M IdeaChina Equity Strategy | Asia Pacific2024 China SOE Reform Stock Opportunities: Continuation of a Multi-Year ThemeMorgan Stanley Asia Limited+Laura WangEquity Strategist Laura.Wang@morganstanley.com +852 2848-6853 Catherine ChenEquity Strategist Catherine.Chen@morganstanley.com +852 3963-4186 Raymond K LiuEquity Strategist Raymond.K.Liu@morganstanley.com +852 2848-7293 The SOE reform theme recently gained investors' attention as top-down policy focus seems to have returned. We reiterate it as a long-term investment theme. An updated 36-stock list is provided. Right time to revisit the SOE reform investment theme: Back in March 2023, we laid out SOE reform details (see China SOE Reforms: A Multi-Year Theme with Stock Opportunities), and noted that VSCC ("Valuation System with Chinese Characteristics") would be a multi-year theme that would be worth revisiting for long-term positioning, with a selective focus on high quality stocks. MS SOE reform stock list delivered strong outperformance relative to both broad market index and the overall SOE universe since our last report (8.2%, 5.2%, and 4.5% alpha vs. offshore MSCI China, A-share CSI300, and CSI SOE index since May 18, 2023 when the list was published, respectively). See below for full performance breakdown.SOE reform initiatives have reaccelerated since the start of the year: We have seen multiple SOE reform policy announcements by SASAC, and the subject was further addressed in other government meetings to promote better state capital efficiency rates, quality of growth and resource allocation. We believe the aligned interests of government authorities, SOEs and investors in expectation of better valuations, improved profitability and efficiency will reinforce the sustainability of this theme and help generate alpha for investors on a longer-term basis, particularly amid a volatile macro/market environment. MS SOE opportunity list 2024: With updates on corporate themes from other regions, as well as the latest China SOE policy updates, we offer a 2024 MS SOE opportunity list of 36 stocks ( Exhibit 11 ) by applying our screening methodology based on 7 quant metrics to the listed SOE universe. We have also provided free float market cap ratios and additional valuation metrics (i.e. P/B) for investors to further fine-tune the opportunity set, based on our study of latest corporate reform activities in Japanese and Korean markets. Signposts to watch for SOE reform momentum: 1) Any updates to COE/SOE KPIs set by SASAC: i.e. "one profit, five ratios"; 2) Further rollout of a broader range SOE policies from central and local authorities; 3) Reform related policy events and action plans: specifically, we look for detailed action plans at upcoming policy meetings, such as the Third Plenary Session of CPC Central Committee. Morgan Stanley does and seeks to do business with companies covered in Mor...
