In the realm of corporate investment, the vision of “one body with two wings” proposed by Modern Investment (000090.SZ) appears promising on the surface, especially when one considers their financial achievementsThe company's recent annual report reveals a net profit of 543 million yuan, marking a notable increase of 25.41%. Each share yields an earnings per share (EPS) figure of 0.32 yuan, compounded by a dividend proposal of 1.5 yuan per ten sharesFrom these metrics, everything seems to indicate a stable and prosperous future for the company and its shareholders.

However, as a listed entity primarily engaged in highway toll collection, Modern Investment's stock performance diverges critically from the trajectory of the overall highway industry index over the past yearThis divergent behavior raises critical questions about the underlying factors affecting investor sentiment and market perception, particularly in an era emphasizing improved market value management among state-owned enterprises.

To grasp why Modern Investment has received such a contrasting market reaction, it is essential to delve deeper into the annual report

The company’s business portfolio is impressively extensive, featuring multiple sectors, including toll collection and maintenance via its subsidiary companiesIt also runs Da Yu Futures, which encompasses various financial sectors such as commodity and financial future brokerage, asset management, and risk managementFurthermore, it manages Modern Wealth, which deals in debt financial products and commodity trading, while highlighting investment and management services through its private equity management divisions like Modern HongyuanThe company also holds a stake in the Hunan Yueyang Baling Rural Commercial Bank and spans various environmental technology initiatives through Hunan Modern Environmental Technology Co., Ltd., among others.

However, academic research on corporate diversification presents a critical lens through which we can analyze these activities

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Generally, related diversification—where a company expands within sectors closely tied to its core business—can act to enhance corporate valueFor instance, a highway company diversifying into related areas like upstream equipment manufacturing or downstream service provision can improve operational synergyModern Investment’s ambitions to invest, construct, and operate in the “transportation + new energy” sectors reflect this strategyIn contrast, unrelated diversification, where businesses diverge significantly from core operations, tends to erode overall company value.

Reviewing Modern Investment’s activities further, it becomes clear they have ventured into numerous non-core strategic areas such as environmental technologies and financial managementTheir annual report often references the “one body with two wings” approach, defining “one body” as highway investment and management, and the “two wings” as their ventures in financial services and industrial operations

Despite this neatly packaged strategic vision, the financial results suggest that these unrelated diversifications have predominantly been value-destroying activities, aligning with scholarly conclusions on sustainability in corporate management.

When examining the contributions of their core and subsidiary companies to net profits, except for Da Yu Futures, which recorded a positive net profit, both Modern Wealth and Modern Environmental Technology reported significant losses totaling 189 million yuanNotably, the losses from Modern Environmental Technology have been ongoing, with previous losses documented at 88 million yuan in 2022. This leads to the stark realization that the losses from these ‘wings’ are not merely numbers; they represent opportunity costs that could have yielded returns if allocated towards more profitable sectors aligned with their core business.

In strategically reassessing their operations, Modern Investment must contemplate pathways to enhance shareholder value effectively

The symbiotic relationship between the “two wings” and the “one body” must be carefully managed; they should synergize rather than weaken the company's core operationsEffective “wings” can indeed propel a company’s growth, but weak and struggling business units can emerge as significant liabilities.

A notable signal for strategic slimming is evidenced in the company's annual report where a substantial scale-back of trading operations is noted, alongside a sharp decline in overall revenueThe revenue dropped by approximately 79.64 billion yuan, a 50.17% decrease compared to the prior year, primarily attributable to an 83.72 billion yuan decline in commodity trading incomeThis drastic reduction can be viewed as a proactive measure in response to regulatory policies and shifting environmental factors, highlighting a robust risk management ethos as the company reviews and curtails underperforming operations.

If Modern Investment continues on this path of strategic contraction, particularly by divesting from unprofitable, non-core activities, there exists the potential to significantly boost net profits by over 200 million yuan