HK/China Equity Long-Short

Osbert Tang, CFA

Equity Capital Markets

China Conch Environment Protection Holdings / Equity Capital Markets

China Conch Environment Protection Holdings

We believe the spin-off by introduction of <a href="https://www.smartkarma.com/entities/china-conch-environment-protection-holdings-limited" target="_blank" data-smartkarma-citation="entities:34405:1" rel="noopener">China Conch Environment Protection Holdings (CEP HK)</a> by <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> will leave more clarity to the business of both companies. Fundamentally speaking, we think CEP is a solid company with a focus on cement kiln waste treatment services for solid and hazardous waste in China.The key positives for CEP are a leadership position in the industry, excellent new project pipeline momentum and strong relationship with its partners, in our view. However, the key negatives are declining margins, concentrated business lines and small market capitalisation. We estimate that CEP's market cap will be just HK$4.98bn and HK$6.38bn, based on the average PER of the peers (5.9x) and high-end of peers (7.6x).

We believe the spin-off by introduction of China Conch Environment Protection Holdings (CEP HK) by China Conch Venture Holdings (586 HK) will leave more clarity to the business of both companies. Fundamentally speaking, we think CEP is a solid company with a focus on cement kiln waste treatment services for solid and hazardous waste in China.The key positives for CEP are a leadership position in the industry, excellent new project pipeline momentum and strong relationship with its partners, in our view. However, the key negatives are declining margins, concentrated business lines and small market capitalisation. We estimate that CEP's market cap will be just HK$4.98bn and HK$6.38bn, based on the average PER of the peers (5.9x) and high-end of peers (7.6x). 

Conch Environment: Initial Thoughts on the Listing by Way of Introduction

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

China Conch Venture Holdings / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> (CCV) has <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0928/2021092801185.pdf" target="_blank" rel="noopener">proposed</a> spinning-off and separately listing the shares of Conch Environment Protection (CEEP), a company principally engaged in providing industrial solid and hazardous waste treatment in the PRC. Here is the listing application form (<a href="https://www1.hkexnews.hk/app/sehk/2021/103856/documents/sehk21092801397.pdf" target="_blank" rel="noopener">Form A1</a>).
CEEP comprised ~17% of the unlisted revenue of CCV in FY20 and ~35% of the profit.
The spin-off will be implemented by way of distribution in-specie - CCV will not retain any interest in CEEP. This is a listing by introduction - no IPO proceeds are involved.
Assuming CEEP's listing goes ahead (no shareholder approval is required), the remaining unlisted ops comprise waste incineration projects, energy-saving equipment, and port logistics.
Separately, I see CCV trading at a 6% discount to its NAV, its narrowest inside a year. The implied stub has never been narrower.
More below the fold.

China Conch Venture Holdings (586 HK) (CCV) has proposed spinning-off and separately listing the shares of Conch Environment Protection (CEEP), a company principally engaged in providing industrial solid and hazardous waste treatment in the PRC. Here is the listing application form (Form A1).
CEEP comprised ~17% of the unlisted revenue of CCV in FY20 and ~35% of the profit.
The spin-off will be implemented by way of distribution in-specie - CCV will not retain any interest in CEEP. This is a listing by introduction - no IPO proceeds are involved.
Assuming CEEP's listing goes ahead (no shareholder approval is required), the remaining unlisted ops comprise waste incineration projects, energy-saving equipment, and port logistics.
Separately, I see CCV trading at a 6% discount to its NAV, its narrowest inside a year. The implied stub has never been narrower.
More below the fold.

China Conch Venture (586 HK): Waste Treatment Spin-Off

Equity Bottom-Up

Canvest Environmental Protection Group / Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/canvest-environmental-protection-group-co-ltd" target="_blank" data-smartkarma-citation="entities:100:1" rel="noopener">Canvest Environmental Protection Group (1381 HK)</a> has underperformed <a href="https://www.smartkarma.com/entities/china-everbright-environment-group-limited" target="_blank" data-smartkarma-citation="entities:15946:1" rel="noopener">China Everbright Environment (257 HK)</a> (CEE) by a massive 43.9pp over the last three months, and we think there is room for it to catch up. In fact, we think its financial and operational performance is not inferior to CEE as reflected by its reported 1H21 result. Moreover, at 7.9x and 6.8x for FY21 and FY22, respectively, its PER valuations are not demanding as well.Canvest has a very secured project pipeline, comparable gearing with CEE, solid cash flow from operating projects and encouraging profitability improvement. It earned a high annualised ROE of 16.6%, about the same as CEE. While it is true that Canvest is smaller and does not enjoy CEE's business diversification, we think these factors cannot justify its significant underperformance within just 3 months.

Canvest Environmental Protection Group (1381 HK) has underperformed China Everbright Environment (257 HK) (CEE) by a massive 43.9pp over the last three months, and we think there is room for it to catch up. In fact, we think its financial and operational performance is not inferior to CEE as reflected by its reported 1H21 result. Moreover, at 7.9x and 6.8x for FY21 and FY22, respectively, its PER valuations are not demanding as well.Canvest has a very secured project pipeline, comparable gearing with CEE, solid cash flow from operating projects and encouraging profitability improvement. It earned a high annualised ROE of 16.6%, about the same as CEE. While it is true that Canvest is smaller and does not enjoy CEE's business diversification, we think these factors cannot justify its significant underperformance within just 3 months. 

Canvest Env (1381 HK): We Should Catch Up China Everbright Env (257 HK)

China Conch Venture Holdings / Equity Bottom-Up

We think the secured project pipeline for <a href="https://www.smartkarma.com/entities/china-conch-venture-holdings-ltd" target="_blank" data-smartkarma-citation="entities:19943:1" rel="noopener">China Conch Venture Holdings (586 HK)</a> should drive encouraging double-digit growth in its core environmental business profit in the next three years. It expects a CAGR of 52.8% in completed waste incineration capacity and 30.2% in completed solid waste and hazardous waste capacity, which in our view, should underpin remarkable earnings outlook.The flat 1H21 profit is masked by a 5% drop in contribution from <a href="https://www.smartkarma.com/entities/anhui-conch-cement-co-ltd" target="_blank" data-smartkarma-citation="entities:159:1" rel="noopener">Anhui Conch Cement (914 HK)</a>. which, in flat, core earnings have surged 31.4% YoY. It solid new project win is an excellent demonstration of its competitiveness. Even for Anhui Conch, the 2H21 outlook is getting more positive than 1H21. We believe that at just 5.9x PER (ex-Anhui Conch) for FY21, the market has sharply undervalued Conch Venture's environmental operations, especially given its lower-than-peers gearing of 19.4% only.

We think the secured project pipeline for China Conch Venture Holdings (586 HK) should drive encouraging double-digit growth in its core environmental business profit in the next three years. It expects a CAGR of 52.8% in completed waste incineration capacity and 30.2% in completed solid waste and hazardous waste capacity, which in our view, should underpin remarkable earnings outlook.The flat 1H21 profit is masked by a 5% drop in contribution from Anhui Conch Cement (914 HK). which, in flat, core earnings have surged 31.4% YoY. It solid new project win is an excellent demonstration of its competitiveness. Even for Anhui Conch, the 2H21 outlook is getting more positive than 1H21. We believe that at just 5.9x PER (ex-Anhui Conch) for FY21, the market has sharply undervalued Conch Venture's environmental operations, especially given its lower-than-peers gearing of 19.4% only.

Conch Venture (586 HK): Better Fortunes Going Forward

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

The September rebalance of the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> was implemented at the close of trading on 3 September. Hang Seng Indexes should announce the results of the December 2021 review of the Hang Seng Family of Indexes on 12 November. The constituent changes will be effective after the close of trading on 3 December.The review period for the December rebalance ends on 30 September and stocks that have at least 3 month of trading history by the review meeting date are eligible for inclusion in the <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a>.There were 3 inclusions at the June rebalance and 3 inclusions and 1 exclusion at the September rebalance to take the number of index constituents to 60.With Hang Seng Indexes looking to get up to 80 <a href="https://www.smartkarma.com/entities/hong-kong-hang-seng-index" target="_blank" data-smartkarma-citation="entities:22899:1" rel="noopener">Hong Kong Hang Seng Index (HSI INDEX)</a> members by mid-2022, there could be 20 inclusions over the next 3 index rebalances.Stocks that are ranked towards the top of their Industry group and are potential inclusions are <a href="https://www.smartkarma.com/entities/smoore-international" target="_blank" data-smartkarma-citation="entities:28241:1" rel="noopener">Smoore International (6969 HK)</a>, <a href="https://www.smartkarma.com/entities/nongfu-spring" target="_blank" data-smartkarma-citation="entities:28955:1" rel="noopener">Nongfu Spring (9633 HK)</a>, <a href="https://www.smartkarma.com/entities/china-resources-beer-holdings" target="_blank" data-smartkarma-citation="entities:399:1" rel="noopener">China Resources Beer Holdings (291 HK)</a>, <a href="https://www.smartkarma.com/entities/china-resources-mixc-lifestyle-services" target="_blank" data-smartkarma-citation="entities:29285:1" rel="noopener">China Resources Mixc Lifestyle Services (1209 HK)</a>, <a href="https://www.smartkarma.com/entities/sunac-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:240:1" rel="noopener">Sunac China Holdings (1918 HK)</a>, <a href="https://www.smartkarma.com/entities/china-gas-holdings-ltd" target="_blank" data-smartkarma-citation="entities:14315:1" rel="noopener">China Gas Holdings (384 HK)</a>, <a href="https://www.smartkarma.com/entities/jd-health-international-inc" target="_blank" data-smartkarma-citation="entities:29677:1" rel="noopener">JD Health (6618 HK)</a>, <a href="https://www.smartkarma.com/entities/hansoh-pharmaceutical-group" target="_blank" data-smartkarma-citation="entities:23675:1" rel="noopener">Hansoh Pharmaceutical (3692 HK)</a>, <a href="https://www.smartkarma.com/entities/china-hongqiao-group-ltd" target="_blank" data-smartkarma-citation="entities:1909:1" rel="noopener">China Hongqiao (1378 HK)</a> and <a href="https://www.smartkarma.com/entities/fosun-international-ltd" target="_blank" data-smartkarma-citation="entities:433:1" rel="noopener">Fosun International (656 HK)</a>.Given that the index committee consciously avoided including stocks from sectors that were targeted by tightening regulations in China, this list will be revised closer to the index committee meeting in November. Another factor that will determine the number of inclusions is the turnover at the rebalance - while it is less than 4% now with the 10 inclusions, that number will move higher as stocks move around and there are capping changes on the largest constituents.

The September rebalance of the Hong Kong Hang Seng Index (HSI INDEX) was implemented at the close of trading on 3 September. Hang Seng Indexes should announce the results of the December 2021 review of the Hang Seng Family of Indexes on 12 November. The constituent changes will be effective after the close of trading on 3 December.The review period for the December rebalance ends on 30 September and stocks that have at least 3 month of trading history by the review meeting date are eligible for inclusion in the Hong Kong Hang Seng Index (HSI INDEX).There were 3 inclusions at the June rebalance and 3 inclusions and 1 exclusion at the September rebalance to take the number of index constituents to 60.With Hang Seng Indexes looking to get up to 80 Hong Kong Hang Seng Index (HSI INDEX) members by mid-2022, there could be 20 inclusions over the next 3 index rebalances.Stocks that are ranked towards the top of their Industry group and are potential inclusions are Smoore International (6969 HK), Nongfu Spring (9633 HK), China Resources Beer Holdings (291 HK), China Resources Mixc Lifestyle Services (1209 HK), Sunac China Holdings (1918 HK), China Gas Holdings (384 HK), JD Health (6618 HK), Hansoh Pharmaceutical (3692 HK), China Hongqiao (1378 HK) and Fosun International (656 HK).Given that the index committee consciously avoided including stocks from sectors that were targeted by tightening regulations in China, this list will be revised closer to the index committee meeting in November. Another factor that will determine the number of inclusions is the turnover at the rebalance - while it is less than 4% now with the 10 inclusions, that number will move higher as stocks move around and there are capping changes on the largest constituents.

HSI Index Rebalance Preview: Potential Inclusions in December

China

China Conch Venture Holdings Limited operates as an investment holding company. The Company, through its subsidiaries, provides energy preservation and environmental protection solutions and offers environment-friendly building materials.

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China Conch Venture Holdings (586 HK)

Conch Environment: Initial Thoughts on the Listing by Way of Introduction

Conch Environment's key postives are leadership position, good pipeline and strong partner relations. The key negatives are declining margins,...

Osbert Tang, CFA

China Conch Venture (586 HK): Waste Treatment Spin-Off

CVV's recent price action suggests news leakage ahead of CCEP's spin-off, with shares gaining 14% compared to 5% for Anhui. I'd be inclined to set...

David Blennerhassett

Canvest Env (1381 HK): We Should Catch Up China Everbright Env (257 HK)

We believe there is room for Canvest to catch up its massive 43.9pp underperformance against CEE in the last 3 months. Its operational and...

Osbert Tang, CFA

Conch Venture (586 HK): Better Fortunes Going Forward

Good secured pipeline of waste incineration and solid and hazardous waste treatment capacity should underpin very solid outlook for the core...

Osbert Tang, CFA

HSI Index Rebalance Preview: Potential Inclusions in December

There could be 10 inclusions to the HSI at the Dec rebalance to help reach the 80 index member count by mid-2022. Index turnover & regulations will...

Brian Freitas

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