HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Shenzhen International / Equity Bottom-Up

<ul>
<li>Given Shenzhen Airlines is already in negative equity, <a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> will not record any of its losses in 2H22, making a big HoH swing in its impact.</li>
<li>The injections of Hangzhou and Hefei logistics projects will be completed by end-FY22, bringing in one-off gains. Jul-Aug toll revenue of <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway (548 HK)</a> has also recovered vs. 1H22.</li>
<li>While there will not be profit at logistics parks transformation business in 2H22, Qianhai Phase II has completed pre-sale in Sep, bring in potentially Rmb3bn to be booked in FY23.</li>
</ul>


Given Shenzhen Airlines is already in negative equity, Shenzhen International (152 HK) will not record any of its losses in 2H22, making a big HoH swing in its impact.
The injections of Hangzhou and Hefei logistics projects will be completed by end-FY22, bringing in one-off gains. Jul-Aug toll revenue of Shenzhen Expressway (548 HK) has also recovered vs. 1H22.
While there will not be profit at logistics parks transformation business in 2H22, Qianhai Phase II has completed pre-sale in Sep, bring in potentially Rmb3bn to be booked in FY23.


Shenzhen Intl (152 HK): Updates on Latest Developments

Shenzhen Expressway Co H / Equity Bottom-Up

<ul>
<li>
<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> guided that many drivers are presented for the rest of the year to support growth, after a 24% YoY decline in 1Q22 net profit. </li>
<li>Toll road business should benefit from organic growth and project completions, while clean energy and waste treatment businesses will experience astronomical growth from capacity acquisitions. </li>
<li>There exists room to leverage up for growth as liabilities-to-asset ratio is still 11pp below its tolerance level of 65%. Besides below-average PERs, FY22F yield of 10% is attractive too.</li>
</ul>



Shenzhen Expressway Co H (548 HK) guided that many drivers are presented for the rest of the year to support growth, after a 24% YoY decline in 1Q22 net profit. 
Toll road business should benefit from organic growth and project completions, while clean energy and waste treatment businesses will experience astronomical growth from capacity acquisitions. 
There exists room to leverage up for growth as liabilities-to-asset ratio is still 11pp below its tolerance level of 65%. Besides below-average PERs, FY22F yield of 10% is attractive too.


Shenzhen Expressway (548 HK): Cautiously Optimistic

<ul>
<li>By deconsolidating <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway (548 HK)</a> (SZX) from <a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> (SZI), SZI's net book value reached HK$16.4bn. Its current market cap of HK$18.9bn implies SZX is almost free. </li>
<li>SZI's high gearing is primarily due to SZX. Excluding SZX, SZI's gearing is just 32.3%. As Shenzhen's flagship SOE, there is consistent monitoring and huge support from the local government.   </li>
<li>SZI's 0.47x P/B is more than 2SD below historical average; but it has proven capability to realise value of underlying assets. Excluding SZX, SZI is on even cheaper 0.32x P/B. </li>
</ul>


By deconsolidating Shenzhen Expressway (548 HK) (SZX) from Shenzhen International (152 HK) (SZI), SZI's net book value reached HK$16.4bn. Its current market cap of HK$18.9bn implies SZX is almost free. 
SZI's high gearing is primarily due to SZX. Excluding SZX, SZI's gearing is just 32.3%. As Shenzhen's flagship SOE, there is consistent monitoring and huge support from the local government.   
SZI's 0.47x P/B is more than 2SD below historical average; but it has proven capability to realise value of underlying assets. Excluding SZX, SZI is on even cheaper 0.32x P/B. 


Shenzhen Intl (152 HK): Deep Dissection Indicates Truly Undervalued

Thematic (Sector/Industry)

<ul>
<li>China Education Sector, specifically <a href="https://www.smartkarma.com/entities/china-education-group-holdin" target="_blank" data-smartkarma-citation="entities:18218:1" rel="noopener">China Education Group (839 HK)</a>, should see better performance in 2022 as regulatory concerns gradually ease. 1H22 result for higher education segment should be a proof.</li>
<li>
<a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> could reverse the bad fortune in 2022 on the back of realisation of undervalued assets, expansion of logistics facilities and better performance at Shenzhen Airlines.</li>
<li>
<a href="https://www.smartkarma.com/entities/china-dongxiang-group-co" target="_blank" data-smartkarma-citation="entities:1068:1" rel="noopener">China Dongxiang (3818 HK)</a> remains an undervalued asset play. Its ability to realise value of its investment portfolio, potential resumption of dividend payout and recovery of sportswear business are drivers.</li>
</ul>


China Education Sector, specifically China Education Group (839 HK), should see better performance in 2022 as regulatory concerns gradually ease. 1H22 result for higher education segment should be a proof.

Shenzhen International (152 HK) could reverse the bad fortune in 2022 on the back of realisation of undervalued assets, expansion of logistics facilities and better performance at Shenzhen Airlines.

China Dongxiang (3818 HK) remains an undervalued asset play. Its ability to realise value of its investment portfolio, potential resumption of dividend payout and recovery of sportswear business are drivers.


Our Three Worst Calls in Last Year and Any Room for a Reversal in 2022?

Zhejiang Expressway Co H / Equity Bottom-Up

<p>After reporting an 8.65x surge in profit in 1H21, we think there are three drivers that should bring better outlook for <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> (ZJEC) over the next twelve months. These positive factors include further rebound in traffic and toll revenue, additional contribution from new projects and good upside from profit of <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>. </p><p>YTD, share price of ZJEC increased by 10%, but we still see good upside potential given that it trades on only 0.9x P/B for FY21 and its ROE for 1H21 already reached 10.1% (before annualised). On earnings valuation, its 5.7x and 5.0x PER for FY21 and FY22, respectively, also appeared very attractive, in our view. </p>

After reporting an 8.65x surge in profit in 1H21, we think there are three drivers that should bring better outlook for Zhejiang Expressway Co H (576 HK) (ZJEC) over the next twelve months. These positive factors include further rebound in traffic and toll revenue, additional contribution from new projects and good upside from profit of Zheshang Securities Co Ltd (601878 CH). YTD, share price of ZJEC increased by 10%, but we still see good upside potential given that it trades on only 0.9x P/B for FY21 and its ROE for 1H21 already reached 10.1% (before annualised). On earnings valuation, its 5.7x and 5.0x PER for FY21 and FY22, respectively, also appeared very attractive, in our view. 

Zhejiang Expressway (576 HK): Drivers in Place for Robust Outlook

China

Tianjin Port Co., Ltd. operates the Tianjin Port and provides related services including loading and unloading, storage, and transportation services.  The Company also acts as a freight transportation agency.

Beibuwan Port Co., Ltd. provides support services for water transportation, including loading and unloading, storage, transportation, and other port related services. Through its subsidiaries, the Company also acts as an oversea transportation agent and develops real estate.

Jiangxi Ganyue Expressway Co., Ltd. maintains, operates, and manages toll expressways, bridges, and other transportation facilities.  The Company manages the Changjiu Expressway, the Changzhang Expressway, the Changfu Expressway, and the Yinsanjiao Overpass.

Jiangxi Ganyue Expressway Co., (600269 CH)

Anhui Expressway Co. Ltd. principally holds, operates and develops toll expressways and highways in Anhui province in China.

Anhui Wanjiang Logistics Group Co Ltd provides loading, unloading, storage, and transition services for coal, containers, bulk and general marine cargo.

Liaoning Port Co.,Ltd. provides logistics services. The Company offers container handling, container transportation, crude oil warehousing, gross cargo transportation, and other services. Liaoning Port provides its services throughout China.

Shenzhen Airport Co., Ltd. provides airport terminal ground passenger transportation and cargo delivery services.  The Company also leases airport lounge, designs and publishes advertisements, and offers air ticket agency services.

Sichuan Expressway Company Limited offers expressway investment and construction services. The Company builds toll highway, bridge, tunnel, and other traffic projects. Sichuan Expressway also conducts city operation, energy, media and financial investment businesses.

Qinhuangdao Port Company Limited loads, stores, transports port cargo. The Company's main products include liquid chemicals, iron ore and coal, oil and other cargo, containers and other products.

Dongguan Development Holdings Co., Ltd invests, develops, and operates toll collection for the Dongguan expressway.

Dongguan Development (Holdings) Co., (000828 CH)

Shenzhen International Holdings Limited operates as a holding company. The Company, through its subsidiaries, provides investment, construction, and operation of logistic infrastructure facilities, as well as offers value-added logistic services. Shenzhen International serves customers worldwide.

COSCO Shipping Ports Limited, through its subsidiaries, provides shipping container leasing services worldwide.  The Company also operates container terminals and provides container handling, storage, transportation and management services, as well as depot handling and stevedoring services.

Port of Tauranga Limited activities include the provision of wharf facilities, back up land for the storage and transit of import and export cargo, berthage, cranes, tug and pilotage services for exporters, importers and shipping companies and the leasing of land and buildings.  The Group also operates a container terminal and has bulk cargo marshalling operations.

Kamigumi Co., Ltd. provides port-harbor transportation services.  The Company's services include port-harbor transport, warehousing, trucking, packing, and heavy cargo transport.  Kamigumi also provides other services like real estate, insurance agency operations, sports clubs, and restaurant management.

PT Jasa Marga Persero Tbk operates the Indonesian highway system.  The Company collects tolls, maintains the road surfaces, and offers towing and ambulance services.

SIA Engineering Co Ltd provides airframe and component overhaul services, line maintenance and technical ground handling services. The Company also manufactures aircraft cabin equipment, refurbishes aircraft galleys, repairs and overhauls hydromechanical aircraft equipment.

Novorossiysk Commercial Sea Port PJSC owns and operates the Novorossiysk Port on the BlackSea. The Company processes, loads, and unloads cargo. Novorossiysk Commercial Sea Trade Port handles mainly crude oil but also services dry cargo such as metals, cement, sugar, grain and containers.

Enav S.p.A. provides air navigation and transportation support services. The Company offers air traffic control, aeronautical information, flight inspection, meteorology, and engineering and maintenance services. Enav conducts its business in Italy.

The Sumitomo Warehouse Co., Ltd. operates warehousing and freight transportation businesses.  The Company provides integrated transportation services including marine, land, and air freight, and stores cargos in warehouses throughout Japan. Sumitomo Warehouse also operates a real estate leasing business.

Mitsubishi Logistics Corporation provides warehousing, logistics, and other distribution services in Japan, the United States, and Asia.  The Company operates ground, port-harbor, and international intermodal transport as well as real estate leasing.

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

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Shenzhen Expressway Co H (548 HK)

Shenzhen Intl (152 HK): Updates on Latest Developments

We find positive developments which point to HoH improvement in 2H22 earnings. Recovery of toll roads, lessening of loss burden in Shenzhen...

Osbert Tang, CFA

Shenzhen Expressway (548 HK): Cautiously Optimistic

SZEX is expected to gain earnings momentum over the next few quarters as toll traffic recovers, clean energy and waste management capacity...

Osbert Tang, CFA

Shenzhen Intl (152 HK): Deep Dissection Indicates Truly Undervalued

We deconsolidated Shenzhen Expressway from Shenzhen Intl and find that SZI is trading on very cheap 0.32x P/B based on its standalone net asset...

Osbert Tang, CFA

Our Three Worst Calls in Last Year and Any Room for a Reversal in 2022?

China Education Sector, Shenzhen Intl and China Dongxiang are the three worst calls that we made in last year. We believe there is room for a...

Osbert Tang, CFA

Zhejiang Expressway (576 HK): Drivers in Place for Robust Outlook

We believe sustained traffic and toll recovery, contribution from new project addition and positive outlook for Zheshang Securities will drive...

Osbert Tang, CFA

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