HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

Chinese airlines are expected to face sustained turbulence given the adverse impact of scattered outbreak of local COVID-19 cases, with the most recent ones being Fujian. We see risks for this round of spread to negatively affect the cross-province travel appetite during the mid-Autumn mini-break and potentially the all-important National Day Golden Week in Oct. With poor Aug traffic figures out (over 50% YoY drop in domestic passenger traffic for both <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> and <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>), Sep is also unlikely to be an easy month.We expect 3Q21 results to be under pressure, and we maintain that a long <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>, short <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> trade can position well amid the current environment. We see too much positive expectations have been built in CSA; meanwhile, Air China will have an easier base for comparison in 4Q21 and the reduction in losses at <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> will continue to help its bottom line in 2H21.

Chinese airlines are expected to face sustained turbulence given the adverse impact of scattered outbreak of local COVID-19 cases, with the most recent ones being Fujian. We see risks for this round of spread to negatively affect the cross-province travel appetite during the mid-Autumn mini-break and potentially the all-important National Day Golden Week in Oct. With poor Aug traffic figures out (over 50% YoY drop in domestic passenger traffic for both China Southern Airlines (1055 HK) and Air China Ltd (H) (753 HK)), Sep is also unlikely to be an easy month.We expect 3Q21 results to be under pressure, and we maintain that a long Air China Ltd (H) (753 HK), short China Southern Airlines (1055 HK) trade can position well amid the current environment. We see too much positive expectations have been built in CSA; meanwhile, Air China will have an easier base for comparison in 4Q21 and the reduction in losses at Cathay Pacific Airways (293 HK) will continue to help its bottom line in 2H21.

Chinese Airlines: Cruising Within Sustained Turbulence

Equity Bottom-Up

<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> should see an YoY reduction in loss contribution from the 29.99%-owned associate <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>, based on CX's latest guidance that losses for 1H21 will be less than both 1H20 and 2H20. If we extrapolate the 1Q21 losses from Air China's associated companies to the full year, we should potentially see as least 30% YoY losses reduction. In our view, this will be of significant help to Air China's bottom-line recovery in FY21.CX's 24.5% MoM passenger traffic rebound in May echoed the sequential improvement of Air China's regional and international traffic. The increase in global vaccination rates and resumption of more long-haul flights suggested an improving outlook for CX's international passenger traffic. This should offer an added support to Air China which, we think as a recovery play, is trading on undemanding 12-month forward P/B multiple of 0.98x - the average level since 2016.

Air China Ltd (H) (753 HK) should see an YoY reduction in loss contribution from the 29.99%-owned associate Cathay Pacific Airways (293 HK), based on CX's latest guidance that losses for 1H21 will be less than both 1H20 and 2H20. If we extrapolate the 1Q21 losses from Air China's associated companies to the full year, we should potentially see as least 30% YoY losses reduction. In our view, this will be of significant help to Air China's bottom-line recovery in FY21.CX's 24.5% MoM passenger traffic rebound in May echoed the sequential improvement of Air China's regional and international traffic. The increase in global vaccination rates and resumption of more long-haul flights suggested an improving outlook for CX's international passenger traffic. This should offer an added support to Air China which, we think as a recovery play, is trading on undemanding 12-month forward P/B multiple of 0.98x - the average level since 2016.   

Air China (753 HK): Positive Implications from CX's May Traffic Announcement

Founder of Antler Capital

Stanley Tsai, CFA

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 726.047px;">Exhibit 1: China Financials | Silver Linings Playbook</td>
</tr>
<tr>
<td style="width: 726.047px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/213/768/original/image_768460236451623962508577.png?1623962508" class="editor-image img-responsive" data-smartkarma-image-id="213768"></figure>

Source: Our analysis
</td>
</tr>
</tbody>
</table>
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<a href="https://www.smartkarma.com/insights/boc-aviation-2588-hk-the-stars-don-t-look-bigger-but-they-do-look-brighter" target="_blank" data-smartkarma-citation="insights:52283" rel="noopener">BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter</a>

In the spirit of the long-awaited UEFA Euro 2020, we present our inaugural "China Financials: Silver Linings Playbook", which summarizes our views on the names that are best positioned to navigate an environment of progressively slower credit growth, tighter liquidity and rising defaults. 
Our screen consists of 100+ stocks in the A/H share universe, as well as a select number of international / non-traditional names that have significant exposures to China's financial system. We have a preference for larger-cap and liquid names, which are then filtered by our opinions on their fundamentals, value, momentum and recent trading volumes. We also try to make our selections versatile and less vulnerable to single-factor movements.
Each player's position on the pitch and the team formation itself convey incremental information about our thoughts on the sector's performance over a three to six-month horizon. To the extent possible, we intend to update our ideas on a periodic basis. This provides a feedback loop with our other ongoing research on the industry.
However, our team selections are not investment recommendations. Instead, they are meant to give structure to our analysis. The playbook allows us to articulate our views on the sector in a timely, concise manner. Our objective is to ensure we don't throw the baby out with the bathwater as sentiments on the sector remain bleak.
With that out of the way, the following is our starting XI. We will dive deeper into our rationale for our selections in the remainder of this insight (Exhibit 1).



Exhibit 1: China Financials | Silver Linings Playbook





Source: Our analysis




Related Insights
China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 
Glut and Famine: We Might See Snow in China This Summer 
China Macro: PPI Peaks, while CPI Eases Tightening Fears 
China Macro: Exports Disappoint, but It's Still Early in the Game 
Glut and Famine: China's Monetary Conditions a Notch Tighter in May 
ICBC: The Bond Identity | A Zero-Growth Dividend Discount Story 
BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China Financials: Silver Linings Playbook

BOC Aviation | BOCAVI <a href="https://www.smartkarma.com/entities/boc-aviation" target="_blank" data-smartkarma-citation="entities:22689:1" rel="noopener">(2588 HK)</a> 
As a follow-up on <a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a>'s Smartkarma Original <a href="https://www.smartkarma.com/insights/asia-pac-airports-ups-but-mostly-downs" target="_blank" data-smartkarma-citation="insights:51855" rel="noopener">Asia-Pac Airports: Ups, But Mostly Downs</a>, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation | BOCAVI (2588 HK) 
As a follow-up on David Blennerhassett's Smartkarma Original Asia-Pac Airports: Ups, But Mostly Downs, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

InterGlobe Aviation Ltd / Equity Capital Markets

Interglobe Aviation (Indigo)’s board approved a fund raising of around US$400m (INR30,000m) on 10th May 2021. This is the second time over the past year that the company has obtained a board approval for undertaking a fund raising. The previous instance was in Aug 2020, when the board approved a fundraising of up to INR40,000m. However, the quicker than expected recovery since then meant that the company never raised the funds and in Jan 2021, its CFO stated that it had no intention of doing so either.However, the brutal COVID-19 second wave in India probably led to a change of heart. In this note, we will talk about the deal dynamics.

Interglobe Aviation (Indigo)’s board approved a fund raising of around US$400m (INR30,000m) on 10th May 2021. This is the second time over the past year that the company has obtained a board approval for undertaking a fund raising. The previous instance was in Aug 2020, when the board approved a fundraising of up to INR40,000m. However, the quicker than expected recovery since then meant that the company never raised the funds and in Jan 2021, its CFO stated that it had no intention of doing so either.However, the brutal COVID-19 second wave in India probably led to a change of heart. In this note, we will talk about the deal dynamics. 

Interglobe Aviation (Indigo) QIP Early Look - Headwinds Lead to a Change of Heart

Hong Kong

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

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Cathay Pacific Airways (293 HK)

Chinese Airlines: Cruising Within Sustained Turbulence

After a devastating Aug, Sep will still be clouded by recent cases in Fujian. We think Long Air China, short CSA strategy should capture CSA's...

Osbert Tang, CFA

Air China (753 HK): Positive Implications from CX's May Traffic Announcement

CX's guidance of triming of losses in 1H21, vs. 1H20 and 2H20, is a positive note to Air China. The 24.5% MoM in passenger traffic echoed Air...

Osbert Tang, CFA

China Financials: Silver Linings Playbook

Our Silver Linings Playbook outlines our views on the China financials names that are most likely to remain resilient in the face of macro...

Stanley Tsai, CFA

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As downstream players continue to hemorrhage cash, over 99% of BOCAVI’s aircraft are still cash-generating. Valuation is undemanding for a high...

Stanley Tsai, CFA

Interglobe Aviation (Indigo) QIP Early Look - Headwinds Lead to a Change of Heart

Interglobe Aviation (Indigo)’s board approved a fund raising of around US$400m on 10th May 2021. This is the second time over the past year that...

Sumeet Singh

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