Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

China Unicom Hong Kong / Equity Bottom-Up

<ul>
<li>Despite the recent share price gain, <a href="https://www.smartkarma.com/entities/china-unicom-hong-kong-ltd" target="_blank" data-smartkarma-citation="entities:1016:1" rel="noopener">China Unicom (762 HK)</a> is inexpensive with respect to parent <a href="https://www.smartkarma.com/entities/china-united-network-a" target="_blank" data-smartkarma-citation="entities:12620:1" rel="noopener">China United Network (600050 CH)</a> - its pseudo domestic A-share twin - and to peers.</li>
<li>Preceding my comments on Unicom, are the current setup/unwind tables for Asia-Pacific Holdcos. </li>
<li>These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.</li>
</ul>


Despite the recent share price gain, China Unicom (762 HK) is inexpensive with respect to parent China United Network (600050 CH) - its pseudo domestic A-share twin - and to peers.
Preceding my comments on Unicom, are the current setup/unwind tables for Asia-Pacific Holdcos. 
These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation &gt;20%.


HK/China Equity Long-Short

Osbert Tang, CFA

Quantitative Analysis

<ul>
<li>Our "Buy the Worst" strategy outperformed HSI by a massive 26.1pp YTD. Over the last five years and seven, this strategy returned 39.7% and 25.8% respectively, beating the market significantly. </li>
<li>For 2022, the strategy will switch into <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a>, <a href="https://www.smartkarma.com/entities/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health (241 HK)</a>, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/sands-china-ltd" target="_blank" data-smartkarma-citation="entities:182:1" rel="noopener">Sands China (1928 HK)</a> and <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi (1810 HK)</a>, based on YTD performance.</li>
<li>While these names are facing sustained headwinds, track record of our strategy suggested that they are more likely to outperform in 2022 than underperform. We think there is turnaround potential.</li>
</ul>


Our "Buy the Worst" strategy outperformed HSI by a massive 26.1pp YTD. Over the last five years and seven, this strategy returned 39.7% and 25.8% respectively, beating the market significantly. 
For 2022, the strategy will switch into Haidilao (6862 HK), Alibaba Health (241 HK), Alibaba Group (9988 HK), Sands China (1928 HK) and Xiaomi (1810 HK), based on YTD performance.
While these names are facing sustained headwinds, track record of our strategy suggested that they are more likely to outperform in 2022 than underperform. We think there is turnaround potential.


“Buy the Worst” Strategy into Year 3: What's on for 2022 to Beat the HSI?

Research on Tech Companies

Evelyn Zhang

Thematic (Sector/Industry)

<ul>
<li> More difficult for companies to obtain and accumulate data;</li>
<li>Digital advertising alliance will be impacted, precision advertising ROI will decline</li>
<li>Mobility service provider like Didi, Ctrip will no longer able to offer differentiate pricing through user profile, also restricted for containing  on national geographic information security</li>
<li>Public Cloud market will transfer from current internet cloud provider to state-owned cloud, benefit infrastructure and service providers</li>
<li>Facial Recognition AI such as in-car camera for autonomous driving assistance will be impacted</li>
<li>Short video content platform will have restrictions on the use of recommendation algorithms, which may cause a decline in user time, and the ecommerce product recommendation accuracy</li>
<li>Internet companies with more than 1mn users that have plans to list in US will have to reconsider</li>
</ul>


 More difficult for companies to obtain and accumulate data;
Digital advertising alliance will be impacted, precision advertising ROI will decline
Mobility service provider like Didi, Ctrip will no longer able to offer differentiate pricing through user profile, also restricted for containing  on national geographic information security
Public Cloud market will transfer from current internet cloud provider to state-owned cloud, benefit infrastructure and service providers
Facial Recognition AI such as in-car camera for autonomous driving assistance will be impacted
Short video content platform will have restrictions on the use of recommendation algorithms, which may cause a decline in user time, and the ecommerce product recommendation accuracy
Internet companies with more than 1mn users that have plans to list in US will have to reconsider


Law & Order: What the New Data Security Laws Mean for China's Tech Sector?

Our "Buy the Worst" strategy as laid out in <a href="https://www.smartkarma.com/insights/a-review-of-buy-the-worst-strategy-in-2020-and-can-it-beat-the-hang-seng-index-in-2021" target="_blank" data-smartkarma-citation="insights:46654" rel="noopener">A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021?</a> showed good performance YTD with a 20.9pp outperformance against the HSI. For most of the time in this year, the average performance for the 5 worst HSI stocks in 2020 - <a href="https://www.smartkarma.com/entities/citic-ltd" target="_blank" data-smartkarma-citation="entities:20590:1" rel="noopener">Citic Ltd (267 HK)</a>, <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a>, <a href="https://www.smartkarma.com/entities/aac-technologies-holdings-inc" target="_blank" data-smartkarma-citation="entities:6544:1" rel="noopener">AAC Technologies Holdings (2018 HK)</a> and <a href="https://www.smartkarma.com/entities/china-unicom-hong-kong-ltd" target="_blank" data-smartkarma-citation="entities:1016:1" rel="noopener">China Unicom Hong Kong (762 HK)</a> - has been ahead of the benchmark index. We will hold on these 5 stocks until the year end of 2021. For 2H21, we continue to see good room for them to outperform. On average, they are still off 41.6% from their 3-year high, vs. just 13% for HSI. With our anticipation of a volatile HSI over the next six months due to concerns on inflation, Sino-US tension, COVID-19 variants and regulatory measures on new economy companies, these old economy stocks with undemanding valuations are stand to see better performance, in our view.

Our "Buy the Worst" strategy as laid out in A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021? showed good performance YTD with a 20.9pp outperformance against the HSI. For most of the time in this year, the average performance for the 5 worst HSI stocks in 2020 - Citic Ltd (267 HK), China Overseas Land &amp; Investment Ltd (688 HK), CNOOC Ltd (883 HK), AAC Technologies Holdings (2018 HK) and China Unicom Hong Kong (762 HK) - has been ahead of the benchmark index. We will hold on these 5 stocks until the year end of 2021. For 2H21, we continue to see good room for them to outperform. On average, they are still off 41.6% from their 3-year high, vs. just 13% for HSI. With our anticipation of a volatile HSI over the next six months due to concerns on inflation, Sino-US tension, COVID-19 variants and regulatory measures on new economy companies, these old economy stocks with undemanding valuations are stand to see better performance, in our view. 

A Mid-Year Review of Our "Buy the Worst" Strategy: Outperformed HSI by 20.9pp

Travis Lundy

Event-Driven

In very early January, the NYSE decided that <a href="https://www.smartkarma.com/entities/china-mobile-ltd" target="_blank" data-smartkarma-citation="entities:27:1" rel="noopener">China Mobile (941 HK)</a> ADRs needed to be delisted. Then they didn't need to be delisted. Then they again needed to be delisted and we are on a path to seeing that complete shortly.The stock was subject to Trump's Executive Order 13959 regarding Communist Chinese Military Companies as were the shares of other Chinese telcos and China Mobile shares were deleted from global indices. That event marked a local low in the first week of January and shares promptly rallied 30%, later settling at an easy 15-20% above the index deletion point. This, and the fact that China a couple of years ago created a method for overseas-jurisdiction Chinese companies to list in China - particularly for very high market cap "tech" companies aiming to take market share from the US for its high-trading value "exported tickers" meant that at some point, the Chinese telcos creating a secondary listing in China was not going to be a surprise. Taking the example of <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd-h" target="_blank" data-smartkarma-citation="entities:1015:1" rel="noopener">China Telecom Corp Ltd (H) (728 HK)</a> which received permission in April to list its shares in mainland markets, on 17 May China Mobile announced its board had decided to pursue a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0517/2021051701190.pdf" target="_blank" rel="noopener">Proposed RMB Share Issue</a>.A week later, and we have a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0524/2021052400195.pdf" target="_blank" rel="noopener">Circular</a>.China Mobile shareholders are being asked to accept that management issue some RMB 50+bn of shares for the stated purpose of investing in "the development of premium 5G networks, the development of new infrastructure for cloud resources, the development of gigabit broadband and smart home, the development of smart mid-end platform, the research and development of the next-generation information technology and digitalized and intelligent ecosystem."That sounds reasonable enough as a concept, but it ignores the fact that China Mobile has nine times that much money in available cash. and eight times that amount in net cash + securities holdings.If China Mobile shares were trading at a high multiple, this might be forgivable, but the shares are trading at a forward adjusted EV/EBITDA multiple of 1.6x and an ex-net cash &amp; securities PER of less than 4x. There are mitigants here. There is possible pricing at a premium to the Hs. There are "price stabilization measures". There are "shareholder return" measures. Some of these might be really worthwhile. The governance issues involved in this Circular and project remain problematic. But there are little stars here, twinkling in the darkness. More below the fold.

In very early January, the NYSE decided that China Mobile (941 HK) ADRs needed to be delisted. Then they didn't need to be delisted. Then they again needed to be delisted and we are on a path to seeing that complete shortly.The stock was subject to Trump's Executive Order 13959 regarding Communist Chinese Military Companies as were the shares of other Chinese telcos and China Mobile shares were deleted from global indices. That event marked a local low in the first week of January and shares promptly rallied 30%, later settling at an easy 15-20% above the index deletion point. This, and the fact that China a couple of years ago created a method for overseas-jurisdiction Chinese companies to list in China - particularly for very high market cap "tech" companies aiming to take market share from the US for its high-trading value "exported tickers" meant that at some point, the Chinese telcos creating a secondary listing in China was not going to be a surprise. Taking the example of China Telecom Corp Ltd (H) (728 HK) which received permission in April to list its shares in mainland markets, on 17 May China Mobile announced its board had decided to pursue a Proposed RMB Share Issue.A week later, and we have a Circular.China Mobile shareholders are being asked to accept that management issue some RMB 50+bn of shares for the stated purpose of investing in "the development of premium 5G networks, the development of new infrastructure for cloud resources, the development of gigabit broadband and smart home, the development of smart mid-end platform, the research and development of the next-generation information technology and digitalized and intelligent ecosystem."That sounds reasonable enough as a concept, but it ignores the fact that China Mobile has nine times that much money in available cash. and eight times that amount in net cash + securities holdings.If China Mobile shares were trading at a high multiple, this might be forgivable, but the shares are trading at a forward adjusted EV/EBITDA multiple of 1.6x and an ex-net cash &amp; securities PER of less than 4x. There are mitigants here. There is possible pricing at a premium to the Hs. There are "price stabilization measures". There are "shareholder return" measures. Some of these might be really worthwhile. The governance issues involved in this Circular and project remain problematic. But there are little stars here, twinkling in the darkness. More below the fold.

China Mobile (941 HK) - It Could Have Been Done Better, But It Ain't Bad for Hs

Hong Kong

China Unicom (Hong Kong) Limited, through its subsidiaries, provides telecommunications services in the People's Republic of China.  The Company's services include cellular, paging, long distance, data, and Internet services.

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China Unicom Hong Kong (762 HK)

StubWorld: Unicom's "Hs" Are Cheap

Unicom is inexpensive versus domestic and international peers, and compared to historical levels. The company is net cash with a solid yield....

David Blennerhassett

“Buy the Worst” Strategy into Year 3: What's on for 2022 to Beat the HSI?

Our "Buy the Worst" strategy outperformed HSI by a massive 26.1pp YTD. For 2022, new names are Haidilao, Ali Health, Alibaba, Sands China and...

Osbert Tang, CFA

Law & Order: What the New Data Security Laws Mean for China's Tech Sector?

China's recent new sweeping data security and protection laws have set the tech sector in turmoil, We examin what are the impact way forward.

Evelyn Zhang

A Mid-Year Review of Our "Buy the Worst" Strategy: Outperformed HSI by 20.9pp

Our "Buy the Worst" strategy has outperformed HSI by 20.9pp so far in 2021; and we believe with the volatile outlook for 2H21, the 5 stocks in the...

Osbert Tang, CFA

China Mobile (941 HK) - It Could Have Been Done Better, But It Ain't Bad for Hs

China Mobile will follow China Telecom in issuing A-shares. The constructs are almost identical. Both suggest upside to the Hs, perhaps more for...

Travis Lundy

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