HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Beijing Capital International Airport (BCIA) / Equity Bottom-Up

Beijing Capital International Airport (BCIA)

<ul>
<li>We think there should not be much positive effect on <a href="https://www.smartkarma.com/entities/beijing-capital-international-airport-bcia" target="_blank" data-smartkarma-citation="entities:10626:1" rel="noopener">Beijing Capital International Airport (BCIA) (694 HK)</a> from Winter Olympics and Paralympics. We expect near-term downside pressure on share price.</li>
<li>Higher operating costs, revenue waivers and tighter traffic control are likely to impair the profitability in next year, as evidenced by the precedent case in the 2008 Beijing Olympics. </li>
<li>While share price has been weak YTD, BCIA is likely to sustain losses into FY22, meaning further book value erosion. That said, even at 0.83x P/B, there is minimal upside.</li>
</ul>


We think there should not be much positive effect on Beijing Capital International Airport (BCIA) (694 HK) from Winter Olympics and Paralympics. We expect near-term downside pressure on share price.
Higher operating costs, revenue waivers and tighter traffic control are likely to impair the profitability in next year, as evidenced by the precedent case in the 2008 Beijing Olympics. 
While share price has been weak YTD, BCIA is likely to sustain losses into FY22, meaning further book value erosion. That said, even at 0.83x P/B, there is minimal upside.


Beijing Capital Intl Airport (694 HK): Don't Bet on the Winter Olympics

Shanghai International Airport / Equity Bottom-Up

<ul>
<li>We consider the acquisitions of Hongqiao and related assets at a price tag of Rmb19.1bn as both financially fair for and strategically beneficial to <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a>.</li>
<li>The 12.13pp increase in stake by the parent company is a vote of support and confidence, and the acquisitions trimmed its 1H21 loss by 29.8% and lowered LPS by 42.1%.</li>
<li>Profit guarantee for Logistics Company and Advertising Segment by the parent for FY22-24 is very welcomed and translated into undemanding acquisition PERs of 12.8x and 10.2x for FY24F.</li>
</ul>


We consider the acquisitions of Hongqiao and related assets at a price tag of Rmb19.1bn as both financially fair for and strategically beneficial to Shanghai International Airport (600009 CH).
The 12.13pp increase in stake by the parent company is a vote of support and confidence, and the acquisitions trimmed its 1H21 loss by 29.8% and lowered LPS by 42.1%.
Profit guarantee for Logistics Company and Advertising Segment by the parent for FY22-24 is very welcomed and translated into undemanding acquisition PERs of 12.8x and 10.2x for FY24F.


Shanghai International Airport (600009 CH): Hongqiao Acquisitions Are Fair Deals

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

China Yangtze Power Co, Ltd. / Event-Driven

<ul>
<li>There are 5 changes to the <a href="https://www.smartkarma.com/entities/shanghai-stock-exchange-sse-50-a-share-index" target="_blank" data-smartkarma-citation="entities:31073:1" rel="noopener">SSE50 Index (SSE50 INDEX)</a> as a part of the December rebalance. One-way turnover is 6% and the one-way trade is CNY 3.3bn.</li>
<li>There is same way flow on <a href="https://www.smartkarma.com/entities/zhangzhou-pientzehuang-pharmaceutical-co-ltd" target="_blank" data-smartkarma-citation="entities:15709:1" rel="noopener">Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. (600436 CH)</a>, <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd" target="_blank" data-smartkarma-citation="entities:34045:1" rel="noopener">China Telecom (601728 CH)</a> and <a href="https://www.smartkarma.com/entities/sanan-optoelectronics-co-ltd" target="_blank" data-smartkarma-citation="entities:4436:1" rel="noopener">Sanan Optoelectronics Co (600703 CH)</a> around the time of the SSE50 inclusion.</li>
<li>With active futures contracts traded on the CFFEX, there will be cash and carry positions and the rebalancing could add to the impact on the inclusions and exclusions.</li>
</ul>


There are 5 changes to the SSE50 Index (SSE50 INDEX) as a part of the December rebalance. One-way turnover is 6% and the one-way trade is CNY 3.3bn.
There is same way flow on Zhangzhou Pientzehuang Pharmaceutical Co., Ltd. (600436 CH), China Telecom (601728 CH) and Sanan Optoelectronics Co (600703 CH) around the time of the SSE50 inclusion.
With active futures contracts traded on the CFFEX, there will be cash and carry positions and the rebalancing could add to the impact on the inclusions and exclusions.


SSE50 Index Rebalance: 5 Changes and Same Way Index Flow

China Southern Airlines / Equity Bottom-Up

The sharp rally in share price of <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> seems to be too excessive as fundamentals are still weak and traffic is facing headwind. While outlook for border opening has improved and collection of fuel surcharges has restarted, we see 4Q21 and early-FY22 stay challenging for China's biggest domestic airline. Its return to loss of Rmb1.4bn in 3Q21, vs. profit of Rmb377m a year ago, is a clear demonstration of the tough operating situation in the near term.CSA's number of scheduled flights on China's top five routes has so far averaged at 61 per day for 4Q, down significantly by 34% YoY, and we think this will reflect unfavourably on the 4Q21 result. Market consensus expectation of a profitable 4Q21 looks clearly aggressive given that its loss was Rmb3.3bn in 4Q20. While the latest developments are positive, they are not enough to change the big picture, in our view. Also, <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> is a better play than CSA on China's potential border opening some time in FY22.

The sharp rally in share price of China Southern Airlines (1055 HK) seems to be too excessive as fundamentals are still weak and traffic is facing headwind. While outlook for border opening has improved and collection of fuel surcharges has restarted, we see 4Q21 and early-FY22 stay challenging for China's biggest domestic airline. Its return to loss of Rmb1.4bn in 3Q21, vs. profit of Rmb377m a year ago, is a clear demonstration of the tough operating situation in the near term.CSA's number of scheduled flights on China's top five routes has so far averaged at 61 per day for 4Q, down significantly by 34% YoY, and we think this will reflect unfavourably on the 4Q21 result. Market consensus expectation of a profitable 4Q21 looks clearly aggressive given that its loss was Rmb3.3bn in 4Q20. While the latest developments are positive, they are not enough to change the big picture, in our view. Also, Air China Ltd (H) (753 HK) is a better play than CSA on China's potential border opening some time in FY22. 

China Southern Airlines (1055 HK): Is There More Room to Go?

The 3Q21 result with widened losses at <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> clearly looks unexciting, but there are several factors that distorted both the YoY and QoQ comparison. These include a change in lease accounting, first-time interest expenses from super short-term bills issued, higher costs on pandemic control and a low base in jet fuel sales in last year. Excluding these factors, we consider SIAC's result is reasonable, and we believe it will turn better.The potential opening of China's borders, improvement in operating cash flow, removal of distorted bases for comparison and completion of asset acquisitions are just some of the favourable developments over the next 12 months, in our view. Well-controlled costs amid the tough operating environment are also setting a stage for SIAC to benefit from its high operating leverage when traffic returns in FY22. That said, we should not be too bearish on the name, especially as the share price has already gone off by 34% YTD.

The 3Q21 result with widened losses at Shanghai International Airport (600009 CH) clearly looks unexciting, but there are several factors that distorted both the YoY and QoQ comparison. These include a change in lease accounting, first-time interest expenses from super short-term bills issued, higher costs on pandemic control and a low base in jet fuel sales in last year. Excluding these factors, we consider SIAC's result is reasonable, and we believe it will turn better.The potential opening of China's borders, improvement in operating cash flow, removal of distorted bases for comparison and completion of asset acquisitions are just some of the favourable developments over the next 12 months, in our view. Well-controlled costs amid the tough operating environment are also setting a stage for SIAC to benefit from its high operating leverage when traffic returns in FY22. That said, we should not be too bearish on the name, especially as the share price has already gone off by 34% YTD.

Shanghai International Airport (600009 CH): We Shouldn't Be Too Bearish

China

Shanghai International Airport Co., Ltd. operates Pudong Airport and Hongquiao airport in Shanghai.   The Company provides a full range of services including air traffic control, terminal management, cargo handling, advertising, space rental, and other related services.

Shanghai International Airport (600009 CH)

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Shanghai International Airport (600009 CH)

Beijing Capital Intl Airport (694 HK): Don't Bet on the Winter Olympics

We expect BCIA's traffic and cost to be negatively, rather than positively, affected by the Winter Olympics and Paralympics to be held in Feb and...

Osbert Tang, CFA