HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>While China's U-turn on COVID policy is expected to bring consumption rebound in 2023, the near-term surge in infections will weigh negatively on retail sales in Dec and Jan.</li>
<li>Residents are spending more time at home in the first wave, with subways and shopping malls empty. We think this will cast negativity on 4Q22 and 1Q23 consumer discretionary profit.</li>
<li>It is prudent to take some monies off the table, particularly F&amp;B stocks like <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/xiabuxiabu-catering-mgt-chn-hldgs-co-ltd" target="_blank" data-smartkarma-citation="entities:76:1" rel="noopener">Xiabuxiabu (520 HK)</a> and <a href="https://www.smartkarma.com/entities/helen-s-international-holdings" target="_blank" data-smartkarma-citation="entities:34113:1" rel="noopener">Helen's (9869 HK)</a> which have almost doubled from trough.</li>
</ul>


While China's U-turn on COVID policy is expected to bring consumption rebound in 2023, the near-term surge in infections will weigh negatively on retail sales in Dec and Jan.
Residents are spending more time at home in the first wave, with subways and shopping malls empty. We think this will cast negativity on 4Q22 and 1Q23 consumer discretionary profit.
It is prudent to take some monies off the table, particularly F&amp;B stocks like Haidilao (6862 HK), Xiabuxiabu (520 HK) and Helen's (9869 HK) which have almost doubled from trough.


China COVID Policy: Near-Term Pains for Consumer Discretionary

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

Haidilao International Holding / Event-Driven

<ul>
<li>It was a busy Friday with the implementation of the December rebalance for multiple indices. The Yuanta/P-shares Taiwan Dividend Plus ETF will continue to rebalance over the next 4 days.</li>
<li>The coming week should be relatively quiet with the announcement of the <a href="https://www.smartkarma.com/entities/stock-exchange-of-thailand-set-50-index" target="_blank" data-smartkarma-citation="entities:31493:1" rel="noopener">Stock Exchange of Thailand SET 50 Index (SET50 INDEX)</a> changes expected.</li>
<li>There were large inflows to ETFs focused on China, Korea, Japan, Taiwan. There were inflows to <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index-etf" target="_blank" data-smartkarma-citation="entities:25:1" rel="noopener">Hang Seng H Share Index ETF</a> and outflows from <a href="https://www.smartkarma.com/entities/tracker-fund-of-hong-kong-ltd" target="_blank" data-smartkarma-citation="entities:29257:1" rel="noopener">Tracker Fund of Hong Kong</a>.</li>
</ul>


It was a busy Friday with the implementation of the December rebalance for multiple indices. The Yuanta/P-shares Taiwan Dividend Plus ETF will continue to rebalance over the next 4 days.
The coming week should be relatively quiet with the announcement of the Stock Exchange of Thailand SET 50 Index (SET50 INDEX) changes expected.
There were large inflows to ETFs focused on China, Korea, Japan, Taiwan. There were inflows to Hang Seng H Share Index ETF and outflows from Tracker Fund of Hong Kong.


Index Rebalance & ETF Flow Recap: S&P/ASX, HSCEI, HSTECH, Haidilao/Super Hi, CSI REIT

<ul>
<li>Hang Seng Indexes has changed the index handling treatment for Secondary Listings and Dual Primary Listings from the next rebalance in March.</li>
<li>The changes could lead to an increase in the index weighting for <a href="https://www.smartkarma.com/entities/li-auto-inc-3dbe6187-544f-40dd-b9f9-72fba9c0110e" target="_blank" data-smartkarma-citation="entities:33811:1" rel="noopener">Li Auto (2015 HK)</a> and the inclusion of <a href="https://www.smartkarma.com/entities/xpeng-inc-4cc65854-d10c-4d20-bf7e-ca0e016715ff" target="_blank" data-smartkarma-citation="entities:33772:1" rel="noopener">XPeng (9868 HK)</a> at the March rebalance.</li>
<li>The improved rankings for the Secondary and Dual Primary listings will lead to other changes to the index in March.</li>
</ul>


Hang Seng Indexes has changed the index handling treatment for Secondary Listings and Dual Primary Listings from the next rebalance in March.
The changes could lead to an increase in the index weighting for Li Auto (2015 HK) and the inclusion of XPeng (9868 HK) at the March rebalance.
The improved rankings for the Secondary and Dual Primary listings will lead to other changes to the index in March.


HSCEI: Index Handling Changes for Secondary & Dual-Primary Listings

Equity Bottom-Up

China Tourism Group Duty Free / Equity Bottom-Up

<ul>
<li>In the near-term, China's relaxation of COVID-combating measures will boost consumption and demand for cross-province travel. <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corporation-limited" target="_blank" data-smartkarma-citation="entities:36229:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (1880 HK)</a> is a beneficiary.</li>
<li>Hotel bookings in Sanya have surged over the last two days, reflecting positive demand reaction. However, China's full border opening likely in 2023 is a challenge to CDFC.  </li>
<li>Low base in FY22 will drive 45% earnings growth for FY23. However, valuations are not cheap at 33.8x PER for FY23, a significant premium to consumption sector and international peers.</li>
</ul>


In the near-term, China's relaxation of COVID-combating measures will boost consumption and demand for cross-province travel. China Tourism Group Duty Free Corp Ltd (1880 HK) is a beneficiary.
Hotel bookings in Sanya have surged over the last two days, reflecting positive demand reaction. However, China's full border opening likely in 2023 is a challenge to CDFC.  
Low base in FY22 will drive 45% earnings growth for FY23. However, valuations are not cheap at 33.8x PER for FY23, a significant premium to consumption sector and international peers.


CTG Duty Free (1880 HK): Near-Term Positive but It Is Not Cheap at All

<ul>
<li>Nearing the end of the review period for the March rebalance, we see <a href="https://www.smartkarma.com/entities/china-shenhua-energy-co-h" target="_blank" data-smartkarma-citation="entities:382:1" rel="noopener">China Shenhua Energy Co H (1088 HK)</a> replacing <a href="https://www.smartkarma.com/entities/china-feihe-ltd" target="_blank" data-smartkarma-citation="entities:24413:1" rel="noopener">China Feihe (6186 HK)</a> in the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">HSCEI INDEX</a>.</li>
<li>Estimated one-way turnover is 1.64% resulting in a one-way trade of HK$1.02bn with passives needing to buy 1x ADV on <a href="https://www.smartkarma.com/entities/china-shenhua-energy-co-h" target="_blank" data-smartkarma-citation="entities:382:1" rel="noopener">China Shenhua Energy</a> and selling 1.7x ADV on <a href="https://www.smartkarma.com/entities/china-feihe-ltd" target="_blank" data-smartkarma-citation="entities:24413:1" rel="noopener">China Feihe</a>.</li>
<li>The change will lead to an increase in the fair value of the HSCEI 2023 dividend futures by over 3 DIPS. Could be more if <a href="https://www.smartkarma.com/entities/china-shenhua-energy-co-h" target="_blank" data-smartkarma-citation="entities:382:1" rel="noopener">China Shenhua</a> pays a special.</li>
</ul>


Nearing the end of the review period for the March rebalance, we see China Shenhua Energy Co H (1088 HK) replacing China Feihe (6186 HK) in the HSCEI INDEX.
Estimated one-way turnover is 1.64% resulting in a one-way trade of HK$1.02bn with passives needing to buy 1x ADV on China Shenhua Energy and selling 1.7x ADV on China Feihe.
The change will lead to an increase in the fair value of the HSCEI 2023 dividend futures by over 3 DIPS. Could be more if China Shenhua pays a special.


HSCEI Index Rebalance Preview: Shenhua Energy (1088) Could Replace China Feihe (6186)

Hong Kong

Chow Tai Fook Jewellery Group Limited retails jewelry.  The Company sells rings, necklaces, earrings, pendants, bracelets, and small statues.  Chow Tai Fook Jewellery operates retail stores in China, Hong Kong, Macau, Taiwan, Malaysia, and Singapore.

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Chow Tai Fook Jewellery (1929 HK)

China COVID Policy: Near-Term Pains for Consumer Discretionary

Near-term negative impact of China's U-turn in COVID policy on consumer discretionary has been underestimated by the market. It is prudent to take...

Osbert Tang, CFA

Index Rebalance & ETF Flow Recap: S&P/ASX, HSCEI, HSTECH, Haidilao/Super Hi, CSI REIT

This recap highlights Insights covering Asian index rebalances (announcements/ forecasts/ IPO Fast Entry/ M&A driven changes). We also highlight...

Brian Freitas

HSCEI: Index Handling Changes for Secondary & Dual-Primary Listings

Hang Seng Indexes has changed the index handling for Secondary and Dual Primary Listings. Xpeng could be added to the HSCEI in March replacing...

Brian Freitas

CTG Duty Free (1880 HK): Near-Term Positive but It Is Not Cheap at All

China's relaxation of COVID control will bring better near-term outlook, as reflected by surge in Sanya's hotel bookings. There are still...

Osbert Tang, CFA

HSCEI Index Rebalance Preview: Shenhua Energy (1088) Could Replace China Feihe (6186)

China Shenhua could replace China Feihe in March. Short interest has been dropping on both stocks and passives need to trade 1-2x ADV on the...

Brian Freitas

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