HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Shenzhen International / Equity Bottom-Up

<p>The 44% YoY decline of reported profit in 1H21 at <a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> (SZI) due to one-off gain in last year has masked its good recurring operations recovery. In fact, all business segments posted encouraging rebound in net profit contribution YoY; and even the 49%-owned Shenzhen Airlines (SZA) witnessed a 39% YoY narrowing in losses attributable to SZI. Net of one-off items, 1H21 profit is HK$961m, against losses of HK$1.2bn in 1H20, indicating a sharply positive YoY swing.</p><p>Management is cautiously optimistic towards 2H21. New projects, healthy recurring growth and asset recycle will drive logistics segment profit, though SZA's profitability will still hinge on the local COVID-19 situation. The acquisition of <a href="https://www.smartkarma.com/entities/shenzhen-investment-holdings-bay-area-development" target="_blank" data-smartkarma-citation="entities:12134:1" rel="noopener">Shenzhen Investment Holdings Bay Area Development (737 HK)</a> by its subsidiary <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> will solidify SZI's market share in Shenzhen, and provide upside from the realisation of its land plot values. Currently at 2SD below the historical average P/B, SZI is deeply undervalued, in our view.</p>

The 44% YoY decline of reported profit in 1H21 at Shenzhen International (152 HK) (SZI) due to one-off gain in last year has masked its good recurring operations recovery. In fact, all business segments posted encouraging rebound in net profit contribution YoY; and even the 49%-owned Shenzhen Airlines (SZA) witnessed a 39% YoY narrowing in losses attributable to SZI. Net of one-off items, 1H21 profit is HK$961m, against losses of HK$1.2bn in 1H20, indicating a sharply positive YoY swing.Management is cautiously optimistic towards 2H21. New projects, healthy recurring growth and asset recycle will drive logistics segment profit, though SZA's profitability will still hinge on the local COVID-19 situation. The acquisition of Shenzhen Investment Holdings Bay Area Development (737 HK) by its subsidiary Shenzhen Expressway Co H (548 HK) will solidify SZI's market share in Shenzhen, and provide upside from the realisation of its land plot values. Currently at 2SD below the historical average P/B, SZI is deeply undervalued, in our view.

Shenzhen Intl (152 HK): Encouraging Recovery of Recurring Profit in 1H21

<p>Share price of <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> (SZI) has been under pressure lately due to concerns on the proposed acquisition of <a href="https://www.smartkarma.com/entities/suning-com-co-ltd-a" target="_blank" data-smartkarma-citation="entities:9178:1" rel="noopener">Suning.com (002024 CH)</a> and weakened performance on its 49%-owned Shenzhen Airlines (SZA). However, now that it decided not to go ahead on Suning.com and there are signs of recovery at SZA, the still-depressed valuation (0.61x P/B, 5-year low) is unwarranted, in our opinion.</p><p>Its core logistics segment performed well in 1H21, achieving higher occupancy which is supportive to rental income, and the expansion in project portfolio should be an added driver. The proposed acquisition of <a href="https://www.smartkarma.com/entities/shenzhen-investment-holdings-bay-area-development" target="_blank" data-smartkarma-citation="entities:12134:1" rel="noopener">Shenzhen Investment Holdings Bay Area Development (737 HK)</a> by its subsidiary <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> should also generate good cash flow with upside from its land assets. Long-term, the transformation of South China Logistics Park may potentially create another successful story similar to its Qianhai project. At FY21F dividend yield of 8%, we believe SZI is very attractive at the current level.</p>

Share price of Shenzhen Intl (152 HK) (SZI) has been under pressure lately due to concerns on the proposed acquisition of Suning.com (002024 CH) and weakened performance on its 49%-owned Shenzhen Airlines (SZA). However, now that it decided not to go ahead on Suning.com and there are signs of recovery at SZA, the still-depressed valuation (0.61x P/B, 5-year low) is unwarranted, in our opinion.Its core logistics segment performed well in 1H21, achieving higher occupancy which is supportive to rental income, and the expansion in project portfolio should be an added driver. The proposed acquisition of Shenzhen Investment Holdings Bay Area Development (737 HK) by its subsidiary Shenzhen Expressway Co H (548 HK) should also generate good cash flow with upside from its land assets. Long-term, the transformation of South China Logistics Park may potentially create another successful story similar to its Qianhai project. At FY21F dividend yield of 8%, we believe SZI is very attractive at the current level.

Shenzhen Intl (152 HK): What's Wrong Recently?

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<p>Hang Seng Indexes Company (HSIL) reviews the constituents of the Hang Seng Composite Index (HSCI) on a half yearly basis in March and September with data cut-off dates as of the end of December and June. The review announcement for the September 2021 review should be made on 13 August and will be effective after the close of trading on 3 September.</p><p>The June review will see the inclusion of stocks that were newly listed from 1 January to 31 March and meet the criteria for joining the index.</p><p>Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors.</p><div><p>There are a lot of stocks that will join the HSCI and will subsequently be included as a part of the Southbound Stock Connect program - these stocks could be bought by mainland investors and could outperform their peers and the market.</p></div><div><p>There are stocks that will be deleted from the HSCI and consequently deleted from the Southbound Stock Connect buy list while some stocks will be deleted from the HSCI but maintained in Stock Connect since they have listed A-shares.</p></div><div><p>Read on for more details and the stocks affected by the changes.</p></div>

Hang Seng Indexes Company (HSIL) reviews the constituents of the Hang Seng Composite Index (HSCI) on a half yearly basis in March and September with data cut-off dates as of the end of December and June. The review announcement for the September 2021 review should be made on 13 August and will be effective after the close of trading on 3 September.The June review will see the inclusion of stocks that were newly listed from 1 January to 31 March and meet the criteria for joining the index.Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors.There are a lot of stocks that will join the HSCI and will subsequently be included as a part of the Southbound Stock Connect program - these stocks could be bought by mainland investors and could outperform their peers and the market.There are stocks that will be deleted from the HSCI and consequently deleted from the Southbound Stock Connect buy list while some stocks will be deleted from the HSCI but maintained in Stock Connect since they have listed A-shares.Read on for more details and the stocks affected by the changes.

HSCI Index Rebalance and Stock Connect: Potential Changes in June and September

Shenzhen Expressway Co H / Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> announced a positive profit alert for 1Q21, indicating that its recurring profit will reach about Rmb533m, versus losses of Rmb160m a year ago as the impact of COVID-19 subsided. More importantly, such profit indication is even 10.2% higher than 1Q19, suggesting a full-recovery in traffic and toll revenue momentum.</p><p>SZ Exp contributed 44.3% of <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a>'s recurring profit (ex-Shenzhen Airlines) in the last two years. The potential acquisition of <a href="https://www.smartkarma.com/entities/shenzhen-investment-holdings-bay-area-development" target="_blank" data-smartkarma-citation="entities:12134:1" rel="noopener">Shenzhen Investment Holdings Bay Area Development (737 HK)</a> has received waiver from the SFC for a mandatory general offer and a successful conclusion should beef up SZ Exp's assets. Lastly, with SZ Exp's target of an estimated 35% increase in its EBITDA, we believe these factors will support SZ Exp's contribution to SZ Int's profit outlook in this year.</p>

Shenzhen Expressway Co H (548 HK) announced a positive profit alert for 1Q21, indicating that its recurring profit will reach about Rmb533m, versus losses of Rmb160m a year ago as the impact of COVID-19 subsided. More importantly, such profit indication is even 10.2% higher than 1Q19, suggesting a full-recovery in traffic and toll revenue momentum.SZ Exp contributed 44.3% of Shenzhen Intl (152 HK)'s recurring profit (ex-Shenzhen Airlines) in the last two years. The potential acquisition of Shenzhen Investment Holdings Bay Area Development (737 HK) has received waiver from the SFC for a mandatory general offer and a successful conclusion should beef up SZ Exp's assets. Lastly, with SZ Exp's target of an estimated 35% increase in its EBITDA, we believe these factors will support SZ Exp's contribution to SZ Int's profit outlook in this year.

Shenzhen Expressway (548 HK): 1Q21 Positive Profit Alert Highly Welcome to Shenzhen Int (152 HK)

<p><a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> managed to engine a rebound in 2H20 after the serious negative impact of COVID-19 outbreak on its two key businesses - <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> and Shenzhen Airlines. Instead of the 20% YoY decline in headline FY20 profit, we think the market's focus should be on the sharp HoH turnaround in its bottomline (excluding one-off items).</p><p>In the post-FY20 result call, management believes that SZ Int has significant potential to be released in the future. Besides the recovery of logistics, toll road and airlines operations, it will benefit from the expansion in logistics network, securitisation of logistics facilities, contribution from Qianhai project and in the longer term, the transformation and upgrade of South China Logistics Park. We remain positive on SZ Int and believe the stock's current multiples are far from being able to fully reflect its value.</p>

Shenzhen Intl (152 HK) managed to engine a rebound in 2H20 after the serious negative impact of COVID-19 outbreak on its two key businesses - Shenzhen Expressway Co H (548 HK) and Shenzhen Airlines. Instead of the 20% YoY decline in headline FY20 profit, we think the market's focus should be on the sharp HoH turnaround in its bottomline (excluding one-off items).In the post-FY20 result call, management believes that SZ Int has significant potential to be released in the future. Besides the recovery of logistics, toll road and airlines operations, it will benefit from the expansion in logistics network, securitisation of logistics facilities, contribution from Qianhai project and in the longer term, the transformation and upgrade of South China Logistics Park. We remain positive on SZ Int and believe the stock's current multiples are far from being able to fully reflect its value.

Shenzhen Intl (152 HK): Remarkable 2H20; Promising Prospects Revealed in Post-Result Call

China

Shenzhen Investment Holdings Bay Area Development Company Limited provides infrastructure construction services. The Company provides highway construction, bridge construction, and other related services. Shenzhen Investment Holdings Bay Area Development offers services in China.

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Shenzhen Investment Holdings B (737 HK)

Shenzhen Intl (152 HK): Encouraging Recovery of Recurring Profit in 1H21

SZI's recovery in recurring earnings in 1H21 is encouraging, and its logistics business should see good momentum in 2H21 and FY22. At 2SD below...

Osbert Tang, CFA

Shenzhen Intl (152 HK): What's Wrong Recently?

SZI's depressed share price has already reflected the concerns of the market, with upside coming from good logistics segment, asset transformation...

Osbert Tang, CFA

HSCI Index Rebalance and Stock Connect: Potential Changes in June and September

A look at the potential changes to the HSCI at the June & September reviews and stocks that could be included in/excluded from Stock Connect. These...

Brian Freitas

Shenzhen Expressway (548 HK): 1Q21 Positive Profit Alert Highly Welcome to Shenzhen Int (152 HK)

Positive profit alert of SZ Exp for 1Q21 should be taken by SZ Int as an ecnouraging sign of recovery in underlying momentum. SZ Exp contributed...

Osbert Tang, CFA

Shenzhen Intl (152 HK): Remarkable 2H20; Promising Prospects Revealed in Post-Result Call

After a good 2H20, we see good future potential at SZ Int and a step up in corporate activities. Its multiples are unable to reflect its recovery...

Osbert Tang, CFA

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