HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Zhejiang Expressway Co H / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/zhejiang-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2178:1" rel="noopener">Zhejiang Expressway Co H (576 HK)</a>'s (ZJEC) subsidiary <a href="https://www.smartkarma.com/entities/zheshang-securities-co-ltd" target="_blank" data-smartkarma-citation="entities:29981:1" rel="noopener">Zheshang Securities Co Ltd (601878 CH)</a> pre-announced a set of solid FY20 result on 26 Jan. With the current strength of the A-share market, we believe this business will add to the recovery of toll road business in FY21, driving encouraging momentum for ZJEC.Focusing back to the core toll road business, both traffic and toll revenue are showing positive YoY growth in Dec 2020, suggesting good recovery pace. ZJEC is also progressing ahead with the plan to list the toll collection rights of Hanghui Expressway as a public infrastructure REIT. We think these factors are important catalysts for ZJEC in this year. Its 5.9x PER and 0.86x P/B for 12-month forward are undemanding and its ROE vs. P/B is also inexpensive in the sector.

Zhejiang Expressway Co H (576 HK)'s (ZJEC) subsidiary Zheshang Securities Co Ltd (601878 CH) pre-announced a set of solid FY20 result on 26 Jan. With the current strength of the A-share market, we believe this business will add to the recovery of toll road business in FY21, driving encouraging momentum for ZJEC.Focusing back to the core toll road business, both traffic and toll revenue are showing positive YoY growth in Dec 2020, suggesting good recovery pace. ZJEC is also progressing ahead with the plan to list the toll collection rights of Hanghui Expressway as a public infrastructure REIT. We think these factors are important catalysts for ZJEC in this year. Its 5.9x PER and 0.86x P/B for 12-month forward are undemanding and its ROE vs. P/B is also inexpensive in the sector.  

Zhejiang Expressway (576 HK): Gaining from Both Growth and Stable Business Exposures

Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

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Data and anecdotes from a range of sources in December and January show the recovery in Chinese domestic travel demand has stalled. Looking forward, government estimates suggest travel activity over the Lunar New Year holiday in February will also remain muted. 
In the run up to the long holiday period, Chinese officials have responded aggressively to Covid19 outbreaks in several Chinese cities, most of them in Northern China. Until vaccines reach most of the population and prove effective against new variants of the virus, travel demand -- outbound and domestic -- will likely remain depressed. Even a Summer rebound now appears optimistic. 
A combination of hesitant consumers and necessarily aggressive government responses to new outbreaks leaves current travel demand far below normal (2019) levels. The stalled recovery in Chinese travel activity thus lags substantially the return of the Chinese consumer. With few signs of "pent-up" travel demand, it appears Chinese tourists may have altered spending priorities. 
The Chinese travel sector will enjoy easy YoY "comps" in early 2021 as we lap the worst of the Covid19 crisis in H120. However, in the medium-term, we see a "new normal" developing: non-essential travel has become riskier and less attractive, and thus a lower priority for consumers, and this will likely remain the case until Covid19 is put decisively in the rear-view mirror.




Data and anecdotes from a range of sources in December and January show the recovery in Chinese domestic travel demand has stalled. Looking forward, government estimates suggest travel activity over the Lunar New Year holiday in February will also remain muted. 
In the run up to the long holiday period, Chinese officials have responded aggressively to Covid19 outbreaks in several Chinese cities, most of them in Northern China. Until vaccines reach most of the population and prove effective against new variants of the virus, travel demand -- outbound and domestic -- will likely remain depressed. Even a Summer rebound now appears optimistic. 
A combination of hesitant consumers and necessarily aggressive government responses to new outbreaks leaves current travel demand far below normal (2019) levels. The stalled recovery in Chinese travel activity thus lags substantially the return of the Chinese consumer. With few signs of "pent-up" travel demand, it appears Chinese tourists may have altered spending priorities. 
The Chinese travel sector will enjoy easy YoY "comps" in early 2021 as we lap the worst of the Covid19 crisis in H120. However, in the medium-term, we see a "new normal" developing: non-essential travel has become riskier and less attractive, and thus a lower priority for consumers, and this will likely remain the case until Covid19 is put decisively in the rear-view mirror.  

December-January Travel Data Confirm Stalled Domestic Recovery; Weak LNY Unlikely to Help

China Southern Airlines / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> looks to be facing stronger pressure from weaker domestic traffic posed by the precautionary measures amid the local COVID-19 cases in China. We see the average fare and frequency on its flights on China's top 5 domestic routes have almost returned to the depressed levels back in Mar 2020, and this is not an encouraging sign, in our view. The vast availability of flights and the reasonable prices during CNY also suggested mediocre demand in the traditional peak air travel season.Also working against the company are the rise in domestic jet fuel price and the slowdown in Rmb appreciation against USD. Although the share price has retreated 21% from the intra-day high of HK$5.23, we still see downside risk given that data points on traffic released over the next two months are unlikely to be encouraging. That said, there is room for the 1Q21 result to disappoint the market, and we see any rebound in share price opportunities to trim ahead of the result announcement in Apr.

China Southern Airlines (1055 HK) looks to be facing stronger pressure from weaker domestic traffic posed by the precautionary measures amid the local COVID-19 cases in China. We see the average fare and frequency on its flights on China's top 5 domestic routes have almost returned to the depressed levels back in Mar 2020, and this is not an encouraging sign, in our view. The vast availability of flights and the reasonable prices during CNY also suggested mediocre demand in the traditional peak air travel season.Also working against the company are the rise in domestic jet fuel price and the slowdown in Rmb appreciation against USD. Although the share price has retreated 21% from the intra-day high of HK$5.23, we still see downside risk given that data points on traffic released over the next two months are unlikely to be encouraging. That said, there is room for the 1Q21 result to disappoint the market, and we see any rebound in share price opportunities to trim ahead of the result announcement in Apr.

China Southern Airlines (1055 HK): Facing Stronger Headwinds

Thematic (Sector/Industry)

The recent rise in local COVID-19 cases in China has made domestic air travel market more challenging in the near term, and this has already reflected on slowing traffic in Dec 2020. <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> has the best performance in Dec and FY20 but we see headwinds given its significant domestic exposure. The government has advised minimising cross-province travel in the Spring Chinese New Year Travel Peak Season and many schools are suggesting the same.We think there are two trades to capture such trend. One, "Long <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a>, short <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a>" as positive expectations on CSA's domestic exposure provides room for disappointment. Two, go long on domestic consumption names as savings in transportation and lodging expenses may be re-directed to F&amp;B and consumer discretionary. These include <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a>, <a href="https://www.smartkarma.com/entities/jiumaojiu-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:28293:1" rel="noopener">Jiumaojiu (9922 HK)</a>, <a href="https://www.smartkarma.com/entities/yum-china-holdings-inc-0533692c-6dae-4014-baa1-ed0b050638f2" target="_blank" data-smartkarma-citation="entities:29259:1" rel="noopener">Yum China Holdings Inc (9987 HK)</a>, <a href="https://www.smartkarma.com/entities/anta-sports-products-ltd" target="_blank" data-smartkarma-citation="entities:10261:1" rel="noopener">Anta Sports Products (2020 HK)</a>, <a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning Co Ltd (2331 HK)</a> and <a href="https://www.smartkarma.com/entities/topsports-international" target="_blank" data-smartkarma-citation="entities:28153:1" rel="noopener">Topsports International (6110 HK)</a>. Meanwhile, <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> may benefit on both the revenue and cost sides.

The recent rise in local COVID-19 cases in China has made domestic air travel market more challenging in the near term, and this has already reflected on slowing traffic in Dec 2020. China Southern Airlines (1055 HK) has the best performance in Dec and FY20 but we see headwinds given its significant domestic exposure. The government has advised minimising cross-province travel in the Spring Chinese New Year Travel Peak Season and many schools are suggesting the same.We think there are two trades to capture such trend. One, "Long Air China Ltd (H) (753 HK), short China Southern Airlines (1055 HK)" as positive expectations on CSA's domestic exposure provides room for disappointment. Two, go long on domestic consumption names as savings in transportation and lodging expenses may be re-directed to F&amp;B and consumer discretionary. These include Haidilao (6862 HK), Jiumaojiu (9922 HK), Yum China Holdings Inc (9987 HK), Anta Sports Products (2020 HK), Li Ning Co Ltd (2331 HK) and Topsports International (6110 HK). Meanwhile, Meituan (3690 HK) may benefit on both the revenue and cost sides. 

Chinese Airlines: Domestic Market Gets a Little Challenging in the Near Term, How to Play It?

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/179/678/original/BANNER-TTOtherDec20_GreyOrange.png?1608575984" class="editor-image img-responsive" data-smartkarma-image-id="179678"></figure></section>We launched this product about a month ago, promising to revisit our suggested pair trades every month or so. Returns on our three pair trade ideas since December 4? Not good, not good at all!If we consider only four of the six names that make up our three suggested pair trades, the portfolio returned a measly +0.2% between December 4 and January 6 (not including costs of trading). However, the two positions that moved hard against us -- which in reality we probably would have been forced to exit due to stop-loss orders -- resulted in a big loss for the portfolio. What happened? Unfortunately, we stepped in front of a surge in momentum in two small-cap names, one on the Long side and one one the Short side. We still believe longer-term trends favor these positions, but in the near-term,  price action simply overwhelmed our investment theses. Despite the substantial paper losses, we're sticking to our guns and keeping the portfolio as-is. We'll be back in a month or so with another update, hopefully with better returns to report.

We launched this product about a month ago, promising to revisit our suggested pair trades every month or so. Returns on our three pair trade ideas since December 4? Not good, not good at all!If we consider only four of the six names that make up our three suggested pair trades, the portfolio returned a measly +0.2% between December 4 and January 6 (not including costs of trading). However, the two positions that moved hard against us -- which in reality we probably would have been forced to exit due to stop-loss orders -- resulted in a big loss for the portfolio. What happened? Unfortunately, we stepped in front of a surge in momentum in two small-cap names, one on the Long side and one one the Short side. We still believe longer-term trends favor these positions, but in the near-term,  price action simply overwhelmed our investment theses. Despite the substantial paper losses, we're sticking to our guns and keeping the portfolio as-is. We'll be back in a month or so with another update, hopefully with better returns to report.

TRACKING TRAFFIC/Pair Trades Update: 'Want to See a Dead Body?' (January 7 2021)

China

China Southern Airlines Company Limited provides commercial airline services throughout China, Southeast Asia and other parts of the world.  The Company also provides other airline related services including aircraft maintenance and air catering.

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China Southern Airlines (1055 HK)

Zhejiang Expressway (576 HK): Gaining from Both Growth and Stable Business Exposures

Sustained toll revenue recovery, further strength at Zheshang Securities and possible REIT issuance of Hanghui Expressway are potential drivers in...

Osbert Tang, CFA

December-January Travel Data Confirm Stalled Domestic Recovery; Weak LNY Unlikely to Help

The recovery in domestic travel demand stalled again in December, and we believe improvement will be muted in the near-term as officials battle...

Tracking Traffic