HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Tourism Group Duty Free Corp Ltd / Equity Bottom-Up

The approvals of more players in the Hainan duty free market at end-2020 is likely to pose challenge to <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a> only in the long term, given the weaker relative competitiveness of the new entrants, CTG Duty Free's established strengths and the sustained positive growth in the overall market. Despite so, we see a trend of rise in competition in China's duty free industry, which is a threat that it cannot overlook in the long run.With the Dec (up to 28th) duty free sales value maintained a solid growth of over 150% YoY, the sustained market growth will offer CTG Duty Free a near-term buffer to competition. The low base in 1H20 as well as the limited appetite of overseas travel due to new coronavirus strains will continue to be positive factors for the company at least in the next six months.

The approvals of more players in the Hainan duty free market at end-2020 is likely to pose challenge to China Tourism Group Duty Free Corp Ltd (601888 CH) only in the long term, given the weaker relative competitiveness of the new entrants, CTG Duty Free's established strengths and the sustained positive growth in the overall market. Despite so, we see a trend of rise in competition in China's duty free industry, which is a threat that it cannot overlook in the long run.With the Dec (up to 28th) duty free sales value maintained a solid growth of over 150% YoY, the sustained market growth will offer CTG Duty Free a near-term buffer to competition. The low base in 1H20 as well as the limited appetite of overseas travel due to new coronavirus strains will continue to be positive factors for the company at least in the next six months.

CTG Duty Free Corp (601888 CH): Facing More Competition in a Rapidly Growing Market

China Travel International Investment Hong Kong / Equity Bottom-Up

China Travel International Investment Hong Kong

We think <a href="https://www.smartkarma.com/entities/china-travel-intl-inv-hk" target="_blank" data-smartkarma-citation="entities:3879:1" rel="noopener">China Travel Intl Inv Hk (308 HK)</a> (CTII) is an interesting name misunderstood, overlooked and under-researched by the market. As such, this will potentially provide promising upside return given its undemanding valuation relative to the travel agency and package tour peers. CTII is not a travel agency and instead it is a major operator of tourist attractions in China that is well positioned to benefit from the recovery of the domestic travel market. Trading at just 0.4x P/B and with net cash equals to 36% of current share price, CTII is also a potential candidate for privatisation by its ultimate parent China Tourism Group.

We think China Travel Intl Inv Hk (308 HK) (CTII) is an interesting name misunderstood, overlooked and under-researched by the market. As such, this will potentially provide promising upside return given its undemanding valuation relative to the travel agency and package tour peers. CTII is not a travel agency and instead it is a major operator of tourist attractions in China that is well positioned to benefit from the recovery of the domestic travel market. Trading at just 0.4x P/B and with net cash equals to 36% of current share price, CTII is also a potential candidate for privatisation by its ultimate parent China Tourism Group.   

China Travel Intl Inv (308 HK): Recovery Play Overlooked by the Market + Privatisation Possibility

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

Cross Asset Strategy

Last month saw China allocations hit record levels across Asia Ex-Japan, Emerging Market and Global active long-only funds.  The average China weight in Asia Ex-Japan funds stands at a record 50.96%, in active GEM funds a record 37.63% and in active Global funds an all-time high of 5.33%However, these increases have come at the expense of greater concentration.  Among Global managers, the top 10 largest China stock holdings now account for 62% of total China allocations, among GEM and Asia Ex-Japan funds just under 50% - an all-time high across all 3 investor groups. Dedicated China managers, however, are more diversified.  In this analysis, we look at the differences between dedicated China funds and their regional peers.  We find that Asia, GEM and Global managers are more concentrated in the Consumer Discretionary and Communication Services sectors, whereas dedicated China managers are more diversified across Technology, Industrials and Health Care stocks.  Regional funds are also underinvested in China A-Shares compared to dedicated China managers, who are running significant overweights vs the MSCI China benchmark.We identify the next generation of Chinese stocks outside of the big index names by following the lead of dedicated managers in the region.  We provide a list of 40 stocks, identified as 'Next Generation' stocks due to their widespread investment in dedicated China funds, but that are currently underowned by Asia Ex-Japan, GEM and Global investors.The list is headed by <a href="https://www.smartkarma.com/entities/jiangsu-hengrui-medicine-co-ltd" target="_blank" data-smartkarma-citation="entities:14128:1" rel="noopener">Jiangsu Hengrui Medicine (600276 CH)</a>, one of the standout domestic holdings within the Health Care sector, followed by <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a> and <a href="https://www.smartkarma.com/entities/luxshare-precision-industry-co-ltd" target="_blank" data-smartkarma-citation="entities:12310:1" rel="noopener">Luxshare Precision Industry (002475 CH)</a> .Analysis taken from our Global, GEM, Asia Ex-Japan and China fund universes.  Global:  386 Active Funds, combined AUM $750bn                                                                                        GEM:  242 Active Funds, combined AUM $370bn                                                                                          Asia Ex-Japan: 98 Active Funds, combined AUM $70bn                                                                              China:  119 Active Funds, combined AUM $50bn

Last month saw China allocations hit record levels across Asia Ex-Japan, Emerging Market and Global active long-only funds.  The average China weight in Asia Ex-Japan funds stands at a record 50.96%, in active GEM funds a record 37.63% and in active Global funds an all-time high of 5.33%However, these increases have come at the expense of greater concentration.  Among Global managers, the top 10 largest China stock holdings now account for 62% of total China allocations, among GEM and Asia Ex-Japan funds just under 50% - an all-time high across all 3 investor groups. Dedicated China managers, however, are more diversified.  In this analysis, we look at the differences between dedicated China funds and their regional peers.  We find that Asia, GEM and Global managers are more concentrated in the Consumer Discretionary and Communication Services sectors, whereas dedicated China managers are more diversified across Technology, Industrials and Health Care stocks.  Regional funds are also underinvested in China A-Shares compared to dedicated China managers, who are running significant overweights vs the MSCI China benchmark.We identify the next generation of Chinese stocks outside of the big index names by following the lead of dedicated managers in the region.  We provide a list of 40 stocks, identified as 'Next Generation' stocks due to their widespread investment in dedicated China funds, but that are currently underowned by Asia Ex-Japan, GEM and Global investors.The list is headed by Jiangsu Hengrui Medicine (600276 CH), one of the standout domestic holdings within the Health Care sector, followed by China Tourism Group Duty Free Corp Ltd (601888 CH) and Luxshare Precision Industry (002475 CH) .Analysis taken from our Global, GEM, Asia Ex-Japan and China fund universes.  Global:  386 Active Funds, combined AUM $750bn                                                                                        GEM:  242 Active Funds, combined AUM $370bn                                                                                          Asia Ex-Japan: 98 Active Funds, combined AUM $70bn                                                                              China:  119 Active Funds, combined AUM $50bn

China's Next Generation:  Diversifying Away from Tencent and Alibaba.

<a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a> made an announcement on the express report of 9M20 result after market close of 12 Oct, suggesting a growth of 141.9% YoY in attributable recurring profit to Rmb2.23bn in 3Q20. We see this result at the high-end of the market expectation, and believe there is room for full-year earnings upgrade by the street. Primarily driven by the favourable duty free policy in Hainan starting 1 Jul, its 3Q20 revenue was up 40.8% YoY and operating margin also expanded to 19.2% (vs. 13% in 3Q19). There is still room for margin expansion as driven by the encouraging sales during the "double festival" Golden Week this year, in our view.

China Tourism Group Duty Free Corp Ltd (601888 CH) made an announcement on the express report of 9M20 result after market close of 12 Oct, suggesting a growth of 141.9% YoY in attributable recurring profit to Rmb2.23bn in 3Q20. We see this result at the high-end of the market expectation, and believe there is room for full-year earnings upgrade by the street. Primarily driven by the favourable duty free policy in Hainan starting 1 Jul, its 3Q20 revenue was up 40.8% YoY and operating margin also expanded to 19.2% (vs. 13% in 3Q19). There is still room for margin expansion as driven by the encouraging sales during the "double festival" Golden Week this year, in our view. 

CTG Duty Free Corp (601888 CH): 3Q20 Profit to Grow 141.9% YoY

During the Golden Week, average daily (for 1-7 Oct) duty free sales amounted to Rmb126m in Hainan, or an impressive 142.7% YoY growth. Since the start of the new Hainan duty free policy, average daily duty free sales has increased by 53%, suggesting a solid trend of improvement. Duty free sales in Hainan in 3Q20 has now equaled to its total sales in the island in 1H20. In our view, this solid performance will reflect positively on <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a>'s quarterly result to be announced in late-Oct, and will serve as a positive share price catalyst. While rising competition is a valid concern, we believe any estimate of their impacts is overblown in the near term. The formation of a joint venture between <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> and <a href="https://www.smartkarma.com/entities/dufry-ag" target="_blank" data-smartkarma-citation="entities:22344:1" rel="noopener">Dufry AG (DUFN SW)</a> to explore travel retail business opportunities in China is no difference. We believe CTG Duty Free's solid SOE status, unparalleled procurement and logistics capabilities, huge volume demand and excellent infrastructure are advantages difficult to challenge.

During the Golden Week, average daily (for 1-7 Oct) duty free sales amounted to Rmb126m in Hainan, or an impressive 142.7% YoY growth. Since the start of the new Hainan duty free policy, average daily duty free sales has increased by 53%, suggesting a solid trend of improvement. Duty free sales in Hainan in 3Q20 has now equaled to its total sales in the island in 1H20. In our view, this solid performance will reflect positively on China Tourism Group Duty Free Corp Ltd (601888 CH)'s quarterly result to be announced in late-Oct, and will serve as a positive share price catalyst. While rising competition is a valid concern, we believe any estimate of their impacts is overblown in the near term. The formation of a joint venture between Alibaba Group (9988 HK) and Dufry AG (DUFN SW) to explore travel retail business opportunities in China is no difference. We believe CTG Duty Free's solid SOE status, unparalleled procurement and logistics capabilities, huge volume demand and excellent infrastructure are advantages difficult to challenge. 

CTG Duty Free Corp (601888 CH): Extending Solid Sales Track in the Golden Week

China

China Tourism Group Duty Free Corporation Limited engages in sales of duty free goods and tax goods. The Company sells tobacco, wine and spirits, perfume, cosmetics, fashion and accessories, watches, jewelry, food, luggage products,and other products. China Tourism Group Duty Free also engages in investment and development of tourism destination commercial complexes.

China Tourism Group Duty Free Corp Ltd (601888 CH)

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China Tourism Group Duty Free Corp Ltd (601888 CH)

CTG Duty Free Corp (601888 CH): Facing More Competition in a Rapidly Growing Market

New players to Hainan duty free market will not bring near-term impact to CTG Duty Free's leadership, but can be long-term challenges. However,...

Osbert Tang, CFA

China Travel Intl Inv (308 HK): Recovery Play Overlooked by the Market + Privatisation Possibility

China Travel Intl Inv is an interesting recovery play yet to be full appreciated by the market. Its depressed valuation and exposure to the...

Osbert Tang, CFA

China's Next Generation: Diversifying Away from Tencent and Alibaba.

China exposure is becoming more concentrated in a small number of large cap stocks. We identify the next generation of China stocks by analyzing...

Steven Holden

CTG Duty Free Corp (601888 CH): 3Q20 Profit to Grow 141.9% YoY

CTG Duty Free pre-announced an encouraging 3Q20 result with a 141.9% YoY profit growth, primarily driven by solid duty free sales in Hainan as a...

Osbert Tang, CFA

CTG Duty Free Corp (601888 CH): Extending Solid Sales Track in the Golden Week

During the Golden Week, China Tourism Group Duty Free Corp Ltd (601888 CH) has recorded an average daily duty free sales of Rmb

Osbert Tang, CFA

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