Brief Industrials: Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare) and more

In this briefing:

1. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)
2. Snippets #19: Marijuana, Mergers, and More
3. Embassy Office Parks REIT – Comparison with AIT and a Look at the Required Yield
4. Hopewell Holdings (54 HK): A Reasonable but Not Great Exit for Shareholders
5. HDC Holdco Trade: Holdco Re-Rating Should Be Transferred to Sub, Time to Long Sub/Short Holdco

1. Shanghai/Shenzhen Connect – $8.4 Bn Inflows in February (Kweichow Moutai, Aier Eye, Luxshare)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Industrials, Consumer Staples, Consumer Discretionary, and Financials names. We estimate that total inflow into the A-share market via northbound trade amounted to USD 8.4 bn in February.

2. Snippets #19: Marijuana, Mergers, and More

Five interesting trends/developments that could impact Thai equities in the recent period:

• Legalization of medicinal marijuana. Thailand legalized medicinal use of marijuana at end of February and has already received immense interest from potential growers. At some point, pharma and healthcare companies could be beneficiaries of this trend.
• Rumbles in the airline industry. Asia Aviation (AAV TB) , parent company of Thai Air Asia, acquires a stake in competitor Nok Air. This is one of the few signs of industry consolidation in this sector.
• MOU signed between TMB and Thanachart. The deal may take longer than initially expected, but the two sides have agreed on some basics such as 70% equity financing and deal size of roughly Bt130-140bn.
• Read-through from US Election 2020. Some of the Democrat policies advocated by candidates in 2020 could turn out to be positive for Asian equities.
• BGrimm acquires Glow SPP1 for a bargain price of Bt3.3bn, or 55% of the expected price, opening the way for the GPSC-Glow merger, potentially the largest deal of 2019.

3. Embassy Office Parks REIT – Comparison with AIT and a Look at the Required Yield

Embassy Office Parks REIT (EOP IN) plans to raise around US$1bn in its India IPO. EOP will primarily hold office assets in Bengaluru, Pune and Noida with a total portfolio size of US$4.2bn. 

In my previous insight, Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish I covered the company background and its projected growth. In this insight, I’ll compare it to its closest listed peer, Ascendas India Trust (AIT SP) and add in the performance of other yield driven listings in India.

4. Hopewell Holdings (54 HK): A Reasonable but Not Great Exit for Shareholders

Hopewell Holdings (54 HK), an infrastructure and property developer, is subject to a privatisation proposal from its Chairman, Sir Gordon Wu. The privatisation price of HK$38.80 cash per share is a 46.7% premium over the closing price on 30 November 2018, the day before the announcement of the privatisation proposal.

5. HDC Holdco Trade: Holdco Re-Rating Should Be Transferred to Sub, Time to Long Sub/Short Holdco

• HDC Holdco and its major Sub HDC-OP are now at 247% of σ on a 20D MA for the first time since mid Nov last year. On a 120D, their current price ratio is substantially higher than the mean. Holdco discount is now 40% to NAV. This is nearly a 10%p drop since early Jan.
• My previous stub trade on the HDC duo again paid off very nicely. I went long Holdco and short Sub on Jan 11. This trade is now delivering a 15% return. During this period, Holdco climbed 23%. Sub went up 8%. They created a 15%p gap in price performance. Holdco’s 23% running was mainly attributable to re-rating of some of its major unlisted holdings.
• Sub also has several key assets that could equally be re-rated. Much of Holdco’s assets that have presumably undergone re-ratings lately are business wise closely correlated with Sub. A 15%p price yield gap should be too harsh on Sub. I expect their price ratio will be challenged downwardly at this level on a short term time horizon.
• I’d close my previous position. I’d initiate a new trade. I’d go long Sub and short Holdco. I’d close this trade at < 50% of σ. Given the fluctuation level of this duo, this’d give nearly a 8% yield.