Brief China: Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way and more

In this briefing:

1. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way
2. China Meidong (1268 HK): +59% YTD After Strong FY18 Results and Positive Outlook; Now Fairly Valued
3. Shenwan Hongyuan IPO Preview: Struggling to Stand Out
4. Guotai Junan Placement: A Reasonable Price for Reasonable Performance
5. China Auto: New Incentives Bring New Demand

1. Asian Telecom Tower Trends: A General Improvement with China Tower Leading the Way

In our latest Asian Tower Trends report, Chris Hoare looks at the listed telecom tower industry across the region. During 4Q18, we became more optimistic on the Asian tower space. 

• China: Last December, we upgraded what is by far the largest towerco globally, China Tower (788 HK), after it became clear the story was much better than disclosed at the time of the IPO (still a mystery as to why this happened),
• The Indian tower business has been buffeted by rapid industry consolidation but we think it is now near a bottom, and recently raised Bharti Infratel (BHIN IN) to Neutral, and
• Growth is improving in Indonesia with increased investment ex Java from the smaller operators. Protelindo (TOWR IJ) our preferred name, but Tower Bersama (TBIG IJ) has lagged badly recently and may be due some catch up. 

With the 5G investment cycle a key theme for coming years, we are now more constructive on the telecom tower space in general. 

2. China Meidong (1268 HK): +59% YTD After Strong FY18 Results and Positive Outlook; Now Fairly Valued

China Meidong Auto (1268 HK) has been a great success story for its investors in the last two years. I first wrote about the company in May 2017 when shares were trading at 1.53 HKD. This week shares traded over 4.7 HKD. While the share price has gyrated wildly the past 24 months the underlying earnings of the company have been increasing steadily and shareholders have been rewarded with solid dividends.

FY18 results were released last month which showed strong growth in revenues (+44%) and net profits (+31%). With the importance of Lexus and Porsche increasing, FY19 should be another year of growth. The performance of BMW remains a wild card.

With the stock up 59% YTD shares are now fairly valued and trading at a 30% premium to its peers. Meidong remains a long-term favorite but has now exceeded my fair value estimate of 4.4 HKD (10x 2019 EPS). I suggest waiting for a better entry point.

3. Shenwan Hongyuan IPO Preview: Struggling to Stand Out

Shenwan Hongyuan Hk (218 HK) is a Chinese securities firm which is backed by Chinese state-owned investment firm, Central Huijin, a 57% shareholder. It listed on the Shenzhen Stock Exchange in January 2015 and seeking to raise $1.5 billion through a Hong Kong listing. Shenwan Hongyuan will start book-building on Thursday according to press reports.

4. Guotai Junan Placement: A Reasonable Price for Reasonable Performance

Guotai Junan Securities (H) (2611 HK), a Chinese securities firm, has launched a primary placement to raise HK$2.7 billion ($345 million) at a placing price of HK$16.34. The placing price is a 7% discount to the last close price of HK$17.64.

5. China Auto: New Incentives Bring New Demand

A speech from Ministry of Commerce last week represented that China would introduce a few incentives to boost auto consumption soon. Among these incentives, allowing re-use of key parts from scrapped cars might increase up to 25% of China’s annual passenger vehicle shipment. Removing restrictions on second-hand cars’ regional migrations could shorten the average length of time car owners keeping their cars, improve existing cars’ utilisation, and hence increase demand on new cars. Improving the market environment for car sales might release some auto dealers’ abnormal operating pressures. Promoting development of aftermarkets could benefit some auto dealers who are expanding business in aftermarkets.