HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Chinese government will continue to boost the slowing domestic economy by supporting consumption. The A-share consumer staples sector, which is less volatile than discretionary, will be benefited.</li>
<li>We see attractive stories for <a href="https://www.smartkarma.com/entities/shanxi-xinghuacun-fen-wine-factory-co" target="_blank" data-smartkarma-citation="entities:9288:1" rel="noopener">Shanxi Xinghuacun Fen Wine (600809 CH)</a>, <a href="https://www.smartkarma.com/entities/foshan-haitian-flavouring-food-co-ltd" target="_blank" data-smartkarma-citation="entities:15577:1" rel="noopener">Foshan Haitian Flavouring (603288 CH)</a>, <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 (600887 CH)</a> and <a href="https://www.smartkarma.com/entities/fu-jian-anjoy-foods-co-ltd" target="_blank" data-smartkarma-citation="entities:30110:1" rel="noopener">Fu Jian Anjoy Foods (603345 CH)</a>.  </li>
<li>While they are trading on high-end of peer multiples, their earnings quality, leadership status and product premiumisation provide good justifications for valuation. Also, all of them have solid financial position.  </li>
</ul>


Chinese government will continue to boost the slowing domestic economy by supporting consumption. The A-share consumer staples sector, which is less volatile than discretionary, will be benefited.
We see attractive stories for Shanxi Xinghuacun Fen Wine (600809 CH), Foshan Haitian Flavouring (603288 CH), Inner Mongolia Yili Industrial (600887 CH) and Fu Jian Anjoy Foods (603345 CH).  
While they are trading on high-end of peer multiples, their earnings quality, leadership status and product premiumisation provide good justifications for valuation. Also, all of them have solid financial position.  


China A-Share Consumer Staples: An Analysis of the Opportunities Ahead

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

Equity Bottom-Up

Cafe De Coral Holdings / Equity Bottom-Up

<ul>
<li>The share price was beaten down during COVID thanks to the lockdown and further restrictive policy. </li>
<li>The recent result has been encouraging especially with the loosening of the restrictive measures.</li>
<li>
<a href="https://www.smartkarma.com/entities/cafe-de-coral-holdings-ltd" target="_blank" data-smartkarma-citation="entities:2568:1" rel="noopener">Cafe De Coral Holdings (341 HK)</a> is trading at a deep discount to its peers.</li>
</ul>


The share price was beaten down during COVID thanks to the lockdown and further restrictive policy. 
The recent result has been encouraging especially with the loosening of the restrictive measures.

Cafe De Coral Holdings (341 HK) is trading at a deep discount to its peers.


Cafe De Coral (341): Start to Show Positive Result

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Event-Driven

Zhejiang Leapmotor Technologie / Event-Driven

<ul>
<li>We see three new listings as potential inclusions to the HSCI in December. One is already in Stock Connect, one will be added to Stock Connect while one will not.</li>
<li>Given the large market moves, there will be many changes to the HSCI in March 2023. Quite a few stocks could remain in the HSCI but drop out of Connect.</li>
<li>Some of the potential deletions/ Stock Connect drops have large Southbound holdings and some of these positions could be pared back over the next few months.</li>
</ul>


We see three new listings as potential inclusions to the HSCI in December. One is already in Stock Connect, one will be added to Stock Connect while one will not.
Given the large market moves, there will be many changes to the HSCI in March 2023. Quite a few stocks could remain in the HSCI but drop out of Connect.
Some of the potential deletions/ Stock Connect drops have large Southbound holdings and some of these positions could be pared back over the next few months.


HSCI Index Rebalance and Stock Connect: Potential Changes in December & March (There's a Lot!)

Forensic Analyst

Jason Yap, CFA

Forensic Accounting

Haidilao International Holding / Forensic Accounting

On 5 November 2021, <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a> announced its decision to shut down or suspend the operation of 300 poor performing stores within the next 2 months, which is approximately one-fifth of total restaurants.Haidilao opened 308 stores in 2019 and 544 in 2020, and added 299 new stores in H1 2021.  As at 30 June 2021, Haidilao had approximately 1,600 stores.  After closing 300 stores, Haidilao remains China's largest hot pot chain with around 1,300 stores. Amidst concerns of over-expansion, Haidilao's share price has declined by 75% since its February 2021 peak, wiping out HKD333.5 billion (USD42.9 billion) of its market cap. On hindsight, Zhang Yong, founder of Haidilao, conceded that the expansion plan had been "<a href="https://www.globaltimes.cn/page/202111/1238261.shtml" target="_blank" rel="noopener">too confident</a>". In this Insight, we discuss whether Haidilao's store closures were fait accompli given the early warning signs of deteriorating performance, which becomes apparent as we examine Haidilao's performance on a store by store basis. Apart from pandemic disruptions, this deterioration would have been compounded by increased competition and permanent changes in consumption habits that have resulted from the pandemic (such as preference for products designed for convenient home cooking).

On 5 November 2021, Haidilao (6862 HK) announced its decision to shut down or suspend the operation of 300 poor performing stores within the next 2 months, which is approximately one-fifth of total restaurants.Haidilao opened 308 stores in 2019 and 544 in 2020, and added 299 new stores in H1 2021.  As at 30 June 2021, Haidilao had approximately 1,600 stores.  After closing 300 stores, Haidilao remains China's largest hot pot chain with around 1,300 stores. Amidst concerns of over-expansion, Haidilao's share price has declined by 75% since its February 2021 peak, wiping out HKD333.5 billion (USD42.9 billion) of its market cap. On hindsight, Zhang Yong, founder of Haidilao, conceded that the expansion plan had been "too confident". In this Insight, we discuss whether Haidilao's store closures were fait accompli given the early warning signs of deteriorating performance, which becomes apparent as we examine Haidilao's performance on a store by store basis. Apart from pandemic disruptions, this deterioration would have been compounded by increased competition and permanent changes in consumption habits that have resulted from the pandemic (such as preference for products designed for convenient home cooking). 

Haidilao (6862 HK)'s Store Closures - A Fait Accompli?

<a href="https://www.smartkarma.com/entities/yihai-int-l-holding-ltd" target="_blank" data-smartkarma-citation="entities:22803:1" rel="noopener">Yihai Int’L Holding (1579 HK)</a> was trading at par with <a href="https://www.smartkarma.com/entities/haidilao-international-holding-ltd" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao (6862 HK)</a> although the former has previously been the market’s darling due to its less capital intensive and higher-margin business. But the fall during COVID was worse for Yihai compared to Haidialo as investors rushed to cash out their unrealized profit, ignoring the fact that Yihai’s previously smaller business in providing ready-to-eat food products which is essentially what the market wanted at that time, has grown bigger, and has become the differentiator during the difficult period hence maintaining respectable earnings multiples compared to Haidilao whose earnings multiple has gone through to the roof. Only recently, post the vaccine discovery, Haidilao’s earnings multiple normalized but it is still trading at almost twice as much of Yihai (92 to 50).
On a YTD basis, however, both share prices have been heavily correlated although 1) Haidilao’s revenue growth slowed considerably, 2) Yihai’s diversification away from being Haidilao’s supplier have shown result and 3) the earnings multiples differences are still persistent although it has narrowed. This begs to question that shouldn’t Yihai’s share price trading higher than Haidilao?
Yihai's share price is currently highly correlated to Haidilao although its business has become less and less correlated to the former and has pivoted away from providing condiments to Haidilao to manufacture ready-to-eat food products hence the business nature is more similar to <a href="https://www.smartkarma.com/entities/nissin-foods-co-ltd" target="_blank" data-smartkarma-citation="entities:26062:1" rel="noopener">Nissin Foods (1475 HK)</a> although Yihai's share price is still massively underperforming Nissin Food Holdings'.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/237/131/original/image_48603681281635075064982.png?1635075064" class="editor-image img-responsive" data-smartkarma-image-id="237131"></figure>
<div class="content-remarks">
source: Reuters
</div>

Yihai Int’L Holding (1579 HK) was trading at par with Haidilao (6862 HK) although the former has previously been the market’s darling due to its less capital intensive and higher-margin business. But the fall during COVID was worse for Yihai compared to Haidialo as investors rushed to cash out their unrealized profit, ignoring the fact that Yihai’s previously smaller business in providing ready-to-eat food products which is essentially what the market wanted at that time, has grown bigger, and has become the differentiator during the difficult period hence maintaining respectable earnings multiples compared to Haidilao whose earnings multiple has gone through to the roof. Only recently, post the vaccine discovery, Haidilao’s earnings multiple normalized but it is still trading at almost twice as much of Yihai (92 to 50).
On a YTD basis, however, both share prices have been heavily correlated although 1) Haidilao’s revenue growth slowed considerably, 2) Yihai’s diversification away from being Haidilao’s supplier have shown result and 3) the earnings multiples differences are still persistent although it has narrowed. This begs to question that shouldn’t Yihai’s share price trading higher than Haidilao?
Yihai's share price is currently highly correlated to Haidilao although its business has become less and less correlated to the former and has pivoted away from providing condiments to Haidilao to manufacture ready-to-eat food products hence the business nature is more similar to Nissin Foods (1475 HK) although Yihai's share price is still massively underperforming Nissin Food Holdings'.


source: Reuters


Yihai International (1579): Diversified Away from Haidilao

China

Xiabuxiabu Catering Management China Holdings Co Ltd  owns and operates a chain of restaurants in China. The company allows customers to choose from a selection of vegetables, meats, and seafood to cook in their own individual hot pot in its restaurants.

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Xiabuxiabu Catering (520 HK)

Cafe De Coral (341): Start to Show Positive Result

Cafe de Coral share price has been beaten down badly and it looks cheap compared to its peers. Operationally, it has started to turn around and...

Henry Soediarko

HSCI Index Rebalance and Stock Connect: Potential Changes in December & March (There's a Lot!)

There could be 3 adds in December while there will be MANY more changes in March. The adds should outnumber the deletes, but there will be many...

Brian Freitas

Haidilao (6862 HK)'s Store Closures - A Fait Accompli?

We discuss whether Haidilao's store closures were inevitable given the early warning signs of deteriorating performance, which becomes apparent...

Jason Yap, CFA

Yihai International (1579): Diversified Away from Haidilao

Mispriced Yihai Intl - share price highly correlated with Haidilao although it has diversified away by growing its ready-to-eat food business that...

Henry Soediarko

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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China A-Share Consumer Staples: An Analysis of the Opportunities Ahead

China's A-share consumer staples are set to benefit from the government's policy to encourage domestic consumption. Their necessity nature also...

Osbert Tang, CFA

Cafe De Coral (341): Start to Show Positive Result

Cafe de Coral share price has been beaten down badly and it looks cheap compared to its peers. Operationally, it has started to turn around and...

Henry Soediarko

HSCI Index Rebalance and Stock Connect: Potential Changes in December & March (There's a Lot!)

There could be 3 adds in December while there will be MANY more changes in March. The adds should outnumber the deletes, but there will be many...

Brian Freitas

Haidilao (6862 HK)'s Store Closures - A Fait Accompli?

We discuss whether Haidilao's store closures were inevitable given the early warning signs of deteriorating performance, which becomes apparent...

Jason Yap, CFA

Yihai International (1579): Diversified Away from Haidilao

Mispriced Yihai Intl - share price highly correlated with Haidilao although it has diversified away by growing its ready-to-eat food business that...

Henry Soediarko