HK/China Equity Long-Short

Osbert Tang, CFA

Quantitative Analysis

<ul>
<li>Our "Buy the Worst" strategy outperformed HSI by a massive 26.1pp YTD. Over the last five years and seven, this strategy returned 39.7% and 25.8% respectively, beating the market significantly. </li>
<li>For 2022, the strategy will switch into <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/alibaba-health-information-technology-ltd" target="_blank" data-smartkarma-citation="entities:453:1" rel="noopener">Alibaba Health (241 HK)</a>, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/sands-china-ltd" target="_blank" data-smartkarma-citation="entities:182:1" rel="noopener">Sands China (1928 HK)</a> and <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi (1810 HK)</a>, based on YTD performance.</li>
<li>While these names are facing sustained headwinds, track record of our strategy suggested that they are more likely to outperform in 2022 than underperform. We think there is turnaround potential.</li>
</ul>


Our "Buy the Worst" strategy outperformed HSI by a massive 26.1pp YTD. Over the last five years and seven, this strategy returned 39.7% and 25.8% respectively, beating the market significantly. 
For 2022, the strategy will switch into Haidilao (6862 HK), Alibaba Health (241 HK), Alibaba Group (9988 HK), Sands China (1928 HK) and Xiaomi (1810 HK), based on YTD performance.
While these names are facing sustained headwinds, track record of our strategy suggested that they are more likely to outperform in 2022 than underperform. We think there is turnaround potential.


“Buy the Worst” Strategy into Year 3: What's on for 2022 to Beat the HSI?

Research on Tech Companies

Evelyn Zhang

Thematic (Sector/Industry)

USTR requested comments on potential exclusions of products of China subject to tariffs.
The largest exemption categories include Electrical equipment, electronic, mechanical equipment.
The household appliances have over 50% dependence on Chinese imports. 
This article combines the four tariff lists and identifies the goods most reliant on China, and consequently, potential beneficiaries of this Sino-US trade relaxation.

USTR requested comments on potential exclusions of products of China subject to tariffs.
The largest exemption categories include Electrical equipment, electronic, mechanical equipment.
The household appliances have over 50% dependence on Chinese imports. 
This article combines the four tariff lists and identifies the goods most reliant on China, and consequently, potential beneficiaries of this Sino-US trade relaxation.

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

Equity Bottom-Up

The bloodbath in Hong Kong and H-shares in the first week of July 2021 was mainly caused by the perceived worsening corporate governance to invest in Chinese companies as the Chinese regulator has gone more draconian on the new listing of the Chinese companies, especially for tech companies.  This will inevitably put downward pressure on the share prices of the tech companies but it will increase trading volume in the HK exchange, on the short term basis at least. In the long term, <a href="https://www.smartkarma.com/entities/hong-kong-exchanges-clearing" target="_blank" data-smartkarma-citation="entities:490:1" rel="noopener">HKEX (388 HK)</a> may be the only Exchange approved by the Chinese government for Chinese companies to raise money from foreign investors. Maintain Buy.

The bloodbath in Hong Kong and H-shares in the first week of July 2021 was mainly caused by the perceived worsening corporate governance to invest in Chinese companies as the Chinese regulator has gone more draconian on the new listing of the Chinese companies, especially for tech companies.  This will inevitably put downward pressure on the share prices of the tech companies but it will increase trading volume in the HK exchange, on the short term basis at least. In the long term, HKEX (388 HK) may be the only Exchange approved by the Chinese government for Chinese companies to raise money from foreign investors. Maintain Buy. 

HK Exchange (388): Beneficiary of HK Tech Crack Down

Our "Buy the Worst" strategy as laid out in <a href="https://www.smartkarma.com/insights/a-review-of-buy-the-worst-strategy-in-2020-and-can-it-beat-the-hang-seng-index-in-2021" target="_blank" data-smartkarma-citation="insights:46654" rel="noopener">A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021?</a> showed good performance YTD with a 20.9pp outperformance against the HSI. For most of the time in this year, the average performance for the 5 worst HSI stocks in 2020 - <a href="https://www.smartkarma.com/entities/citic-ltd" target="_blank" data-smartkarma-citation="entities:20590:1" rel="noopener">Citic Ltd (267 HK)</a>, <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a>, <a href="https://www.smartkarma.com/entities/aac-technologies-holdings-inc" target="_blank" data-smartkarma-citation="entities:6544:1" rel="noopener">AAC Technologies Holdings (2018 HK)</a> and <a href="https://www.smartkarma.com/entities/china-unicom-hong-kong-ltd" target="_blank" data-smartkarma-citation="entities:1016:1" rel="noopener">China Unicom Hong Kong (762 HK)</a> - has been ahead of the benchmark index. We will hold on these 5 stocks until the year end of 2021. For 2H21, we continue to see good room for them to outperform. On average, they are still off 41.6% from their 3-year high, vs. just 13% for HSI. With our anticipation of a volatile HSI over the next six months due to concerns on inflation, Sino-US tension, COVID-19 variants and regulatory measures on new economy companies, these old economy stocks with undemanding valuations are stand to see better performance, in our view.

Our "Buy the Worst" strategy as laid out in A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021? showed good performance YTD with a 20.9pp outperformance against the HSI. For most of the time in this year, the average performance for the 5 worst HSI stocks in 2020 - Citic Ltd (267 HK), China Overseas Land &amp; Investment Ltd (688 HK), CNOOC Ltd (883 HK), AAC Technologies Holdings (2018 HK) and China Unicom Hong Kong (762 HK) - has been ahead of the benchmark index. We will hold on these 5 stocks until the year end of 2021. For 2H21, we continue to see good room for them to outperform. On average, they are still off 41.6% from their 3-year high, vs. just 13% for HSI. With our anticipation of a volatile HSI over the next six months due to concerns on inflation, Sino-US tension, COVID-19 variants and regulatory measures on new economy companies, these old economy stocks with undemanding valuations are stand to see better performance, in our view. 

A Mid-Year Review of Our "Buy the Worst" Strategy: Outperformed HSI by 20.9pp

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 21 May. The constituent changes will be effective after the close of trading on 4 June.For the <a href="https://www.smartkarma.com/entities/hang-seng-tech-index" target="_blank" data-smartkarma-citation="entities:31367:1" rel="noopener">Hang Seng Tech Index (HSTECH INDEX)</a>, there are 2 inclusions and 3 exclusions. This brings the number of index constituents back down to 30.The inclusions are Autohome (2518 HK) and <a href="https://www.smartkarma.com/entities/bilibili-inc-83a27302-cd7d-4e6a-a1de-bcf93eb022c3" target="_blank" data-smartkarma-citation="entities:32215:1" rel="noopener">Bilibili Inc (9626 HK)</a> while the deletions are <a href="https://www.smartkarma.com/entities/zte-corp-h" target="_blank" data-smartkarma-citation="entities:6922:1" rel="noopener">ZTE Corp H (763 HK)</a>, <a href="https://www.smartkarma.com/entities/fit-hon-teng-ltd" target="_blank" data-smartkarma-citation="entities:22868:1" rel="noopener">Fit Hon Teng (6088 HK)</a> and <a href="https://www.smartkarma.com/entities/archosaur-games" target="_blank" data-smartkarma-citation="entities:28948:1" rel="noopener">Archosaur Games (9990 HK)</a>.The inclusion of Autohome (2518 HK) is a surprise and so is the corresponding deletion of <a href="https://www.smartkarma.com/entities/fit-hon-teng-ltd" target="_blank" data-smartkarma-citation="entities:22868:1" rel="noopener">Fit Hon Teng (6088 HK)</a>. With a large impact on both names, these are the ones to watch for. One-way turnover is estimated at 5.61% and will result in a one-way trade of HK$1.41bn.There are 10 trading days to implementation of the changes. The largest passive flows will go to <a href="https://www.smartkarma.com/entities/bilibili-inc-83a27302-cd7d-4e6a-a1de-bcf93eb022c3" target="_blank" data-smartkarma-citation="entities:32215:1" rel="noopener">Bilibili Inc (9626 HK)</a>, <a href="https://www.smartkarma.com/entities/beijing-kuaishou-technology-co-ltd" target="_blank" data-smartkarma-citation="entities:29725:1" rel="noopener">Kuaishou Technology (1024 HK)</a>, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> while there will be outflows from <a href="https://www.smartkarma.com/entities/xiaomi-corp" target="_blank" data-smartkarma-citation="entities:24409:1" rel="noopener">Xiaomi Corp (1810 HK)</a>, <a href="https://www.smartkarma.com/entities/zte-corp-h" target="_blank" data-smartkarma-citation="entities:6922:1" rel="noopener">ZTE Corp H (763 HK)</a>, <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> and <a href="https://www.smartkarma.com/entities/jd-health-international-inc" target="_blank" data-smartkarma-citation="entities:29677:1" rel="noopener">JD Health (6618 HK)</a>.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 21 May. The constituent changes will be effective after the close of trading on 4 June.For the Hang Seng Tech Index (HSTECH INDEX), there are 2 inclusions and 3 exclusions. This brings the number of index constituents back down to 30.The inclusions are Autohome (2518 HK) and Bilibili Inc (9626 HK) while the deletions are ZTE Corp H (763 HK), Fit Hon Teng (6088 HK) and Archosaur Games (9990 HK).The inclusion of Autohome (2518 HK) is a surprise and so is the corresponding deletion of Fit Hon Teng (6088 HK). With a large impact on both names, these are the ones to watch for. One-way turnover is estimated at 5.61% and will result in a one-way trade of HK$1.41bn.There are 10 trading days to implementation of the changes. The largest passive flows will go to Bilibili Inc (9626 HK), Kuaishou Technology (1024 HK), Meituan (3690 HK) and Tencent (700 HK) while there will be outflows from Xiaomi Corp (1810 HK), ZTE Corp H (763 HK), Alibaba Group (9988 HK) and JD Health (6618 HK).

HSTECH Index Rebalance: Back to 30 with 2 Adds and 3 Deletes

China

AAC Technologies Holdings Inc designs, develops and manufactures a broad range of miniaturized components that include speakers, receivers and microphones in the acoustic segment and others such as haptics vibrators, RF and antennas, and optical lenses. AAC's products are found in mobile devices such as smartphones, tablets, wearables, ultrabooks, notebooks and electronic book-readers.

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AAC Technologies Holdings (2018 HK)

“Buy the Worst” Strategy into Year 3: What's on for 2022 to Beat the HSI?

Our "Buy the Worst" strategy outperformed HSI by a massive 26.1pp YTD. For 2022, new names are Haidilao, Ali Health, Alibaba, Sands China and...

Osbert Tang, CFA

A Truce in Trade War?

USTR requested comments on potential exclusions of products of China subject to tariffs. We analyze the potential beneficiaries of this Sino-US...

Evelyn Zhang

HK Exchange (388): Beneficiary of HK Tech Crack Down

HKEX (388 HK) may be the only Exchange approved by the Chinese government for Chinese companies to raise money from foreign investors. Maintain Buy

Henry Soediarko

A Mid-Year Review of Our "Buy the Worst" Strategy: Outperformed HSI by 20.9pp

Our "Buy the Worst" strategy has outperformed HSI by 20.9pp so far in 2021; and we believe with the volatile outlook for 2H21, the 5 stocks in the...

Osbert Tang, CFA

HSTECH Index Rebalance: Back to 30 with 2 Adds and 3 Deletes

There are 2 adds and 3 deletes for the HSTECH Index. One-way turnover is estimated at 5.61% and will result in a one-way trade of HK$1.41bn. 2518...

Brian Freitas

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