HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Apr is a good month for <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> as it marks the first month since COVID-19 outbreak that its passenger growth outpaced that for <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> - its growth rate is 10.5pp ahead of CSA. In addition, freight traffic growth is also higher, and we think this send out stronger signal for narrower gap between the two going forward.Load factor performance in the month also pointed to a catch-up at Air China, which is a trend that we have been expecting. We believe the increase in vaccination rates, more border openings and resumption of direct international flights will be the major drivers for Air China - the resumption of operations of US Visa offices in China is a clear evidence for the gradual return to business as usual, in our view.

Apr is a good month for Air China Ltd (H) (753 HK) as it marks the first month since COVID-19 outbreak that its passenger growth outpaced that for China Southern Airlines (1055 HK) - its growth rate is 10.5pp ahead of CSA. In addition, freight traffic growth is also higher, and we think this send out stronger signal for narrower gap between the two going forward.Load factor performance in the month also pointed to a catch-up at Air China, which is a trend that we have been expecting. We believe the increase in vaccination rates, more border openings and resumption of direct international flights will be the major drivers for Air China - the resumption of operations of US Visa offices in China is a clear evidence for the gradual return to business as usual, in our view.

Air China (753 HK): Sending Out Stronger Signals

While the Mar traffic figures continued to show that <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> is still lagging behind <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> in many areas, there is no doubt that such underperformance is reducing sequentially. The latest figures show that Air China is narrowing its gap on passenger load factor, seeing rebound in international passenger traffic, registering better cargo and mail strengths and catching up on freight and overall load factors.We believe many of these attributes fit well into our arguments for a reversal of CSA's outperformance against Air China in this year as we written in <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a>. The relative valuation also suggests CSA is richly valued against Air China. For details, please refer to our attached update presentation file on the trade.

While the Mar traffic figures continued to show that Air China Ltd (H) (753 HK) is still lagging behind China Southern Airlines (1055 HK) in many areas, there is no doubt that such underperformance is reducing sequentially. The latest figures show that Air China is narrowing its gap on passenger load factor, seeing rebound in international passenger traffic, registering better cargo and mail strengths and catching up on freight and overall load factors.We believe many of these attributes fit well into our arguments for a reversal of CSA's outperformance against Air China in this year as we written in 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK). The relative valuation also suggests CSA is richly valued against Air China. For details, please refer to our attached update presentation file on the trade. 

Air China (753 HK): Further Evidences of Improving Against China Southern (1055 HK)

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

Beijing Kingsoft Office Softwa / Event-Driven

We are nearly 95% through the review period for the June review of the <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" data-smartkarma-citation="entities:22906:1" rel="noopener">Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX)</a>. With a large AUM in ETFs tracking the index, large open interest on the CFFEX listed futures, and volatile stocks, it could pay to look at the potential changes to the index.China Securities Index Co (CSI) will announce the changes end May/beginning June and the changes will be effective after the close of trading on 11 June.We expect 30 changes at the upcoming June 2021 index review - this is the maximum number of changes that are permitted at a single review. Estimated one-way turnover is 4.08% and will result in a one-way trade of CNY 10.8bn.The expected inclusions have outperformed the <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" data-smartkarma-citation="entities:22906:1" rel="noopener">Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX)</a> on a year to date basis even post the momentum selloff that started in February. Buying the inclusion basket vs selling the CSI300 futures as a hedge could provide good market neutral returns over the next few weeks.

We are nearly 95% through the review period for the June review of the Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX). With a large AUM in ETFs tracking the index, large open interest on the CFFEX listed futures, and volatile stocks, it could pay to look at the potential changes to the index.China Securities Index Co (CSI) will announce the changes end May/beginning June and the changes will be effective after the close of trading on 11 June.We expect 30 changes at the upcoming June 2021 index review - this is the maximum number of changes that are permitted at a single review. Estimated one-way turnover is 4.08% and will result in a one-way trade of CNY 10.8bn.The expected inclusions have outperformed the Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) on a year to date basis even post the momentum selloff that started in February. Buying the inclusion basket vs selling the CSI300 futures as a hedge could provide good market neutral returns over the next few weeks.

CSI300 Index Rebalance Preview: Recovering from the Growth Sell-Off

Thematic (Sector/Industry)

While <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> sustained its outperformance against <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> in its traffic in Feb, we have already seen some signs of positive factors for Air China emerging, leading us to believe that the unfavourable performance of our advocated <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a> YTD will soon come to an inflection point.<a href="https://www.smartkarma.com/insights/smartkarma-webinar-pair-trade-long-air-china-short-china-southern-still-an-opportunity" target="_blank" data-smartkarma-citation="insights:47857" rel="noopener"></a>The positive signs that we saw are: 1.) stronger passenger load MoM and cargo traffic YoY in Feb at Air China; 2.) now that the Rmb/USD has weakened; 3.) rise in jet fuel more negative to CSA; and 4.) pick-up in Air China's fare after CNY. In valuation terms, CSA's sharp rally has returned it to 1.16x P/B, more than 1SD above historical average, and back to the level in early-2019 before the outbreak - which is not cheap anymore.

While China Southern Airlines (1055 HK) sustained its outperformance against Air China Ltd (H) (753 HK) in its traffic in Feb, we have already seen some signs of positive factors for Air China emerging, leading us to believe that the unfavourable performance of our advocated 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK) YTD will soon come to an inflection point.The positive signs that we saw are: 1.) stronger passenger load MoM and cargo traffic YoY in Feb at Air China; 2.) now that the Rmb/USD has weakened; 3.) rise in jet fuel more negative to CSA; and 4.) pick-up in Air China's fare after CNY. In valuation terms, CSA's sharp rally has returned it to 1.16x P/B, more than 1SD above historical average, and back to the level in early-2019 before the outbreak - which is not cheap anymore.

2021 High Conviction Update: Chinese Airlines Pair Trade - Almost Getting to the Inflection Point

Guangzhou Baiyun International Airport / Equity Bottom-Up

The sharp YoY rebound of the Feb domestic traffic (aircraft movement +81.8% and passenger traffic +139.5%) at <a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> is largely on the back of COVID-19 impacted low base in last Feb. When compared the 2M21 figures with the 'normal' 2M19 figures, it still indicated a 16.1% and 38.9% decline, suggesting that they are yet to fully resumed but are not too far away. We see positive signs for stronger pace in domestic traffic after the CNY starting Mar, and this should be good for GBIA given its heavy domestic exposure. Meanwhile, the increase in vaccination rates both domestically and internationally will bode well for air travel appetite, underpinning further traffic recovery. We continue to prefer GBIA to both <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> and <a href="https://www.smartkarma.com/entities/beijing-capital-international-airport-bcia" target="_blank" data-smartkarma-citation="entities:10626:1" rel="noopener">Beijing Capital International Airport (BCIA) (694 HK)</a>.

The sharp YoY rebound of the Feb domestic traffic (aircraft movement +81.8% and passenger traffic +139.5%) at Guangzhou Baiyun International Airport (600004 CH) is largely on the back of COVID-19 impacted low base in last Feb. When compared the 2M21 figures with the 'normal' 2M19 figures, it still indicated a 16.1% and 38.9% decline, suggesting that they are yet to fully resumed but are not too far away. We see positive signs for stronger pace in domestic traffic after the CNY starting Mar, and this should be good for GBIA given its heavy domestic exposure. Meanwhile, the increase in vaccination rates both domestically and internationally will bode well for air travel appetite, underpinning further traffic recovery. We continue to prefer GBIA to both Shanghai International Airport (600009 CH) and Beijing Capital International Airport (BCIA) (694 HK). 

Guangzhou Baiyun Intl Airport (600004 CH): Further Narrowing the Gap

China

Guangzhou Baiyun International Airport Co., Ltd. operates the Guangzhou Baiyun International Airport and provides related transportation services, including ground, passenger, storage, airplane maintenance and repair, and other services.  The Company also provides food, space rental, and advertising services.

Guangzhou Baiyun International Airport (600004 CH)

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Guangzhou Baiyun International Airport (600004 CH)

Air China (753 HK): Sending Out Stronger Signals

Apr is the first month since the pandemic that Air China outperformed CSA on overall passenger traffic growth. We expect this trend to gather...

Osbert Tang, CFA

Air China (753 HK): Further Evidences of Improving Against China Southern (1055 HK)

Air China looks to have reduced its gap against China Southern in many operating metrics in Mar, supporting our argument for reversal of share...

Osbert Tang, CFA

CSI300 Index Rebalance Preview: Recovering from the Growth Sell-Off

We forecast 30 changes to the CSI300 Index at the June review that will be announced at the end of May and effective 11 June. The expected...

Brian Freitas

2021 High Conviction Update: Chinese Airlines Pair Trade - Almost Getting to the Inflection Point

Feb traffic is not too bad at CSA but we see some positive signs emerging at Air China, supporting a potential reversal of its underperformance...

Osbert Tang, CFA

Guangzhou Baiyun Intl Airport (600004 CH): Further Narrowing the Gap

GBIA's 2M21 traffic indicated it has significantly narrowed the gap with "normal" traffic in 2M19, largely on the back of good domestic routes. We...

Osbert Tang, CFA

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