Chinese family-owned companies, which make up 67% of the Shanghai and Shenzhen stock exchanges, are more profitable than non-family companies, concludes report by Banca March and IE University

Chinese family-owned companies, which represent 67% of the Shanghai and Shenzhen stock exchanges, are more profitable than non-family-owned companies, concludes a report by Banca March and IE University. The study, conducted by March Asset Management (AM), a Banca March management company, and IE University's IE Center for Families in Business, provides ground-breaking rigorous evidence on the profitability of family businesses in the Chinese markets of Shanghai and Shenzhen. These markets have been gradually opening up to foreign capital since 2003, offering attractive investment opportunities in companies focused on meeting the growing domestic demand of a market of more than 1.4 billion consumers.

IE University’s Dr. Cristina Cruz, who directed the report, explains:

"The extraordinary growth of Chinese stock markets has been driven largely by the development of private equity firms, many of which are under the control of their founders or their family members."
Dr. Cristina Cruz, Responsible for the report and Professor at IE University

This is reflected in the explosive growth of family-owned companies on the stock market, which rose from 27% to 67% in just fifteen years, and in the significant increase in the number of family companies founded by their owners or immediate family members as opposed to those that emerged as a result of state privatization. According to the report, in 2005, only 40% of family businesses on the stock exchange were founded by their owners. By 2020, this percentage had risen to 80%.

Despite the growing importance of family businesses in China, Dr. Cruz points out the differences between these family businesses and those listed in other markets: "With an average lifespan of only 20 years, these companies lack an established corporate culture and are facing their first generational change. They compete in an environment marked by high volatility and significant government intervention, which raises questions about their ability to balance long-term growth visions with the immediate demands of the market that justify the existence of the family premium we have found in other markets such as Europe or the US."

Javier Pérez, manager of March International The Family Businesses Fund, highlights the huge potential of the Chinese market, “which is turning towards a more consumer-focused economy. At March A.M., we want to take advantage of this context of strong growth to offer our clients investment opportunities in a segment that we consider key, such as family businesses. Through March International The Family Businesses Fund we are looking for companies with profitable businesses, with reference shareholders involved in the development of the business."

Despite contextual differences, the report confirms the family premium in the Chinese stock market, i.e. a higher profitability in both accounting and market terms of family businesses compared to non-family businesses. The CAGR for the period for the portfolio of family companies was 41% compared to 23% for non-family companies (weighted by market capitalization) and the average ROA was 3.92% for family companies, and 2.89% for non-family companies. All this implies that family businesses have created more value during the study period: the economic value added (EVA) of family businesses is 39.42 compared to 18.5 for non-family businesses. The report also shows that this higher profitability is accompanied by higher average volatility (30% for the family business versus 25% for the non-family business), although family businesses show lower risk of insolvency.

The family premium is mainly determined by the 100 family firms with the highest stock market returns, which in the 2016-2020 period obtained an average stock market return of 50.49% compared to 3.90% for the other family firms. These companies are also more profitable in accounting terms (ROA of 5.59% versus 3.96% for the rest of family members) and have generated a much higher aggregate economic value (EVA of 275.22 versus 39.71 for the rest of family members).

These Top100 companies have unique characteristics: they are significantly larger companies (average market capitalization of USD 3,488 million compared to USD 657 million for the rest of the family companies), and they compete mainly in industries that are leading the transformation of the Chinese economy (renewable energy, electric car manufacturing, etc.). Among these Top 100 companies are:

• Sungrow Power Supply, the world's largest manufacturer of solar inverters and energy storage systems for photovoltaic projects. Its founder, Cao Riexan, is currently the company's CEO and chairman.
• ByD, the world's largest manufacturer of electric vehicles with more than 200,000 employees. Its founder, Wang Chuanfu, is CEO and chairman.
• Midea Group, the world's largest home appliance manufacturer, founded in 1968 with more than 150,000 employees. Its founder, HE XIangjian, is retired from management, and Fan Hongbo, a non-family executive, is currently CEO and chairman of the company.

The report also analyzes the behavior of these companies during the COVID-19 crisis. According to Dr. Cruz: "The analysis shows the vulnerability of the family business in this context, but also its commitment to the long term in line with what is found in other markets." The number of listed family businesses fell by approximately 25% from 2020 to 2021, and the profitability of those that survived had a greater relative drop compared to non-family businesses. These family firms did not reduce their workforces and continued to invest in fixed assets, which contrasts with the behavior of non-family firms, which during the crisis reduced their workforces by an average of 33% and their investments in fixed assets by 56%. 

In the post-crisis period, family firms showed a better recovery compared to non-family firms, with a higher compound annual profitability (24% vs. 14%). However, this higher profitability is accompanied by higher volatility (19% versus 15% for non-family businesses). 

Future challenges include the generational transition, which many of these companies are facing for the first time. Only 23% of listed family businesses are in the hands of the second generation, with a clear preference for appointing a family successor: 60% of second-generation companies are led by a family CEO. 

In terms of sustainability and corporate governance, although their performance is inferior to that of non-family firms, family firms have improved significantly in both aspects over the last 15 years. For example, the incorporation of independent board members has increased from 35.34% in 2005 to 38.73% in 2020.  And in 2020, 16% of CEOs at the head of family businesses were women, 11 percentage points more than in 2005. One such example is New Hope Luihe, a leading agricultural industrialization company that, in 2018, ranked 126th among the top 500 Chinese companies on the Fortune list. The daughter of the group's founder, Liu Chang, is the company's president. 

However, the number of companies in which the same person holds the position of CEO and chairman has grown, from 10% in 2005 to 45% in 2020, while this percentage remains stable at around 10% for non-family companies.

Commenting on these results, Dr. Cruz concludes: "The report shows that family businesses are key pillars of the Chinese economy, but their ability to adapt to rapid change and cope with generational transition will be crucial to their success in an increasingly complex business environment. It is essential that these companies continue to innovate and adapt to market demands, while keeping their focus on the long term."