HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<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> announced good FY20 result with its continuing operations (excluding the disposal of pipeline and Dalian LNG terminal) registered a 47.8% YoY earnings growth. Interestingly, profit for its discontinued operations witnessed a 20.6% YoY decline.Two immediate bright spots from the result announcement are: 1.) a special DPS of Rmb2.1366 is declared, in line with its guidance of 50% of the proceeds from disposal. Note that this is still subject to several conditions, meaning that the transaction is not yet completed as of 23 Mar; 2.) better profit at the remaining CORE natural gas business, with pre-tax profit up 28.1%.  For the special dividends, management still expects them to be paid on or before 30 Jul 2021.We estimate Kunlun's continuing operations is trading on 11x PER for FY20, much lower than other gas utilities peers. We will provide more update after the analyst presentation.

Kunlun Energy (135 HK) announced good FY20 result with its continuing operations (excluding the disposal of pipeline and Dalian LNG terminal) registered a 47.8% YoY earnings growth. Interestingly, profit for its discontinued operations witnessed a 20.6% YoY decline.Two immediate bright spots from the result announcement are: 1.) a special DPS of Rmb2.1366 is declared, in line with its guidance of 50% of the proceeds from disposal. Note that this is still subject to several conditions, meaning that the transaction is not yet completed as of 23 Mar; 2.) better profit at the remaining CORE natural gas business, with pre-tax profit up 28.1%.  For the special dividends, management still expects them to be paid on or before 30 Jul 2021.We estimate Kunlun's continuing operations is trading on 11x PER for FY20, much lower than other gas utilities peers. We will provide more update after the analyst presentation. 

Kunlun Energy (135 HK): Quick Update on FY20 Result And, More Importantly, Special Dividends

<a href="https://www.smartkarma.com/entities/enn-energy-holdings-ltd" target="_blank" data-smartkarma-citation="entities:316:1" rel="noopener">ENN Energy (2688 HK)</a> showcased an encouraging re-acceleration in 2H20 with a growth of 22.8% in its core earnings, though full-year growth of 18.2% is being dragged by the COVID-19 impaired 1H20. Both retail gas sales and value added services have seen their profit momentum recovered in the second half, and the strength for Integrated Energy (IE) stays on course (gross profit +84% YoY in 2H20).Management painted a positive picture for FY21 in the post-result call, as guidance pointed to at least 15% gas volume growth, stable dollar margin, Rmb8-10bn IE revenue (Rmb5bn in FY20) and at least 15% core earnings growth. We think these are all very conservative expectations. 1Q21 gas volume has already grown by over 30% so far, though low base is one of the reasons. We continue to like ENN and maintain that it is the top pick among pure gas utilities companies in China and its premium to sector average is well deserved.

ENN Energy (2688 HK) showcased an encouraging re-acceleration in 2H20 with a growth of 22.8% in its core earnings, though full-year growth of 18.2% is being dragged by the COVID-19 impaired 1H20. Both retail gas sales and value added services have seen their profit momentum recovered in the second half, and the strength for Integrated Energy (IE) stays on course (gross profit +84% YoY in 2H20).Management painted a positive picture for FY21 in the post-result call, as guidance pointed to at least 15% gas volume growth, stable dollar margin, Rmb8-10bn IE revenue (Rmb5bn in FY20) and at least 15% core earnings growth. We think these are all very conservative expectations. 1Q21 gas volume has already grown by over 30% so far, though low base is one of the reasons. We continue to like ENN and maintain that it is the top pick among pure gas utilities companies in China and its premium to sector average is well deserved.

ENN Energy (2688 HK): Well Justifies the Premium; and Management Guides for a Better FY21

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Thematic (Sector/Industry)

Utilities are the smallest sector allocation among global EM managers.  Average weights stand at 1.45%, or underweight -0.41% versus the <a href="https://www.smartkarma.com/entities/ishares-msci-emerging-markets" target="_blank" data-smartkarma-citation="entities:438:1" rel="noopener">iShares MSCI Emerging Markets (EEM US)</a> portfolio.  Only 66.8% of the EM funds in our analysis have any exposure at all, with 29.5% positioned as overweight.<a href="https://www.smartkarma.com/entities/enn-energy-holdings-ltd" target="_blank" data-smartkarma-citation="entities:316:1" rel="noopener">ENN Energy (2688 HK)</a> and <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 Group Corp (916 HK)</a> are the few brightspots in an otherwise very lightly held sector.With continued underperformance of the MSCI EM Utilities sector, a weight in the benchmark MSCI Emerging Markets index of sub 2% and an average active fund weight of 1.45%, EM managers must question whether Utilities stocks have a place in EM portfolios at all.

Utilities are the smallest sector allocation among global EM managers.  Average weights stand at 1.45%, or underweight -0.41% versus the iShares MSCI Emerging Markets (EEM US) portfolio.  Only 66.8% of the EM funds in our analysis have any exposure at all, with 29.5% positioned as overweight.ENN Energy (2688 HK) and China Longyuan Power Group Corp (916 HK) are the few brightspots in an otherwise very lightly held sector.With continued underperformance of the MSCI EM Utilities sector, a weight in the benchmark MSCI Emerging Markets index of sub 2% and an average active fund weight of 1.45%, EM managers must question whether Utilities stocks have a place in EM portfolios at all.

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Smoore International Holdings / Event-Driven

On 1 March, Hang Seng Indexes (HSIL) announced the conclusions of the market consultation on the "Proposal to enhance the Hang Seng Index as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market".The main takeaways are an increase in the number of <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> constituents to 80 by mid-2022 and ultimately to 100, balanced representation across 7 Industry group with a market coverage of not less than 50%, a 3 month minimum listing history requirement, a representation of 20-25 Hong Kong companies in the index, and a rationalisation in the weighting cap to 8% for all stocks (including Secondary Listings and WVR Securities).There is no timeline of how HSIL intends to reach the 80 constituent target count by mid-2022 or to the 100 constituents beyond that. HSIL has not updated the index methodology file either which adds another layer of uncertainty.In this Insight we look at stocks that could be higher probability inclusions in the index at the June review based on the current index methodology and the proposed changes to the methodology and come up with 9 potential inclusions and 2 potential exclusions.

On 1 March, Hang Seng Indexes (HSIL) announced the conclusions of the market consultation on the "Proposal to enhance the Hang Seng Index as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market".The main takeaways are an increase in the number of Hong Kong Hang Seng Index (HSI INDEX) constituents to 80 by mid-2022 and ultimately to 100, balanced representation across 7 Industry group with a market coverage of not less than 50%, a 3 month minimum listing history requirement, a representation of 20-25 Hong Kong companies in the index, and a rationalisation in the weighting cap to 8% for all stocks (including Secondary Listings and WVR Securities).There is no timeline of how HSIL intends to reach the 80 constituent target count by mid-2022 or to the 100 constituents beyond that. HSIL has not updated the index methodology file either which adds another layer of uncertainty.In this Insight we look at stocks that could be higher probability inclusions in the index at the June review based on the current index methodology and the proposed changes to the methodology and come up with 9 potential inclusions and 2 potential exclusions.

HSI Index Rebalance Preview: Potential Changes in June

Hang Seng Indexes have announced the conclusions of the market consultation on the "Proposal to enhance the Hang Seng Index as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market".The main changes to the index are:<ul>
<li>Increase the number of constituents to 80 by mid-2022 and ultimately to have 100 stocks in the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a>. </li>
<li>To have a more balanced representation of the Hong Kong stock market, the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> constituents will be selected from seven Industry Groups. The target is to achieve a market cap coverage of not less than 50% for each Industry Group.</li>
<li>To provide flexibility for the timely addition of new listings, the listing history requirement will be lowered to 3 months.</li>
<li>There will be 20-25 'Hong Kong companies' in the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> and this number will be evaluated at least every 2 years.</li>
<li>All index constituents, including Secondary Listings and WVR Securities, will be subject to a weighting cap of 8%. The 8% cap will be applied to the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a> constituents as well.</li>
</ul>There is no mention of the tranched inclusion of stocks in the index. This leads us to believe that 5 stocks (net) could be included in the index at each review, starting in June 2021 and concluding in June 2022.With a change in the Industry groups and a reduction in the target coverage (in terms of market cap) from 80% to 50% for each Industry group, we refresh our list of potential inclusions into and exclusions from the index.

Hang Seng Indexes have announced the conclusions of the market consultation on the "Proposal to enhance the Hang Seng Index as regards continuing to serve as the most representative and important benchmark of the Hong Kong stock market".The main changes to the index are:
Increase the number of constituents to 80 by mid-2022 and ultimately to have 100 stocks in the Hong Kong Hang Seng Index (HSI INDEX). 
To have a more balanced representation of the Hong Kong stock market, the Hong Kong Hang Seng Index (HSI INDEX) constituents will be selected from seven Industry Groups. The target is to achieve a market cap coverage of not less than 50% for each Industry Group.
To provide flexibility for the timely addition of new listings, the listing history requirement will be lowered to 3 months.
There will be 20-25 'Hong Kong companies' in the Hong Kong Hang Seng Index (HSI INDEX) and this number will be evaluated at least every 2 years.
All index constituents, including Secondary Listings and WVR Securities, will be subject to a weighting cap of 8%. The 8% cap will be applied to the Hang Seng China Enterprises Index (HSCEI INDEX) constituents as well.
There is no mention of the tranched inclusion of stocks in the index. This leads us to believe that 5 stocks (net) could be included in the index at each review, starting in June 2021 and concluding in June 2022.With a change in the Industry groups and a reduction in the target coverage (in terms of market cap) from 80% to 50% for each Industry group, we refresh our list of potential inclusions into and exclusions from the index.

HSI Market Consultation: BIG Changes Coming

Hong Kong

China Gas Holdings Ltd. invests in, operates and manages natural gas distribution pipelines.  The Company distributes and sells natural gas to residential, commercial and industrial users, and bottles and sells compressed natural gas.  China Gas also constructs and operates gas stations.

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China Gas Holdings (384 HK)

Kunlun Energy (135 HK): Quick Update on FY20 Result And, More Importantly, Special Dividends

Kunlun has a good FY20 with better than expected natural gas sales profitability. It also declared special dividends from the pipeline and Dalian...

Osbert Tang, CFA

ENN Energy (2688 HK): Well Justifies the Premium; and Management Guides for a Better FY21

ENN Energy logged an impressive earnings acceleration in 2H20 and management suggested that FY21 will also be a nice one on good gas volume and...

Osbert Tang, CFA

EM Utilities: Bailing Out

With continued underperformance of the MSCI EM Utilities sector, EM managers must question whether Utilities stocks have a place in EM portfolios...

Steven Holden

HSI Index Rebalance Preview: Potential Changes in June

Following the proposed changes to the HSI, we identify potential inclusions and exclusions at the June review. Turnover will be high due to changes...

Brian Freitas

HSI Market Consultation: BIG Changes Coming

Hang Seng Indexes has announced the conclusions of the market consultation and the HSI is going to look different in a years time. Financials see a...

Brian Freitas

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