HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>We expect more supportive measures to be rolled out on hydrogen energy development in 2022, and the recently announced MIIT Plan already showed an escalation of its industrial use. </li>
<li>Hydrogen may potentially account for 5% of final energy consumption in 2030 and 20% in 2060. Industrial use may represent 60% of total, driving tremendous opportunities for the players.</li>
<li>We think <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a>, <a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">Cimc Enric Holdings (3899 HK)</a> and <a href="https://www.smartkarma.com/entities/weichai-power-co-ltd-h" target="_blank" data-smartkarma-citation="entities:12508:1" rel="noopener">Weichai Power Co Ltd H (2338 HK)</a> are the prime beneficiaries and they have made good progress lately.</li>
</ul>


We expect more supportive measures to be rolled out on hydrogen energy development in 2022, and the recently announced MIIT Plan already showed an escalation of its industrial use. 
Hydrogen may potentially account for 5% of final energy consumption in 2030 and 20% in 2060. Industrial use may represent 60% of total, driving tremendous opportunities for the players.
We think Dongfang Electric (1072 HK), Cimc Enric Holdings (3899 HK) and Weichai Power Co Ltd H (2338 HK) are the prime beneficiaries and they have made good progress lately.


China's Hydrogen Economy: More Excitements into 2022

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Quantitative Analysis

<ul>
<li>As of Friday Nov 19, the average A/H premium of 134 A/H stocks are 109.3%. The average A/H premium changed by -1.4ppt over the past one week.</li>
<li>The sector with the biggest A/H premium increase was Utilities (ΔA/H premium=5.1ppt) while the sector with the biggest A/H premium decrease was Consumer Discretionary (ΔA/H premium=-13.1ppt).</li>
<li>The top 3 stocks based on increase in A/H premium in the past week were SINOPEC SHANG, YANTAI NORTH, and SINOPEC OILFIELD.</li>
</ul>


As of Friday Nov 19, the average A/H premium of 134 A/H stocks are 109.3%. The average A/H premium changed by -1.4ppt over the past one week.
The sector with the biggest A/H premium increase was Utilities (ΔA/H premium=5.1ppt) while the sector with the biggest A/H premium decrease was Consumer Discretionary (ΔA/H premium=-13.1ppt).
The top 3 stocks based on increase in A/H premium in the past week were SINOPEC SHANG, YANTAI NORTH, and SINOPEC OILFIELD.


A/H Premium Weekly: Utility Led the Premium Increase

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a> (DEC) achieved an encouraging 3Q21 with reported net profit increased 33.5% YoY and new orders signed reached Rmb12.6bn for 3Q21 and Rmb47bn for 9M21. Although recurring profit grew a slower 12.9%, it is still decent amid higher input costs. In particular, we are pleased to see its gross margin for 3Q21 expanded by 1.6pp YoY. Its solid financial position with 51% of share price being net cash is an added strength. We believe there is room for the Street to upgrade FY21 forecasts, as DEC's 9M21 result has already reached 79% of full-year consensus estimate. Earnings outlook appears to be secured as we estimate DEC's backlog enough to cover FY20 revenue at 2.63x. DEC's long-term exposure to pumped storage and hydrogen economy of China is very appealing and is yet to be captured in the earnings over the next two years. Even so, its valuations for FY21 and FY22 are still inexpensive, in our view.

Dongfang Electric (1072 HK) (DEC) achieved an encouraging 3Q21 with reported net profit increased 33.5% YoY and new orders signed reached Rmb12.6bn for 3Q21 and Rmb47bn for 9M21. Although recurring profit grew a slower 12.9%, it is still decent amid higher input costs. In particular, we are pleased to see its gross margin for 3Q21 expanded by 1.6pp YoY. Its solid financial position with 51% of share price being net cash is an added strength. We believe there is room for the Street to upgrade FY21 forecasts, as DEC's 9M21 result has already reached 79% of full-year consensus estimate. Earnings outlook appears to be secured as we estimate DEC's backlog enough to cover FY20 revenue at 2.63x. DEC's long-term exposure to pumped storage and hydrogen economy of China is very appealing and is yet to be captured in the earnings over the next two years. Even so, its valuations for FY21 and FY22 are still inexpensive, in our view. 

Dongfang Electric (1072 HK): Healthy 3Q21 Result with Positive Order Flow

Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

We deliver this via advisory services, strategic planning, opportunity analysis/sourcing, as well as solution implementation. 

Whilst, we create intellectual discipline and operational leverage for your projects or daily activities, our ultimate objective is to empower whilst enhancing your decision making. 

Strategic Knowledge and Solutions

Cross Asset Strategy

<ul>
<li>
Our Q3-2021 All Cap High-Risk screen of stocks produced a market-cap-weighted average price return of 2% and a simple average decline of 0.2%.</li>
<li>
Out of the 34 stocks that appeared in our Q3-2021 screen, 15 stocks saw an average share price decline of 11.5%, whilst 19 stocks appreciated on average by 14%. The two biggest declining stock  were down 25% and 19% respectively.</li>
<li>Our Q4 2021 screen, with 38 names (up from 34 seen in Q3 and Q2 2021) delivers an interesting composition this quarter, </li>
<li>
As in the previous few quarters, we anticipate the possibility of a risk of deteriorating credit metrics during the next few quarters: Q4 2021’s Altman Z score rests at 1.23, which is just up on Q3 2021’s level of 1.19.</li>
</ul>



Our Q3-2021 All Cap High-Risk screen of stocks produced a market-cap-weighted average price return of 2% and a simple average decline of 0.2%.

Out of the 34 stocks that appeared in our Q3-2021 screen, 15 stocks saw an average share price decline of 11.5%, whilst 19 stocks appreciated on average by 14%. The two biggest declining stock  were down 25% and 19% respectively.
Our Q4 2021 screen, with 38 names (up from 34 seen in Q3 and Q2 2021) delivers an interesting composition this quarter, 

As in the previous few quarters, we anticipate the possibility of a risk of deteriorating credit metrics during the next few quarters: Q4 2021’s Altman Z score rests at 1.23, which is just up on Q3 2021’s level of 1.19.


Screening the Silk Road: Q4 2021 High-Risk Names to Avoid

While <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric Corporation (1072 HK)</a> (DEC) has witnessed excellent share price performance into 2H21, we believe there is still more room for the stock to go. Earnings revision momentum is positive, with FY21-22 forecasts revised up by 10-11% in the last month, but such magnitudes are likely to have still under-estimated DEC's earnings. The fact that its new orders for 1H21 reached a record high and grew by 32.9% adds comfort to our investment thesis. We estimate DEC's backlog at around Rmb96bn now, good enough to cover 2.6x its annual revenue, and this was up from 2.3x at end-FY20. New order momentum in 3Q21 looks sustaining strength, and with PER valuation at 15x for FY21 and 13.5x for FY22, it does not look demanding given its technical strengths and encouraging outlook. Longer-term, besides the benefits from hydrogen and pumped storage, we see DEC well positioned to gain from China's vigorous attitude towards nuclear generation as well.

While Dongfang Electric Corporation (1072 HK) (DEC) has witnessed excellent share price performance into 2H21, we believe there is still more room for the stock to go. Earnings revision momentum is positive, with FY21-22 forecasts revised up by 10-11% in the last month, but such magnitudes are likely to have still under-estimated DEC's earnings. The fact that its new orders for 1H21 reached a record high and grew by 32.9% adds comfort to our investment thesis. We estimate DEC's backlog at around Rmb96bn now, good enough to cover 2.6x its annual revenue, and this was up from 2.3x at end-FY20. New order momentum in 3Q21 looks sustaining strength, and with PER valuation at 15x for FY21 and 13.5x for FY22, it does not look demanding given its technical strengths and encouraging outlook. Longer-term, besides the benefits from hydrogen and pumped storage, we see DEC well positioned to gain from China's vigorous attitude towards nuclear generation as well. 

Dongfang Electric (1072 HK): Looks to Have More Room to Go

China

Dongfang Electric Corporation Limited manufactures and sells hydro and steam power generators and AC/DC electric motors. The Company also provides repair, upgrade, maintenance, and other services for the products.

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Dongfang Electric (1072 HK)

China's Hydrogen Economy: More Excitements into 2022

China's push for hydrogen energy use is likely to further escalate in 2022, following a soon-to-be announcement of top-level design plan for the...

Osbert Tang, CFA

A/H Premium Weekly: Utility Led the Premium Increase

We highlight the utility sector as the biggest A/H premium gainer and the Consumer Discretionary as the biggest A/H premium lager.

Ke Yan, CFA, FRM