HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Zhejiang Expressway Co H / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/zhejiang-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2178:1" rel="noopener">Zhejiang Expressway Co H (576 HK)</a>'s (ZJEC) subsidiary <a href="https://www.smartkarma.com/entities/zheshang-securities-co-ltd" target="_blank" data-smartkarma-citation="entities:29981:1" rel="noopener">Zheshang Securities Co Ltd (601878 CH)</a> pre-announced a set of solid FY20 result on 26 Jan. With the current strength of the A-share market, we believe this business will add to the recovery of toll road business in FY21, driving encouraging momentum for ZJEC.Focusing back to the core toll road business, both traffic and toll revenue are showing positive YoY growth in Dec 2020, suggesting good recovery pace. ZJEC is also progressing ahead with the plan to list the toll collection rights of Hanghui Expressway as a public infrastructure REIT. We think these factors are important catalysts for ZJEC in this year. Its 5.9x PER and 0.86x P/B for 12-month forward are undemanding and its ROE vs. P/B is also inexpensive in the sector.

Zhejiang Expressway Co H (576 HK)'s (ZJEC) subsidiary Zheshang Securities Co Ltd (601878 CH) pre-announced a set of solid FY20 result on 26 Jan. With the current strength of the A-share market, we believe this business will add to the recovery of toll road business in FY21, driving encouraging momentum for ZJEC.Focusing back to the core toll road business, both traffic and toll revenue are showing positive YoY growth in Dec 2020, suggesting good recovery pace. ZJEC is also progressing ahead with the plan to list the toll collection rights of Hanghui Expressway as a public infrastructure REIT. We think these factors are important catalysts for ZJEC in this year. Its 5.9x PER and 0.86x P/B for 12-month forward are undemanding and its ROE vs. P/B is also inexpensive in the sector.  

Zhejiang Expressway (576 HK): Gaining from Both Growth and Stable Business Exposures

Thematic (Sector/Industry)

We see the joint announcement by five ministries/departments on the development of postal and express industry in the Guangdong-Hong Kong-Macau Greater Bay Area has positive implications on many of the logistics operators in China in the medium to long term. The supporting initiatives range from the strengthening of the strategic hubs of Guangzhou and Shenzhen airports to encouraging more industry consolidations.While many companies are expected to benefit from these GBA postal and express policies, we highlight some of the most important ones in this Insight - <a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> (GBIA) and <a href="https://www.smartkarma.com/entities/shenzhen-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:15522:1" rel="noopener">Shenzhen Airport Co A (000089 CH)</a>, <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>, <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a>, <a href="https://www.smartkarma.com/entities/kerry-logistics-network-ltd" target="_blank" data-smartkarma-citation="entities:367:1" rel="noopener">Kerry Logistics Network (636 HK)</a>, <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> and <a href="https://www.smartkarma.com/entities/maanshan-dingtai-rare-a" target="_blank" data-smartkarma-citation="entities:4128:1" rel="noopener">S.F. Holding (002352 CH)</a>.

We see the joint announcement by five ministries/departments on the development of postal and express industry in the Guangdong-Hong Kong-Macau Greater Bay Area has positive implications on many of the logistics operators in China in the medium to long term. The supporting initiatives range from the strengthening of the strategic hubs of Guangzhou and Shenzhen airports to encouraging more industry consolidations.While many companies are expected to benefit from these GBA postal and express policies, we highlight some of the most important ones in this Insight - Guangzhou Baiyun International Airport (600004 CH) (GBIA) and Shenzhen Airport Co A (000089 CH), China Southern Airlines (1055 HK), Sinotrans (598 HK), Kerry Logistics Network (636 HK), Shenzhen Intl (152 HK) and S.F. Holding (002352 CH).

China Logistics: Key Beneficiaries of China's Greater Bay Area Postal and Express Development

Shenzhen International / Equity Bottom-Up

In this Insight, we look at the pair trades involving the three key Shenzhen state-owned enterprises - <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a>, <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> and <a href="https://www.smartkarma.com/entities/shenzhen-investment-ltd" target="_blank" data-smartkarma-citation="entities:17281:1" rel="noopener">Shenzhen Investment (604 HK)</a>.  We believe the best trade will be a "Long Shenzhen Int, short Shenzhen Inv" strategy as we believe the catalysts include growth in logistics business, recovery of air and toll road traffic and REIT issuance of toll roads will drive outperform of SZ Int against SZ Inv (which is primarily a property company).We also think that SZ Int is best place to benefit from the supportive policies introduced by the government, given its business mix and its size. Our overall ranking of these three stocks are: 1.) SZ Int, 2.) SZ Exp, and 3.) SZ Inv. <a href="https://www.smartkarma.com/entities/shenzhen-investment-holdings-bay-area-development" target="_blank" data-smartkarma-citation="entities:12134:1" rel="noopener"></a>

In this Insight, we look at the pair trades involving the three key Shenzhen state-owned enterprises - Shenzhen Intl (152 HK), Shenzhen Expressway Co H (548 HK) and Shenzhen Investment (604 HK).  We believe the best trade will be a "Long Shenzhen Int, short Shenzhen Inv" strategy as we believe the catalysts include growth in logistics business, recovery of air and toll road traffic and REIT issuance of toll roads will drive outperform of SZ Int against SZ Inv (which is primarily a property company).We also think that SZ Int is best place to benefit from the supportive policies introduced by the government, given its business mix and its size. Our overall ranking of these three stocks are: 1.) SZ Int, 2.) SZ Exp, and 3.) SZ Inv. 

The Shenzhen Story: A Look at the Pair Trades on SZ Int, SZ Exp and SZ Inv

Shenzhen Airlines (SZA), <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a>'s 49%-owned associated company, posted a sharp turnaround in 3Q20 with a profit of Rmb239m, compared with a loss of Rmb2.2bn in 1H20. This has very positive implications on SZIH given that SZA is its major profit contributor. Adding to that is the full recovery at its 51.56%-owned <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> (SZEX) which recorded a 1.9% YoY profit growth in 3Q20. We estimate that SZEX and SZA together will generate a massive positive swing of HK$1.7bn in SZIH's bottom line in 3Q20 when compared with 1H20.In our view, the solid results of these two operating entities showcased a good momentum on SZIH's business segments in 2H20. With further improvement in its logistics business, we are positive on SZIH's recovery in 2H20. From the COVID-19 trough, the stock has underperformed the share price rebounds of the H-share airlines and H-share toll roads, yet SZEX and SZA normally contribute 86-87% of SZIH's recurrent earnings. That said, we see good value in SZIH which trades on undemanding 0.87x P/B.

Shenzhen Airlines (SZA), Shenzhen Intl (152 HK)'s 49%-owned associated company, posted a sharp turnaround in 3Q20 with a profit of Rmb239m, compared with a loss of Rmb2.2bn in 1H20. This has very positive implications on SZIH given that SZA is its major profit contributor. Adding to that is the full recovery at its 51.56%-owned Shenzhen Expressway Co H (548 HK) (SZEX) which recorded a 1.9% YoY profit growth in 3Q20. We estimate that SZEX and SZA together will generate a massive positive swing of HK$1.7bn in SZIH's bottom line in 3Q20 when compared with 1H20.In our view, the solid results of these two operating entities showcased a good momentum on SZIH's business segments in 2H20. With further improvement in its logistics business, we are positive on SZIH's recovery in 2H20. From the COVID-19 trough, the stock has underperformed the share price rebounds of the H-share airlines and H-share toll roads, yet SZEX and SZA normally contribute 86-87% of SZIH's recurrent earnings. That said, we see good value in SZIH which trades on undemanding 0.87x P/B.

Shenzhen Intl (152 HK): Shenzhen Airlines Returned to Profit in 3Q20

We find <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> (SZIH) an interesting, yet inexpensive, play on the encouraging outlook of both Shenzhen city and the Greater Bay Area. At the current depressed valuation of just 0.87x P/B, it is off significantly from the peak P/B of 1.2x in early this year. We see this penalty unjustifiable, as its two core assets - <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> (SZEX) and Shenzhen Airlines - will see good recovery in bottom line in 2H20. The announcement of their 3Q20 results are likely positive catalysts, as SZIH itself does not report quarterly result.Longer term, SZIH is a beneficiary of infrastructure REIT program given its HK$15.8bn worth of logistics assets, and this business will also benefit from the e-commerce boom. Moreover, as the controlling shareholder of SZEX, SZIH will accrue the benefits from SZEX's potential securitisation of toll road and environmental treatment assets. In our view, SZIH is a rare species that currently overlooked by the market.

We find Shenzhen Intl (152 HK) (SZIH) an interesting, yet inexpensive, play on the encouraging outlook of both Shenzhen city and the Greater Bay Area. At the current depressed valuation of just 0.87x P/B, it is off significantly from the peak P/B of 1.2x in early this year. We see this penalty unjustifiable, as its two core assets - Shenzhen Expressway Co H (548 HK) (SZEX) and Shenzhen Airlines - will see good recovery in bottom line in 2H20. The announcement of their 3Q20 results are likely positive catalysts, as SZIH itself does not report quarterly result.Longer term, SZIH is a beneficiary of infrastructure REIT program given its HK$15.8bn worth of logistics assets, and this business will also benefit from the e-commerce boom. Moreover, as the controlling shareholder of SZEX, SZIH will accrue the benefits from SZEX's potential securitisation of toll road and environmental treatment assets. In our view, SZIH is a rare species that currently overlooked by the market. 

Shenzhen Intl (152 HK): A Gem in the Greater Bay Area

China

Shenzhen Expressway Company Limited constructs, manages and operates toll highways and expressways in China.

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Shenzhen Expressway Co H (548 HK)

Zhejiang Expressway (576 HK): Gaining from Both Growth and Stable Business Exposures

Sustained toll revenue recovery, further strength at Zheshang Securities and possible REIT issuance of Hanghui Expressway are potential drivers in...

Osbert Tang, CFA

China Logistics: Key Beneficiaries of China's Greater Bay Area Postal and Express Development

China's support of postal and express industry development in the Greater Bay Area has positive implications on many logistics companies. We...

Osbert Tang, CFA

The Shenzhen Story: A Look at the Pair Trades on SZ Int, SZ Exp and SZ Inv

We rank the three Shenzhen SOEs in the following order: SZ Int (152 HK), SZ Exp (548 HK) and SZ Inv (604 HK); and believe "Long SZ Int, short SZ...

Osbert Tang, CFA

Shenzhen Intl (152 HK): Shenzhen Airlines Returned to Profit in 3Q20

We estimate that Shenzhen Airlines and Shenzhen Expressway together will generate a positive swing of HK$1.7bn in Shenzhen Intl's 3Q20 bottom line...

Osbert Tang, CFA

Shenzhen Intl (152 HK): A Gem in the Greater Bay Area

Shenzhen Intl is an interesting, yet inexpensive (0.87x P/B), play on the encouraging outlook of Shenzhen and the Greater Bay Area. 3Q20 results of...

Osbert Tang, CFA

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