CIO Horrocks scents dividend bonanza in China

The CSRC's drive to elevate dividend payout ratios, combined with investors' desire for transparency, potentially spells good news for China equities.
CIO Horrocks scents dividend bonanza in China

Beijing’s drive to elevate low dividend payout ratios is set to spur investment opportunities, particularly amid present equity market turmoil, says Mathews Asia CIO Robert Horrocks.

Just last week the China Securities Regulatory Commission (CSRC) announced plans to enhance supervision of the decision-making process and improve dividend implementation. It will also require IPO candidates to provide detailed information on their rules on shareholder returns, dividend policy and bonus plan.

Historically, the dividend payout ratio of listed Chinese companies has been significantly lower than international peers.

According to Bloomberg data, from 2001 to the end of September this year, the dividend payout ratio of Shenzhen Composite Index constituent stocks was 29.36%; Shanghai Composite Index 44.76%, Hong Kong red-chip stocks 39.66%, and Hang Seng China Enterprises Index 45.94%.

It falls well below, for example, the 62.14% of Hong Kong’s Hang Seng Index.

Edward Huang, strategist at Haitong International Research, notes that the CSRC will require listed firms to elevate their payout ratios to the 60% international standard over time, better balancing the interests of company management and shareholders.

He adds that imposing a detailed cash dividend policy will help to safeguard shareholders’ interests by enabling them to share corporate earnings, therein encouraging long-term investment, deterring “blind investment” made by listed firms and boosting stock market valuations.

On the investment potential, Horrocks suggests dividend investments can be extremely fruitful, but are often an overlooked strategy in Asia. This, he argues, needs to change, particularly in light of the present market environment.

“Right now there is an increasing level of fear or uncertainty about where the world’s economy is going, so people will pay a premium for businesses with a more sustainable and transparent profile,” suggests Horrocks.

He notes that dividends play an important role in generating positive performance since they help investors to evaluate a company and monitor corporate governance. They also illustrate the management’s willingness to pay attention to the interests of minority shareholders. And it helps to restrict business owners’ spending on marginal projects.

“If you treat Chinese equity as an asset class and have made the strategic decision that you are going to be there for the long haul and buy companies that pay decent dividends and reinvest the dividends over time, they become the big part of the total returns,” he adds.

Horrocks sees dividends in Asia as more underpriced than elsewhere, given that Asian firms don’t pay as much out as their international peers, while Asian investors have a tendency to chase growth.

He argues that dividend investment is a good way to find alpha as most people look at a six-to-12-month timeframe and try to time the market to catch a rally, but at the same time overlook the dividend yield of 3-4%.

One of the main reasons behind the low payout ratio of Chinese firms over the past decade has been that many firms are still developing fast, when they tend to retain earnings to enhance the capital and meet expansion needs.

But Horrocks prefers to view a dividend payout policy as a signalling mechanism for good corporate governance that supports sustainable growth over the long term.

“Even in the fastest-growing companies in the fastest-growing economy, the key thing is responsible management in terms of generating cash but not accruals, and paying attention to minority shareholders,” he concludes.

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