HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

In this Insight, we review our three best trades - <a href="https://www.smartkarma.com/entities/cosco-shipping-energy-tran-h" target="_blank" data-smartkarma-citation="entities:646:1" rel="noopener">Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK)</a>, <a href="https://www.smartkarma.com/entities/lonking-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3944:1" rel="noopener">Lonking Holdings (3339 HK)</a> and <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> - in 2020. Based on our calls, these trades generated at least 42%, 37.5% and 81.6%, respectively, in this year, without staying 100% of the time in the market.As for 2021, we believe the current levels for <a href="https://www.smartkarma.com/entities/cosco-shipping-energy-tran-h" target="_blank" data-smartkarma-citation="entities:646:1" rel="noopener">Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK)</a> and <a href="https://www.smartkarma.com/entities/lonking-holdings-ltd" target="_blank" data-smartkarma-citation="entities:3944:1" rel="noopener">Lonking Holdings (3339 HK)</a> are still attractive in building new positions, while for <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a>, we will wait for a pull-back to HK$12.0-13.0 levels before we re-establish our position.

In this Insight, we review our three best trades - Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK), Lonking Holdings (3339 HK) and SITC International (1308 HK) - in 2020. Based on our calls, these trades generated at least 42%, 37.5% and 81.6%, respectively, in this year, without staying 100% of the time in the market.As for 2021, we believe the current levels for Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK) and Lonking Holdings (3339 HK) are still attractive in building new positions, while for SITC International (1308 HK), we will wait for a pull-back to HK$12.0-13.0 levels before we re-establish our position. 

Our Three Best Trades in 2020! and How Will We Position for 2021?

Equity Bottom-Up

With a 51% surge in share price since Oct on the back of the strengths in intra-Asia freight rates and the positive news on signing of the Regional Comprehensive Economic Partnership (RCEP), <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK</a>)'s valuations have entered into historical high levels. Despite a projected high ROE of 29% for FY21, its P/B multiple of 4.65x has already blown through the roof. We still think that SITC is a very quality company with solid fundamentals, but the current valuations look to have overweighed the positive factors but turned a blind eye on the risks. These include the sustainability of elevated freight rates, potentially higher charter costs and remote contribution from RCEP; and we believe it is prudent to lighten position in SITC now. Meanwhile, the key upside risks are a better-than-expected volume, declaration of special dividends and further spike in freight rates.

With a 51% surge in share price since Oct on the back of the strengths in intra-Asia freight rates and the positive news on signing of the Regional Comprehensive Economic Partnership (RCEP), SITC International (1308 HK)'s valuations have entered into historical high levels. Despite a projected high ROE of 29% for FY21, its P/B multiple of 4.65x has already blown through the roof. We still think that SITC is a very quality company with solid fundamentals, but the current valuations look to have overweighed the positive factors but turned a blind eye on the risks. These include the sustainability of elevated freight rates, potentially higher charter costs and remote contribution from RCEP; and we believe it is prudent to lighten position in SITC now. Meanwhile, the key upside risks are a better-than-expected volume, declaration of special dividends and further spike in freight rates. 

SITC International (1308 HK): Well, a Very Quality Company but Too Much Too Fast

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<a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a>'s operating statistics showed that 3Q20 achieved the highest quarterly revenue and volume growth since 1Q19, and we believe this was built on solid cargo demand and its niche presence in the booming intra-Asia market. While average freight rates came down by 6.3% in 3Q20 and 3% in 9M20, this is more than offset by the 36.5% decline in average bunker price YTD, and should lead to good margin expansion in this year.
The strong 3Q20 operating data suggested that SITC is on track to reach a record profit in FY20. Even better, we expect ROE for the next two years to stay at levels of over 25% while maintaining a net cash position. Despite having rallied by 41.5% YTD, we continue to like its quality management, strong intra-Asia franchise, solid financial position and willingness to share success with shareholders (average dividend payout ratio of 82% in the last four years). 
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SITC International (1308 HK)'s operating statistics showed that 3Q20 achieved the highest quarterly revenue and volume growth since 1Q19, and we believe this was built on solid cargo demand and its niche presence in the booming intra-Asia market. While average freight rates came down by 6.3% in 3Q20 and 3% in 9M20, this is more than offset by the 36.5% decline in average bunker price YTD, and should lead to good margin expansion in this year.
The strong 3Q20 operating data suggested that SITC is on track to reach a record profit in FY20. Even better, we expect ROE for the next two years to stay at levels of over 25% while maintaining a net cash position. Despite having rallied by 41.5% YTD, we continue to like its quality management, strong intra-Asia franchise, solid financial position and willingness to share success with shareholders (average dividend payout ratio of 82% in the last four years). 


SITC International (1308 HK): Impressive 3Q20 to Support a Record Year in FY20

With an 11.6% YoY growth (in Rmb terms), China's export trade continued its recovery momentum in Aug. This represents a further acceleration from 10.5% growth in Jul and is the fifth consecutive monthly YoY growth since Apr. Export to US has picked up in the last two months while the growth to ASEAN maintained at over 15%. ASEAN sustained its position as China's largest trading partner, accounting for 15% of China's total trade value in 8M20.We believe China' strong export and trade figures for Aug bode well for both <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a> and <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a>. Both companies are heavily geared towards China's trade activities and are with particular exposure to the intra-Asia market. Sinotrans has 50% of its freight forwarding volume in 1H20 from this geographical market while SITC has sole presence in intra-Asia trade. In our view, both companies will report solid 3Q20 figures by end-Oct.

With an 11.6% YoY growth (in Rmb terms), China's export trade continued its recovery momentum in Aug. This represents a further acceleration from 10.5% growth in Jul and is the fifth consecutive monthly YoY growth since Apr. Export to US has picked up in the last two months while the growth to ASEAN maintained at over 15%. ASEAN sustained its position as China's largest trading partner, accounting for 15% of China's total trade value in 8M20.We believe China' strong export and trade figures for Aug bode well for both Sinotrans (598 HK) and SITC International (1308 HK). Both companies are heavily geared towards China's trade activities and are with particular exposure to the intra-Asia market. Sinotrans has 50% of its freight forwarding volume in 1H20 from this geographical market while SITC has sole presence in intra-Asia trade. In our view, both companies will report solid 3Q20 figures by end-Oct.

China Transportation: Strong Aug Export to Benefit Sinotrans (598 HK) And SITC Intl (1308 HK)

While the headline 1H20 profit for <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a> was a 19.9% YoY drop, the real focus should be on the 4% YoY profit growth (+10% for recurring profit) in 2Q20. This suggests very encouraging recovery of earnings in 2Q20, vs. a plunge of 58.4% YoY.  Both forwarding and e-commerce businesses showed profit growth in 1H20, with logistics being the only key drag. Also, margin at most levels has seen YoY expansion in 2Q20.We see 2H20 growth to further recover, riding on the improvement in China's trade performance. Logistics will benefit from the fading impact of COVID-19 and e-commerce to benefit from China's "dual circulation" policy. At 0.38x 12-month forward P/B multiple, or 1.5 SD below the average of 0.71x since 2013, the valuation has not adequately reflected the recovery momentum, in our view. We now project its ROE to reach 8.4% for FY20 and 9.2% for FY21, highly justify a reversion to mean multiple. A PER of 4.7x is also cheap for a name with good recovery pace.

While the headline 1H20 profit for Sinotrans (598 HK) was a 19.9% YoY drop, the real focus should be on the 4% YoY profit growth (+10% for recurring profit) in 2Q20. This suggests very encouraging recovery of earnings in 2Q20, vs. a plunge of 58.4% YoY.  Both forwarding and e-commerce businesses showed profit growth in 1H20, with logistics being the only key drag. Also, margin at most levels has seen YoY expansion in 2Q20.We see 2H20 growth to further recover, riding on the improvement in China's trade performance. Logistics will benefit from the fading impact of COVID-19 and e-commerce to benefit from China's "dual circulation" policy. At 0.38x 12-month forward P/B multiple, or 1.5 SD below the average of 0.71x since 2013, the valuation has not adequately reflected the recovery momentum, in our view. We now project its ROE to reach 8.4% for FY20 and 9.2% for FY21, highly justify a reversion to mean multiple. A PER of 4.7x is also cheap for a name with good recovery pace.

Sinotrans (598 HK): Very Encouraging Profit Recovery Momentum in 2Q20

Hong Kong

SITC International Holdings Company Ltd. offers marine shipping services.  The Company offers container liner shipping, freight forwarding, customs clearance, shipping agency, and ship brokerage services.  SITC operates in Asia.

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SITC International (1308 HK)

Our Three Best Trades in 2020! and How Will We Position for 2021?

We review our three best trades in 2020 which generated returns of at least 42%, 37.5% and 81.6%, respectively; and we lay out our strategy for the...

Osbert Tang, CFA