HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

A close look on the May traffic for the Chinese airlines will reveal that <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> continued to make positive progress to narrow down its gap against <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a>. The former's overall passenger traffic YoY growth was 6.7pp better than the latter in the month; and its freight traffic was even at a 25.4% YoY growth, compared with just 5.9% for CSA. We saw that Air China has already stopped its underperformance against CSA starting Apr, with both stocks moving very much in tandem in the last three months. With the recent local COVID-19 case outbreak in Guangdong, particularly Guangzhou which negatively affect scheduled flights into CSA's headquarter hub, we see room for near-term outperformance at Air China. With better pick-up of international traffic going forward, we expect Air China to widen its outperformance into 2H21.

A close look on the May traffic for the Chinese airlines will reveal that Air China Ltd (H) (753 HK) continued to make positive progress to narrow down its gap against China Southern Airlines (1055 HK). The former's overall passenger traffic YoY growth was 6.7pp better than the latter in the month; and its freight traffic was even at a 25.4% YoY growth, compared with just 5.9% for CSA. We saw that Air China has already stopped its underperformance against CSA starting Apr, with both stocks moving very much in tandem in the last three months. With the recent local COVID-19 case outbreak in Guangdong, particularly Guangzhou which negatively affect scheduled flights into CSA's headquarter hub, we see room for near-term outperformance at Air China. With better pick-up of international traffic going forward, we expect Air China to widen its outperformance into 2H21. 

Chinese Airlines: China Southern (1055 HK) Seeing More Pressure than Air China (753 HK)

Equity Bottom-Up

Shanghai International Airport / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> (SIAC) announced that it will suspend from trading starting 10 Jun, pending the announcement of the acquisitions of a 100% stake in Hongqiao Company, 100% stake in Logistics Company and assets related to the 4th runway at the Shanghai Pudong International Airport from its parent. Valuation and consideration have not been finalised and financial figures not disclosed yet. However, strategically, we think the deal is positive to SIAC with reduction in connected transactions, consolidation of both airports in Shanghai under its ownership, cash cow contribution from Hongqiao Airport, capture of the cargo momentum through Logistics Company and part coverage of earnings hole left by the unfavourable duty free agreement with <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free-corp-ltd" target="_blank" data-smartkarma-citation="entities:12278:1" rel="noopener">China Tourism Group Duty Free Corp Ltd (601888 CH)</a>.

Shanghai International Airport (600009 CH) (SIAC) announced that it will suspend from trading starting 10 Jun, pending the announcement of the acquisitions of a 100% stake in Hongqiao Company, 100% stake in Logistics Company and assets related to the 4th runway at the Shanghai Pudong International Airport from its parent. Valuation and consideration have not been finalised and financial figures not disclosed yet. However, strategically, we think the deal is positive to SIAC with reduction in connected transactions, consolidation of both airports in Shanghai under its ownership, cash cow contribution from Hongqiao Airport, capture of the cargo momentum through Logistics Company and part coverage of earnings hole left by the unfavourable duty free agreement with China Tourism Group Duty Free Corp Ltd (601888 CH). 

Shanghai International Airport (600009 CH): Suspension of Trading on Potential Acquisitions

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

<a href="https://www.smartkarma.com/entities/airports-of-thailand-pcl" target="_blank" data-smartkarma-citation="entities:239:1" rel="noopener">Airports of Thailand (AOT TB)</a> path to recovery is quite clear - vaccine, borders reopening, and shorter or abolishment of the quarantine requirement. The first two are in the works with countries around the world racing against each other for a higher and faster vaccination. Shorten or abolishment of quarantine requirement may be difficult, even for those who are already fully vaccinated, until the next quarter at least. The Phuket reopening sandbox will be a proof of concept of whether 1) Thailand's health infrastructure is ready to accept foreign tourists and 2) people are ready to travel again once vaccinated.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/212/121/original/image_17443488521623225592751.png?1623225593" class="editor-image img-responsive" data-smartkarma-image-id="212121"></figure>
source: Reuters

Airports of Thailand (AOT TB) path to recovery is quite clear - vaccine, borders reopening, and shorter or abolishment of the quarantine requirement. The first two are in the works with countries around the world racing against each other for a higher and faster vaccination. Shorten or abolishment of quarantine requirement may be difficult, even for those who are already fully vaccinated, until the next quarter at least. The Phuket reopening sandbox will be a proof of concept of whether 1) Thailand's health infrastructure is ready to accept foreign tourists and 2) people are ready to travel again once vaccinated.

source: Reuters

Airport of Thailand (AOT): Phuket Sandbox

Guangzhou Baiyun International Airport / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> (GBIA) posted another month of good traffic performance with aircraft movement and passenger throughput rose by 44.9% YoY and 94.1% YoY, respectively. Thanks to the strength on the domestic routes, we believe it has sustained traffic outperformance against both <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> (SIAC) and <a href="https://www.smartkarma.com/entities/beijing-capital-international-airport-bcia" target="_blank" data-smartkarma-citation="entities:10626:1" rel="noopener">Beijing Capital International Airport (BCIA) (694 HK)</a> in May.However, we are concerned that the recent outbreak of local COVID-19 cases in Guangzhou and Guangdong will negatively affect traffic in Jun and Jul as the local health commissions and governments stepped up measures to contain the spread. We have already seen a 69.5% decline in the scheduled Shanghai-Guangzhou flights operated by <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> and <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> in a 14-day period since the peak on 27 May. Share price of GBIA outperformed SIAC by 14.9pp YTD and the outbreak in southern China is likely to trigger the former to give back some of its outperformance in the near term until the dust is settled.

Guangzhou Baiyun International Airport (600004 CH) (GBIA) posted another month of good traffic performance with aircraft movement and passenger throughput rose by 44.9% YoY and 94.1% YoY, respectively. Thanks to the strength on the domestic routes, we believe it has sustained traffic outperformance against both Shanghai International Airport (600009 CH) (SIAC) and Beijing Capital International Airport (BCIA) (694 HK) in May.However, we are concerned that the recent outbreak of local COVID-19 cases in Guangzhou and Guangdong will negatively affect traffic in Jun and Jul as the local health commissions and governments stepped up measures to contain the spread. We have already seen a 69.5% decline in the scheduled Shanghai-Guangzhou flights operated by China Southern Airlines (1055 HK) and Air China Ltd (H) (753 HK) in a 14-day period since the peak on 27 May. Share price of GBIA outperformed SIAC by 14.9pp YTD and the outbreak in southern China is likely to trigger the former to give back some of its outperformance in the near term until the dust is settled. 

Guangzhou Baiyun Intl Airport (600004 CH): Facing Challenges in the Near Term

Founder of Antler Capital

Stanley Tsai, CFA

BOC Aviation | BOCAVI <a href="https://www.smartkarma.com/entities/boc-aviation" target="_blank" data-smartkarma-citation="entities:22689:1" rel="noopener">(2588 HK)</a> 
As a follow-up on <a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a>'s Smartkarma Original <a href="https://www.smartkarma.com/insights/asia-pac-airports-ups-but-mostly-downs" target="_blank" data-smartkarma-citation="insights:51855" rel="noopener">Asia-Pac Airports: Ups, But Mostly Downs</a>, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation | BOCAVI (2588 HK) 
As a follow-up on David Blennerhassett's Smartkarma Original Asia-Pac Airports: Ups, But Mostly Downs, we take a look at BOCAVI, which, in our view, is a compelling alternative to APAC airport operators and airlines as a post-Covid trade.
BOCAVI is a highly geared play on the resumption of air travel. The stock has gone through periods of significant out/underperformance against the APAC airports and airlines and may continue to give investors high beta in either direction. The geographical exposure is broad, but there is a heavy skew towards short-haul flights, which will see the earliest acceleration in passenger traffic.
Management's countercyclical capex expansion increasingly looks like a shrewd bet. At its core, BOCAVI is in the capital management business. Strong liquidity and BOC's explicit backing have allowed the lessor to grow its purchase-and-leaseback portfolio through the depths of the pandemic. While airlines are still hemorrhaging cash, over 99% of BOCAVI's aircraft remain cash-generating.  
We expect the firm's undiscounted committed revenues to top USD20bn in 2021. By year-end, the value of the portfolio will have doubled since 2014. We estimate the present value of this cashflow stream to be HKD72.80/share. We are essentially getting free growth optionality. 
We are buyers at book value. The stock is trading at 8x P/E and 1.1x P/B on a 12M forward basis. BOCAVI is reasonably liquid, with a market cap of USD6bn and average daily turnover of USD3.5mn. Besides the obvious risk of protracted lockdowns globally, a well-functioning USD bond market and BOC's funding support are critical to our investment case.
Attachment: BOCAVI Financial Summary

BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

China

Beijing Capital International Airport Company Limited operates both aeronautical and non-aeronautical business in the Beijing airport.  The Company provides aircraft movement and passenger service facilities, safety and security services, fire-fighting services, and ground handling services.  In addition, Beijing Capital operates duty free and other retail shops and leases properties.

Beijing Capital International Airport (BCIA) (694 HK)

Beijing Capital International Airport (BCIA)

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Beijing Capital International Airport (BCIA) (694 HK)

Chinese Airlines: China Southern (1055 HK) Seeing More Pressure than Air China (753 HK)

May traffic revealed that Air China sustaining its trend of narrowing down operational gap against CSA. Local COVID-19 cases in Guangzhou means a...

Osbert Tang, CFA

Shanghai International Airport (600009 CH): Suspension of Trading on Potential Acquisitions

We view SIAC's potential acquisitions of Hongiao Airport, Logistics Company and Pudong 4th runway as strategically positive, pending announcement...

Osbert Tang, CFA

Airport of Thailand (AOT): Phuket Sandbox

The Phuket reopening sandbox will be a proof of concept of whether 1) Thailand's health infrastructure is ready to accept foreign tourists and 2)...

Henry Soediarko

Guangzhou Baiyun Intl Airport (600004 CH): Facing Challenges in the Near Term

We see risk of GBIA underperforming its peers in the near term on the back of the increase in domestic COVID-19 cases in Guangzhou and Guangdong,...

Osbert Tang, CFA

BOC Aviation (2588 HK): The Stars Don't Look Bigger, but They Do Look Brighter

As downstream players continue to hemorrhage cash, over 99% of BOCAVI’s aircraft are still cash-generating. Valuation is undemanding for a high...

Stanley Tsai, CFA

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