Forging capital market management ability From Get rid of the fog and return to value
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1. Choose the right place: enterprises should choose the listing place that matches the strategy and obtain the best valuation and market liquidity support. Taking the three potential listed enterprise categories as an example, we find that a shares, Hong Kong shares and US shares have their own advantages
First, a large number of large Chinese funded enterprise groups are looking for the second business curve, incubating high growth new businesses and seeking independent listing. Its strategic objectives include: seeking higher valuation and lasting premium for high growth businesses, allowing new businesses to develop faster and more flexibly with an independent structure, and avoiding the legacy problems of enterprise groups from affecting the listing of new businesses. For such new business engines, China’s A-share market is highly attractive and matched. Specifically, the A-share market has a higher valuation of emerging economic industries. In addition, the consistency between the listing location and business location also simplifies the complexity of compliance. At the same time, the A-share market has sufficient funds to provide RMB funds required for the growth of new businesses.
Secondly, many multinational enterprises with a large number of customer groups in Greater China or the Asia Pacific region are or have divested their business in the Asia Pacific region to realize independent operation and separate listing. Its strategic objectives include: distinguishing high growth regional businesses from mature regional businesses, obtaining higher valuation, and obtaining listing status in the Asia Pacific region, which can improve the brand awareness of enterprises among Asian consumers and deepen communication with local analysts. Equally important, the spin off has enhanced its flexibility in rewarding managers and employees in Asia. For such consumer driven businesses in Asia, the Hong Kong stock market is attractive and well matched. On the one hand, in terms of geographical location, Hong Kong is close to Asian consumers and investors, and multinational enterprises are more familiar with the local legal system and cultural environment; On the other hand, the Hong Kong market not only retains its links with global investors, but also reaches mainland investors. Of course, with the gradual introduction of relevant reforms for the listing of foreign enterprises in China’s a shares, more listing options will be provided for such enterprises in the future.
Finally, for Chinese companies that want to enter the international market and raise funds in the global market, US stock listing may be a better option [2]. The three most important strategic considerations include: improving global reputation, obtaining funds from global investors, and connecting local resources with the help of foreign investors.
2. Manage the process well: formulate a clear and reasonable IPO schedule, regularly check the IPO preparation degree, and establish a special working group to manage the whole IPO process
Enterprise development is a marathon, and IPO must be the sprint stage in the marathon. Enterprises need to plan the whole process from the beginning, even in the emerging stage of new business, that is, build teams, finance, systems and other systems according to the high standards and strict requirements of IPO, and constantly review and optimize them in the process of business growth. Despite the existence of multiple listing sectors, we suggest that enterprises should always refer to the most stringent rules of the main board of Shanghai Stock Exchange and consider them from six aspects: Board of directors and governance, organization and process, historical and forward-looking finance, compensation and equity opportunities, IPO strategies and resources and capital market story (see Figure 1).
At the same time, a special working group composed of internal management team and external consulting experts is the guarantee for the success of IPO. During the IPO preparation period of 12 months to more than 3 years, the working group worked with the board of directors and management to prepare the capital market story, manage the cooperation with accountants, lawyers and investment banks, and improve all aspects of the IPO sprint stage. Specifically, it includes preparing for IPO maturity, identifying major gaps in IPO maturity assessment, and formulating and taking charge of IPO maturity workflow charter, timetable and overall IPO roadmap; Hire professional external consultants, such as law firms, auditors, professional audit consultants or salary consultants, to fully solve the remaining problems; Manage IPO transactions, manage the whole process and coordinate stakeholders in the actual transaction execution stage, manage relevant consultants (banks, lawyers, auditors, investor relations / public relations companies), and provide capital market Stories (including market descriptions), business plans, preparation and communication of due diligence, etc.
3. Make a good strategy: strictly formulate the enterprise strategy, clearly describe the business model, write a strategy oriented capital market story, enhance the attraction to long-term value investors and contribute to the success of IPO
In the above five aspects, winning enterprise strategy is the soul of IPO success. When writing the capital market story, the enterprises to be listed should take the enterprise strategy as the starting point, the business model should be clearly expressed, and the theme of value creation should be complete, so that investors can understand, understand and look forward to it. Capital market stories with corporate strategy as the core usually include six elements: top-down vision, key investment highlights, determination of key themes, top-down summary of capital market stories, review of analyst reports and recommendations, classification of capital market story elements and determination of key projects. Among them, “key investment highlights” is particularly important. It refines and accurately expresses the most attractive characteristics of the company, such as the company’s basic market and its characteristics, the company’s positioning in this market, the company’s product portfolio and technology positioning, flexibility relative to cyclical fluctuations, M & a performance, future strategic opportunities (revenue use), financial performance and profit potential.
Take a short video technology company listed in Hong Kong stock market as an example. First of all, the company has a vision of “becoming the most obsessed company in the world to create value for customers” and a mission of “helping people find what they need, give full play to their strengths and continuously improve everyone’s unique happiness”. Secondly, it closely follows the investment theme of short video social networking, highlighting its ability to accurately grasp the pulse of consumers’ new forms of entertainment. Third, in terms of investment highlights, the company spoke with figures such as average daily active users, average monthly paying users and total commodity transactions, highlighting the competitive advantages of its main business, while laying the groundwork for second curve businesses such as e-commerce and leaving room for imagination. In addition to the detailed financial and operational data disclosure in the prospectus and the endorsement of large investment banks and accounting firms, its IPO was oversubscribed 1200 times and achieved great success.
It is worth noting that enterprises usually experience multiple rounds of financing before listing. Enterprises need to fully understand the key expectations of investors in different financing stages of enterprises, and timely customize, polish and update the enterprise strategy and capital market story (see Figure 3). In the seed stage financing, the enterprise capital market story should focus on the feasibility of the business idea, and discuss the overall market scale and growth rate, the differentiated competitive advantage of products, whether they belong to the industry leader, the professional experience and cooperation experience of the team, and how to build the supply chain. In round a financing, the process from 0 to 1 has been completed. Enterprises need to focus on how to expand the market and realize scale. Therefore, they need to answer questions such as whether the business model has been verified, whether the market team is effective, whether there is profit planning or the size of future capital gap, and whether they have advantages compared with the top three in the market. In the B / C round of financing, investors’ perspective shifted from expanding territory to consolidating management and growth. Therefore, they paid more attention to whether the core senior management suitable for the new stage was formed, whether the operation team was stable, whether the expected scale was achieved, the retention of employees, and whether the equity structure was reasonable. Round D and subsequent rounds of financing usually occur in the time window when the enterprise has grown into an industry-leading enterprise and made final preparations for listing. Therefore, market share, sustainable growth potential, listing schedule, financial data standardization, cash flow health and valuation rationality have become the top priority of strategy formulation at this stage.
It must be pointed out that the capital market story is not just a story. It starts with the forward-looking top-level strategy, shows down-to-earth business success, and finally falls into the sound internal and external communication. In the face of sharp eyed investors, the strategic essence it should contain is far more important than the form of expression.
4. Practice your internal skills: be a big molecule and a small denominator, improve the return on investment capital, and inject high-quality connotation into growth
After analysis, McKinsey found that the return on investment capital (ROIC) is the core driving force of the enterprise’s capital market value, and the return on investment capital is a key component of the enterprise’s total shareholder return (TRS). At the same time, the data of A-share market shows that among enterprises with income growth of more than 10%, the correlation between enterprise valuation multiple (EV / IC) and return on investment capital is more than 50%, and gradually evolves to mature markets, such as about 70% in the United States.
A well-known small and medium-sized fund manager once said: “really excellent enterprises are rare. I am willing to go on with enterprises with good business model and strong competitiveness for a long time.” Echoing its investment philosophy, the target of the fund manager’s initial screening of invested enterprises is ROIC, which requires enterprises to achieve an average ROIC of more than 10% in the past 5 to 10 years.
From the case of China’s A-share market, many listed enterprises have worked hard to strengthen their internal strength and consolidate their profits, which has indeed received a good response in the capital market, which is worth learning from. They actively seek benefits from management and take multiple transformation measures, such as accelerating the layout of high-profit market segments, focusing on key customer management and service capabilities, accelerating the transformation to asset light business model, and cleaning up inefficient and ineffective assets; Focus and tenaciously build the transformation mechanism and organization, such as setting an example and supervision by the chairman and senior leaders, establishing the transformation and improvement project management office, and creating a corporate culture of continuous self breakthrough and innovation.
Taking a leading heavy machinery enterprise as an example, it has improved its production efficiency by building a digital chemical plant and widely distributing production robots, and persistently investing 5% of its income in technology research and development all year round; At the same time, the inventory pressure drop caused by the improvement of accounts receivable and quality reduces the investment capital; With one belt, one road and other construction opportunities, we should expand the sales and make the big denominator. Thanks to this series of measures, its ROIC has climbed to the level of 12% – 14% since 2017, followed by the recognition of the capital market and the rise of share price (see Figure 4).
Coincidentally, we have seen similar successful cases in the fields of food addition, pharmaceutical R & D and comprehensive groups. For example, a first-class food addition enterprise significantly improved its profitability through quality control, and then actively explored the global market, exported the management mode, and raised the stock price to a stable high (see Figure 5).
5. Do a good job in connection: embrace long-term value investors and build a positive and promising professional market value management ability with international high standards
We usually evaluate the capital market management ability of listed enterprises along six aspects (see Figure 6). Compared with the best practice of capital market management in mature markets, A-share listed companies still have broad room for improvement. Although most listed companies have established special investor relations teams and basic information disclosure mechanisms, only a few large listed companies actively communicate with investors and carry out differentiated classification management, and few enterprises can pay forward-looking attention to the changes of investors’ demands. At present, the investor communication strategy of A-share listed companies is slightly monotonous, and 80% of enterprises still rely on the way of updating slow Web pages; Only 60% of enterprises can update information disclosure in time, but generally lack depth and detail; Few companies can actively communicate with the capital market.
Looking forward to the future, with the rising proportion of institutional investors, the focus of enterprise capital market management needs to shift from individual investors to institutional investors. Therefore, it is necessary to comprehensively adjust and optimize the communication channels, methods and contents of investors. Especially for small and medium-sized enterprises that lack the initiative to pay attention to the capital market, active and promising market value management will become a sharp weapon for them to overtake in corners.
We suggest that enterprises build excellent investor relationship management capabilities from the following six aspects (see Figure 7).
First, establish a professional capital market management team led and responsible by the CEO. The professional team will comprehensively handle specific businesses and improve the level of capital market management functions. Led by the CEO in charge of strategy and business, they can better represent the enterprise and have more authority when communicating with investors.
Second, the enterprise should focus on the long-term value investors who can accompany the long-term growth of the enterprise, rationally evaluate the enterprise value and trade infrequently, and fully understand the changes in the investment needs of long-term value investors, such as the daily interest in ESG and other topics.
Third, we should use multi-level and multi-channel investor communication strategies and make full use of scientific and technological means to carry out personalized communication of “thousands of people and thousands of faces”.
Fourth, build a capital market story combined with business strategy, turn professional and complex business planning into a language that investors can understand, and maintain a high degree of consistency in content to ensure that investors get what they see.
Fifth, improve the transparency of financial and operational information, and convey relevant information by means of management presentation, press release Q & A, analyst communication letter and so on.
Finally, we should firmly fulfill the commitments of the capital market and maintain the credit and brand of the capital market.
China’s capital market has opened a new chapter. Whether ambitious companies to be listed or listed enterprises already in it, it is important for them to comply with the trend of institutionalization, rationalization and internationalization and embrace international practices and best practices in advance for their continued success in the capital market. At the same time, from the perspective of time span and content breadth, the improvement of market value management system is not a point repair, but a systematic rethinking and reconstruction. This transformation and upgrading is inseparable from the top-down concept transformation and practice of the board of directors and CEO. In addition, enterprises also need to think in a transposition, think from the perspective and mentality of investors, and upgrade the relationship between the two sides from capital combination to long-term partnership. Start with the end and win the future. We believe that a number of world-class Chinese listed companies will emerge in the next decade and stand out through full cycle market value management, for which we are full of expectations.
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