HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<p>We believe <a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> is an attractive alternative consumption play given its exposure to the rise in demand for food, beverages and household chemical product packaging in China. It is among the top player in China's packaging manufacturing (1-piece cans, 2-piece cans, tinplate packaging and plastic containers) with prominent customer profile including Coca-Cola, Tsingtao, Carlsberg, Blue Moon, Feihe, Yili and Jiaduobao etc. </p><p>The combination of margin expansion, capacity growth and surging consumption demand, we expect CPMC to post a steady rising ROE. We expect special DPS payout on the receipt of Rmb1.5bn repurchase consideration from JDB settlement, and this will place its dividend yield at least at 7.8%. Its 8.9x PER and 0.69x P/B represent deep discounts to its customers (40x PER) and packaging peers (23.4x) which are unjustified in our view.</p>

We believe CPMC Holdings (906 HK) is an attractive alternative consumption play given its exposure to the rise in demand for food, beverages and household chemical product packaging in China. It is among the top player in China's packaging manufacturing (1-piece cans, 2-piece cans, tinplate packaging and plastic containers) with prominent customer profile including Coca-Cola, Tsingtao, Carlsberg, Blue Moon, Feihe, Yili and Jiaduobao etc. The combination of margin expansion, capacity growth and surging consumption demand, we expect CPMC to post a steady rising ROE. We expect special DPS payout on the receipt of Rmb1.5bn repurchase consideration from JDB settlement, and this will place its dividend yield at least at 7.8%. Its 8.9x PER and 0.69x P/B represent deep discounts to its customers (40x PER) and packaging peers (23.4x) which are unjustified in our view.

CPMC Holdings (906 HK): An Attractive Inexpensive Alternative Consumption Play

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

China Youran Dairy Group Ltd / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/china-youran-dairy-group-ltd" target="_blank" data-smartkarma-citation="entities:31075:1" rel="noopener">China Youran Dairy Group Ltd (1836774D CH)</a>, (Youran) is a leader in China’s upstream dairy market and one of a select number of dairy farming companies around the world with a business layout covering the entire upstream dairy industry. In our previous insight, we discussed Youran’s business model along with investment themes favouring the company. In this report, analyse the company’s financial statements and growth potential.</p>

China Youran Dairy Group Ltd (1836774D CH), (Youran) is a leader in China’s upstream dairy market and one of a select number of dairy farming companies around the world with a business layout covering the entire upstream dairy industry. In our previous insight, we discussed Youran’s business model along with investment themes favouring the company. In this report, analyse the company’s financial statements and growth potential.

Youran IPO: Robust Top-Line Growth Via Acquisitions & Organic Growth

<p><a href="https://www.smartkarma.com/entities/china-youran-dairy-group-ltd" target="_blank" data-smartkarma-citation="entities:31075:1" rel="noopener">China Youran Dairy Group Ltd (1836774D CH)</a>, (Youran) is a leader in China’s upstream dairy market and one of a select number of dairy farming companies around the world with business operations covering the entire upstream dairy industry. According to Frost &amp; Sullivan, the company is the largest integrated provider of products and services in the upstream dairy industry in China, in terms of revenue, in the first half of 2020.</p><p>The company has filed for an IPO on the Hong Kong Stock Exchange with a placeholder value of US$2 billion.</p>

China Youran Dairy Group Ltd (1836774D CH), (Youran) is a leader in China’s upstream dairy market and one of a select number of dairy farming companies around the world with business operations covering the entire upstream dairy industry. According to Frost &amp; Sullivan, the company is the largest integrated provider of products and services in the upstream dairy industry in China, in terms of revenue, in the first half of 2020.The company has filed for an IPO on the Hong Kong Stock Exchange with a placeholder value of US$2 billion.

Quality-first, Business-perspective Strategy, Urbem (HK) Limited

Steven Chen

Quality-first, Business-perspective Strategy

<ul>
<li>According to our definition, A2 Milk is a wonderful business largely thanks to its superior return on capital guarded by a multi-layered moat, a megatrend-driven growth prospect, and the capability to compound earnings for shareholders;</li>
<li>Mr. Market displayed his short-termism in terms of the stock recently, which we think provides a rare entry point for investors interested in the company into 2021.</li>
</ul>


According to our definition, A2 Milk is a wonderful business largely thanks to its superior return on capital guarded by a multi-layered moat, a megatrend-driven growth prospect, and the capability to compound earnings for shareholders;
Mr. Market displayed his short-termism in terms of the stock recently, which we think provides a rare entry point for investors interested in the company into 2021.


Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<div>
<p>On <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0731/2020073101776.pdf" target="_blank" rel="noopener">31 July 2020</a>, dairy farmer <a href="https://www.smartkarma.com/entities/china-zhongdi-dairy-holdings" target="_blank" data-smartkarma-citation="entities:22662:1" rel="noopener">China Zhongdi Dairy (1492 HK)</a> entered into a subscription agreement with Hongkong Jingang Trade Holding Co (Jingang Trade), a company wholly-owned by <a href="https://www.smartkarma.com/entities/inner-mongolia-yili-indus-a" target="_blank" data-smartkarma-citation="entities:3220:1" rel="noopener">Inner Mongolia Yili Industrial Group (A) (600887 CH)</a>,  pursuant to which Jingang Trade was allotted 432,641,522 shares at HK$0.47/share, representing ~16.6% of the enlarged issued share capital in Zhongdi.  The subscription was <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0812/2020081200704.pdf" target="_blank" rel="noopener">completed</a> on 12 August.</p>
<p>Immediately after completion, the shareholding percentage of Zhang Jianshe and Zhang Kaizhan (the Zhang Group) in Zhongdi decreased to approximately 29.51% of the then issued share capital, and the Zhang Group ceased to be the controlling shareholders of Zhongdi. </p>
<h3>The New News</h3>
<p>Jingang Trade and the Zhang Group have now <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0927/2020092700065.pdf" target="_blank" rel="noopener">entered</a> into a Share Subscription Agreement (SSA) with the Offeror, which is a vehicle jointly held by Yili and the Zhang Group, such that Jingang Trade and the Zhang Group will transfer 432.641mn shares and 707.878mn shares respectively to the Offeror at HK$1.132/share. Upon completion of the SSA, the Offeror will hold 43.75%, and be obligated to make a Mandatory General Offer for all shares not owned. The MGO will be HK$1.132/share (a 11% premium to last close). The price will not be increased.</p>
<p>The SSA is primarily subject to independent shareholder approval and China's SAMR.</p>
<p>The MGO is subject to a 50% (of all shares out) acceptance condition.</p>
<p>Despite the meagre headline Offer premium to last close, Zhongdi shares are up 129% YTD. Apart from timing associated with regulatory approvals, this looks a done deal.</p>
</div>
<div>
<p>This transaction is highly reminiscent of the recent <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0906/2020090600009.pdf" target="_blank" rel="noopener">conditional voluntary general offer</a> for <a href="https://www.smartkarma.com/entities/yuanshengtai-dairy-farm-ltd" target="_blank" data-smartkarma-citation="entities:17091:1" rel="noopener">Yuanshengtai Dairy Farm (1431 HK)</a> from <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> discussed in <em><a href="https://skr.ma/uF9jE" target="_blank" rel="noopener">YST Dairy (1431 HK): VGO From China Feihe</a></em>. </p>
</div>
<div>
<p>As always, more below the fold.</p>
</div>


On 31 July 2020, dairy farmer China Zhongdi Dairy (1492 HK) entered into a subscription agreement with Hongkong Jingang Trade Holding Co (Jingang Trade), a company wholly-owned by Inner Mongolia Yili Industrial Group (A) (600887 CH),  pursuant to which Jingang Trade was allotted 432,641,522 shares at HK$0.47/share, representing ~16.6% of the enlarged issued share capital in Zhongdi.  The subscription was completed on 12 August.
Immediately after completion, the shareholding percentage of Zhang Jianshe and Zhang Kaizhan (the Zhang Group) in Zhongdi decreased to approximately 29.51% of the then issued share capital, and the Zhang Group ceased to be the controlling shareholders of Zhongdi. 
The New News
Jingang Trade and the Zhang Group have now entered into a Share Subscription Agreement (SSA) with the Offeror, which is a vehicle jointly held by Yili and the Zhang Group, such that Jingang Trade and the Zhang Group will transfer 432.641mn shares and 707.878mn shares respectively to the Offeror at HK$1.132/share. Upon completion of the SSA, the Offeror will hold 43.75%, and be obligated to make a Mandatory General Offer for all shares not owned. The MGO will be HK$1.132/share (a 11% premium to last close). The price will not be increased.
The SSA is primarily subject to independent shareholder approval and China's SAMR.
The MGO is subject to a 50% (of all shares out) acceptance condition.
Despite the meagre headline Offer premium to last close, Zhongdi shares are up 129% YTD. Apart from timing associated with regulatory approvals, this looks a done deal.


This transaction is highly reminiscent of the recent conditional voluntary general offer for Yuanshengtai Dairy Farm (1431 HK) from China Feihe (6186 HK) discussed in YST Dairy (1431 HK): VGO From China Feihe. 


As always, more below the fold.


Zhongdi Dairy (1492 HK): Possible MGO from Yili

China

Inner Mongolia Yili Industrial Group Co., Ltd. produces milk, powdered milk, ice cream, and other dairy products.  The Company also produces frozen food and noodles.

Inner Mongolia Yili Industrial Group (A) (600887 CH)

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Inner Mongolia Yili Industrial Group (A) (600887 CH)

CPMC Holdings (906 HK): An Attractive Inexpensive Alternative Consumption Play

CPMC is well positioned to capture the strong packaging demand from food, beverage and chemical products driven by China's consumption growth. Yet,...

Osbert Tang, CFA

Youran IPO: Robust Top-Line Growth Via Acquisitions & Organic Growth

Youran, the leader in China’s upstream dairy market has filed for an IPO on the Hong Kong Stock Exchange with a placeholder value of US$2 billion.

Oshadhi Kumarasiri

Youran Dairy IPO Preview

According to Frost & Sullivan, Youran is the largest integrated provider of products and services in the upstream dairy industry in China, in terms...

Oshadhi Kumarasiri

2021 High Conviction: A2 Milk

Buying quality businesses at or below fair prices and holding them for the long run is the key to generate alpha. A2 Milk at the current level...

Steven Chen

Zhongdi Dairy (1492 HK): Possible MGO from Yili

After entering into a trading halt on the 4 September "pursuant to The Codes on Takeovers and Mergers and Share Buy-backs", Yuanshengtai Dairy...

David Blennerhassett

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