HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Southern Airlines / Equity Bottom-Up

<p><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> is the only of the Big Three Chinese airlines to record a profit in 3Q20, thanks to its domestic exposure, good cost management and exchange gain from Rmb/USD appreciation. It logged a profit of Rmb711m in the quarter, significantly ahead of losses of Rmb671m for Air China and Rmb563m for CEA. We believe CSA's solid performance can extend into 4Q20, sustaining its outperformance against these two peers.</p><p>Both CEA and Air China will continue to be weighted down by their international routes, with Air China further suffers from the burden from <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a>. At 0.75x P/B, CSA stays firmly as our top pick in the Chinese airlines sector.   </p>

China Southern Airlines (1055 HK) is the only of the Big Three Chinese airlines to record a profit in 3Q20, thanks to its domestic exposure, good cost management and exchange gain from Rmb/USD appreciation. It logged a profit of Rmb711m in the quarter, significantly ahead of losses of Rmb671m for Air China and Rmb563m for CEA. We believe CSA's solid performance can extend into 4Q20, sustaining its outperformance against these two peers.Both CEA and Air China will continue to be weighted down by their international routes, with Air China further suffers from the burden from Cathay Pacific Airways (293 HK). At 0.75x P/B, CSA stays firmly as our top pick in the Chinese airlines sector.   

China Southern Airlines (1055 HK): Profit, Profit, Profit in 3Q20

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>A Double Dose of StubWorld this week...</p>
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<p>After fourteen consecutive months of total leased office space declining, major Hong Kong property-owners have scant alternatives but to negotiate leases. And like <a href="https://www.smartkarma.com/entities/swire-properties-ltd" target="_blank" data-smartkarma-citation="entities:5775:1" rel="noopener">Swire Properties (1972 HK)</a>, sell non-core assets.</p>
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<p>Preceding my comments on Swire are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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A Double Dose of StubWorld this week...



After fourteen consecutive months of total leased office space declining, major Hong Kong property-owners have scant alternatives but to negotiate leases. And like Swire Properties (1972 HK), sell non-core assets.



Preceding my comments on Swire are the weekly setup/unwind tables for Asia-Pacific Holdcos.





These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.




StubWorld: Swire Shedding Property Amidst Leasing Funk

Shenzhen International / Equity Bottom-Up

<p>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.</p><p>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. </p>

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

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Thematic (Sector/Industry)

<p>Before Covid19 shut down outbound Chinese tourism in 2020, there were the mass protests in Hong Kong, which sharply reduced Mainland visits to its largest outbound destination in 2019.</p><p>Before the Hong Kong protests, there was a drowning incident in Thailand in 2018 that killed dozens of Chinese visitors and sharply reduced travel to another top outbound destination. </p><p>And before the Phuket accident came political disputes with Taiwan, Korea, and Japan, all of which temporarily reduced Chinese tourist visits to these important regional destinations. </p><p>Taken together, these disruptions have undermined <em>outbound</em> Chinese travel demand and added to volatility.</p><p>And what about Chinese <em>domestic</em> travel demand?</p><p>Pre-Covid19, domestic tourism growth was flagging, and though it's been less volatile than outbound demand, Chinese domestic travel certainly has not been immune to demand shocks either (viruses, the partial displacement of air travel by high speed rail, etc.).</p><p>We simply don't think investing in the growth of Chinese tourism is the "no-brainer" that many market participants seem to think it is. Between moderating growth rates and a series of external demand shocks, there have been few periods of sustained strong (10%+) demand growth in recent years. In our view, Chinese tourism can no longer be viewed as a growth industry.  </p>

Before Covid19 shut down outbound Chinese tourism in 2020, there were the mass protests in Hong Kong, which sharply reduced Mainland visits to its largest outbound destination in 2019.Before the Hong Kong protests, there was a drowning incident in Thailand in 2018 that killed dozens of Chinese visitors and sharply reduced travel to another top outbound destination. And before the Phuket accident came political disputes with Taiwan, Korea, and Japan, all of which temporarily reduced Chinese tourist visits to these important regional destinations. Taken together, these disruptions have undermined outbound Chinese travel demand and added to volatility.And what about Chinese domestic travel demand?Pre-Covid19, domestic tourism growth was flagging, and though it's been less volatile than outbound demand, Chinese domestic travel certainly has not been immune to demand shocks either (viruses, the partial displacement of air travel by high speed rail, etc.).We simply don't think investing in the growth of Chinese tourism is the "no-brainer" that many market participants seem to think it is. Between moderating growth rates and a series of external demand shocks, there have been few periods of sustained strong (10%+) demand growth in recent years. In our view, Chinese tourism can no longer be viewed as a growth industry.  

Is Chinese Tourism Really a 'Growth' Industry?

<p>On the 9 June, <a href="https://www.smartkarma.com/entities/cathay-pacific-airways-ltd" target="_blank" data-smartkarma-citation="entities:243:1" rel="noopener">Cathay Pacific Airways (293 HK)</a> disclosed in its massive recapitalisation proposal <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0609/2020060900356.pdf" target="_blank" rel="noopener">announcement</a>, that:</p>
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<p>By the fourth quarter of 2020, Cathay Pacific’s management team will recommend to the Board the optimum size and shape of the Cathay Pacific Group to meet the air travel needs of Hong Kong while keeping Cathay Pacific’s financial status at a healthy level and meeting its responsibilities to Shareholder - <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0609/2020060900356.pdf" target="_blank" rel="noopener">page 6</a></p>
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<p>This morning, Cathay <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1021/2020102100213.pdf" target="_blank" rel="noopener">announced</a> its board had approved the following restructuring plan:</p>
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<li>Its wholly-owned Cathay Dragon, will cease its operations with effect from today. It is intended that regulatory approval will be sought for a majority of Cathay Dragon’s routes to be operated by the Company and wholly-owned subsidiary low-cost carrier, Hong Kong Express Airways.</li>
<li>Approximately 8,500 positions across the Cathay Pacific Group (including Cathay Dragon) will be eliminated, accounting for around 24% of the Cathay Pacific Group’s headcount of 35,000.</li>
<li>Hong Kong-based cabin and cockpit crew of Cathay Pacific will be asked to agree to changes in their conditions of service which are designed, inter alia, to match remuneration more closely to productivity and to enhance market competitiveness.</li>
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<p>This restructuring will cost HK$2.2bn, to be funded internally. </p>
<p>Cathay is still running at a HK$1.5-HK$2bn/monthly loss. This restructuring is expected to save HK$500mn/month once fully implemented in 2021.</p>
<p>Separately <a href="https://www.smartkarma.com/entities/swire-pacific-ltd-cl-a" target="_blank" data-smartkarma-citation="entities:10433:1" rel="noopener">Swire Pacific (A) (19 HK)</a>'s discount to NAV appears to have met support at around the current NAV discount.</p>
<p>As always, more below the fold.</p>

On the 9 June, Cathay Pacific Airways (293 HK) disclosed in its massive recapitalisation proposal announcement, that:

By the fourth quarter of 2020, Cathay Pacific’s management team will recommend to the Board the optimum size and shape of the Cathay Pacific Group to meet the air travel needs of Hong Kong while keeping Cathay Pacific’s financial status at a healthy level and meeting its responsibilities to Shareholder - page 6

This morning, Cathay announced its board had approved the following restructuring plan:

Its wholly-owned Cathay Dragon, will cease its operations with effect from today. It is intended that regulatory approval will be sought for a majority of Cathay Dragon’s routes to be operated by the Company and wholly-owned subsidiary low-cost carrier, Hong Kong Express Airways.
Approximately 8,500 positions across the Cathay Pacific Group (including Cathay Dragon) will be eliminated, accounting for around 24% of the Cathay Pacific Group’s headcount of 35,000.
Hong Kong-based cabin and cockpit crew of Cathay Pacific will be asked to agree to changes in their conditions of service which are designed, inter alia, to match remuneration more closely to productivity and to enhance market competitiveness.

This restructuring will cost HK$2.2bn, to be funded internally. 
Cathay is still running at a HK$1.5-HK$2bn/monthly loss. This restructuring is expected to save HK$500mn/month once fully implemented in 2021.
Separately Swire Pacific (A) (19 HK)'s discount to NAV appears to have met support at around the current NAV discount.
As always, more below the fold.

China

Air China Limited provides passenger, cargo, and airline-related services in China.  The Company is primarily based in Beijing and a major hub for domestic and international air transportation.  Air China's airline-related services include aircraft maintenance, repair, overhaul service, ground services, and in-flight catering services.

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Air China Ltd (H) (753 HK)

China Southern Airlines (1055 HK): Profit, Profit, Profit in 3Q20

CSA is the only of the Big Three to record a profit in 3Q20, thanks to its domestic exposure, good cost management and exchange gain from Rmb/USD...

Osbert Tang, CFA

StubWorld: Swire Shedding Property Amidst Leasing Funk

After fourteen consecutive months of total leased office space declining, major Hong Kong property-owners have scant alternatives but to negotiate...

David Blennerhassett

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

Is Chinese Tourism Really a 'Growth' Industry?

The effects of the Covid19 pandemic aside, we believe strong (10%+) growth in underlying Chinese tourism demand is becoming more elusive.

Tracking Traffic

Cathay Pacific: Exit The Dragon

With passenger travel unlikely to return to pre-COVID-19 levels until 2024, the inevitable staff cut is announced, together with the cessation of...

David Blennerhassett

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