HK/China Equity Long-Short

Osbert Tang, CFA

Equity Capital Markets

China Tourism Group Duty Free Corp Ltd / Equity Capital Markets

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a> has received approval from CSRC for H-share issue and the HK hearing may come as early as Tuesday.</li>
<li>There is report that funds raised will scale down to US$5bn, from US$7bn previously, and this will mean a price of about HK$200, or 26% discount to the A-shares.</li>
<li>Valuations (29.3x PER for FY21 and 22x for FY22) are not too stretched, but following a weak 3Q21, it may need a cheaper level to ensure attractive debut.  </li>
</ul>



China Tourism Group Duty Free Corp Ltd (601888 CH) has received approval from CSRC for H-share issue and the HK hearing may come as early as Tuesday.
There is report that funds raised will scale down to US$5bn, from US$7bn previously, and this will mean a price of about HK$200, or 26% discount to the A-shares.
Valuations (29.3x PER for FY21 and 22x for FY22) are not too stretched, but following a weak 3Q21, it may need a cheaper level to ensure attractive debut.  


CTG Duty Free (601888 CH): Green Light for H-Share IPO and Updated View on Valuation

Forensic Analyst

Jason Yap, CFA

Equity Bottom-Up

Luk Fook Holdings Intl / Equity Bottom-Up

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In this insight, we discuss a long-short pair trade idea (long <a href="https://www.smartkarma.com/entities/luk-fook-holdings-intl-ltd" target="_blank" data-smartkarma-citation="entities:19054:1" rel="noopener">Luk Fook Holdings Intl (590 HK)</a> and short <a href="https://www.smartkarma.com/entities/chow-tai-fook-jewellery-group" target="_blank" data-smartkarma-citation="entities:549:1" rel="noopener">Chow Tai Fook Jewellery (1929 HK)</a>) amongst HK listed jewelers.  As China and HK based bitcoin holders scramble to protect their crypto assets in light of latest regulations, we build on a hypothetical premise that these investors would shift their crypto assets into an asset class that is both tactile and familiar to the <a href="https://www.kitco.com/news/2021-08-31/Chinese-gold-demand-from-millennials-picks-up.html" target="_blank" rel="noopener">Chinese</a> - that is, physical gold / jewelry. 
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There are two major reasons why we believe this is an attractive long-short pair trade: 
1) Relative Valuations - CTF has outperformed LF in the past year.  Year to date, CTF is up 56.3% while LF is up only 9.2%.  As a result, LF has become more attractive than CTF on a relative valuation basis: 
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<div>
<ul style="list-style-type: disc;">
<li>LF trades at a forward P/E of 9.8x, which is 56% discount to CTF's  forward P/E of 22.2x. LF is also trading at EV/EBITDA of 5.3x, which is 63% discount to CTF's EV/EBITDA of 14.3x. We believe this valuation discount is too excessive for LF as compared to CTF.</li>
<li>LF trades at a discount of 3% to past 3 year historical average P/E (10.1x) whereas CTF trades at a premium of 41% to past 3 year historical average P/E (15.8x).</li>
<li>Similarly,  LF trades at a discount of 17% to past 3 year historical average P/B (1.2x) whereas CTF trades at a premium of 72% to past 3 year historical average P/B (2.9x). Hence, CTF appears overvalued relative to its historical average P/E and P/B multiples. </li>
<li>LF generates higher operating margins than CTF. LF generated operating margin of 11.5% versus 8.8% for CTF for last 12 months ended 31 March 2021.  Although, on an ROE basis, CTF beats LF (21.1% versus 9.4%) due to higher asset turnover (1.1x versus 0.6x) and higher debt leverage (43.2% versus 13.3%).  </li>
</ul>
</div>
</div>
<div>
2) Gradual improvement in HK and Macau, which benefits Luk Fook more
</div>
<ul>
<li>Mainland China sales account for 85% of CTF's sales and 60% of LF's sales. with the balance generated mainly from HK and Macau. CTF's larger exposure to Mainland China likely explains its share price outperformance relative to LF given stable pandemic conditions in China, albeit these factors now appear fully discounted into CTF's price.</li>
<li>Since 23 September 2020, China reinstated tourist visas, through which majority of visitors enter Macau, for all provinces and which is for quarantine free travel.  Visitors from greater China make up over 90% of tourists to the former Portuguese colony of Macau.</li>
<li>On 23 September 2021, HK <a href="https://news.cgtn.com/news/2021-09-22/Hong-Kong-s-Come2hk-scheme-to-boost-cross-border-travel-13LtdBJ6zny/index.html" target="_blank" rel="noopener">announced</a> quarantine free exemptions for non-HK residents travelling from Guangdong and Macao.  Returning visitors to China and Macau after HK visits remain subject to quarantine.  Nevertheless, this signals potential further easing of travel measures among China and the 2 Chinese territories. </li>
<li>The upcoming October 2021 Golden Week would be a good barometer of visitor traffic to HK under current travel measures. If the pandemic situation remains stable after the massive passenger flows expected during this period, this could boost optimism of earlier and fuller relaxation of intra Greater China travel measures. </li>
<li>In short, as visitor traffic to HK and Macau ramps up, LF stands to benefit more due to its larger exposure to these markets, with potential upside from further easing of travel measures.</li>
</ul>


In this insight, we discuss a long-short pair trade idea (long Luk Fook Holdings Intl (590 HK) and short Chow Tai Fook Jewellery (1929 HK)) amongst HK listed jewelers.  As China and HK based bitcoin holders scramble to protect their crypto assets in light of latest regulations, we build on a hypothetical premise that these investors would shift their crypto assets into an asset class that is both tactile and familiar to the Chinese - that is, physical gold / jewelry. 

There are two major reasons why we believe this is an attractive long-short pair trade: 
1) Relative Valuations - CTF has outperformed LF in the past year.  Year to date, CTF is up 56.3% while LF is up only 9.2%.  As a result, LF has become more attractive than CTF on a relative valuation basis: 



LF trades at a forward P/E of 9.8x, which is 56% discount to CTF's  forward P/E of 22.2x. LF is also trading at EV/EBITDA of 5.3x, which is 63% discount to CTF's EV/EBITDA of 14.3x. We believe this valuation discount is too excessive for LF as compared to CTF.
LF trades at a discount of 3% to past 3 year historical average P/E (10.1x) whereas CTF trades at a premium of 41% to past 3 year historical average P/E (15.8x).
Similarly,  LF trades at a discount of 17% to past 3 year historical average P/B (1.2x) whereas CTF trades at a premium of 72% to past 3 year historical average P/B (2.9x). Hence, CTF appears overvalued relative to its historical average P/E and P/B multiples. 
LF generates higher operating margins than CTF. LF generated operating margin of 11.5% versus 8.8% for CTF for last 12 months ended 31 March 2021.  Although, on an ROE basis, CTF beats LF (21.1% versus 9.4%) due to higher asset turnover (1.1x versus 0.6x) and higher debt leverage (43.2% versus 13.3%).  




2) Gradual improvement in HK and Macau, which benefits Luk Fook more


Mainland China sales account for 85% of CTF's sales and 60% of LF's sales. with the balance generated mainly from HK and Macau. CTF's larger exposure to Mainland China likely explains its share price outperformance relative to LF given stable pandemic conditions in China, albeit these factors now appear fully discounted into CTF's price.
Since 23 September 2020, China reinstated tourist visas, through which majority of visitors enter Macau, for all provinces and which is for quarantine free travel.  Visitors from greater China make up over 90% of tourists to the former Portuguese colony of Macau.
On 23 September 2021, HK announced quarantine free exemptions for non-HK residents travelling from Guangdong and Macao.  Returning visitors to China and Macau after HK visits remain subject to quarantine.  Nevertheless, this signals potential further easing of travel measures among China and the 2 Chinese territories. 
The upcoming October 2021 Golden Week would be a good barometer of visitor traffic to HK under current travel measures. If the pandemic situation remains stable after the massive passenger flows expected during this period, this could boost optimism of earlier and fuller relaxation of intra Greater China travel measures. 
In short, as visitor traffic to HK and Macau ramps up, LF stands to benefit more due to its larger exposure to these markets, with potential upside from further easing of travel measures.


HK Jewellers Pair Trade - All That Glitters Not Crypto, But Gold?

China Tourism Group Duty Free Corp Ltd / Equity Bottom-Up

We have expressed our positive view on <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a> in various Insights previously. In this Insight, we look at the proposed H-share IPO from the perspective of investors who do not know it well. For seasoned investors in this name, this Insight serves as a summary of our views and provides background details on the proposed IPO.Fundamentally speaking, the key positives for CTG Duty Free are: 1.) absolute leadership in China's duty free market, 2.) encouraging growth outlook, and 3.) solid profitability and financial position. Key negatives are: 1.) policy risk and rising competition, 2.) concern on payback of new projects, and 3.) risk of overseas expansion. If the IPO is being priced at the current average H-A discount, it will be on 32.7x FY21F PER, we see this not expensive relative to the premium retailers listed in Hong Kong.

We have expressed our positive view on China Tourism Group Duty Free Corp Ltd (601888 CH) in various Insights previously. In this Insight, we look at the proposed H-share IPO from the perspective of investors who do not know it well. For seasoned investors in this name, this Insight serves as a summary of our views and provides background details on the proposed IPO.Fundamentally speaking, the key positives for CTG Duty Free are: 1.) absolute leadership in China's duty free market, 2.) encouraging growth outlook, and 3.) solid profitability and financial position. Key negatives are: 1.) policy risk and rising competition, 2.) concern on payback of new projects, and 3.) risk of overseas expansion. If the IPO is being priced at the current average H-A discount, it will be on 32.7x FY21F PER, we see this not expensive relative to the premium retailers listed in Hong Kong. 

CTG Duty Free (601888 CH) H-Share Pre-IPO: Fundamentally Speaking

Asian Insight Provider - Actionable ideas, CrossASEAN Research

Henry Soediarko

Asian Insight Provider - Actionable ideas

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Health And Happiness (H&H) / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/health-and-happiness-h-h-int" target="_blank" data-smartkarma-citation="entities:20582:1" rel="noopener">Health And Happiness (H&amp;H) (1112 HK)</a> 1H 2019 result was better than its Australian competitor, Bellamy, whose product is perceived to be premium in China yet it is still trading at a 77% discount at 16x PER. Post the 100 days clean up operation in China that target the health supplement industry that contributes to 35% of the company's total revenue,  its share price weakened by circa  30%; creating a buying opportunity for investors with appetite for infant milk formula cum adult nutrition care business in China.

Health And Happiness (H&amp;H) (1112 HK) 1H 2019 result was better than its Australian competitor, Bellamy, whose product is perceived to be premium in China yet it is still trading at a 77% discount at 16x PER. Post the 100 days clean up operation in China that target the health supplement industry that contributes to 35% of the company's total revenue,  its share price weakened by circa  30%; creating a buying opportunity for investors with appetite for infant milk formula cum adult nutrition care business in China.  

Health & Happiness (1112): Buy - Unjustly Punished!

Making sense of the Global Market, Euromonitor International Ltd.

Yu Mitsuhashi

Making sense of the Global Market

Euromonitor International Ltd.

We are a global market research company focused on industries, countries, economies and consumers worldwide. Our cross-country comparable research helps your organisation identify opportunities and develop growth strategies in countries and regions across the globe. With offices around the world, 1,200 analysts in 100 countries and market research on every key trend and driver, we give you powerful access to the real story behind consumer change.

Thematic (Sector/Industry)

<ul><li>Slow recovery of personal accessories in Hong Kong as Chinese tourists return</li><li>Fine jewellery players continue to lead personal accessories in Hong Kong</li><li>Internet retailing grows in Hong Kong but specialist stores remains the key channel</li><li>Jewellery will continue to drive growth of personal accessories in the forecast period</li></ul>

Slow recovery of personal accessories in Hong Kong as Chinese tourists returnFine jewellery players continue to lead personal accessories in Hong KongInternet retailing grows in Hong Kong but specialist stores remains the key channelJewellery will continue to drive growth of personal accessories in the forecast period

Hong Kong

Luk Fook Holdings (International) Limited retails jewellery. The Company engages in the sourcing, designing, wholesaling and retailing of a variety of platinum and gold jewellery, gold ornaments, gem-set jewellery, natural jadeites, gemstones, and other related products. Luk Fook offers its products in Hong Kong, Mainland China, Macau, Singapore, the United States and Canada.

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Luk Fook Holdings Intl (590 HK)

HK Jewellers Pair Trade - All That Glitters Not Crypto, But Gold?

We discuss a long-short trade for HK jewelers (CTF and LF). As HK/China bitcoin holders scramble to protect crypto assets, such investors could...

Jason Yap, CFA

Health & Happiness (1112): Buy - Unjustly Punished!

Health And Happiness (H&H) (1112 HK) 1H 2019 result was better than its Australian competitor, Bellamy, whose product is perceived to be...

Henry Soediarko

Personal Accessories in Hong Kong, China

Slow recovery of personal accessories in Hong Kong as Chinese tourists return Fine jewellery players continue to...

Euromonitor International Ltd.

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

CTG Duty Free (601888 CH): Green Light for H-Share IPO and Updated View on Valuation

CTG Duty Free may need to sweeten its upcoming IPO with cheaper multiples especially following a weak 3Q21 result and the pullback in share price...

Osbert Tang, CFA

HK Jewellers Pair Trade - All That Glitters Not Crypto, But Gold?

We discuss a long-short trade for HK jewelers (CTF and LF). As HK/China bitcoin holders scramble to protect crypto assets, such investors could...

Jason Yap, CFA

CTG Duty Free (601888 CH) H-Share Pre-IPO: Fundamentally Speaking

In relation to CTG Duty Free's H-share IPO, key positives are: 1.) absolute leadership in China's duty free market, 2.) encouraging growth outlook,...

Osbert Tang, CFA

Health & Happiness (1112): Buy - Unjustly Punished!

Health And Happiness (H&H) (1112 HK) 1H 2019 result was better than its Australian competitor, Bellamy, whose product is perceived to be...

Henry Soediarko

Personal Accessories in Hong Kong, China

Slow recovery of personal accessories in Hong Kong as Chinese tourists return Fine jewellery players continue to...

Euromonitor International Ltd.