HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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> saw stronger new contract growth in 2Q23, increasing by 15.5% YoY. Sharp pick-up in domestic contracts is the key driver.</li>
<li>We estimate its backlog at end-1H23 at Rmb3.9trn, up 15% from end-FY22. This equals 5.1x the projected FY23 revenue, indicating very comfortable forward coverage.</li>
<li>Despite a 22.5% share price increase YTD, it trades on just 0.21x P/B. Compared with an ROE of 7-8%, it is inexpensive. Upside will come from asset value realisation.</li>
</ul>



China Communications Construction (1800 HK) saw stronger new contract growth in 2Q23, increasing by 15.5% YoY. Sharp pick-up in domestic contracts is the key driver.
We estimate its backlog at end-1H23 at Rmb3.9trn, up 15% from end-FY22. This equals 5.1x the projected FY23 revenue, indicating very comfortable forward coverage.
Despite a 22.5% share price increase YTD, it trades on just 0.21x P/B. Compared with an ROE of 7-8%, it is inexpensive. Upside will come from asset value realisation.


China Comm Const (1800 HK): New Contract Growth Accelerated

Thematic (Sector/Industry)

<ul>
<li>As Rmb moved from appreciation in 1Q23 to depreciation in 2Q23, there is a total change in the beneficiaries discussed in <a href="https://www.smartkarma.com/insights/china-strategy-it-is-the-foreign-exchange-impact-stupid" target="_blank" data-smartkarma-citation="insights:99729" rel="noopener">China Strategy: It Is the Foreign Exchange Impact, Stupid!</a> </li>
<li>The new beneficiaries are <a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">CIMC Enric Holdings (3899 HK)</a>, <a href="https://www.smartkarma.com/entities/china-energy-engineering-group" target="_blank" data-smartkarma-citation="entities:21017:1" rel="noopener">China Energy Engineering (3996 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/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a> and <a href="https://www.smartkarma.com/entities/avichina-industry-technology-h" target="_blank" data-smartkarma-citation="entities:16315:1" rel="noopener">AviChina Industry &amp; Technology H (2357 HK)</a>. </li>
<li>
<a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">CIMC Enric Holdings (3899 HK)</a> generated 20.2% of FY22 earnings from exchange gain as Rmb depreciated. Revenue from outside China rose 10% in 1H23 and accounted for 54.4% of total.  </li>
</ul>


As Rmb moved from appreciation in 1Q23 to depreciation in 2Q23, there is a total change in the beneficiaries discussed in China Strategy: It Is the Foreign Exchange Impact, Stupid! 
The new beneficiaries are CIMC Enric Holdings (3899 HK), China Energy Engineering (3996 HK), China Communications Construction (1800 HK), Sinotrans (598 HK) and AviChina Industry &amp; Technology H (2357 HK). 

CIMC Enric Holdings (3899 HK) generated 20.2% of FY22 earnings from exchange gain as Rmb depreciated. Revenue from outside China rose 10% in 1H23 and accounted for 54.4% of total.  


China Strategy: The RMB Reversal Is Just Too Fast!

<ul>
<li>Although 5% GDP growth target for 2023 is at the low end of market speculation of 5.5-6%, we think this reflects the government's conservative stance amid post-COVID recovery. </li>
<li>A 0.2pp higher budget deficit and a special purpose bond quota of Rmb3.8trn suggested that government spending will stay as important economic driver.</li>
<li>Consumption is another major stimulus for economic growth, and more supportive measures will be rolled out - we have seen many cities planning to hand out consumption vouchers.</li>
</ul>


Although 5% GDP growth target for 2023 is at the low end of market speculation of 5.5-6%, we think this reflects the government's conservative stance amid post-COVID recovery. 
A 0.2pp higher budget deficit and a special purpose bond quota of Rmb3.8trn suggested that government spending will stay as important economic driver.
Consumption is another major stimulus for economic growth, and more supportive measures will be rolled out - we have seen many cities planning to hand out consumption vouchers.


China NPC: Implications of Government Working Report 2023

<ul>
<li>China may bring ahead quota for special purpose bond issuance in 2023 to 2H22. This may potentially at Rmb1.5trn (US$220bn), which will provide big boost to the economy.</li>
<li>For 5M22, the three most important areas of spending of local government bond proceeds are urban construction and industrial park, social services and transport infrastructure.</li>
<li>
<a href="https://www.smartkarma.com/entities/china-state-construction-int-l-holdings" target="_blank" data-smartkarma-citation="entities:10038:1" rel="noopener">China State Construction Int'l (3311 HK)</a>, <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a>, <a href="https://www.smartkarma.com/entities/china-railway-group-ltd-h" target="_blank" data-smartkarma-citation="entities:264:1" rel="noopener">China Railway Group (390 HK)</a>, <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture (586 HK)</a> and <a href="https://www.smartkarma.com/entities/anta-sports-products-ltd" target="_blank" data-smartkarma-citation="entities:10261:1" rel="noopener">Anta Sports (2020 HK)</a> are the top picks.</li>
</ul>


China may bring ahead quota for special purpose bond issuance in 2023 to 2H22. This may potentially at Rmb1.5trn (US$220bn), which will provide big boost to the economy.
For 5M22, the three most important areas of spending of local government bond proceeds are urban construction and industrial park, social services and transport infrastructure.

China State Construction Int'l (3311 HK), Anhui Conch Cement (914 HK), China Railway Group (390 HK), China Conch Venture (586 HK) and Anta Sports (2020 HK) are the top picks.


China Stimulus: These Are the Key Beneficiaries

Asian Hedge Fund Manager, Long Short Equity, Macro

David Mudd

Cross Asset Strategy

<ul>
<li>China State Construction International and Sinopec Engineering have short term reversal patterns indicating profit taking from recent advances.</li>
<li>China Resources Cement reverses downtrend with volume indicating some near term gains after reporting that 1st half profit was under pressure.</li>
<li>Yum China continues to show downward pressure given the increasing competition in the retail food segment, while Nongfu Spring collapses on news about the safety of its products.</li>
</ul>


China State Construction International and Sinopec Engineering have short term reversal patterns indicating profit taking from recent advances.
China Resources Cement reverses downtrend with volume indicating some near term gains after reporting that 1st half profit was under pressure.
Yum China continues to show downward pressure given the increasing competition in the retail food segment, while Nongfu Spring collapses on news about the safety of its products.


Technically Speaking: Breakouts & Breakdowns: HONG KONG (July 17)

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)

China Comm Const (1800 HK): New Contract Growth Accelerated

New contract growth accelerated to 15.5% in 2Q23, and we estimate its end-1H23 backlog is enough to cover 5.1x the projected FY23 revenue. Relative...

Osbert Tang, CFA

China Strategy: The RMB Reversal Is Just Too Fast!

The Rmb continued to depreciate in last month, by another 2.2% so far into Jul. With interim results to be reported in Aug, it is important to...

Osbert Tang, CFA

China NPC: Implications of Government Working Report 2023

A 0.2pp higher budget deficit and a Rmb3.8trn special purpose bond quota suggested government spending will remain important economic driver. More...

Osbert Tang, CFA

China Stimulus: These Are the Key Beneficiaries

Potential massive special purpose bond issuance by local governments in 2H22 (brought forward from 2023) will provide a much-needed boost to the...

Osbert Tang, CFA

Technically Speaking: Breakouts & Breakdowns: HONG KONG (July 17)

Sinopec Engineering and China State Construction have entered short term corrections while CRC has broken its downtrend in the near term. Yum...

David Mudd

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