Leading AKM Industrial Company Limited (SEHK:1639) as the CEO, Zhi Chai took the company to a valuation of HK$2.77B. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. Today we will assess Chai’s pay and compare this to the company’s performance over the same period, as well as measure it against other SEHK-listed CEOs leading companies of similar size and profitability. Check out our latest analysis for AKM Industrial
Did Chai create value?
Earnings is a powerful indication of 1639’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Chai’s performance in the past year. In the past year, 1639 released a profit of HK$79.02M , which is an increase of 182.77% from its prior year’s earnings of HK$27.94M. This is an encouraging signal that 1639 aims to sustain a strong track record of generating profits regardless of the challenges. Since earnings are heading towards the right direction, CEO pay should be reflective of Chai’s hard work. During the same period, Chai’s total compensation rose by 17.27% to HK$799.00K. Although I couldn’t find information on the composition of Chai’s pay, if some portion were non-cash items such as stocks and options, then fluctuations in 1639’s share price can move the real level of what the CEO actually takes home at the end of the day.
Is 1639’s CEO overpaid relative to the market?
While one size does not fit all, as compensation should be tailored to the specific company and market, we can fashion a high-level benchmark to see if 1639 is an outlier. This exercise can help direct shareholders to ask the right question about Chai’s incentive alignment. Typically, a SEHK small-cap is worth around HK$2.61B, generates earnings of HK$245M, and remunerates its CEO at roughly HK$3.3M per year. Accounting for the size of 1639 in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Chai is being paid well below other SEHK CEOs of small-caps, on average.
Next Steps:
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in 1639, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. If you have not done so already, I urge you to complete your research by taking a look at the following: