Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Bottom-Up

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/973/original/BANNER-TourDec20.png?1608779882" class="editor-image img-responsive" data-smartkarma-image-id="179973"></figure></section><p><em>Outbound</em> Chinese tourism activity remained dormant in November. Macau's recovery slowed, and the appearance of a new variant of the Covid19 virus suggests a potential recovery in Chinese outbound travel may be pushed back until at least the middle of 2021, maybe later. </p><p>To our surprise, the recovery in <em>domestic</em> Chinese tourism also appears to have lost steam in November. Passenger counts at the three major national airlines fell YoY, and overall activity was well below that of October. Chinese consumers remain cautious towards discretionary travel. </p><p>We believe Chinese travel demand <em>will</em> recover gradually in 2021, and that the recovery could gain momentum in the second half of the year. Still, the emergence of a new strain of the virus will likely cap outbound travel in the near-term, and it also appears the rebound in domestic demand is moderating. For now, we would avoid pricey travel-related stocks like <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a>.</p>

Outbound Chinese tourism activity remained dormant in November. Macau's recovery slowed, and the appearance of a new variant of the Covid19 virus suggests a potential recovery in Chinese outbound travel may be pushed back until at least the middle of 2021, maybe later. To our surprise, the recovery in domestic Chinese tourism also appears to have lost steam in November. Passenger counts at the three major national airlines fell YoY, and overall activity was well below that of October. Chinese consumers remain cautious towards discretionary travel. We believe Chinese travel demand will recover gradually in 2021, and that the recovery could gain momentum in the second half of the year. Still, the emergence of a new strain of the virus will likely cap outbound travel in the near-term, and it also appears the rebound in domestic demand is moderating. For now, we would avoid pricey travel-related stocks like Trip.com (TCOM US).

TRACKING TRAFFIC/Chinese Tourism: Domestic Recovery Lost Steam in November

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<p>On December 26th, Beijing’s municipal government responded to a fresh outbreak of Covid19 by ordering residents to stay at home during the upcoming Lunar New Year (LNY) holiday. LNY falls on February 12th next year, barely six weeks from now.  </p>
<p>The bad news out of Beijing highlights an important risk to Chinese travel-related companies: that yet <em>another</em> important holiday period could effectively be lost to Covid19. If the restrictions put in place by local authorities in Beijing extend to other large cities or provinces, it could push back a recovery in Chinese travel demand until Summer 2021 or even Golden Week, in October 2021.</p>
<p>In this note we explain why LNY travel matters, and why we now believe normal levels of LNY travel may again be lost in 2021. We also point to the example of Macau, which continues to see sub-par tourism demand five months after it eased travel restrictions for some Chinese visitors.</p>




On December 26th, Beijing’s municipal government responded to a fresh outbreak of Covid19 by ordering residents to stay at home during the upcoming Lunar New Year (LNY) holiday. LNY falls on February 12th next year, barely six weeks from now.  
The bad news out of Beijing highlights an important risk to Chinese travel-related companies: that yet another important holiday period could effectively be lost to Covid19. If the restrictions put in place by local authorities in Beijing extend to other large cities or provinces, it could push back a recovery in Chinese travel demand until Summer 2021 or even Golden Week, in October 2021.
In this note we explain why LNY travel matters, and why we now believe normal levels of LNY travel may again be lost in 2021. We also point to the example of Macau, which continues to see sub-par tourism demand five months after it eased travel restrictions for some Chinese visitors.

Dreams Deferred: Looks Like Lunar New Year Travel Demand May Be Lost

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Travelsky Technology Ltd H / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/travelsky-technology-ltd-h" target="_blank" data-smartkarma-citation="entities:19829:1" rel="noopener">Travelsky Technology Ltd H (696 HK)</a> remains the de-facto SaaS play in the Chinese domestic airlines' industry that is proven by the higher ROE and lower debt level compared to the airlines in general. Volumes have recovered post the worse COVID-19 period thanks to the decisive government policy and as of October 2020, the YoY variance has narrowed to -1.3% compared to -46.7% in May 2020, further reinforcing the investment thesis that domestic travel that makes up to 85% of the group's business is recovering on the right direction. </p>
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<p><strong>Investors should treat <a href="https://www.smartkarma.com/entities/travelsky-technology-ltd-h" target="_blank" data-smartkarma-citation="entities:19829:1" rel="noopener">Travelsky Technology Ltd H (696 HK)</a> as an ETF to get exposure to the air travel recovery in China without the hassle of picking which airlines to buy.</strong></p>
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Travelsky Technology Ltd H (696 HK) remains the de-facto SaaS play in the Chinese domestic airlines' industry that is proven by the higher ROE and lower debt level compared to the airlines in general. Volumes have recovered post the worse COVID-19 period thanks to the decisive government policy and as of October 2020, the YoY variance has narrowed to -1.3% compared to -46.7% in May 2020, further reinforcing the investment thesis that domestic travel that makes up to 85% of the group's business is recovering on the right direction. 

Investors should treat Travelsky Technology Ltd H (696 HK) as an ETF to get exposure to the air travel recovery in China without the hassle of picking which airlines to buy.


Travelsky (696): Muted Impact from New Virus

HK/China Equity Long-Short

Osbert Tang, CFA

<p>While <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> (CSA) is still showing the best traffic performance in absolute level, the Nov traffic showed that <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> has started to pick up its momentum. We believe the three important things to note are: 1.) Air China recording the least retreat in passenger traffic momentum MoM, 2.) Air China has the least drop in passenger load factor MoM, and 3.) Air China gathering cargo momentum.</p><p>Since Nov, Air China has outperformed CSA by 10pp, and we see good possibility for this trend to continue into 2021, hence our <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a>. Another positive note is that share price of <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a> has surged by 63.6% from the rights issue price of HK$4.68, and this has added some HK$2.2bn to Air China's value on the additional holdings in CX from the rights.</p>

While China Southern Airlines (1055 HK) (CSA) is still showing the best traffic performance in absolute level, the Nov traffic showed that Air China Ltd (H) (753 HK) has started to pick up its momentum. We believe the three important things to note are: 1.) Air China recording the least retreat in passenger traffic momentum MoM, 2.) Air China has the least drop in passenger load factor MoM, and 3.) Air China gathering cargo momentum.Since Nov, Air China has outperformed CSA by 10pp, and we see good possibility for this trend to continue into 2021, hence our 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK). Another positive note is that share price of Cathay Pacific Airways (293 HK) has surged by 63.6% from the rights issue price of HK$4.68, and this has added some HK$2.2bn to Air China's value on the additional holdings in CX from the rights.

Air China (753 HK): Quietly Catching up Against Peers, Well Set to Outperform in 2021

Thematic (Sector/Industry)

<p>The tech break up is not happening soon but the regulators have been more vocal and active in penalizing the Big Tech companies. In the US, <a href="https://www.smartkarma.com/entities/facebook-inc-a" target="_blank" data-smartkarma-citation="entities:665:1" rel="noopener">Facebook Inc A (FB US)</a> was sued over monopoly concern and the EU has issued Digital Services Act that aims to create better chances for smaller developers to compete in the Apple and Google ecosystem. In China, the regulator has also been more stringent on the Big Tech, starting with the cancelation of <a href="https://www.smartkarma.com/entities/ant-financial-services-group" target="_blank" data-smartkarma-citation="entities:24240:1" rel="noopener">Ant Group (6688 HK)</a> IPO and now potentially to ask <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> and <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> to divest some of their investments. </p>
<p>The smaller tech companies in China also have issues that their revenue growth rate has started to slow down considerably, therefore, reducing the potential to reach break-even unless they do a massive cost-cutting exercise. </p>
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<p>source: Capital IQ</p>
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<p>If the Big Tech backer such as Tencent and Alibaba are told to reduce their holdings in the above shares, while the investees also do not much cash lying around in the balance sheet and trading at expensive valuation, there are two outcome possible - <strong>either a further capital raising that will send the shares multiples down or investors to start rotating into other sectors that also will send share price down. </strong></p>
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The tech break up is not happening soon but the regulators have been more vocal and active in penalizing the Big Tech companies. In the US, Facebook Inc A (FB US) was sued over monopoly concern and the EU has issued Digital Services Act that aims to create better chances for smaller developers to compete in the Apple and Google ecosystem. In China, the regulator has also been more stringent on the Big Tech, starting with the cancelation of Ant Group (6688 HK) IPO and now potentially to ask Tencent Holdings (700 HK) and Alibaba Group (9988 HK) to divest some of their investments. 
The smaller tech companies in China also have issues that their revenue growth rate has started to slow down considerably, therefore, reducing the potential to reach break-even unless they do a massive cost-cutting exercise. 


source: Capital IQ


If the Big Tech backer such as Tencent and Alibaba are told to reduce their holdings in the above shares, while the investees also do not much cash lying around in the balance sheet and trading at expensive valuation, there are two outcome possible - either a further capital raising that will send the shares multiples down or investors to start rotating into other sectors that also will send share price down. 


Hong Kong

Cathay Pacific Airways Limited operates scheduled airline services. The Company also provides related services, including airline catering, aircraft handling, and engineering.

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Cathay Pacific Airways (293 HK)

TRACKING TRAFFIC/Chinese Tourism: Domestic Recovery Lost Steam in November

It appears the nascent recovery in Chinese domestic tourism activity began to stall in November. Outbound travel activity remains dormant, and even...

Tracking Traffic

Dreams Deferred: Looks Like Lunar New Year Travel Demand May Be Lost

We now believe there is a better than even chance that much of the Chinese travel demand normally associated with LNY will be lost in 2021.

Tracking Traffic

Travelsky (696): Muted Impact from New Virus

Travelsky Technology Ltd H (696 HK) is comparable to an ETF for investors who want to get exposure to the air travel recovery in China without...

Henry Soediarko

Air China (753 HK): Quietly Catching up Against Peers, Well Set to Outperform in 2021

Air China narrowed its gap against CSA on traffic and load performance in Nov, and this sets the stage for its outperformance in 2021. The surge in...

Osbert Tang, CFA

Tech Sell-Off - Progress

Although the US and China are at so to say war, it is not too impossible that the Chinese and the US regulator will work together in order to curb...

Henry Soediarko

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