Chinese asset managers are rushing to launch funds to woo investors into state-owned firms, whose shares have surged this year as Beijing pushes the market to revalue the previously overlooked state sector.

Shares of state-owned enterprises (SOEs) have risen sharply since November, when top securities regulator Yi Huiman called for a new model to price them. China's state asset regulator has repeatedly urged SOEs to improve profitability and communications with investors, in line with Beijing's overall efforts in the past three years to make these firms leaner and stronger.

Mainland-listed state telecom operators China Mobile and China Telecom have jumped more than 50% each this year and China Petroleum & Chemical Corp has soared 44%, compared with a 5% gain in the benchmark index.

The rally has spurred fund launches. More than 10 mutual fund companies have applied to launch nearly a score of SOE-dedicated funds since March, state media reported.

E Fund Management Co this week launched a mutual fund, aiming to raise up to 8 billion yuan ($1.16 billion) to be ploughed into shares of strategically important SOEs.

Rongtong Fund Management Co, which is controlled by an SOE tasked with managing state-owned capital, said it plans to roll out a series of products targeting SOEs.

Pierre Hoebrechts, head of macro research at East Eagle Asset Management, points to the noticeable improvement in the finances of SOEs.

"Generally, they have outperformed investors' expectations. And many of them are much cheaper than their global peers, which is one of the factors that has made them an interesting segment to invest in over the past few months and going forward," he said.

State companies' shares have so far outperformed the broader market, delivering what investors term a rare "SOE alpha".

The CSI State-owned Enterprises Composite Index is up 8% so far this year and the CSI Central-SOEs Technological Innovation Index has soared 24%.

The funds are hoping to cash in on improving retail sentiment, focused on SOE reforms and technological self-reliance. Turnover in the A-share market has surpassed 1 trillion yuan ($145.26 billion) for two weeks.

BETTER COMMUNICATION

Qi Wang, CEO of MegaTrust Investment(HK) says SOEs have also improved investor communication and transparency, citing the example of a planned 20-minute conference call with a large SOE's investor relations (IR) official that extended to more than an hour.

"The company IR was eager to impress us and did most of the talking. This is a major departure from their unenthusiastic manner years ago," Wang said in a note to clients.

Investors also expect SOEs to play a big role in Beijing's desire for tech self-sufficiency and national security in its rivalry with the United States.

Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management, said investors should consider treating Chinese telecom giants as growth, rather than value stocks, given their growth outlook in cloud computing.

That means "there is a huge valuation upside potential," said Yuan, who started buying Chinese telecom and oil companies last November.

However, there are some questions in the market about whether the rally will be sustained.

"In the long term, SOEs' performance still needs more fundamental support," said Lei Meng, China equities strategist at UBS Securities.

"We need to observe the implementation of more policy details or more improvements in SOEs' operating efficiency."

MegaTrust's Wang also sees SOEs as good trading opportunities, not ideal for long-term investment.

"We are still at the early stage of moving from mediocre to good, not from good to great ... this is not yet a Cinderella story." ($1 = 6.8850 Chinese yuan) (Reporting by Jason Xue and Samuel Shen in Shanghai, Summer Zhen in Hong Kong Editing by Vidya Ranganathan & Shri Navaratnam)