HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

China Communications Construction / Equity Bottom-Up

<ul>
<li>There is a sharp escalation in business momentum of <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> in 4Q22, with value of new contracts signed surged 95.3% YoY to Rmb510bn.</li>
<li>New contract growth reached 21.6% in FY22, ahead of its target of 11.8%. We estimate its end-FY22 backlog at Rmb3.6trn, which is enough to cover 5x its FY22 revenue. </li>
<li>Local governments' special purpose bond quota may increase by 4-10% in FY23F, boosting CCCC's contract outlook. At 2x PER, 0.2x P/B and 7.6% dividend yield, CCCC stays attractive.</li>
</ul>


There is a sharp escalation in business momentum of China Communications Construction (1800 HK) in 4Q22, with value of new contracts signed surged 95.3% YoY to Rmb510bn.
New contract growth reached 21.6% in FY22, ahead of its target of 11.8%. We estimate its end-FY22 backlog at Rmb3.6trn, which is enough to cover 5x its FY22 revenue. 
Local governments' special purpose bond quota may increase by 4-10% in FY23F, boosting CCCC's contract outlook. At 2x PER, 0.2x P/B and 7.6% dividend yield, CCCC stays attractive.


China Comm Const (1800 HK): Securing Stronger Backlog to Fuel Growth

Thematic (Sector/Industry)

<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

<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> made efforts to reduce debt and realise asset value lately through selling subsidiary minority stakes or issuing REIT. It is deeply undervalued at 0.21x P/B. </li>
<li>CCCC sold 4.84-9.98% stakes in four subsidiaries for Rmb7.5bn while maintaining controlling interests. We estimate this will reduce its end-3Q21 debt by 1.5%, with similar reduction in finance costs.</li>
<li>Its REIT issuance on the Jiatong Section of Wuhan-Shenzhen Expressway is progressing well and we see this to be an important tool for further recycle of projects to generate cash.</li>
</ul>



China Communications Construction (1800 HK) made efforts to reduce debt and realise asset value lately through selling subsidiary minority stakes or issuing REIT. It is deeply undervalued at 0.21x P/B. 
CCCC sold 4.84-9.98% stakes in four subsidiaries for Rmb7.5bn while maintaining controlling interests. We estimate this will reduce its end-3Q21 debt by 1.5%, with similar reduction in finance costs.
Its REIT issuance on the Jiatong Section of Wuhan-Shenzhen Expressway is progressing well and we see this to be an important tool for further recycle of projects to generate cash.


China Comm Const (1800 HK): Taking Meaningful Steps to Reduce Debt

<p>We welcome the strong rebound in new contracts signed by <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) in 3Q21, and believe it is set to maintain good momentum on the back of local governments' infrastructure spending and the recovery in overseas demand. New contracts signed for domestic market rose 52.9% YoY while overseas surged 113% in the quarter, fuelling a 57.6% YoY growth in total new contract signed. Such pace looks very encouraging when compared with the 10.2% YoY drop recorded in overall new contracts in 2Q21.</p><p>With 9M21 new contract value amounted to Rmb1trn, CCCC has already achieved 86% of its annual new contract target, and it looks very likely that actual full-year figure will beat its guidance. We expect urban construction (48% of total 3Q21 new contract) will continue to fuel the growth, as local governments strive to achieve "common prosperity" by improving overall living standard. The acceleration in issuance of special purpose bonds in 2H21 will definitely boost the funding for more infrastructure construction, thus benefiting CCCC's contracts on hand, in our view. </p>

We welcome the strong rebound in new contracts signed by China Communications Construction (1800 HK) (CCCC) in 3Q21, and believe it is set to maintain good momentum on the back of local governments' infrastructure spending and the recovery in overseas demand. New contracts signed for domestic market rose 52.9% YoY while overseas surged 113% in the quarter, fuelling a 57.6% YoY growth in total new contract signed. Such pace looks very encouraging when compared with the 10.2% YoY drop recorded in overall new contracts in 2Q21.With 9M21 new contract value amounted to Rmb1trn, CCCC has already achieved 86% of its annual new contract target, and it looks very likely that actual full-year figure will beat its guidance. We expect urban construction (48% of total 3Q21 new contract) will continue to fuel the growth, as local governments strive to achieve "common prosperity" by improving overall living standard. The acceleration in issuance of special purpose bonds in 2H21 will definitely boost the funding for more infrastructure construction, thus benefiting CCCC's contracts on hand, in our view. 

China Comm Const (1800 HK): Exciting New Contract Momentum Fuels Outlook

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Event-Driven

<ul>
<li>Media reports indicate that <a href="https://www.smartkarma.com/entities/midea-group-co-ltd-a" target="_blank" data-smartkarma-citation="entities:16185:1" rel="noopener">Midea Group (000333 CH)</a> has priced its H-shares IPO at HK$54.8/share, the top of the range. That is a 19.85% discount to the A-shares.</li>
<li>Reports also indicate that the IPO was oversubscribed multiple times with Hillhouse and GIC putting in large orders. That could result in the Offer Size Adjustment Option being exercised.</li>
<li>The exercise of the Offer Size Adjustment Option will take the IPO raise to HK$31bn (US$3.98bn) and index inclusion in some of the larger indices will become a lot easier.</li>
</ul>


Media reports indicate that Midea Group (000333 CH) has priced its H-shares IPO at HK$54.8/share, the top of the range. That is a 19.85% discount to the A-shares.
Reports also indicate that the IPO was oversubscribed multiple times with Hillhouse and GIC putting in large orders. That could result in the Offer Size Adjustment Option being exercised.
The exercise of the Offer Size Adjustment Option will take the IPO raise to HK$31bn (US$3.98bn) and index inclusion in some of the larger indices will become a lot easier.


Midea Group (300 HK): Priced at Top End; Offer Size Adj Option Exercise Would Ease Index Fast Entry

China

China Railway Group Limited offers transportation facility construction services. The Company builds railways, roads, tunnels, and bridges. China Railway Group also conducts engineering survey, equipment manufacturing, real estate development, and investment businesses.

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China Railway Group (601390 CH)

China Comm Const (1800 HK): Securing Stronger Backlog to Fuel Growth

CCCC recorded a sharp 95.3% YoY growth in new contracts signed in 4Q22, finishing the year sharply ahead of its target. Its shares stay very...

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 Comm Const (1800 HK): Taking Meaningful Steps to Reduce Debt

CCCC is progressing to reduce debt by selling minority stakes in subsidiaries and issuing REIT on toll road asset. These moves are positive and its...

Osbert Tang, CFA

China Comm Const (1800 HK): Exciting New Contract Momentum Fuels Outlook

CCCC has a fruiful 3Q21 with overall new contract value grew 57.6% YoY, signficantly accelerated from 28.5% in 1H21. The strong rebound in overseas...

Osbert Tang, CFA

Midea Group (300 HK): Priced at Top End; Offer Size Adj Option Exercise Would Ease Index Fast Entry

Midea Group (300 HK) lists today. There could be investors switching from the A-shares to the H-shares. Index Fast Entry for the H-shares will...

Brian Freitas

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