HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<p>The appreciation of Rmb against the USD by 6.5% in 2020 has led to many companies recording exchange losses in their FY20 accounts. However, with the Rmb depreciating against USD so far by 0.2% YTD, we believe it is time to look at the victims in last year and see how they will be affected by a weaker Rmb in this year should the trend sustain.</p><p>Within our coverage, <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a>, <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>, <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> and <a href="https://www.smartkarma.com/entities/cosco-shipping-energy-tran-h" target="_blank" data-smartkarma-citation="entities:646:1" rel="noopener">Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK)</a> are the key victims in last year with their exchange losses amounting to 5-11% of FY20 profit. Except <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>, we believe the remaining three names will be the beneficiaries under a scenario of weaker Rmb/USD exchange rate. </p>

The appreciation of Rmb against the USD by 6.5% in 2020 has led to many companies recording exchange losses in their FY20 accounts. However, with the Rmb depreciating against USD so far by 0.2% YTD, we believe it is time to look at the victims in last year and see how they will be affected by a weaker Rmb in this year should the trend sustain.Within our coverage, Sinotrans (598 HK), China Communications Construction (1800 HK), Shenzhen Intl (152 HK) and Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK) are the key victims in last year with their exchange losses amounting to 5-11% of FY20 profit. Except Shenzhen Intl (152 HK), we believe the remaining three names will be the beneficiaries under a scenario of weaker Rmb/USD exchange rate. 

A Look on Some Victims of Rmb Appreciation in FY20: How Will They Fare in FY21 if Rmb Stays Weak?

Equity Bottom-Up

China Communications Construction / Equity Bottom-Up

<p>Management is generally optimistic towards FY21 outlook, with a target of 10% growth in new contract and revenue. In the post-result call, <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) highlights its focus on strategy refinement, cost control and overseas expansion as some of its major initiatives. We take the management's guidance positively; and trading at outrageously cheap multiples of 3.1x PER and 0.2x P/B, we think the market is too negative towards CCCC. </p><p>As for FY20 result, we do not agree that CCCC's profit is unexciting. While profit was down 17.6% YoY, there is a 98.6% HoH improvement in 2H20. Excluding factors like foreign exchange loss on Rmb appreciation and higher credit impairment (mainly on Australia project), CCCC has a flat YoY. This is even before taking into account the loss of toll revenue amounting to Rmb1.4bn in 1H20 due to the pandemic. That said, we see good room for a double-digit recovery in FY21 as some of these factors are removed.</p>

Management is generally optimistic towards FY21 outlook, with a target of 10% growth in new contract and revenue. In the post-result call, China Communications Construction (1800 HK) (CCCC) highlights its focus on strategy refinement, cost control and overseas expansion as some of its major initiatives. We take the management's guidance positively; and trading at outrageously cheap multiples of 3.1x PER and 0.2x P/B, we think the market is too negative towards CCCC. As for FY20 result, we do not agree that CCCC's profit is unexciting. While profit was down 17.6% YoY, there is a 98.6% HoH improvement in 2H20. Excluding factors like foreign exchange loss on Rmb appreciation and higher credit impairment (mainly on Australia project), CCCC has a flat YoY. This is even before taking into account the loss of toll revenue amounting to Rmb1.4bn in 1H20 due to the pandemic. That said, we see good room for a double-digit recovery in FY21 as some of these factors are removed.

China Comm Const (1800 HK): Key Takeaways from Post-FY20 Result Call

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Quantitative Analysis

<div>
<p>Spreads narrowed sharply this week with 68 of 100 liquid spreads narrowing, 32 widening. The big winner on the week was Consumer narrowing 2.46% as every spread in the space narrowed despite five of six stocks falling in Hs (i.e. As fell even more). </p>
<p>The <a href="https://www.smartkarma.com/entities/shandong-chenming-paper-h" target="_blank" data-smartkarma-citation="entities:13775:1" rel="noopener">Shandong Chenming Paper H (1812 HK)</a> situation intruded on the H/S spreads this week as the decision to convert the B shares to Hs (described by <a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a> in <a href="https://www.smartkarma.com/insights/shandong-chenming-paper-1812-hk-the-h-b-convergence-trade" target="_blank" data-smartkarma-citation="insights:49247" rel="noopener">Shandong Chenming Paper (1812 HK): The H/B Convergence Trade</a> mid-week) caused ructions in the H/A spread.</p>
<p>But overall, it was a decent week. Only two sectors saw spreads widen (Energy and Utilities), both accompanied by net southbound selling in the week to Wednesday (the last day to which we have granular name-by-name data).</p>
<table class="table table-striped"><tbody>
<tr>
<td><p>Sector</p></td>
<td style="text-align: right;"><p>Last Week</p></td>
<td style="text-align: right;"><p>Previous Week</p></td>
<td style="text-align: right;"><p>3wks Ago</p></td>
<td style="text-align: right;"><p>4wks Ago</p></td>
</tr>
<tr>
<td><p>Consumer</p></td>
<td style="text-align: right;"><p>+ 2.46%</p></td>
<td style="text-align: right;"><p>+ 0.74%</p></td>
<td style="text-align: right;"><p>-  0.14%</p></td>
<td style="text-align: right;"><p>-  1.65%</p></td>
</tr>
<tr>
<td><p>Energy</p></td>
<td style="text-align: right;"><p>-  0.39%</p></td>
<td style="text-align: right;"><p>-  0.56%</p></td>
<td style="text-align: right;"><p>-  0.36%</p></td>
<td style="text-align: right;"><p>+ 0.67%</p></td>
</tr>
<tr>
<td><p>Financials &amp; Real Estate</p></td>
<td style="text-align: right;"><p>+ 0.92%</p></td>
<td style="text-align: right;"><p>+ 0.53%</p></td>
<td style="text-align: right;"><p>+ 1.19%</p></td>
<td style="text-align: right;"><p>-  1.12%</p></td>
</tr>
<tr>
<td><p>Health Care &amp; Info Tech</p></td>
<td style="text-align: right;"><p>+ 1.50%</p></td>
<td style="text-align: right;"><p>+ 2.29%</p></td>
<td style="text-align: right;"><p>-  0.54%</p></td>
<td style="text-align: right;"><p>-  2.86%</p></td>
</tr>
<tr>
<td><p>Industrials</p></td>
<td style="text-align: right;"><p>+ 1.19%</p></td>
<td style="text-align: right;"><p>+ 0.15%</p></td>
<td style="text-align: right;"><p>-  0.42%</p></td>
<td style="text-align: right;"><p>-  1.20%</p></td>
</tr>
<tr>
<td><p>Materials</p></td>
<td style="text-align: right;"><p>+ 1.42%</p></td>
<td style="text-align: right;"><p>+ 0.61%</p></td>
<td style="text-align: right;"><p>-  0.33%</p></td>
<td style="text-align: right;"><p>-  0.84%</p></td>
</tr>
<tr>
<td><p>Utilities</p></td>
<td style="text-align: right;"><p>-  0.91%</p></td>
<td style="text-align: right;"><p>-  0.87%</p></td>
<td style="text-align: right;"><p>-  1.25%</p></td>
<td style="text-align: right;"><p>-  0.14%</p></td>
</tr>
<tr>
<td><p><strong>Sector Average</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.88%</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.41%</strong></p></td>
<td style="text-align: right;"><p><strong>-  0.26%</strong></p></td>
<td style="text-align: right;"><p><strong>-  1.02%</strong></p></td>
</tr>
<tr>
<td><p><strong>All Market Average</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.96%</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.59%</strong></p></td>
<td style="text-align: right;"><p><strong>+ 0.05%</strong></p></td>
<td style="text-align: right;"><p><strong>-  1.22%</strong></p></td>
</tr>
</tbody></table>
</div><div><div></div></div><p><span>10-day cross-market spread volatility continues to fall. This past week ended at 20% down from 23% in the ten days to 12 March. This is down off highs in the low 30s a couple weeks ago, but the long-term average is still under 20%.</span></p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/770/original/Screenshot+2021-03-20+at+8.25.25+PM.png?1616243179" class="editor-image img-responsive" data-smartkarma-image-id="195770"></figure></section><div><div>
<hr>
<h3>The H/A Spread Market</h3>
</div></div><div><p>The past week has seen H-shares come off, but spreads narrow as Hs outperformed their As pretty dramatically. Interestingly, the narrower the spread, to start with, the better the performance on the week. Ideally, spread players want to see that red line sloping downward from upper left to lower right because even a big spread movement for a 70% discount stock means very large performance is needed to catch up. </p></div><div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/724/original/Screenshot+2021-03-20+at+5.41.02+PM.png?1616233277" class="editor-image img-responsive" data-smartkarma-image-id="195724"></figure></section></div><div>
<p>The average discount has started tightening again and we are at 38% which is where the spread rebounded to un Q2 of 2020 after widening in the Covid-crash. </p>
<p>In 2019, spreads spent a fairly long time in the 34-36% average. </p>
</div><section><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/728/original/Screenshot+2021-03-20+at+5.44.03+PM.png?1616233457" class="editor-image img-responsive" data-smartkarma-image-id="195728"></figure></section></section><hr><div><div><h2>Last Week's Recommendations</h2></div></div><div><ul style="list-style-type: disc;">
<li>There were 81 recommendations last week.</li>
<li>Positive alpha returned. There were 49 long spreads and 32 short spreads which gained on average 27bp against the delta-neutral gain of 0.20%, indicating spread alpha of 7bp on the week. This is back to a good trend after a horrible week the week before.</li>
<li>There are <em>nearly</em> 80 recommendations this week (turnover remains low).  </li>
</ul></div><hr><div><div><h2>Consumer Sector</h2></div></div><div>
<p>The first sector discussed is Consumer. It was a complex week there. </p>
<ul>
<li>Five out of six H-shares were down on the week. <a href="https://www.smartkarma.com/entities/tsingtao-brewery-co-ltd-h" target="_blank" data-smartkarma-citation="entities:1296:1" rel="noopener">Tsingtao Brewery Co Ltd H (168 HK)</a> was up 10.6%.</li>
<li>All six spreads narrowed with the average H-share outperformance of A at 2.46%. It was a strong week for every spread in the group. </li>
<li>Normally when this happens, there is significant net selling by Southbound. This week saw net buying of HK$270mm to Wednesday, halting four straight weeks prior of net selling. </li>
</ul>
</div><div></div><div><div><div class="content-highlight">
<p>Last week, I recommended keeping the shorts (<a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> and <a href="https://www.smartkarma.com/entities/fuyao-glass-industry-group-co-ltd" target="_blank" data-smartkarma-citation="entities:330:1" rel="noopener">Fuyao Glass Industry Group (3606 HK)</a>) and the long in <a href="https://www.smartkarma.com/entities/guangzhou-automobile-group-co-ltd" target="_blank" data-smartkarma-citation="entities:11082:1" rel="noopener">Guangzhou Automobile Group (2238 HK)</a> and adding a long on <a href="https://www.smartkarma.com/entities/hisense-home-appliances-group-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20107:1" rel="noopener">Hisense Home Appliances Group Co., Ltd. H (921 HK)</a> H vs A.</p>
<p>Those trades lost an average of 0.51% last week in spread terms after losing 29bp the week before, and 16bp the week before that. Despite three losing weeks in a row, positioning in the sector is still up 262bp in four weeks. </p>
<p>This week's trade recommendations are below the fold.</p>
</div></div></div><div><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/729/original/Screenshot+2021-03-20+at+5.44.45+PM.png?1616233498" class="editor-image img-responsive" data-smartkarma-image-id="195729"></figure></section></div><div><section>For this week's recommendations on Consumer, and discussion of the Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities sectors, and all trade recommendations, please read on.</section></div>


Spreads narrowed sharply this week with 68 of 100 liquid spreads narrowing, 32 widening. The big winner on the week was Consumer narrowing 2.46% as every spread in the space narrowed despite five of six stocks falling in Hs (i.e. As fell even more). 
The Shandong Chenming Paper H (1812 HK) situation intruded on the H/S spreads this week as the decision to convert the B shares to Hs (described by David Blennerhassett in Shandong Chenming Paper (1812 HK): The H/B Convergence Trade mid-week) caused ructions in the H/A spread.
But overall, it was a decent week. Only two sectors saw spreads widen (Energy and Utilities), both accompanied by net southbound selling in the week to Wednesday (the last day to which we have granular name-by-name data).


Sector
Last Week
Previous Week
3wks Ago
4wks Ago


Consumer
+ 2.46%
+ 0.74%
-  0.14%
-  1.65%


Energy
-  0.39%
-  0.56%
-  0.36%
+ 0.67%


Financials &amp; Real Estate
+ 0.92%
+ 0.53%
+ 1.19%
-  1.12%


Health Care &amp; Info Tech
+ 1.50%
+ 2.29%
-  0.54%
-  2.86%


Industrials
+ 1.19%
+ 0.15%
-  0.42%
-  1.20%


Materials
+ 1.42%
+ 0.61%
-  0.33%
-  0.84%


Utilities
-  0.91%
-  0.87%
-  1.25%
-  0.14%


Sector Average
+ 0.88%
+ 0.41%
-  0.26%
-  1.02%


All Market Average
+ 0.96%
+ 0.59%
+ 0.05%
-  1.22%


10-day cross-market spread volatility continues to fall. This past week ended at 20% down from 23% in the ten days to 12 March. This is down off highs in the low 30s a couple weeks ago, but the long-term average is still under 20%.

The H/A Spread Market
The past week has seen H-shares come off, but spreads narrow as Hs outperformed their As pretty dramatically. Interestingly, the narrower the spread, to start with, the better the performance on the week. Ideally, spread players want to see that red line sloping downward from upper left to lower right because even a big spread movement for a 70% discount stock means very large performance is needed to catch up. 
The average discount has started tightening again and we are at 38% which is where the spread rebounded to un Q2 of 2020 after widening in the Covid-crash. 
In 2019, spreads spent a fairly long time in the 34-36% average. 
Last Week's Recommendations
There were 81 recommendations last week.
Positive alpha returned. There were 49 long spreads and 32 short spreads which gained on average 27bp against the delta-neutral gain of 0.20%, indicating spread alpha of 7bp on the week. This is back to a good trend after a horrible week the week before.
There are nearly 80 recommendations this week (turnover remains low).  
Consumer Sector
The first sector discussed is Consumer. It was a complex week there. 

Five out of six H-shares were down on the week. Tsingtao Brewery Co Ltd H (168 HK) was up 10.6%.
All six spreads narrowed with the average H-share outperformance of A at 2.46%. It was a strong week for every spread in the group. 
Normally when this happens, there is significant net selling by Southbound. This week saw net buying of HK$270mm to Wednesday, halting four straight weeks prior of net selling. 


Last week, I recommended keeping the shorts (BYD (1211 HK) and Fuyao Glass Industry Group (3606 HK)) and the long in Guangzhou Automobile Group (2238 HK) and adding a long on Hisense Home Appliances Group Co., Ltd. H (921 HK) H vs A.
Those trades lost an average of 0.51% last week in spread terms after losing 29bp the week before, and 16bp the week before that. Despite three losing weeks in a row, positioning in the sector is still up 262bp in four weeks. 
This week's trade recommendations are below the fold.
For this week's recommendations on Consumer, and discussion of the Energy, Financials &amp; Real Estate, Health Care, Tech, Industrials, Materials, and Utilities sectors, and all trade recommendations, please read on.

Quiddity Weekly H/A: Consumer Strong, Spreads Narrowing Masks A-Share Weakness

<p>We had a call with <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> with positive takeaways. We see management taking action to address the issues of high gearing and slow cash payback, good progress in infrastructure REIT issuance, potential improvement in profitability and limited impact of the Sino-US tension. The company is also exploring various options to support its share prices.</p><p>After a 13% rebound since the exclusion from MSCI global indexes, there still exists significant upside potential for CCCC, in our view. Its 12-month forward P/B multiple of 0.21x remains cheap. With improvement in profitability and a narrowing in the H-A discount, we expect re-rating to continue - a return to 1SD below historical average P/B will imply 66% upside.  </p>

We had a call with China Communications Construction (1800 HK) with positive takeaways. We see management taking action to address the issues of high gearing and slow cash payback, good progress in infrastructure REIT issuance, potential improvement in profitability and limited impact of the Sino-US tension. The company is also exploring various options to support its share prices.After a 13% rebound since the exclusion from MSCI global indexes, there still exists significant upside potential for CCCC, in our view. Its 12-month forward P/B multiple of 0.21x remains cheap. With improvement in profitability and a narrowing in the H-A discount, we expect re-rating to continue - a return to 1SD below historical average P/B will imply 66% upside.  

China Comm Const (1800 HK): Positive Takeaways from Call with Company

<p>With the conclusion of the deletion from MSCI global indices on 5 Jan, we believe focus for <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> should shift back to its fundamentals. In our view, strong recovery in toll road concession businesses, solid new contract momentum and conclusion of its first public infrastructure REIT issuance are the positive drivers and catalysts in this year. </p><p>CCCC's H-share has underperformed A-share sharply since mid-Nov, with its discount widened to 51% from 43%, and it is now the time to stage a reversal. Despite its rebound in last two days, CCCC still trades on just 0.2x 12-month forward P/B multiple. This implies that the market considers as much as Rmb216bn, or 17%, of its total assets are worthless, and we think this is not justified. Its current P/B is also ridiculously low at 2 SD below historical average. </p>

With the conclusion of the deletion from MSCI global indices on 5 Jan, we believe focus for China Communications Construction (1800 HK) should shift back to its fundamentals. In our view, strong recovery in toll road concession businesses, solid new contract momentum and conclusion of its first public infrastructure REIT issuance are the positive drivers and catalysts in this year. CCCC's H-share has underperformed A-share sharply since mid-Nov, with its discount widened to 51% from 43%, and it is now the time to stage a reversal. Despite its rebound in last two days, CCCC still trades on just 0.2x 12-month forward P/B multiple. This implies that the market considers as much as Rmb216bn, or 17%, of its total assets are worthless, and we think this is not justified. Its current P/B is also ridiculously low at 2 SD below historical average. 

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)

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

China Communications Construction (1800 HK)

A Look on Some Victims of Rmb Appreciation in FY20: How Will They Fare in FY21 if Rmb Stays Weak?

We expect Sinotrans, CCCC and CSET to be the beneficiaries of weaker Rmb against USD in this year. However, due to its ownership in Shenzhen...

Osbert Tang, CFA

China Comm Const (1800 HK): Key Takeaways from Post-FY20 Result Call

We stay positive on CCCC after post-result call. It targets to achieve 10% growth in revenue and new contracts in FY21 and we are optimistic. At...

Osbert Tang, CFA

China Comm Const (1800 HK): Positive Takeaways from Call with Company

Positive messages from a call with CCCC and we expect re-rating to continue after the recent 13% rebound in share price. At 0.21x P/B, the stock is...

Osbert Tang, CFA

China Comm Const (1800 HK): Brewing Bull

CCCC has been a massive underperformer, partly driven by the MSCI deletion. With the issue now behind us, foucs should return to the fundamentals...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

A Look on Some Victims of Rmb Appreciation in FY20: How Will They Fare in FY21 if Rmb Stays Weak?

We expect Sinotrans, CCCC and CSET to be the beneficiaries of weaker Rmb against USD in this year. However, due to its ownership in Shenzhen...

Osbert Tang, CFA

China Comm Const (1800 HK): Key Takeaways from Post-FY20 Result Call

We stay positive on CCCC after post-result call. It targets to achieve 10% growth in revenue and new contracts in FY21 and we are optimistic. At...

Osbert Tang, CFA

Quiddity Weekly H/A: Consumer Strong, Spreads Narrowing Masks A-Share Weakness

The move in H/A spreads was 96bp this week. The strength in spreads masks some A-share weakness in the big and liquid names. Quiddity long/short...

Travis Lundy

China Comm Const (1800 HK): Positive Takeaways from Call with Company

Positive messages from a call with CCCC and we expect re-rating to continue after the recent 13% rebound in share price. At 0.21x P/B, the stock is...

Osbert Tang, CFA

China Comm Const (1800 HK): Brewing Bull

CCCC has been a massive underperformer, partly driven by the MSCI deletion. With the issue now behind us, foucs should return to the fundamentals...

Osbert Tang, CFA