HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

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. 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.

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

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In September 2016, China's State Council passed down a directive for the top ten enterprises in the iron and steel industry to achieve a total concentrated production capacity of over 60% of the overall production capacity by 2025.
As at the end of 2018, the concentration was estimated at 38%.
Rumours of a possible merger between <a href="https://www.smartkarma.com/entities/baoshan-iron-steel-co-a" target="_blank" data-smartkarma-citation="entities:3891:1" rel="noopener">Baoshan Iron &amp; Steel Co A (600019 CH)</a> and <a href="https://www.smartkarma.com/entities/maanshan-iron-steel-h" target="_blank" data-smartkarma-citation="entities:204:1" rel="noopener">Maanshan Iron &amp; Steel H (323 HK)</a> are not new, as discussed in a <a href="https://www.reuters.com/article/us-china-steel-m-a-exclusive/exclusive-china-steel-giant-baowu-in-talks-to-take-over-rival-magang-sources-idUSKCN1M50U6" target="_blank" rel="noopener">Reuters article</a> back in September last year. Baosteel denied a merger was on the cards in November.
On the 31 May this year, Maanshan <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0602/ltn20190602057.pdf" target="_blank" rel="noopener">announced</a> Anhui SASAC and China Baowu had entered into an agreement, such that Anhui SASAC will transfer 51% of the equity interest held by it in Magang Group to China Baowu for nil consideration. The remaining 49% equity interest in Magang will remain with Anhui SASAC<a href="https://www.smartkarma.com/entities/maanshan-iron-steel-h" target="_blank" data-smartkarma-citation="entities:204:1" rel="noopener"></a>
Magang holds 45.54% in Maanshan via its A shares (<a href="https://www.smartkarma.com/entities/maanshan-iron-steel-a" target="_blank" data-smartkarma-citation="entities:206:1" rel="noopener">Maanshan Iron &amp; Steel A (600808 CH)</a>). 
The equity transfer will result in China Baowu, a 100% owned entity of SASAC, holding 51% in Magang.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/093/794/original/chart.PNG?1563868274" class="editor-image img-responsive" data-smartkarma-image-id="93794"></figure>
<div style="text-align: left;" class="content-caption">Source: HKEx announcement</div>
Maanshan has now <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0723/ltn20190723049.pdf" target="_blank" rel="noopener">updated</a> the equity transfer, the completion of which will trigger a conditional Mandatory General Offer (MGO) for H shareholders at $2.97/share, a 1.37% premium to last close.
The equity transfer remains subject to a number of conditions, including the CSRC waiving China Baowu's obligation to make a General Offer for Maanshan's A shares. Baowu sought a similar waiver from Hong Kong's SFC towards making a general offer for Maanshan's H shares, but was denied. Presumably, this latest announcement was triggered by the SFC's decision.
Approvals from the State Administration of Market Regulation and NDRC are also outstanding. 
In addition, as Baowu is the major shareholder of <a href="https://www.smartkarma.com/entities/baoshan-iron-steel-co-a" target="_blank" data-smartkarma-citation="entities:3891:1" rel="noopener">Baoshan Iron &amp; Steel Co A (600019 CH)</a> and an indirect holder in various listed A-share companies with steel interests, approval for the equity transfer is required from the German Bundeskartellamt and Korea Fair Trade Commission.
The MGO is conditional on 343.87mn H shares tendering or ~20% of total H shares outstanding and 4.46% of total A&amp;H shares, which together would give Baowu 50% of Maanshan.
Should the equity transfer complete, the MGO is unlikely to get up. But that is intentional. The indicative MGO price will, however, provide a floor near/medium term until the completion of the Offer.

In September 2016, China's State Council passed down a directive for the top ten enterprises in the iron and steel industry to achieve a total concentrated production capacity of over 60% of the overall production capacity by 2025.
As at the end of 2018, the concentration was estimated at 38%.
Rumours of a possible merger between Baoshan Iron &amp; Steel Co A (600019 CH) and Maanshan Iron &amp; Steel H (323 HK) are not new, as discussed in a Reuters article back in September last year. Baosteel denied a merger was on the cards in November.
On the 31 May this year, Maanshan announced Anhui SASAC and China Baowu had entered into an agreement, such that Anhui SASAC will transfer 51% of the equity interest held by it in Magang Group to China Baowu for nil consideration. The remaining 49% equity interest in Magang will remain with Anhui SASAC
Magang holds 45.54% in Maanshan via its A shares (Maanshan Iron &amp; Steel A (600808 CH)). 
The equity transfer will result in China Baowu, a 100% owned entity of SASAC, holding 51% in Magang.

Source: HKEx announcement
Maanshan has now updated the equity transfer, the completion of which will trigger a conditional Mandatory General Offer (MGO) for H shareholders at $2.97/share, a 1.37% premium to last close.
The equity transfer remains subject to a number of conditions, including the CSRC waiving China Baowu's obligation to make a General Offer for Maanshan's A shares. Baowu sought a similar waiver from Hong Kong's SFC towards making a general offer for Maanshan's H shares, but was denied. Presumably, this latest announcement was triggered by the SFC's decision.
Approvals from the State Administration of Market Regulation and NDRC are also outstanding. 
In addition, as Baowu is the major shareholder of Baoshan Iron &amp; Steel Co A (600019 CH) and an indirect holder in various listed A-share companies with steel interests, approval for the equity transfer is required from the German Bundeskartellamt and Korea Fair Trade Commission.
The MGO is conditional on 343.87mn H shares tendering or ~20% of total H shares outstanding and 4.46% of total A&amp;H shares, which together would give Baowu 50% of Maanshan.
Should the equity transfer complete, the MGO is unlikely to get up. But that is intentional. The indicative MGO price will, however, provide a floor near/medium term until the completion of the Offer. 

China

Shanghai Baosteel Packaging Co. Ltd., manufactures steel products. The Company also provides metal packaging services. Shanghai Baosteel Packaging serves customers and clients internationally.

Shanghai Baosteel Packaging-A (601968 CH)

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Shanghai Baosteel Packaging-A (601968 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

Maanshan & Baosteel Forged

In September 2016, China's State Council passed down a directive for the top ten enterprises in the iron and steel industry to achieve a total...

David Blennerhassett

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