HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>
<a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a>, <a href="https://www.smartkarma.com/entities/china-longyuan-power-group-corp-ltd" target="_blank" data-smartkarma-citation="entities:14215:1" rel="noopener">China Longyuan Power (916 HK)</a> and <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> are the three stocks that made the most money in 2021 based on our call.</li>
<li>
<a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a> is the best-performing one with 52.3% return, and this is followed by <a href="https://www.smartkarma.com/entities/china-longyuan-power-group-corp-ltd" target="_blank" data-smartkarma-citation="entities:14215:1" rel="noopener">China Longyuan (916 HK)</a> at 45.1% and <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> at 33.9%.</li>
<li>We continue to like all of them into 2022 as they will be benefited by sustained growth of city-gas projects, government's push for wind power and infrastructure investments, respectively.</li>
</ul>



Kunlun Energy (135 HK), China Longyuan Power (916 HK) and China Communications Construction (1800 HK) are the three stocks that made the most money in 2021 based on our call.

Kunlun Energy (135 HK) is the best-performing one with 52.3% return, and this is followed by China Longyuan (916 HK) at 45.1% and China Communications Construction (1800 HK) at 33.9%.
We continue to like all of them into 2022 as they will be benefited by sustained growth of city-gas projects, government's push for wind power and infrastructure investments, respectively.


The Three Names that We Made the Most Money in 2021 and How They Will Fare in 2022

Equity Bottom-Up

China Everbright Environment / Equity Bottom-Up

<ul>
<li>China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.</li>
<li>NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.</li>
<li>Both <a href="https://www.smartkarma.com/entities/china-everbright-environment-group-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a> and <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.</li>
</ul>


China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.
NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.
Both China Everbright Environment (257 HK) and China Communications Construction (1800 HK) are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.


Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

<ul>
<li>China's construction machinery companies should benefit from the decision of bringing forward infrastructure investments by the Central Economic Work Conference; but the Nov industry figures still showed lacklustre performance.</li>
<li>Excavator sales volume was down 36.6% YoY in the month, with domestic sales even plunged by 51.4%. Wheel loader looks to be better with a lesser YoY decline at 8.5%.</li>
<li>High base and time lag for translating into demand mean unit sales will stay weak over the next few months. We prefer <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> as infrastructure play. </li>
</ul>


China's construction machinery companies should benefit from the decision of bringing forward infrastructure investments by the Central Economic Work Conference; but the Nov industry figures still showed lacklustre performance.
Excavator sales volume was down 36.6% YoY in the month, with domestic sales even plunged by 51.4%. Wheel loader looks to be better with a lesser YoY decline at 8.5%.
High base and time lag for translating into demand mean unit sales will stay weak over the next few months. We prefer China Communications Construction (1800 HK) as infrastructure play. 


China Construction Machinery: Not Seeing the End of the Tunnel Yet

China Communications Construction / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> made efforts to reduce debt and realise asset value lately through selling subsidiary minority stakes or issuing REIT. It is deeply undervalued at 0.21x P/B. </li>
<li>CCCC sold 4.84-9.98% stakes in four subsidiaries for Rmb7.5bn while maintaining controlling interests. We estimate this will reduce its end-3Q21 debt by 1.5%, with similar reduction in finance costs.</li>
<li>Its REIT issuance on the Jiatong Section of Wuhan-Shenzhen Expressway is progressing well and we see this to be an important tool for further recycle of projects to generate cash.</li>
</ul>



China Communications Construction (1800 HK) made efforts to reduce debt and realise asset value lately through selling subsidiary minority stakes or issuing REIT. It is deeply undervalued at 0.21x P/B. 
CCCC sold 4.84-9.98% stakes in four subsidiaries for Rmb7.5bn while maintaining controlling interests. We estimate this will reduce its end-3Q21 debt by 1.5%, with similar reduction in finance costs.
Its REIT issuance on the Jiatong Section of Wuhan-Shenzhen Expressway is progressing well and we see this to be an important tool for further recycle of projects to generate cash.


China Comm Const (1800 HK): Taking Meaningful Steps to Reduce Debt

<p>3Q21 result of <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> (CCCC) marks another steady quarter with reported growth of 4.9% YoY. We believe the improvement in construction business has been partly offset by weaker toll road operation given the negative traffic impact from higher domestic COVID-19 cases during the summer time. Hence, recurring profit was weaker with a marginal 1.2% decline in 3Q21. Nonetheless, 9M21 vs. 9M19 still sees a steady CAGR of 4.8% in earnings. Also, there is good YoY growth in operating cash flow.</p><p>We expect a recovery in traffic to bode well for CCCC's investment projects, adding to its good cost management and positive reversal in credit and asset impairments. The encouraging 3Q21 new contract momentum (+57.6% YoY) and the sharp rebound in overseas contracts signed is expected to underpin CCCC's outlook for the next two years. Valuation multiples are clearly still very undemanding - 0.21x P/B, 3.3x PER and 6% dividend yield. </p>

3Q21 result of China Communications Construction (1800 HK) (CCCC) marks another steady quarter with reported growth of 4.9% YoY. We believe the improvement in construction business has been partly offset by weaker toll road operation given the negative traffic impact from higher domestic COVID-19 cases during the summer time. Hence, recurring profit was weaker with a marginal 1.2% decline in 3Q21. Nonetheless, 9M21 vs. 9M19 still sees a steady CAGR of 4.8% in earnings. Also, there is good YoY growth in operating cash flow.We expect a recovery in traffic to bode well for CCCC's investment projects, adding to its good cost management and positive reversal in credit and asset impairments. The encouraging 3Q21 new contract momentum (+57.6% YoY) and the sharp rebound in overseas contracts signed is expected to underpin CCCC's outlook for the next two years. Valuation multiples are clearly still very undemanding - 0.21x P/B, 3.3x PER and 6% dividend yield. 

China Comm Const (1800 HK): Sustaining a Stable Track in 3Q21

China

China Communications Construction Company Ltd. is a transportation infrastructure group.  The Company is involved in infrastructure construction, infrastructure design, dredging, and port machinery manufacturing.  China Communications has operations worldwide.

China Communications Construction (1800 HK)

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China Communications Construction (1800 HK)

The Three Names that We Made the Most Money in 2021 and How They Will Fare in 2022

Going into 2022, we continue to like the three best-performing stocks based on our call in 2021, namely Kunlun Energy, China Longyuan Power and...

Osbert Tang, CFA

Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

We see local governments' special purpose bonds issuance and uses for 4Q21 and 1Q22 to benefit environmental and infrastructure construction...

Osbert Tang, CFA

China Construction Machinery: Not Seeing the End of the Tunnel Yet

While CEWC's decision to accelerate infrastructure investment bodes well for the construction machinery sector, high base and time lag in demand...

Osbert Tang, CFA

China Comm Const (1800 HK): Taking Meaningful Steps to Reduce Debt

CCCC is progressing to reduce debt by selling minority stakes in subsidiaries and issuing REIT on toll road asset. These moves are positive and its...

Osbert Tang, CFA

China Comm Const (1800 HK): Sustaining a Stable Track in 3Q21

CCCC's flat 3Q21 reflects better construction but lower toll road profit, partly as traffic is disrupted by COVID-19 cases during summer. Outlook...

Osbert Tang, CFA

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