| This essay, set in the context of the stock right reform in China, adopts the Market Capitalization Management concept (MCM) originated from the western economy. Firstly the concept of Market Capitalization Management will be discussed andcompared against Value Management (VM)in detail to elaborate the differences between the two.The essay will then use Suning Appliances(Suning) as an example to further illustrate the application and development of MCM in the Chinese market, to demonstrate to the reader the key factorsof MCM and to show some strategies employed by listed companies, followed by the current situation andthe prospect of MCM in the Chinese market with an aimto provide some perspective around MCM strategies.With the introduction of stock right reform in 2005, the Chinese stock market has come into a full circulation when the difference between tradable and non-tradable shares was eliminated, enabling all shares of a listed company to be tradable in the 2nd market.Share value is not discriminated amongst large or small shareholders hence Market Capitalization (MC) has become a meaningful term as it defines the liquid value of a listed company. Every share is traded equally irrespective of the size of the shareholders. However the MC varies each trading day, month, quarter, year, and on highly traded stocks, potentially even every second. The change as well as the value of MC has become a key performance indicator (KPI) of the management of listed entities. How to improve the MC is a critical question and therefore the management of market capitalization is imperative.In the more developed western capital markets, MCM is not clearly differentiated and value management is widely adopted. More emphasis is placed on creation of intrinsic value. However, in the Chinese market that is relatively young and immature with only some twenty years of history, MC is yet to reflect the change of intrinsic value of a company in a timely oraccurate way. The functionality of market resource allocation is yet to be extended across all listed companies, therefore listed companies need to have strategies for resource allocation and forMCM. Evolution of and separation from value management have led to the new valuation concept, MCM.VM is the foundation of MCM. MCM is derived fromVM and an extension of VM. In the semi-strong effective form market where MCM is not clearly separately and defined, MCM is the same as VM. In the weak effective form Chinese stock market, an effective management of MC is needed to reflect the intrinsic value of a listed company.MCM maximises shareholder value, incorporates the management of investor relationships and capital markets, as well as emphasizes value realization and management capability.Publicly listed on 21/07/2004, Suning was the 1st listed electronic appliance franchisor in China. With good performance, potential and prospects, Suning has been favoured by many investors. Its successful float marks one of the company's significant milestones, signifying its transformation from a private company dealing with only endusers and suppliers,to a listed public company dealing with investors, consumers and suppliers. Its strategic goals changed from profit maximisation to shareholder value maximization, from a relatively simple company expansion to a complex social expansion.Accordingly its growth platform was sizably expanded and brand value significantly lifted, boosting the rapid growth of its franchise business.Below is a snapshot of key performance indicators of Suning, showing phenomenal growth over the last 7 years with the company experiencing 60 times MC and almost 20 times revenue. Those figures suggest Suning is a high growth stock: There are more than 2000 listed companies in China's A Stock Market, how many of them are able to achieve such growth as Suning? Very few. Hence it's worth our research and analysis. It is Suning's effective MCM and strategies that contributed to its phenomenal growth, in addition to the market and industry opportunities.According to Security Investment theories, there are two variables affecting the MC. One is the intrinsic value, i.e. the share value, with the other factor being extrinsic value meaning the market realisation and recognition of the company's internal value. MC is representative of the intrinsic value. Good intrinsic value theoretically means a good share price. If a company does not have a good intrinsic value, its MC will not be good, as a high MC cannot be sustained without the support of good intrinsic value. Therefore, intrinsic value is very important. Asthe market is invisible with its own way of valuation, unique cycle and behaviour, it could lead the same share to premium price or discount price when coupled with information asymmetry.As such, Suning's success in its MCM is based on its sound operational management thathas led to its intrinsic value creation. Its phenomenal growth in MC can be attributed not only to key accounting indicators such as revenue and profit, but also to business activities expansion, industry leader market position, effective organizational structure and team work. All those factors jointly and severally contributed towards creation of the company's intrinsic value and ultimately growth of MC.MCM also complements its relations with investors and capital raising strategies. Though the capital market was typical of information asymmetry and investors unlikely knew all the key factors of the company with a high degree of accuracy, Suning successfully managed to complete its fourth capital raising through good resource allocation and investor relation strategies. Suning maximised its value creation, value recognition and value management by proving its value to the market and gaining recognition from its investors, and ultimately maximised shareholder's value.Suning has managed to issue more shares through merger and acquisition activities. It consolidated and restructured resources available, not only to cater to investors, but also to lift its value. |
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