC relaxed some of itspolicies requiring compulsory payments of cash dividends(Exhibit 1).At the same time,the number of listed firms continued to increase,resulting in
47、a gradual decline in theproportion of firms paying cash dividends.The proportion of firms paying cash dividendsbegan to increase again after 2005,reaching 68%in 2011,driven by a new series of policiesdesigned to encourage cash dividends(Exhibit 1).However,dividend payout ratios and dividend yields r
48、emain low,leaving room forimprovement.The collective dividend payout ratio(cash dividends/profits)of A-share firmshas increased marginally,but the share of companies paying out more than 30%remainslow.The collective dividend yield has also increased,but the proportion of firms paying outmore than 3%
49、is still quite small(Exhibits 3-7).Firms on the SME/GEM boards focus more on cash dividends.The faster-growing firmslisted on the SME/GEM boards,as a whole and in terms of dividend payout ratio and theproportion of firms paying dividends,slightly outperform firms comprising the CSI 300index.This wou
50、ld imply that investors in SME/GEM firms focus more on convertingcorporate profits into personal income via cash dividends(Exhibits 8-10).Characteristics of listcos paying cash dividendsFirms with excess free cash flow are more likely to pay cash dividends.We find that thehigher a firms free cash fl
