China Shenhua's Dividend Excites Market Hungry for SOE Yield

Updated on
  • Other state-owned enterprise stocks rallied on dividend news
  • Daqin Railway, ICBC among those that could mimic move: CICC

China Shenhua Energy Co.’s special dividend took the market by surprise, but it didn’t take long for shares of other state-run companies to catch a bid.

China Mobile Ltd. to Daqin Railway Co. Ltd. have jumped since the Beijing-based coal miner’s announcement of a 2.51 yuan-per-share special payout fueled speculation other state-owned enterprises could follow suit. Investors have long lobbied for better shareholder returns from China’s state behemoths, and Shenhua’s move -- which saw its stock soar by the most since 2008 on Monday -- provided a concrete sign companies may finally be listening.

“Never in the history of state-owned enterprises have we seen this kind of dividend pay,” said Laban Yu, head of Asian oil and gas equity at Jefferies Hong Kong Ltd. “This is a big deal - there is a lot of pressure on these state-owned enterprises to pay dividends.”

Shenhua’s special dividend is indicative of a shift in China’s attitude toward SOEs -- away from being mainly vehicles for keeping Chinese workers employed and toward a source of funding for the government, Yu said. State-run companies should “enhance” their mechanisms for paying dividends as part of a wider move to restructure, Xiao Yaqing, head of the government body that supervises SOEs, said earlier this month, according to a transcript posted to the news portal of China’s State Council.

China Mobile, Daqin Railway, Industrial and Commercial Bank of China Ltd. and Anhui Conch Cement Co. are among companies that could be “the next China Shenhua,” analysts led by Hanfeng Wang at China International Capital Corp. said in a research note Monday. The brokerage selected SOEs with relatively low debt-to-asset ratios and good cash levels when determining which companies may be more likely to issue high dividends.

China Telecom

Following on Shenhua’s heels, state-run China Telecom Corp. announced a record-high dividend on Tuesday for the 2016 year. The HK$0.105 offer represents a payout ratio of up to 43 percent, said Christopher Lane, a senior research analyst on Asian telecommunications at Sanford C Bernstein HK Ltd. That would be the highest ratio since 2013, according to data compiled by Bloomberg.

While acknowledging Shenhua’s move was a “bellwether” for the SOE sector in a note Monday, Yu and his fellow analysts at Jefferies said it’s likely to be a “one-off,” in a separate report.
Other Asian nations have also prodded large-cap companies over shareholder returns, with mixed results. While Korean dividend yields have ticked higher over the past four years, Japan’s gave up some gains in the second half of 2016.

Shenhua’s special dividend, which was announced late Friday, may reflect its parent company’s need to source cash for new investments as the coal industry recovers from a downturn, said Dai Ming, who manages a fund of structured products for investing in Chinese equities at Hangsheng Asset Management Co. in Shanghai.

State-owned firms with stable earnings and no major capital expenditure plans may follow them in paying special dividends for the sake of their cash-hungry parents, he said.

This prospect “will surely drive up prices in the short term,” Dai said. “Though you can’t expect it to be a continuous propeller to shares, which will definitely correct if the companies fail to meet such expectations.”

— With assistance by Emma O'Brien, Amanda Wang, Ramsey Al-Rikabi, and Jing Yang De Morel

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