Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

China Resources Beer Holdings / Event-Driven

Last evening, Hang Seng Indexes announced that the conclusions of the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> market consultation will be released on 1 March. This means that the implementation of the changes using the new methodology will begin at the June 2021 review and conclude at the March 2022 review.With the results of the March 2021 review scheduled to be announced post market close tomorrow (26 February), the review will follow the current methodology. But with the leeway afforded to the index committee to decide on the stocks to be included/ excluded, stocks could be selected based on whether they will make the cut for inclusion based on the future methodology. This will also reduce the turnover at future reviews.The <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> already has 52 constituents and we expect this to increase further at the March review. We expect only inclusions and the number of stocks in the index could increase to 55-56. This too will reduce the turnover at future reviews. The stocks included at the March review will see a big impact since they will be included in one shot, as opposed to stocks included at the June review where the implementation will most likely occur in 4 tranches.Potential inclusions are <a href="https://www.smartkarma.com/entities/enn-energy-holdings-ltd" target="_blank" data-smartkarma-citation="entities:316:1" rel="noopener">ENN Energy (2688 HK)</a>, <a href="https://www.smartkarma.com/entities/china-resources-beer-holdings" target="_blank" data-smartkarma-citation="entities:399:1" rel="noopener">China Resources Beer Holdings (291 HK)</a>, <a href="https://www.smartkarma.com/entities/country-garden-services-holdings-company-limited" target="_blank" data-smartkarma-citation="entities:27343:1" rel="noopener">Country Garden Services Holdings (6098 HK)</a>. Outside possibilities are <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/china-gas-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14315:1" rel="noopener">China Gas Holdings (384 HK)</a> and <a href="https://www.smartkarma.com/entities/longfor-properties" target="_blank" data-smartkarma-citation="entities:8149:1" rel="noopener">Longfor Properties (960 HK)</a>.

Last evening, Hang Seng Indexes announced that the conclusions of the Hong Kong Hang Seng Index (HSI INDEX) market consultation will be released on 1 March. This means that the implementation of the changes using the new methodology will begin at the June 2021 review and conclude at the March 2022 review.With the results of the March 2021 review scheduled to be announced post market close tomorrow (26 February), the review will follow the current methodology. But with the leeway afforded to the index committee to decide on the stocks to be included/ excluded, stocks could be selected based on whether they will make the cut for inclusion based on the future methodology. This will also reduce the turnover at future reviews.The Hong Kong Hang Seng Index (HSI INDEX) already has 52 constituents and we expect this to increase further at the March review. We expect only inclusions and the number of stocks in the index could increase to 55-56. This too will reduce the turnover at future reviews. The stocks included at the March review will see a big impact since they will be included in one shot, as opposed to stocks included at the June review where the implementation will most likely occur in 4 tranches.Potential inclusions are ENN Energy (2688 HK), China Resources Beer Holdings (291 HK), Country Garden Services Holdings (6098 HK). Outside possibilities are Haidilao (6862 HK), China Gas Holdings (384 HK) and Longfor Properties (960 HK).

HSI March Index Rebalance Preview - Last One Before New Methodology Kicks In

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

In 1933, British author James Hilton published a book called Lost Horizon, which was four years later more famously made into a movie of the same name by Frank Capra. The movie depicts a love story in a mythical utopia hidden in the mountains - a paradise removed from the earth, unbothered by the cares of the world, where people live very long lives in harmony with each other and their environment. It is a fabulous movie in terms of scenery and sets, though its treatment of non-western culture is somewhat 1937-ish.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/188/506/original/ronald+colman.jpg?1613231797" class="editor-image img-responsive" data-smartkarma-image-id="188506"></figure></section>The name of this temperate paradise on earth "found" by plane crash survivor Robert Conway (the character played by Ronald Colman) is the now-famous Shangri-La and it is at the western end of the Kunlun Mountains (崑崙山). The subject of this insight is Kunlun Energy (昆侖能源有限公司) and as you can see, the characters of the two Kunluns have nothing to do with each other, but it's a nice movie. <h3>The News and The Backdrop</h3>On 22 December last year, HK-listed China energy investment holdco <a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a> made an announcement regarding the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to an entity called PipeChina, which is 29.9% owned by <a href="https://www.smartkarma.com/entities/petrochina-co-ltd-h" target="_blank" data-smartkarma-citation="entities:262:1" rel="noopener">PetroChina (857 HK)</a>. <a href="https://www.smartkarma.com/profiles/osbert-tang-cfa" target="_blank" data-smartkarma-citation="accounts:3879" rel="noopener">Osbert Tang, CFA</a> published a report on 23 December regarding the sale, and subsequently another in the middle of January regarding how Kunlun Energy would look on a pro-forma basis afterwards. I think this deserves a closer look.

In 1933, British author James Hilton published a book called Lost Horizon, which was four years later more famously made into a movie of the same name by Frank Capra. The movie depicts a love story in a mythical utopia hidden in the mountains - a paradise removed from the earth, unbothered by the cares of the world, where people live very long lives in harmony with each other and their environment. It is a fabulous movie in terms of scenery and sets, though its treatment of non-western culture is somewhat 1937-ish.The name of this temperate paradise on earth "found" by plane crash survivor Robert Conway (the character played by Ronald Colman) is the now-famous Shangri-La and it is at the western end of the Kunlun Mountains (崑崙山). The subject of this insight is Kunlun Energy (昆侖能源有限公司) and as you can see, the characters of the two Kunluns have nothing to do with each other, but it's a nice movie. The News and The BackdropOn 22 December last year, HK-listed China energy investment holdco Kunlun Energy (135 HK) made an announcement regarding the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to an entity called PipeChina, which is 29.9% owned by PetroChina (857 HK). Osbert Tang, CFA published a report on 23 December regarding the sale, and subsequently another in the middle of January regarding how Kunlun Energy would look on a pro-forma basis afterwards. I think this deserves a closer look. 

Will Investors Find Shangri-La in Kunlun?

On 22 December 2020 post market close, Hang Seng Indexes (HSIL) released the consultation paper on the "Proposal to enhance the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market". Market participants had until 24 January to submit their views to HSIL.HSIL are scheduled to announce the changes to the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> as a part of the March review on 26 February. There is a high probability that the conclusions of the market consultation will be announced on the same day.Given some large new listings since then and the price movements on the stocks, we refresh our list of potential inclusions and exclusions assuming that HSIL go up to 65 names or 80 names.In both cases, the turnover is very high in percentage terms and in dollar terms. HSIL will need to implement the changes over 1 year.We continue to believe that the market will probably be fine with increasing the number of constituents to 65, but will likely balk at going up to 80 in one shot.Financials would see the largest decrease in weight, offset by gains in Information Technology, Consumer Discretionary, Properties, Healthcare, Consumer Staples and Utilities.

On 22 December 2020 post market close, Hang Seng Indexes (HSIL) released the consultation paper on the "Proposal to enhance the Hong Kong Hang Seng Index (HSI INDEX) as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market". Market participants had until 24 January to submit their views to HSIL.HSIL are scheduled to announce the changes to the Hong Kong Hang Seng Index (HSI INDEX) as a part of the March review on 26 February. There is a high probability that the conclusions of the market consultation will be announced on the same day.Given some large new listings since then and the price movements on the stocks, we refresh our list of potential inclusions and exclusions assuming that HSIL go up to 65 names or 80 names.In both cases, the turnover is very high in percentage terms and in dollar terms. HSIL will need to implement the changes over 1 year.We continue to believe that the market will probably be fine with increasing the number of constituents to 65, but will likely balk at going up to 80 in one shot.Financials would see the largest decrease in weight, offset by gains in Information Technology, Consumer Discretionary, Properties, Healthcare, Consumer Staples and Utilities.

HSI Market Consultation - Name Changes as We Await the Conclusions

HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

We think <a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a> will become an attractive gas utilities company after it completed the transaction to dispose of its Beijing Pipeline and Dalian LNG. By then, we see over 70% of its earnings will derive from natural gas sales business, a profile that compares well with its peers in the gas utilities sector.In valuation terms, the new Kunlun will trade on just 10.5x PER for FY22F, well below 14x for its peers. While its ROE is lower than peers, this is due to its huge cash on hand even after the distribution of special dividends. Its FY22F P/B of 0.64x (on ex-special dividend basis) appears undemanding, especially given that, before making any investment in natural gas end-user sales business with the proceeds as planned, net cash (after special dividend) will still amount to 57% of the share price.

We think Kunlun Energy (135 HK) will become an attractive gas utilities company after it completed the transaction to dispose of its Beijing Pipeline and Dalian LNG. By then, we see over 70% of its earnings will derive from natural gas sales business, a profile that compares well with its peers in the gas utilities sector.In valuation terms, the new Kunlun will trade on just 10.5x PER for FY22F, well below 14x for its peers. While its ROE is lower than peers, this is due to its huge cash on hand even after the distribution of special dividends. Its FY22F P/B of 0.64x (on ex-special dividend basis) appears undemanding, especially given that, before making any investment in natural gas end-user sales business with the proceeds as planned, net cash (after special dividend) will still amount to 57% of the share price. 

Kunlun Energy (135 HK): How Will the New Kunlun Look Like?

<a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a> finally concluded the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to PipeChina at a very favourable 1.9x P/B multiple. This is significantly better than 1.21x and 1.43x that <a href="https://www.smartkarma.com/entities/petrochina-co-ltd-h" target="_blank" data-smartkarma-citation="entities:262:1" rel="noopener">Petrochina Co Ltd H (857 HK)</a> and <a href="https://www.smartkarma.com/entities/china-petroleum-chemical-h" target="_blank" data-smartkarma-citation="entities:369:1" rel="noopener">China Petroleum &amp; Chemical (386 HK)</a> got from their deals with PipeChina, respectively.With net cash inflow of Rmb37bn, or HK$4.94/share (ie 77% of current share price), Kunlun intends to pay out 50% of such cash. That said, the overall dividend yield for FY21F will reach 40.5%. After the transaction, based on sum-of-the-parts valuation, we place Kunlun at HK$10.58, meaning that it trades on a steep 39% discount. We believe Kunlun will escalate its expansion into the downstream gas sales business going forward, and this should narrow its valuation discount to gas utilities peers.

Kunlun Energy (135 HK) finally concluded the sale of its 60% equity interest in Beijing Pipeline and 75% equity interest in Dalian LNG to PipeChina at a very favourable 1.9x P/B multiple. This is significantly better than 1.21x and 1.43x that Petrochina Co Ltd H (857 HK) and China Petroleum &amp; Chemical (386 HK) got from their deals with PipeChina, respectively.With net cash inflow of Rmb37bn, or HK$4.94/share (ie 77% of current share price), Kunlun intends to pay out 50% of such cash. That said, the overall dividend yield for FY21F will reach 40.5%. After the transaction, based on sum-of-the-parts valuation, we place Kunlun at HK$10.58, meaning that it trades on a steep 39% discount. We believe Kunlun will escalate its expansion into the downstream gas sales business going forward, and this should narrow its valuation discount to gas utilities peers. 

Kunlun Energy (135 HK): Very Favourable Valuation for Pipeline and Dalian LNG Disposals

China

ENN Energy Holdings Ltd. distributes natural gas in China.  The Company, through its subsidiaries, invests in, operates, and manages gas pipelines, and sells and distributes piped and bottled gas in China.

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ENN Energy (2688 HK)

HSI March Index Rebalance Preview - Last One Before New Methodology Kicks In

HSIL will announce the changes to the HSI post market close tomorrow. With the conclusions of the market consultation being announced on 1 March,...

Brian Freitas

Will Investors Find Shangri-La in Kunlun?

Kunlun Energy is the wrong price. Investors have not yet digested the event. They should take a closer look. There is potentially a LOT of upside...

Travis Lundy

HSI Market Consultation - Name Changes as We Await the Conclusions

The conclusions of the HSI market consultation could be announced on 26 Feb along with the March review. Given recent large listings and price...

Brian Freitas

Kunlun Energy (135 HK): How Will the New Kunlun Look Like?

Kunlun will become a cheap and quality gas utility after completion of Beijing Pipeline and Dalian LNG disposal. This Insight looks at its FY22...

Osbert Tang, CFA

Kunlun Energy (135 HK): Very Favourable Valuation for Pipeline and Dalian LNG Disposals

Kunlun secured a very good deal of 1.9x P/B for the disposal of its interest in Beijing pipeline and Dalian LNG. It will payout 50% of proceeds at...

Osbert Tang, CFA

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