What is " China Special Valuation System"?

" Zhongte Valuation," short for China Special Valuation System, is a concept proposed by Yi Huiman, the chairman of the China Securities Regulatory Commission (CSRC). It aims to improve the valuation of Chinese state-owned enterprises in the financial market by developing valuation methods that suit the characteristics of these enterprises.

The " Zhongte Valuation" sector mainly includes undervalued listed banks and some central and state-owned enterprises (SOEs), especially large-scale central SOE groups. The sectors with significant valuation gaps are mostly concentrated in banking, construction, telecommunications, petroleum and petrochemicals, and coal industries. Common features include long-term low valuations such as PB (Price-to-Book Ratio), high proportion of A-share market capitalization, and involvement in key areas related to national economy and people's livelihood.

Key Features of China Special Valuation System Stocks:

High dividend yields, generally not less than 3%.
Stable and steady growth in performance, strong resilience to risks, capable of enduring economic cycles.
Stocks are still in a severely undervalued state, with notably low Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios for central SOEs.

Types of China Special Valuation System Stocks:

State-Owned Enterprises (SOEs) and Energy Stocks	Covering various industries such as energy, banking, and telecommunications, controlled or owned by the government. ex: China Petroleum & Chemical Corporation (Sinopec), China Communications Construction, China Railway Engineering
Financial Stocks	Including banks, securities firms, and insurance companies. Examples: Bank of China, China Life Insurance, Ping An Insurance
Infrastructure Stocks	Large-scale enterprise groups controlled by the state, operating in areas such as energy, infrastructure, and manufacturing. ex: China State Construction Engineering, China Metallurgical Group Corporation, Minmetals Corporation
Emerging Technology Stocks	ex: Tencent Holdings, Alibaba Group, Baidu
Consumer Brands and Retail Stocks	ex: China Unicom, Wuliangye, Kweichow Moutai Group

Note: The scope and stocks covered by China Special Valuation System may vary due to research methods and focus.

Stocks with Good Performance in China Special Valuation System:

China Petroleum & Chemical Corporation (Sinopec, 00386.HK)	One of China's largest petrochemical companies, covering multiple sectors including petroleum, natural gas, and chemicals. Its stock is listed on the Hong Kong Stock Exchange (00386.HK) and has shown stable performance in recent years.
Ping An Insurance (02318.HK)	A leading insurance and financial services provider in China, offering services in insurance, banking, asset management, and more. Its stock is listed on the Hong Kong Stock Exchange (02318.HK) and has long been one of the hot stocks among investors.
China State Construction Engineering Corporation (03311.HK)	One of China's largest construction and engineering contractors, involved in construction, infrastructure, real estate, and more. Its stock is listed on the Hong Kong Stock Exchange (03311.HK) and has shown significant growth recently due to the revival of the construction industry.
China Unicom (00762.HK)	One of China's three major state-owned telecommunications operators, providing mobile communication, broadband internet, and other services. Its stock is listed on the Hong Kong Stock Exchange (00762.HK) and has seen a good uptrend recently driven by the development of 5G and digital transformation.
Bank of China (03988.HK)	One of China's four major state-owned banks, offering diversified services including banking, finance, and investment. Its stock is listed on the Hong Kong Stock Exchange (03988.HK) and has long been one of the top picks among investors in the financial sector.

Top 10 Leading Stocks in China Special Valuation System:

AVIC Trust: Controlled by the State-owned Assets Supervision and Administration Commission (SASAC), with China Aviation Industry Corporation (AVIC) as the controlling shareholder. The company's main business covers comprehensive financial services and industrial investment.
PetroChina : Controlled by the State-owned Assets Supervision and Administration Commission (SASAC), PetroChina's main business includes oil and gas exploration and development, refining and chemical production, natural gas and pipeline operations, as well as sales of refined oil products. Dividend yield: 5.38%.
China Steel International :Ultimately controlled by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, the company provides green steel services and has achieved performance in metallurgical engineering projects across 32 countries along the Belt and Road Initiative. Overseas revenue accounts for 29.68%.
Shanghai Energy :Controlled by China Coal Group, the company engages in the production of washed coal and coking coal primarily for smelting. Annual production of coking coal is approximately 5.3 million tons. Dividend yield: 4.95%.
COFCO Capital:Controlled by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, with COFCO Group as the controlling shareholder. The company's main business includes insurance, futures, and trust services, with revenue accounting for 99% of the total. It is one of the second batch of pilot mixed-ownership reform companies designated by the National Development and Reform Commission.
China Communications Construction:Controlled by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, the company is a leading multinational giant specializing in infrastructure design, construction, dredging, and equipment manufacturing.
China Science Publishing & Media:Controlled by the China Science Publishing & Media Group, the company focuses on professional knowledge repositories, digital education cloud services, and medical health big data.
China Publishing Group:Controlled by the China Publishing Group, the company's main business includes publishing books, newspapers, electronic audio-visual products, and more. It holds the top position in China for national book retail market share, copyright trade, and output scale.
China International Travel Service Corporation: Actively controlled by the State-owned Assets Supervision and Administration Commission of the State Council, the company is the world's fourth largest duty-free business operator and the leading enterprise in China's duty-free shop industry.
China Galaxy Securities :A securities company under China Construction Bank and PetroChina, China Galaxy Securities is one of the securities companies with the most branches in China.

Advantages and Limitations of China Special Valuation System:

Advantages:

Value Discovery: China Special Valuation System helps investors discover stocks that are undervalued by the market, providing investment opportunities.
Reasonable Valuation, Risk Control: Compared to other stocks, China Special Valuation System stocks have more reasonable valuations. Through indepth analysis of the company's fundamentals, investors can gain a clearer understanding of the company's true value, reducing investment risks.
Stable Profits, Long term Returns: Investors in China Special Valuation System are usually long-term investors who believe that the company's intrinsic value will eventually be reflected in the stock price, thereby achieving relatively stable long-term returns.
Risk Diversification: China Special Valuation System portfolios typically diversify investments across multiple industries and companies, reducing the risk associated with a single company or industry.
High Growth Potential, Broad Industry Prospects: Stocks in the China Special Valuation System system are usually in a rapid growth stage, with industries that generally have broad market prospects and significant growth potential. With the support of government policies and increasing market demand, these industries will have more development opportunities.

Limitations:

Longer Market Reaction Time
Market and Company Uncertainty
Short-term Stock Volatility Due to Market Sentiment
Misjudging Company Value Leading to Investment Losses

Challenges and Future Trends of China Special Valuation System:

Challenges:

Transparency and Information Disclosure:The information disclosure and transparency in the Chinese market are relatively low, affecting the data sources and accuracy of the China Special Valuation System. Some companies may have incomplete or inaccurate financial data, which can impact the valuation results.
Policy Risk:China, as an emerging market, experiences frequent changes in its policy environment and regulations, affecting business operations and valuations. Changes in government policies can alter industry competition dynamics, thus affecting the stability and predictability of company values.
Market Volatility: The Chinese stock market exhibits relatively high volatility, with investor sentiment and market hotspots often having significant impacts on stock prices. This increases the difficulty of accurate predictions and valuations.
Uncertain Macroeconomic Environment: China's macroeconomic environment is influenced by various domestic and international factors such as economic growth rates, inflation rates, exchange rate fluctuations, etc., all of which can affect company performance and valuations.
Intense Competition and Industry Changes:The Chinese market is highly competitive, with rapid industry transformations. The rise of some emerging industries and the decline of traditional ones may change industry landscapes and companies' competitive positions, posing challenges to valuation analysis.

Future Development Trends:

The China Special Valuation System has become an important investment strategy in the A-share market this year. Currently, many investors still view stocks related to the China Special Valuation System as short-term concepts, merely temporary speculative objects. However, through detailed analysis of the background, underlying logic, and subsequent capital drivers of the China Special Valuation System, we can see that the China Special Valuation System is not a short-term action but a long-term trend.

Digitalization and Technological Innovation:China is actively promoting digital transformation and technological innovation, influencing the development of various industries and companies' competitiveness. The China Special Valuation System will focus more on companies' technological capabilities, innovation abilities, and digitalization levels.
Environmental Protection and Sustainable Development: With the increasing emphasis on environmental awareness and the importance of sustainable development, the environmental protection industry and renewable energy sectors may become future investment hotspots. The China Special Valuation System may consider companies' environmental policies and sustainable development strategies.
Consumer Upgrading and Service Industry Development:China's consumer market is continuously upgrading, with growing consumer demands for quality and services. Therefore, consumer brands and the service industry may become key focus areas for the China Special Valuation System.
Capital Market Reforms: China's capital market reforms are continuously deepening, including reforms in the registration system, internationalization, and trading mechanism reforms. These reforms will affect market stability and investor confidence, presenting new challenges and opportunities for the China Special Valuation System.
Globalization Impact:The influence of Chinese companies globally is continuously strengthening, with a clear trend of participating in global competition. Hence, the China Special Valuation System may need to consider more about companies' globalization strategies and international market competition.

Regulatory agencies stated in November 2022 the necessity to systematically think about the basic connotations, realization paths, and key tasks of China's special modern capital market and explore the establishment of a valuation system with Chinese characteristics. This profound initiative is not a short-term speculative action and deserves continuous in-depth research and anticipation of market performance.

The issuance of related thematic funds, such as the China Special Valuation System ETF launched by funds such as HuaAn Fund, GF Fund, and China Merchants Fund, is expected to drive up the stock prices of companies related to the China Special Valuation System and attract social security funds, insurance funds, and others interested in long-term value investment to join in.

Although stocks related to the China Special Valuation System have shown relatively flat performance in the past, the high dividend yields of many central enterprises have attracted more value investors to continue buying. This new investment concept reflects the theoretical innovation of China's capital market and requires investors to continue in-depth research and understanding. With China's economic transformation, the China Special Valuation System is expected to dominate the investment market in the coming years.

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We have based this article on our internal research and information available to the public from sources we believe to be reliable. While we have taken all reasonable care in preparing this article, we do not represent the information contained in this article is accurate or complete and we accept no responsibility for errors of fact or for any opinion expressed in this article. Opinions, projections and estimates reflect our assessments as of the article date and are subject to change. We have no obligation to notify you or anyone of any such change. You must make your own independent judgment with respect to any matter contained in this article. Neither we or our respective directors, officers or employees will be responsible for any losses or damages which any person may suffer or incur as a result of relying upon anything stated or omitted from this article.

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