Daily Brief China: Hongkong Land, Consun Pharmaceutical, Pinduoduo, Hong Kong Hang Seng Index, Road King Infrastructure, Seazen (Formerly Future Land) and more

• China’s swift and sudden abolishment of its Covid rules triggered across-the-board outperformance for Hong Kong stocks. The HSI is up ~13% since early December 2022. 
• A strong rebound of inbound tourism and the resumption of normalised travel between Hong Kong and the mainland should underpin the city’s recovery.
• The retail sector, notably the high street shop segment, should lead this post-Covid recovery in terms of both rents and prices. 

• The potential high-priced acquisition proposed by Wepon failed. In fact, Wepon is in a vicious circle. So, terminating the acquisition is not a bad thing for Consun Pharmaceutical (1681 HK).
• Consun kept positive momentum and its performance was strong in 22H1. Such growth is expected to continue after China reopens as non-COVID related medical demand returns to normal.
• Considering its solid business performance and large cash balance, Consun is obviously undervalued. In our view, even without Wepon’s deal as the catalyst, Consun still has investment value.

• The market seems to be expecting quite a bit from Pinduoduo (PDD US) in upcoming earnings with consensus expecting the company to make around RMB 11.4bn OP in 4Q22.
• With CCP’s anti-monopoly drive on hold, Pinduoduo may need to persuade customers and merchants a bit more than usual via sales and marketing to further improve its market position.
• TEMU was anyway going to be a significant burden on profitability. With aggressive discounting and coupons, we think that burden has gotten significantly heavier.

• HSI Index has paused for breath this month underperforming most other global indices
• The outlook for the region remains strong as reopening strength gains momentum and the Government continue to announce new supportive measures
• We favour a buy the dip strategy and suggest using derivatives to play it

We view Road King as “Medium Risk” on the LARA scale. The company has increasingly focused on growing and improving its property development business. We view favourably Road King’s geographical exposure to the Yangtze River Delta and Pan Bohai Rim regions, as well as the steady cash flow from its toll-road segment. The toll-road business has high margins, and reflects the company’s decent relationship with the government.

However, Road King has little pricing power, as tolls are regulated to avoid excessive charges. We also negatively note the company’s reliance on JV structures for the property and toll-road segments, along with its heavy use of perpetual securities. Moreover, Road King has poor disclosure compared to peers.  

Our fundamental Credit Bias is “Negative”, as Road King may not be able to deleverage in the near term, given its need to replenish the small land bank. Positively, the company has a well-spread debt maturity profile, with the next offshore bond (USD 480 mn) due in September 2024. Road King does not have to redeem its perpetuals, given the absence of coupon step-ups.

Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”. We believe the Chinese Property sector has moderate exposure to environmental and social risks. The sector is not energy intensive, but may face social issues related to construction safety and ability to meet homebuyers’ requirements. We view governance risks as being more significant, due to the sector’s generally lower transparency and weaker internal controls.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

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