To complement the reform of the new share issuance system, starting from the 21st, China Securities Index Co., Ltd. officially released relevant data on industry price-earnings ratios. For this purpose, a responsible person from the company accepted an interview regarding issues related to the release of industry P/E ratios.
China Securities Journal: Why does the index company release industry P/E ratios?
China Securities Index Co., Ltd.: Releasing industry P/E ratios is one of the measures taken by the index company as an independent third-party professional institution to serve the development of China's capital market from the perspectives of marketization, professionalism, and standardization.
In the context of "three highs" in new share issuances over the past two years and frequent initial public offering (IPO) breaks, regulatory authorities hope that the index company can leverage its professional advantages to provide more information services for the issuance, trading, and daily supervision of new shares. The release of industry P/E ratio data at this time by the index company is a significant measure to adapt to and support the reform of the new share issuance system.
The price-earnings ratio is a commonly used indicator in the securities market. Currently, there are many P/E ratio data disclosed by regulatory authorities or other market institutions in the market. Since the end of 2008, the index company has also been disclosing the P/E ratio data of important market indices daily. However, there are few authoritative institutions disclosing the highly market-focused industry P/E ratio data. This time, the index company releases the full-market industry P/E ratio data to meet market demand and fill a gap in important market data.
On the other hand, there exist unscientific or non-transparent situations in the application of P/E ratio data, especially in the process of new share pricing. Currently, the valuation methods for new share issuance pricing are mainly divided into three categories: discounted cash flow method, comparable company comparison method, and economic added value method. Among these, the comparable company comparison method is the most widely used method in the domestic market, which involves horizontal comparisons to determine the value of a company by comparing the issuer with listed companies that have similar or close industry characteristics, share capital scale, and management models. Commonly used P/E or price-to-book ratio valuations in the current market belong to this category of methods. In this process, the valuation level of the same or similar industries becomes the core issue in new share pricing. Due to the lack of such public data in the market, this valuation method finds it difficult to truly play its role. The release of industry P/E ratio data can change this situation to a certain extent.
China Securities Journal: What impact will the release of industry P/E ratio data have on new share issuance?
China Securities Index Co., Ltd.: As mentioned earlier, in the pricing of new share issuances, industry P/E ratio data is an important reference indicator for new share pricing. However, due to various reasons in recent years, there has been a significant divergence between the pricing of new shares and the industry valuation level. According to the research report "Analysis of New Share Issuance and Listing Situations from 2010 to 2011" published by the Index Company on January 17, 2012, looking at new shares issued from 2010 to 2011 by industry, the P/E ratio levels of newly issued shares in 9 out of the 10 first-level industries of the CSI were significantly higher than the average P/E ratio levels of the respective industries. The P/E ratio for newly issued shares in the energy industry was 53.50 times, which was twice the industry average. The P/E ratios for newly issued shares in the utilities, industrial, and pharmaceuticals and health care industries were as high as 55.6 times, 49.7 times, and 61.5 times respectively, exceeding the industry averages by 90%, 75%, and 55% respectively. Although the causes of the "three highs" in new share issuance are relatively complex, asymmetry of information and irrationality in the market are also important factors.
The industry P/E ratio data released by the index company can, on the one hand, provide references for companies planning to issue shares and underwriters when formulating issuance plans, as well as for consulting institutions participating in inquiries; and on the other hand, it can help investors conduct investment analysis. It also provides data support for the daily supervision of regulatory authorities. Through this information service, market transparency can be further increased, and to a certain extent, information asymmetry can be eliminated, reducing irrational behavior in the market and enhancing the discernment ability of market participants, thereby guiding new share pricing back to rationality.
China Securities Journal: Why does the industry P/E ratio data adopt the industry classification of the "Guidelines for Industry Classification of Listed Companies"?
China Securities Index Co., Ltd.: In April 2001, the CSRC issued the "Guidelines for Industry Classification of Listed Companies", establishing the industry classification standards for listed companies. According to relevant regulations, when new shares are issued and listed, they need to declare their industry category to the exchange based on the CSRC's industry classification standards. When changes occur in industry affiliation, declarations from listed companies are required. Therefore, the industry classification in the "Guidelines for Industry Classification of Listed Companies" is the unified classification standard adopted for new share issuance and daily supervision by regulatory authorities, having high authority. Industry P/E ratio data based on this classification standard can more directly reflect the valuation situation of the corresponding industry for new share issuance, thus better playing the role of industry P/E ratios in new share pricing.
It is reported that the CSRC is studying adjustments to the "Guidelines for Industry Classification of Listed Companies". After the new "Guidelines for Industry Classification of Listed Companies" is released, China Securities Index Co., Ltd. will calculate and publish industry P/E ratios according to the new industry classification standards.
China Securities Journal: What calculation method is used for industry P/E ratios? What is the general overview of the current industry P/E ratio data?
China Securities Index Co., Ltd.: The currently released industry P/E ratios are static P/E ratio data, calculated using the commonly used weighted stock method. This method refines the calculation口径issued by the CSRC in 2004 regarding individual stocks and market P/E ratios. After excluding loss-making stocks, the total A-share market capitalization of stocks in the industry that meet the calculation conditions is used as the industry's total market capitalization, and the sum of A-share net profits is used as the industry's net profit. The ratio of the two is the industry P/E ratio. This calculation method can better reflect the overall valuation situation of the industry.
According to the division standards of the "Guidelines for Industry Classification of Listed Companies" issued by the CSRC, listed companies are divided into 13 categories, 9 auxiliary categories, and 91 major categories. According to the calculation rules, loss-making stocks from the most recent annual report and suspended-listing stocks are excluded. If the remaining sample stock count is less than 5, the industry P/E ratio is not calculated. Therefore, this time, the P/E ratio data for 86 industries out of the 113 industries that meet the calculation conditions is announced.
Based on the latest data, among the 13 categories and 9 auxiliary categories, the agriculture, forestry, animal husbandry, and fishery industry and the electronics industry have relatively high P/E ratios, at 51.91 times and 39.63 times respectively. Industries with lower P/E ratios include the financial insurance industry and the transportation and storage industry, with P/E ratios of 10.43 times and 11.85 times respectively. Among the 64 major categories where data has been released, the industries with the highest P/E ratios are forestry and communication services, with P/E ratios of 68.85 times and 65.16 times respectively. The industries with the lowest P/E ratios are air transportation and banking, with P/E ratios of 7.89 times and 9.21 times respectively.
In addition to the daily industry P/E ratio data, the index company will also calculate and disclose the average P/E ratio data of the industry over the last month, three months, six months, and one year, as well as detailed P/E ratio data for all A-shares for reference.
China Securities Journal: Besides the currently released P/E ratio data for 86 industries, what kind of market data will the index company release in the future?
China Securities Index Co., Ltd.: In addition to the currently released P/E ratio data for 86 industries based on the division standards of the "Guidelines for Industry Classification of Listed Companies" issued by the CSRC, once the other 27 industries without published P/E ratios meet the calculation conditions, the index company will immediately calculate and release their P/E ratio data. Moreover, the index company will soon release industry P/E ratio data based on the CSI industry classification. On the basis of the currently released static P/E ratio data, more refined data such as rolling P/E ratios will be added. At the same time, the index company will closely monitor market reactions, study market demands, adhere to the concept of serving the capital market, further improve the ways and channels for releasing P/E ratios, launch more market service measures suitable for demand, and strive to play a greater role in cooperating with the reform of the new share issuance system and promoting the development of the capital market.
China Securities Journal: How can one obtain the relevant data on industry P/E ratios?
China Securities Index Co., Ltd.: All the data for the industry P/E ratios of the entire Shanghai-Shenzhen market released this time can currently be queried and downloaded through the website of China Securities Index Co., Ltd. www.csindex.com.cn. In the future, we will further expand the channels for publishing related data through the index company's data service platform, authorized information providers, and regulatory departments.