China's Stock-Market King Reveals Some Trade Secretsby
Annual reports shed light on China Securities Finance Corp.
State rescue fund prefers banks, SOEs, consumer companies
In China’s financial circles, they call it the King -- a state-run investing behemoth with unmatched power to move the world’s second-largest stock market.
Its tactics, shrouded in mystery since authorities armed the agency with more than $480 billion last summer, have been the subject of fierce speculation among copycat investors and short sellers alike. Now, thanks to mandatory shareholder disclosures in hundreds of Chinese companies’ annual reports, the clearest picture yet of China Securities Finance Corp. -- as the King is officially known -- is coming into view.
The filings suggest CSF’s nickname is more than just hype. The agency is a top 10 shareholder in more than 600 companies, including almost all of China’s Inc.’s biggest names. It favors banks, state-owned enterprises and consumer firms that dominate benchmark indexes, while shunning small-cap stocks with less market impact. It’s a disciplined investor, too, targeting firms with above-average profitability and limiting its holdings in any one company to about 3 percent of the shares outstanding.
“It can give you a little bit more insight into what the government strategy is," said Pauline Dan, head of Greater China equities at Pictet Asset Management in Hong Kong, which oversees about $159 billion worldwide. “They’re not exactly very forthcoming with disclosure or what they’re going to do."
Given CSF’s firepower, knowing which stocks it favors has become a big focus of local investors seeking a tailwind from state buying. Bearish traders, meanwhile, are trying to avoid betting against the agency, which became the government’s main tool for supporting share prices after China’s $5 trillion market crash last summer. The Shanghai Composite Index has rallied 16 percent from a one-year low in January, helped along by state purchases and speculation that economic growth is stabilizing. It rose 0.5 percent at the close on Thursday.
"Investors keenly watch the CSF’s changing positions and guess when and what it may be buying or selling," said Ronald Wan, chief executive at Partners Capital International in Hong Kong. "The state fund has a double mission: to support the market and to make a profit."
Unsurprisingly, CSF’s biggest holdings are in financial companies, whose heavy weightings in benchmark indexes make them prime candidates for government campaigns to prop up the $6 trillion market. Lenders including Industrial & Commercial Bank of China Ltd. and Agricultural Bank of China Ltd. comprised eight of CSF’s 10 largest positions at the end of December, according to data compiled from about 1,500 annual reports released by Chinese companies so far.
More than 80 percent of CSF’s 100 biggest holdings are state-owned enterprises, including CRRC Corp., a maker of high-speed trains. The agency is also warming to consumer-oriented companies, which accounted for nearly half of its 29 disclosed stake increases during the fourth quarter. CSF held 2.6 percent of Kweichow Moutai Co., the distiller of fiery liquor, at the end of December and 3.1 percent of Inner Mongolia Yili Industrial Group Co., one of the country’s biggest dairy producers.
While CSF has remained silent on its strategy, its managers do appear to care about the financial performance of their investments. The agency’s top 100 holdings, which account for more than 70 percent of its disclosed portfolio value, have a median return on equity of 15 percent, double that of the overall market.
Valuations seem to matter, too. CSF doesn’t show up as a top 10 holder of small-cap firms in the ChiNext index, which has a price-to-earnings ratio four times higher than that of the Shanghai Composite. (Some smaller funds associated with CSF, however, have appeared as major ChiNext stakeholders.)
Other details on CSF are coming to light in Chinese media. The agency, which was originally formed to provide margin trading and securities lending services to brokerages, doubled its earnings and revenue in 2015, the government-owned 21st Century Business Herald reported on Wednesday, without saying where it got the information.
CSF has been transferring some of its shares to other state-controlled entities as partial repayment for loans, China Business News said this week, which may help explain why the agency’s reported holdings in corporate filings fell by about 65 billion yuan in the fourth quarter to 550 billion yuan. That figure likely understates the size of its total portfolio because it excludes stocks where CSF owns a stake, but isn’t a top 10 shareholder. A Beijing-based spokesman at CSF declined to comment.
Investing in CSF’s favorite stocks doesn’t always pay off. Chinese banks, for example, have gained just 0.7 percent on average in mainland trading over the past three months, trailing the Shanghai Composite by more than 3 percentage points. The ChiNext, meanwhile, has jumped 11 percent despite evidence that CSF is shunning small-caps.
For many analysts, CSF is too big to ignore. While the agency doesn’t disclose financial details, people familiar with the matter said in July that it had access to as much as 3 trillion yuan of funding. CSF sought another 2 trillion yuan in August, people with knowledge of the matter said at the time.
One key finding from the annual reports is the apparent cap on CSF’s holdings in individual stocks. None of the filings examined by Bloomberg showed a position exceeding 3.03 percent of shares outstanding, with stakes in at least 115 companies coming in just below that level. For investors looking to ride CSF’s coattails, that makes stocks already at the 3 percent threshold less attractive than those in which it has more room to add.
The filings “might give insight into which shares may get targeted going forward,” said Sandy Mehta, chief executive officer of Hong Kong-based Value Investment Principals Ltd. “It’s a must for professional investors to know the ownership structure.”