HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<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

Equity Bottom-Up

China Everbright Environment / Equity Bottom-Up

<ul>
<li>The FY21 result of <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> (CEE) should look impressive and we see improvement in cash flow to relieve market concerns on leverage and financial position.  </li>
<li>New project addition is solid over the last three months, adding about 5% to operational project portfolio. Strong special purpose bonds issuance in 4Q21 and 2022 will fuel pipeline momentum.</li>
<li>Valuations look undemanding at 4.1x PER and 0.65x P/B for FY22F; and by maintaining payout ratio at c.30%, dividend yields are at attractive 6.4% and 7.4% for next 2 years.</li>
</ul>


The FY21 result of China Everbright Environment (257 HK) (CEE) should look impressive and we see improvement in cash flow to relieve market concerns on leverage and financial position.  
New project addition is solid over the last three months, adding about 5% to operational project portfolio. Strong special purpose bonds issuance in 4Q21 and 2022 will fuel pipeline momentum.
Valuations look undemanding at 4.1x PER and 0.65x P/B for FY22F; and by maintaining payout ratio at c.30%, dividend yields are at attractive 6.4% and 7.4% for next 2 years.


China Everbright Environment (257 HK): Roaring in the Year of Tiger!

<ul>
<li>
<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> will benefit immensely from the lower debt burden of local governments as the central government rolls out more fiscal support measures.</li>
<li>We anticipate an acceleration in receivable collection to improve its cash flow while the new projects pipeline may speed up. Its FCF has positively turned around in 1H24.</li>
<li>Despite recent outperformance, it remains a laggard since 2022. Still, it trades on an undemanding 5.5x PER and an appealing 6.3% yield on a higher dividend payout. </li>
</ul>



China Everbright Environment (257 HK) will benefit immensely from the lower debt burden of local governments as the central government rolls out more fiscal support measures.
We anticipate an acceleration in receivable collection to improve its cash flow while the new projects pipeline may speed up. Its FCF has positively turned around in 1H24.
Despite recent outperformance, it remains a laggard since 2022. Still, it trades on an undemanding 5.5x PER and an appealing 6.3% yield on a higher dividend payout. 


China Everbright Env (257 HK): An Underappreciated Beneficiary

<ul>
<li>Plunge in net profit, high gearing and slowdown in new projects are market concerns, but should have well reflected in its share price. Its 3.6x PER is just too cheap. </li>
<li>FY23 will see profit recovery, backed by decent project pipeline and lack of one-offs like impairment and exchange losses. Consensus forecast of 15% profit growth is too conservative.</li>
<li>Cash flow will improve over the next two years as collection of national subsidies accelerates, capex moderates and contribution from operating projects increases. </li>
</ul>


Plunge in net profit, high gearing and slowdown in new projects are market concerns, but should have well reflected in its share price. Its 3.6x PER is just too cheap. 
FY23 will see profit recovery, backed by decent project pipeline and lack of one-offs like impairment and exchange losses. Consensus forecast of 15% profit growth is too conservative.
Cash flow will improve over the next two years as collection of national subsidies accelerates, capex moderates and contribution from operating projects increases. 


China Everbright Environment (257 HK): The Dust Should Have Settled

China

China Everbright Water Limited offers water environmental services. The Company provides water environment management, sponge city construction, sewage treatment, river-basin ecological restoration, water supply, and other related services. China Everbright Water conducts businesses in Shenzhen, Singapore, and Hong Kong.

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China Everbright Water (1857 HK)

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

China Everbright Environment (257 HK): Roaring in the Year of Tiger!

CEE's FY21 result should be impressive and will serve as share price catalyst. Solid recent new project pipeline and higher special purpose bond...

Osbert Tang, CFA

China Everbright Env (257 HK): An Underappreciated Beneficiary

CEE is poised to benefit from a lower local government debt burden on increased fiscal support, with improved cash flow, accelerated project...

Osbert Tang, CFA

China Everbright Environment (257 HK): The Dust Should Have Settled

FY23 outlook has brightened as it will be supported by healthy project pipeline and lack of one-off items. There is potential for financial...

Osbert Tang, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

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

China Everbright Environment (257 HK): Roaring in the Year of Tiger!

CEE's FY21 result should be impressive and will serve as share price catalyst. Solid recent new project pipeline and higher special purpose bond...

Osbert Tang, CFA

China Everbright Env (257 HK): An Underappreciated Beneficiary

​CEE is poised to benefit from a lower local government debt burden on increased fiscal support, with improved cash flow, accelerated project...

Osbert Tang, CFA

China Everbright Environment (257 HK): The Dust Should Have Settled

FY23 outlook has brightened as it will be supported by healthy project pipeline and lack of one-off items. There is potential for financial...

Osbert Tang, CFA

CEE is poised to benefit from a lower local government debt burden on increased fiscal support, with improved cash flow, accelerated project...