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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Quantitative Analysis

<p>The property sector in China has been in the spotlight over the last few years. Regulators have made various attempts to temper price growth but the silver bullet has been elusive so far.</p><p>The powers that be realise that the lack of affordable housing is one of the reasons for China's birth rate dropping and there is now a renewed effort to ensure that property prices do not continue to run up. As part of the measures that started with the 'Three Red Lines' almost a year ago, Bloomberg reports that China has halted PE funds from raising money to invest in residential property developments.</p><p>We take a look at some of the regulatory changes that have been implemented over the last year and see how the companies in the sector are faring. We then look for stocks with similar characteristics but different stock returns over the last year to find trade opportunities.</p>

The property sector in China has been in the spotlight over the last few years. Regulators have made various attempts to temper price growth but the silver bullet has been elusive so far.The powers that be realise that the lack of affordable housing is one of the reasons for China's birth rate dropping and there is now a renewed effort to ensure that property prices do not continue to run up. As part of the measures that started with the 'Three Red Lines' almost a year ago, Bloomberg reports that China has halted PE funds from raising money to invest in residential property developments.We take a look at some of the regulatory changes that have been implemented over the last year and see how the companies in the sector are faring. We then look for stocks with similar characteristics but different stock returns over the last year to find trade opportunities.

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>In StubWorld this week ...</p>
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<p><a href="https://www.smartkarma.com/entities/indofood-sukses-makmur-tbk-p" target="_blank" data-smartkarma-citation="entities:1053:1" rel="noopener"></a>Beleaguered <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a>'s shares bounced after the company <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0810/2021081001009.pdf" target="_blank" rel="noopener">said</a> it is in talks to sell stakes in two of its units. But optimism over improved capital management appears naive. </p>
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<p>Preceding my comments on Evergrande are the weekly setup/unwind tables for Asia-Pacific Holdcos.</p>
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<p>These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.</p>
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<p>As always, more below the fold.</p>
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In StubWorld this week ...




Beleaguered Evergrande Real Estate Group (3333 HK)'s shares bounced after the company said it is in talks to sell stakes in two of its units. But optimism over improved capital management appears naive. 




Preceding my comments on Evergrande are the weekly setup/unwind tables for Asia-Pacific Holdcos.


These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold - the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent - of at least 20%.


As always, more below the fold.


Founder of Antler Capital

Stanley Tsai, CFA

Thematic (Sector/Industry)

<p>For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).</p>
<p><strong>The Debt-Fueled Supercycle. </strong>The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.</p>
<p><strong>The Inventory Drawdown. </strong>Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.</p>
<p><strong>The Insatiable Demand. </strong>The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.</p>
<p><strong>The Aggressive Developers. </strong>The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.</p>
<table class="table table-striped">
<tbody>
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<td style="width: 746px;"><strong>Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)</strong></td>
</tr>
<tr>
<td style="width: 746px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/144/original/image_45072834061624549646155.png?1624549646" class="editor-image img-responsive" data-smartkarma-image-id="215144"></figure>
<p>Source: National Bureau of Statistics, Our analysis</p>
</td>
</tr>
</tbody>
</table>
<p><strong>Related Insights</strong></p>
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-operation-twist-the-deposit-version" target="_blank" data-smartkarma-citation="insights:53435" rel="noopener">China Macro: Operation Twist | The Deposit Version</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> </li>
</ul>

For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).
The Debt-Fueled Supercycle. The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.
The Inventory Drawdown. Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.
The Insatiable Demand. The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.
The Aggressive Developers. The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.



Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)




Source: National Bureau of Statistics, Our analysis




Related Insights


China Financials: Silver Linings Playbook 

Glut and Famine: We Might See Snow in China This Summer 

China Macro: Operation Twist | The Deposit Version 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Exports Disappoint, but It's Still Early in the Game 


China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

<p>In two SCMP articles on the <a href="https://www.scmp.com/business/companies/article/3128495/im-very-dissatisfied-tvbs-performance-says-chinese-media-tycoon" target="_blank" rel="noopener">7 April</a>, PRC media tycoon Li Ruigang, <a href="https://www.smartkarma.com/entities/television-broadcasts-ltd" target="_blank" data-smartkarma-citation="entities:19341:1" rel="noopener">Television Broadcasts (511 HK)</a>'s largest shareholder (via Young Lion Holdings), discussed his dissatisfaction with TVB's performance, saying:</p>
<blockquote>
<p>As a free broadcaster, TVB should be a public open platform welcoming other players in the media and entertainment industry to participate.</p>
</blockquote>
<p>Under the broadcasting ordinance in Hong Kong, non-permanent residents - such as Li - cannot apply for a free TV or pay TV licence, and are branded “disqualified persons”. Li added:</p>
<blockquote>
<p>We respect the ordinance. In the past five years, CMC was a passive investor. [But] if TVB does not reform now, it will shrink, then perish. I am now trying to bring it out from drowning.</p>
</blockquote>
<p>Yesterday, TVB <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0412/2021041200063.pdf" target="_blank" rel="noopener">announced</a> Mark Lee Po On, Vice Chairman (since <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0429/2020042902252.pdf" target="_blank" rel="noopener">April</a> last year) and Group CEO (since January 2015), had resigned. </p>
<p>This follows the resignation Charles Chan (then Chairman and NED) in <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0122/2020012200238.pdf" target="_blank" rel="noopener">January</a> last year, culminating in the re-oganisation of Young Lion Holding in last August.</p>
<p>One but can't help but speculate there are more changes afoot, one that may ultimately lead to changes in the ordinance.</p>
<p>More below the fold.</p>

In two SCMP articles on the 7 April, PRC media tycoon Li Ruigang, Television Broadcasts (511 HK)'s largest shareholder (via Young Lion Holdings), discussed his dissatisfaction with TVB's performance, saying:

As a free broadcaster, TVB should be a public open platform welcoming other players in the media and entertainment industry to participate.

Under the broadcasting ordinance in Hong Kong, non-permanent residents - such as Li - cannot apply for a free TV or pay TV licence, and are branded “disqualified persons”. Li added:

We respect the ordinance. In the past five years, CMC was a passive investor. [But] if TVB does not reform now, it will shrink, then perish. I am now trying to bring it out from drowning.

Yesterday, TVB announced Mark Lee Po On, Vice Chairman (since April last year) and Group CEO (since January 2015), had resigned. 
This follows the resignation Charles Chan (then Chairman and NED) in January last year, culminating in the re-oganisation of Young Lion Holding in last August.
One but can't help but speculate there are more changes afoot, one that may ultimately lead to changes in the ordinance.
More below the fold.

<p>B-shares - remember them?</p>
<p>Created in 1992 to attract foreign investors,  their introduction, which followed the launch of A-shares, was a precursor to wider market access reforms for foreigners, as China integrated itself with the global economy.</p>
<p>Fast forward and years of market liberalisation provide foreign investors access to 3,000+ companies with A-shares. As a result, the combined market value of B shares accounts for less than 0.2% of the capitalisation of A-shares issued by companies in Shanghai. More importantly, the average daily trading volume for B-shares is ~0.1% of its peers.</p>
<p>Over the last decade, the HSI is up 30%. The Shanghai Exchange is up 18%, whereas the Shanghai B-share index is down 22%. For Shenzhen, the main index is up 70% versus 37% for the B-share index. </p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/194/975/original/image_19472098951615942317700.png?1615942320" class="editor-image img-responsive" data-smartkarma-image-id="194975"></figure>
<div style="text-align: left;" class="content-caption">Source: CapIQ</div>
<p>B shares have become a sort of zombie market for foreigners. </p>
<p>The authorities <em>could</em> merge the B and A shares, which would result in a spike in the Bs, given their historical trading discount.</p>
<p>Alternatively, B shares can be transferred into H-shares for trading on the Hong Kong exchange, as seen in <a href="https://www.smartkarma.com/entities/china-international-marine-cntnrs-gp-ltd" target="_blank" data-smartkarma-citation="entities:11752:1" rel="noopener">China International Marine Cntnrs Gp (2039 HK)</a>, <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd-h" target="_blank" data-smartkarma-citation="entities:18368:1" rel="noopener">China Vanke Co Ltd (H) (2202 HK)</a>, and <a href="https://www.smartkarma.com/entities/livzon-pharmaceutical-group-inc" target="_blank" data-smartkarma-citation="entities:18726:1" rel="noopener">Livzon Pharmaceutical Group (1513 HK)</a>.</p>
<h3>The New News</h3>
<p>On the 29 January 2021, <a href="https://www.smartkarma.com/entities/shandong-chenming-paper-a" target="_blank" data-smartkarma-citation="entities:19264:1" rel="noopener">Shandong Chenming Paper A (000488 CH)/(1812 HK)</a> <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0201/2021020100079.pdf" target="_blank" rel="noopener">announced</a> the proposed listing of its domestic (B-shares) on the Hong Kong Stock Exchange, as H-shares. The circular is <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0221/2021022100021.pdf" target="_blank" rel="noopener">here</a>, and shareholders approved the transfer on the <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0314/2021031400011.pdf" target="_blank" rel="noopener">9 March</a>.</p>
<p>B-shares closed yesterday at HK$5.49/share. Yet the H-shares - in which the B-shares will be converted into - are trading at HK$6.70/share.</p>
<p><em>More below the fold ...</em></p>

B-shares - remember them?
Created in 1992 to attract foreign investors,  their introduction, which followed the launch of A-shares, was a precursor to wider market access reforms for foreigners, as China integrated itself with the global economy.
Fast forward and years of market liberalisation provide foreign investors access to 3,000+ companies with A-shares. As a result, the combined market value of B shares accounts for less than 0.2% of the capitalisation of A-shares issued by companies in Shanghai. More importantly, the average daily trading volume for B-shares is ~0.1% of its peers.
Over the last decade, the HSI is up 30%. The Shanghai Exchange is up 18%, whereas the Shanghai B-share index is down 22%. For Shenzhen, the main index is up 70% versus 37% for the B-share index. 

Source: CapIQ
B shares have become a sort of zombie market for foreigners. 
The authorities could merge the B and A shares, which would result in a spike in the Bs, given their historical trading discount.
Alternatively, B shares can be transferred into H-shares for trading on the Hong Kong exchange, as seen in China International Marine Cntnrs Gp (2039 HK), China Vanke Co Ltd (H) (2202 HK), and Livzon Pharmaceutical Group (1513 HK).
The New News
On the 29 January 2021, Shandong Chenming Paper A (000488 CH)/(1812 HK) announced the proposed listing of its domestic (B-shares) on the Hong Kong Stock Exchange, as H-shares. The circular is here, and shareholders approved the transfer on the 9 March.
B-shares closed yesterday at HK$5.49/share. Yet the H-shares - in which the B-shares will be converted into - are trading at HK$6.70/share.
More below the fold ...

Shandong Chenming Paper (1812 HK): The H/B Convergence Trade

China

China Vanke Co., Ltd. is a property development company.  The Company develops residential properties in Shenzhen, Shanghai, Beijing, Tianjin, Shenyang, Nanjing, and other big cities in China.

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China Vanke (H) (2202 HK)

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David Blennerhassett

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