HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Although 5% GDP growth target for 2023 is at the low end of market speculation of 5.5-6%, we think this reflects the government's conservative stance amid post-COVID recovery. </li>
<li>A 0.2pp higher budget deficit and a special purpose bond quota of Rmb3.8trn suggested that government spending will stay as important economic driver.</li>
<li>Consumption is another major stimulus for economic growth, and more supportive measures will be rolled out - we have seen many cities planning to hand out consumption vouchers.</li>
</ul>


Although 5% GDP growth target for 2023 is at the low end of market speculation of 5.5-6%, we think this reflects the government's conservative stance amid post-COVID recovery. 
A 0.2pp higher budget deficit and a special purpose bond quota of Rmb3.8trn suggested that government spending will stay as important economic driver.
Consumption is another major stimulus for economic growth, and more supportive measures will be rolled out - we have seen many cities planning to hand out consumption vouchers.


China NPC: Implications of Government Working Report 2023

<ul>
<li>China may bring ahead quota for special purpose bond issuance in 2023 to 2H22. This may potentially at Rmb1.5trn (US$220bn), which will provide big boost to the economy.</li>
<li>For 5M22, the three most important areas of spending of local government bond proceeds are urban construction and industrial park, social services and transport infrastructure.</li>
<li>
<a href="https://www.smartkarma.com/entities/china-state-construction-int-l-holdings" target="_blank" data-smartkarma-citation="entities:10038:1" rel="noopener">China State Construction Int'l (3311 HK)</a>, <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>, <a href="https://www.smartkarma.com/entities/china-railway-group-ltd-h" target="_blank" data-smartkarma-citation="entities:264:1" rel="noopener">China Railway Group (390 HK)</a>, <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 (586 HK)</a> and <a href="https://www.smartkarma.com/entities/anta-sports-products-ltd" target="_blank" data-smartkarma-citation="entities:10261:1" rel="noopener">Anta Sports (2020 HK)</a> are the top picks.</li>
</ul>


China may bring ahead quota for special purpose bond issuance in 2023 to 2H22. This may potentially at Rmb1.5trn (US$220bn), which will provide big boost to the economy.
For 5M22, the three most important areas of spending of local government bond proceeds are urban construction and industrial park, social services and transport infrastructure.

China State Construction Int'l (3311 HK), Anhui Conch Cement (914 HK), China Railway Group (390 HK), China Conch Venture (586 HK) and Anta Sports (2020 HK) are the top picks.


China Stimulus: These Are the Key Beneficiaries

Equity Bottom-Up

China Everbright Environment / Equity Bottom-Up

<ul>
<li>The FY21 result of <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) should look impressive and we see improvement in cash flow to relieve market concerns on leverage and financial position.  </li>
<li>New project addition is solid over the last three months, adding about 5% to operational project portfolio. Strong special purpose bonds issuance in 4Q21 and 2022 will fuel pipeline momentum.</li>
<li>Valuations look undemanding at 4.1x PER and 0.65x P/B for FY22F; and by maintaining payout ratio at c.30%, dividend yields are at attractive 6.4% and 7.4% for next 2 years.</li>
</ul>


The FY21 result of China Everbright Environment (257 HK) (CEE) should look impressive and we see improvement in cash flow to relieve market concerns on leverage and financial position.  
New project addition is solid over the last three months, adding about 5% to operational project portfolio. Strong special purpose bonds issuance in 4Q21 and 2022 will fuel pipeline momentum.
Valuations look undemanding at 4.1x PER and 0.65x P/B for FY22F; and by maintaining payout ratio at c.30%, dividend yields are at attractive 6.4% and 7.4% for next 2 years.


China Everbright Environment (257 HK): Roaring in the Year of Tiger!

<p>We think <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) is the best-performing environment company within the China Everbright Group, as evidenced by the 38.8% YoY growth in 1H21 earnings (ex-consolidated subsidiaries <a href="https://www.smartkarma.com/entities/china-everbright-water-limited" target="_blank" data-smartkarma-citation="entities:31446:1" rel="noopener">China Everbright Water (1857 HK)</a> and <a href="https://www.smartkarma.com/entities/china-everbright-greentech-0377b31c-5401-466f-987e-9a176b05fb52" target="_blank" data-smartkarma-citation="entities:24085:1" rel="noopener">China Everbright Greentech (1257 HK)</a>). Management's indication in the post-1H21 call that operating cash flow rose 77% YoY in the period is also a good sign.</p><p>Excellent new project momentum and secured project pipeline should drive CEE's earnings in the next two years. The trend of increase in operation service revenue is also positive as this should support the growth in recurrent income and operating cash flow. We continue to see encouraging outlook for its waste-to-energy business, and with 21 projects under construction, this segment will underpin its profit outlook.  In our view, CEE's valuations of 4.1x PER and 0.61x P/B for FY21 are very appealing.  <a href="https://www.smartkarma.com/entities/china-environment-ltd" target="_blank" data-smartkarma-citation="entities:2832:1" rel="noopener"></a></p>

We think China Everbright Environment (257 HK) (CEE) is the best-performing environment company within the China Everbright Group, as evidenced by the 38.8% YoY growth in 1H21 earnings (ex-consolidated subsidiaries China Everbright Water (1857 HK) and China Everbright Greentech (1257 HK)). Management's indication in the post-1H21 call that operating cash flow rose 77% YoY in the period is also a good sign.Excellent new project momentum and secured project pipeline should drive CEE's earnings in the next two years. The trend of increase in operation service revenue is also positive as this should support the growth in recurrent income and operating cash flow. We continue to see encouraging outlook for its waste-to-energy business, and with 21 projects under construction, this segment will underpin its profit outlook.  In our view, CEE's valuations of 4.1x PER and 0.61x P/B for FY21 are very appealing.  

China Everbright Environment (257 HK): The Most Impressive of All

<ul>
<li>Plunge in net profit, high gearing and slowdown in new projects are market concerns, but should have well reflected in its share price. Its 3.6x PER is just too cheap. </li>
<li>FY23 will see profit recovery, backed by decent project pipeline and lack of one-offs like impairment and exchange losses. Consensus forecast of 15% profit growth is too conservative.</li>
<li>Cash flow will improve over the next two years as collection of national subsidies accelerates, capex moderates and contribution from operating projects increases. </li>
</ul>


Plunge in net profit, high gearing and slowdown in new projects are market concerns, but should have well reflected in its share price. Its 3.6x PER is just too cheap. 
FY23 will see profit recovery, backed by decent project pipeline and lack of one-offs like impairment and exchange losses. Consensus forecast of 15% profit growth is too conservative.
Cash flow will improve over the next two years as collection of national subsidies accelerates, capex moderates and contribution from operating projects increases. 


China Everbright Environment (257 HK): The Dust Should Have Settled

China

China Everbright Water Limited offers water environmental services. The Company provides water environment management, sponge city construction, sewage treatment, river-basin ecological restoration, water supply, and other related services. China Everbright Water conducts businesses in Shenzhen, Singapore, and Hong Kong.

China Everbright Water (1857 HK)

China NPC: Implications of Government Working Report 2023

A 0.2pp higher budget deficit and a Rmb3.8trn special purpose bond quota suggested government spending will remain important economic driver. More...

Osbert Tang, CFA

China Stimulus: These Are the Key Beneficiaries

Potential massive special purpose bond issuance by local governments in 2H22 (brought forward from 2023) will provide a much-needed boost to the...

Osbert Tang, CFA

China Everbright Environment (257 HK): Roaring in the Year of Tiger!

CEE's FY21 result should be impressive and will serve as share price catalyst. Solid recent new project pipeline and higher special purpose bond...

Osbert Tang, CFA

China Everbright Environment (257 HK): The Most Impressive of All

CEE recorded impressive 1H21 earnings growth, and with higher tariff, solid new project momentum, continued strong pipeline and improving cash...

Osbert Tang, CFA

China Everbright Environment (257 HK): The Dust Should Have Settled

FY23 outlook has brightened as it will be supported by healthy project pipeline and lack of one-off items. There is potential for financial...

Osbert Tang, CFA