HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Shenzhen International / Equity Bottom-Up

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.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.

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)

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.

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?

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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:
<blockquote>
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>
</blockquote>
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:
<ul>
<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>
</ul>
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 <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.
As always, more below the fold.

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 Southern Airlines / Equity Bottom-Up

<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> has caught up in its passenger traffic in Sep with a 27.5% YoY decline, compared with -32.2% for <a href="https://www.smartkarma.com/entities/china-eastern-airlines-co-h" target="_blank" data-smartkarma-citation="entities:1079:1" rel="noopener">China Eastern Airlines Co (H) (670 HK)</a> and -38.6% for <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>. More importantly, domestic passenger traffic reached a growth of 1.6% YoY, suggesting a full recovery in last month. CSA also performed well on capacity management - achieving the best passenger, cargo and overall load factors for Sep and 9M20 among the big three. We expect the good traffic recovery, solid load factors, QoQ increase in average fare and sharp appreciation in Rmb will support encouraging bottom line rebound in 3Q20, with a slight potential of reporting a profit in the quarter. In our view, CSA remains inexpensive at 0.8x 12-month forward P/B given its underlying recovery momentum and below-average valuation.

China Southern Airlines (1055 HK) has caught up in its passenger traffic in Sep with a 27.5% YoY decline, compared with -32.2% for China Eastern Airlines Co (H) (670 HK) and -38.6% for Air China Ltd (H) (753 HK). More importantly, domestic passenger traffic reached a growth of 1.6% YoY, suggesting a full recovery in last month. CSA also performed well on capacity management - achieving the best passenger, cargo and overall load factors for Sep and 9M20 among the big three. We expect the good traffic recovery, solid load factors, QoQ increase in average fare and sharp appreciation in Rmb will support encouraging bottom line rebound in 3Q20, with a slight potential of reporting a profit in the quarter. In our view, CSA remains inexpensive at 0.8x 12-month forward P/B given its underlying recovery momentum and below-average valuation. 

China Southern Airlines (1055 HK): Impressive Sep Sets Strong Tone for 4Q20

Shanghai International Airport / Equity Bottom-Up

<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> witnessed sustained strength on its domestic and cargo throughput in Sep, outperforming both <a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> and <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> by very significant margins. In fact, SIAC is the only airport among the big three to consecutive YoY growth in domestic passenger traffic in the last two months. In Sep, domestic aircraft movement surged 18.9% YoY and domestic passenger throughput grew 13.5% YoY, and both are impressive turnouts. In our view, the strong domestic performance, good demand during the "double festival" Golden Week and China International Import Expo to be held in Shanghai during 5-10 Nov should ensure continued strength in SIAC's traffic in 4Q20.

Shanghai International Airport (600009 CH) witnessed sustained strength on its domestic and cargo throughput in Sep, outperforming both Guangzhou Baiyun International Airport (600004 CH) and Beijing Capital International Airport (BCIA) (694 HK) by very significant margins. In fact, SIAC is the only airport among the big three to consecutive YoY growth in domestic passenger traffic in the last two months. In Sep, domestic aircraft movement surged 18.9% YoY and domestic passenger throughput grew 13.5% YoY, and both are impressive turnouts. In our view, the strong domestic performance, good demand during the "double festival" Golden Week and China International Import Expo to be held in Shanghai during 5-10 Nov should ensure continued strength in SIAC's traffic in 4Q20.

Shanghai International Airport (600009 CH): Best Momentum Against Peers in Sep

China

China Southern Airlines Company Limited provides commercial airline services throughout China, Southeast Asia and other parts of the world.  The Company also provides other airline related services including aircraft maintenance and air catering.

China Eastern Airlines Corporation Limited, together with its subsidiaries, operates in the civil aviation industry. It offers passenger, cargo, mail delivery, ground, cargo handling, and other extended transportation services.

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.

Hainan Airlines Co., Ltd. provides passenger and freight air transportation. The Company also provides charter flight services. 

Spring Airlines Co., Ltd. offers air transportation services. The Company provides domestic air transportation, international air transportation, cargo transportation, and other services. Spring Airlines also offers ticket home delivery, insurance transaction, and other services.

Juneyao Airlines Co. Ltd. supplies air transportation services. The Company provides domestic and international routes for passengers and cargoes. Juneyao Airlines also offers ticket home delivery and electronic ticketing services.

China Express Airlines Co., Ltd. provides air transportation services. The Company offers passenger and freight air transportation, aviation equipment maintenance and aircraft leasing, ticket and hotel booking, consulting, and other services. China Express Airlines serves customers worldwide.

China Express Airlines Co Ltd (002928 CH)

COSCO SHIPPING Holdings Co., Ltd offers marine freight transportation services.  The Company offers container shipping, dry bulk shipping, logistics services, freight forwarding, and terminal and container leasing services internationally.  COSCO SHIPPING Holdings Co., Ltd operates container ships and terminals, and manufactures shipping containers.

S.F. Holding Co., Ltd operates as a holding company. The Company, through its subsidiaries, provides logistics, order tracking, supply chain management, and warehousing services. S.F. Holding operates worldwide.

Daqin Railway Co., Ltd. mainly provides coal transportation service in Northern China. It also operates passenger transportation business.

Singapore Airlines Limited provides air transportation, engineering, pilot training, air charter, and tour wholesaling services. The Company's airline operation covers Asia, Europe, the Americas, South West Pacific, and Africa.

ANA Holdings Inc provides a variety of air transportation-related services. The Company offers scheduled & unscheduled air passenger services and air courier services. ANA sells aircraft parts and provides travel arrangement & reservation services as well.

United Airlines Holdings Inc is an airline holding company.  The Company owns and operates airlines that transports persons, property and mail throughout the United States and abroad.

Southwest Airlines Co. is a domestic airline that provides primarily short-haul, high-frequency, point-to-point service.  The Company offers flights throughout the United States.

International Consolidated Airlines Group S.A. provides transportation services. The Company offers international and domestic air passenger and cargo transportation services. International Consolidated Airlines Group serves customers worldwide.

International Consolidated Airlines Group (IAG LN)

International Consolidated Airlines Group

LATAM Airlines Group S.A. is an airline that provides both domestic and international flight services.  The Company provides passenger and cargo services to destinations in Chile, South America, the Caribbean, Europe, North America, and the Pacific.  LATAM Airlines operates passenger aircraft and cargo freighters.

InterGlobe Aviation Limited provides passenger airlines services. The Company offers ground management, air transportation, terminal maintenance, and other services. InterGlobe Aviation conducts its business globally.

Turk Hava Yollari Anonim Ortakligi (THY), also known as Turkish Airlines, provides passenger and cargo air transportation services. The Company serves all domestic destinations as well as the Middle East, North America, Europe, Asia, North Africa and South Africa.

Cathay Pacific Airways Limited operates scheduled airline services. The Company also provides related services, including airline catering, aircraft handling, and engineering.

Qantas Airways Limited provides transportation of passengers through two airlines including Qantas (full service carrier) and Jetstar (low cost carrier), operating international, domestic and regional services. The Company also includes Qantas Frequent Flyer and Qantas Freight which generates diverse revenue streams and adds value for customers and investors.

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Air China Ltd (A) (601111 CH)

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

China Southern Airlines (1055 HK): Impressive Sep Sets Strong Tone for 4Q20

China Southern has the best traffic and load factor among the big three airlines in Sep. Good traffic, load expansion, fare improvement and Rmb...

Osbert Tang, CFA

Shanghai International Airport (600009 CH): Best Momentum Against Peers in Sep

Shanghai Intl Airport recorded encouraging growth of 18.9% in domestic aircraft movement and 13.5% in domestic passenger traffic in Sep. They are...

Osbert Tang, CFA

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