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Story I —— CRH's Evolution

Wang Xiangming Chairman of China Resources Group
  • In April 2023, the kapok trees burst forth in full bloom in Xiaojingwan, Huizhou, painting the landscape with scarlet hues.

    Meanwhile, within the halls of the learning and innovation center of a central enterprise, top executives gathered to discuss the present and future of a "new species" – one that shone as brightly as the kapok outside their windows.

    This "new species" was none other than CRH, which had been oicially transformed from a pilot enterprise to a state-owned capital investment company by SASAC in June 2022.

    Since its inception in 1938, CRH has undergone multiple transformations, marking a self-evolving development history. As we enter 2023, we celebrate the 85th anniversary of CRH's establishment and the 40th anniversary of China Resources Group. As we stand at a new historical juncture, CRH is currently undergoing its fourth transformation.

    CRH's employees have chosen to respond to changing times and fulill the national mission by building a state-owned capital investment company with unique CRH characteristics and a world-class enterprise with global competitiveness. This proactive step relects the commitment of hundreds of thousands of CRH employees to adapt and evolve with the times.

    As the currents of history surge forward, we set sail with a powerful momentum, propelled by the winds of change and the spirit of the times.

    CRH's Solution to Propositions of This Era

    CRH's evolution into a state-owned capital investment company began in 2018. Since that year, CRH, which was established as a pilot state-owned capital investment company, has kicked of an unprecedented organizational transformation.

    In 2020, Chairman Wang Xiangming assumed leadership of CRH. Under his guidance, the Group restarted high-level training and engaged in extensive discussions to build consensus and address major issues. Over the course of ive training sessions held between 2020 and 2022, CRH gradually developed a new development model for a state-owned capital investment company, known as the "1246 model", which consists of the following goals: Adhering to one goal: to build a state-owned capital investment company with CRH characteristics and a world-class enterprise with global competitiveness; developing towards two directions: people's livelihood and becoming the pillar of a great power; implementing four reshapes: value reshape, business reshape, organizational reshape, and spirit reshape; reinforcing six capabilities: fund raising, investment management, industrial development, supervision and management, asset exit, and shared service capabilities.

    The "1246 model" clariies our goal and vision as well as our business structure, tools,methods, and capacity building direction. This model has irmly underpinned CRH's next stage of evolution and ofered a solution for the growth of a state-owned capital investment company.

    In the sixth top executives training session in April 2023, Chairman Wang Xiangming put forward new requirements: to raise political awareness, further enrich and improve the "1246 model", and give full play to the function and value of CRH as a state-owned capital investment company in the new journey of Chinese modernization.

    Over the past 85 years, CRH's senior management has undergone multiple changes.However, like their predecessors, our current leaders remain committed to developing in line with the times and identifying their mission. They are focused on setting clear directions and identifying key base points, with a keen awareness of China's broader trajectory.

    The 20th CPC National Congress established the grand goal of comprehensively promoting the great rejuvenation of the Chinese nation with Chinese modernization. Only by creating many world-class enterprises can we support a modernized economic system, create a new development pattern, and build China into a modernized socialist power with leading comprehensive national strength and international inluence.

    Chairman Wang Xiangming emphasized that for CRH, "the challenge of modernizing China is both a longstanding aspiration and mission". He further underscored that "the current historical juncture has once again arrived at CRH, and that the responsibility to confront it falls on the shoulders of the current generation of CRH employees". 

    At the micro-level, CRH has translated the grand goals of our times into concrete actions. How can the Group build a world-class enterprise? What is the path to optimizing its industrial portfolio and emphasizing the "people's livelihood" and "the pillar of a great power" business directions? How can the "four reshapes" become the deining characteristic and methodology for CRH's transformation into a state-owned capital investment company and a world-class enterprise? What steps can be taken to enhance CRH's overall capabilities as a state-owned capital investment company, with "capital management" as its core?

    After CRH was transformed into a state-owned capital investment company, its corporate attributes and operations have undergone dramatic changes. These changes improved its operational and allocation eiciency, and stimulated its corporate vitality at all levels. This empowered CRH to move towards the goal of being a world-class enterprise with excellent products, outstanding brands, leading innovation, and modern governance driven by"efectiveness" and "eiciency".

    Wang Binghua, who has previously served as the head of several central enterprises,was appointed by SASAC as an external director of CRH for a period of one year. During his tenure, he was struck by the unity and strong consensus among CRH's employees: "The transformation of CRH into a state-owned capital investment company is not merely a matter of adjusting control structures and institutional mechanisms, but rather a signiicant impetus and opportunity for growth. I am impressed by the strong desire of CRH's employees to seize this historic opportunity andpropel the development of the Group to new heights. The time is ripe, and we cannot aford to let it slip away." 

    Chairman Wang Xiangming and his team are also keenly aware that this unprecedented transformation in CRH's history is bound to be a long-term and arduous process. "In this process, the task at the group level is to design the overall enterprise, identify key patterns, promote integration, and empower employees," he noted. "At the business unit level, leaders must explore efective paths and methods to enhance the Group's core competitiveness".

    With the wisdom and unwavering eforts of all its employees, CRHis contributing its resources to meet the challenges of the times.

    Governance Change under Capital Ties

    Director Wang Binghua researched at CR Power Haifeng Power Plant.

    Transformation into a state-owned capital investment company means a deep adjustment of the governance and control model. Liu Haiyan, head of the Board of Directors Secretariat of the CRH Oice, said that to become a state-owned capital investment company, CRH needs to transform its industry and business, and its corporate governance mechanism and organizational control model also need to be changed more extensively than ever before.

    CRH has enhanced its corporate governance mechanism by placing a strong emphasis on capital management, resulting in the development of a comprehensive set of solutions for capital management.

    First, CRH clariied the functional positioning of the Group's headquarters, business units, and production and operation units. The Group's headquarters is the "capital level", which creates capital value through capital operation and strategic control to make CRH "more valuable"; the business units are the "asset level", which creates industrial value through investment management and asset management to make CRH "more proitable"; the grassroots production and operation enterprises are the "operation level", which directly creates market value to make CRH "wealthier".

    Secondly, CRH enhanced the board's decision-making ability on the basis of establishing and improving the board of directors of business units. CRH has established a team of 40 full-time directors who are deeply involved in business units' "strategy setting, decision making, and risk prevention". To enhance the duty- performance of full-time directors, CRH drew up diferent topics every quarter for in-depth discussion, and also invited internal and external experts to conduct occasional training for directors.

    In commemoration of the 40th anniversary of the establishment of a modern corporate system, CRH will publish a White Paper on Corporate Governance to the community to summarize its governance experience, establish governance guidelines, and articulate its vision for future governance practices. 

    In addition, CRH has implemented a diferentiated controlapproach based on the maturity of its diferent business units.The Group has established ive dimensions and 14 indicators to evaluate 26 business units, and according to the evaluation results, the business units are classiied into three categories: A, B, and C. By doing so, the Group can implement diferentiated control strategies for business units with diferent maturity levels, giving full play to the value-creation role of headquarters and the initiative of the individual business units.

    Once a corporate governance system is established, it is essential to monitor its efectiveness. To this end, CRH has developed evaluation models that assess the performance of business unit boards of directors on two dimensions: normality and efectiveness. The evaluation of full-time directors is closely linked to the operating performance of the business unit, and the results of the evaluation are used to inform decisions regarding their appointment, removal, and remuneration, ensuring that the goals of dispatched directors align with those of the business unit's management.

    By deining, authorizing, controlling, and evaluating the hierarchy according to established rules and regulations, CRH has established clear management boundaries between the headquarters and business units. This ensures moderate control, which guarantees the consistency of the group-wide strategy, controls major risks, and safeguards the interests of shareholders. Moreover, this approach maximizes the enthusiasm of the grassroots employees, laying a solid governance foundation for CRH to become a world-class enterprise.

    CR Sanjiu's Innovation under Group Transformation

    CR Sanjiu's Management Team.

     CRH's profound changes have spurred innovative exploration of business units and brought great opportunities to the development of its subsidiaries. 

    The "1246 model" has enabled the board of directors of CR Sanjiu to play a more signiicant role in setting strategy, making decisions, and mitigating risks. The board's structure is now more rational, and directors have been able to perform their duties more efectively, achieving transparency in their statutory powers and responsibilities, promoting coordinated operations, and implementing efective checks and balances.

    CR Sanjiu's industrial development has also entered a brand-new phase. CR Sanjiu currently sets two directions: one is consumer health products that provide Chinese consumers with solutions for the whole health management cycle, and the other one is prescription drugs mainly consisting of proprietary Chinese medicines. These two directions involve both"people's livelihood" and pharmaceutical innovation and R&D in line with the "the pillar of a great power" strategy.

    As the Group transitions into a state-owned capital investment company, CR Sanjiu aims to accelerate its growth opportunities through mergers, acquisitions, and consolidation. By leveraging additional industrial resources, the Group hopes to promote high-quality development in the innovative traditional Chinesemedicine industry and become an industry leader by the end of the 14th Five-Year Plan period.

    In December 2022, CR Sanjiu successfully acquired KPC. This has signiicantly bolstered its position in the traditional Chinese medicine industry. The acquisition has given CR Sanjiu control over key products, such as Sanqi (Panax ginseng), and the Kunzhongyao 1381 brand, ofering a signiicant advantage to its boutique traditional Chinese medicine business.

    CR Sanjiu has prioritized the research and development of innovative drugs, establishing three research institutes for innovative drugs, traditional Chinese medicine, and consumer health products. It has also created the Deep Blue Lab for intelligent pharmaceutical manufacturing, the Fuxi Lab to address the health needs of the aging population, and the Water Drop Lab, which focuses on the industrial design of consumer health products. In 2022, CR Sanjiu invested RMB 700 million in research and development.

    Zhou Hui, secretary of the board of directors of CR Sanjiu, said that the changes implemented have been positively received and evaluated in the capital market. This is evidenced by the signiicant increase in market value for two consecutive years and full realization of CR Sanjiu's corporate value. As deep reforms continue to take place, CR Sanjiu is conident that it will soar to even greater heights.

    As China's economy faces critical challenges and uncertainties,CRH remains dedicated to its patriotic mission and historical legacy.

    With a long history of standing at the forefront of the times, CRH's people will continue to develop and grow through excellent practices to welcome the Group's centenary anniversary.

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