Photographer: Vivek Prakash/Bloomberg

China's Dividend Superstars Mask Stinginess of State Firms

Updated on
  • Most central SOEs resist Beijing’s calls for higher dividends
  • PetroChina’s hefty payout just a “one off,” says Bocom’s Hong

Eye-catching dividends from PetroChina Co. to China Mobile Ltd. have got investors excited, hopeful the country’s state-run behemoths are heeding Beijing’s call to revolutionize their approach to shareholder payouts.

Problem is, they’re the exception -- not the rule.

Less than half of 334 Chinese central government-controlled companies tracked by Bloomberg have announced higher dividends since 2014, when officials intensified calls for SOEs to increase them. Excluding China Mobile’s payouts, which more than doubled the past two years, and China Shenhua Energy Co. -- it declared a surprise special dividend in March -- the overall value of SOE dividends dropped 4.4 percent in the two years to 2016.

“Payouts as big as Shenhua’s and China Mobile’s are exceptional cases,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. in Shanghai, which oversees about 400 million yuan ($60 million). “Many companies saw their cash flow squeezed amid slower growth over the last two years. It’s hard to set an across-the-board rule on payouts for SOEs of very different profitability.”

The problem for many is debt. Encouraged to ramp up spending in the wake of the financial crisis, SOEs boosted leverage at almost five times the rate they bolstered cash levels in the 2014-2016 earnings period, data compiled by Bloomberg show.

While investors are aware of the challenge posed by SOE leverage, low or non-existent dividends have been a persistent bug bear, with China’s state-controlled companies seen as being more attuned to their masters in Beijing than the holders of the rest of their shares.

Perhaps cognizant of that -- and its own potential windfall -- the government unveiled a plan to boost dividends in early 2014. Given the lack of progress since then, the chief of the securities regulator reiterated the call for bigger SOE payouts in April this year, threatening to punish “iron roosters which have the ability to offer cash dividends but never plucked a feather,” making use of a Chinese slang term for misers.

Cash Strapped

The message from Beijing has been heard “loud and clear,” though putting it into practice isn’t so easy, says Chen Xingdong, chief China economist at BNP Paribas SA in Beijing. China’s economy has only this year started to recover from a downturn that hit earnings and commodity prices.

“While their directors understand the importance of dividends, many SOEs are strapped for cash to repay debts amid the slowdown,” he said.

Total debt for the 332 companies -- minus Shenhua and China Mobile -- has climbed 37 percent since 2014, versus the 8 percent growth in combined cash and equivalent holdings. The original list of 334 state-owned firms was assembled using members of the CSI Central SOEs, a gauge compiled by China Securities Index Co. China Mobile was then added in.

The world’s largest phone carrier, China Mobile seems to be heeding the call, announcing a special payout this month and a full-year dividend in 2016 results out in March. The company is unusual among SOEs, however, because it managed to boost its cash pile by about 14 percent from end-2014 through June, while cutting total debt by 52 percent, according to data compiled by Bloomberg.

‘Individual Cases’

Likewise, Shenhua, China’s biggest coal miner, more than doubled its cash hoard from the end of 2014 to June amid a jump in raw materials prices, while debt rose by just 8 percent. Interestingly, though Shenhua ignited a wave of anticipation over SOE dividends with its special payout earlier this year, the firm didn’t follow suit in its earnings for the first half of 2017 released late on Friday.

The company announced a merger with China Guodian Group on Monday, creating the world’s largest power company.

China Mobile and Shenhua are “individual cases,” says Yang Delong, chief economist at First Seafront Fund Management Co. in Shenzhen. Both companies are at least 72 percent owned by state-run parents, who have a political imperative to be seen taking part in SOE reform and also need cash to undertake mergers and acquisitions.

“A key reason for them paying huge dividends is to benefit their parents,” Yang said. “Minority shareholders just benefit from it in passing.”

Not Sustainable

PetroChina, the country’s top oil producer, fueled the buzz around SOE dividends with the announcement last week it will pay shareholders its entire half-year profit. But while the headline number might be impressive -- the state-controlled company will pass on almost 12.7 billion yuan ($1.9 billion) in dividends -- PetroChina’s 12-month payouts are down 32 percent from two years ago, falling along with oil prices.

The dividend is “a one off,” says Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong. “It’s unlikely to be sustainable as it’s a large chunk of cash.” PetroChina’s shares have lost 0.6 percent in Hong Kong since it announced the interim dividend on Aug. 25.

China’s four biggest banks, all state-controlled, report second-quarter earnings this week. Between 2014 and 2016, all of them saw a reduction in dividend ratios.

For a more meaningful and widespread turnaround in payouts, China’s SOEs will need to improve their balance sheets and profits, says Sam Le Cornu, co-head of Asian equities at Macquarie Investment Management in Hong Kong.

“The potential for higher SOE payout ratios will rise as China re-balances its economy and continues its deleveraging programs,” he said.

— With assistance by Aaron Clark

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