HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<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

Asia Pac IPO & Placement Research, China biotech, Aequitas Research

Ke Yan, CFA, FRM

Asia Pac IPO & Placement Research, China biotech

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Quantitative Analysis

<ul>
<li>We analyze the monthly Hong Kong Connect flows with our data engine.</li>
<li>We tabulate the top stocks by inflows, outlfows, and holding by mainland investors.</li>
<li>Inflows last month amounted to USD 5.7bn which marks sixth months of inflows. Top three stocks southbound investors bought were Meituan, CNOOC, and Tencent.</li>
</ul>


We analyze the monthly Hong Kong Connect flows with our data engine.
We tabulate the top stocks by inflows, outlfows, and holding by mainland investors.
Inflows last month amounted to USD 5.7bn which marks sixth months of inflows. Top three stocks southbound investors bought were Meituan, CNOOC, and Tencent.


Hong Kong Connect Flows Monthly (May): Meituan, CNOOC, Tencent

Equity Bottom-Up

China Communications Construction / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> has bucked the trend of weaker earnings growth in the last two quarters by posting a healthy 17.7% YoY net profit growth for 1Q22.</li>
<li>While gross margin contracted slightly, the good control on selling and administrative expenses have partly absorbed margin contraction. Its new contract value for 1Q22 has also reached record high.</li>
<li>With government's aggressive special purpose bond issue and infrastructure investment, we expect new contract momentum to pick up. Trading at 3.2x PER and 0.22x P/B, CCCC is massively undervalued.</li>
</ul>



China Communications Construction (1800 HK) has bucked the trend of weaker earnings growth in the last two quarters by posting a healthy 17.7% YoY net profit growth for 1Q22.
While gross margin contracted slightly, the good control on selling and administrative expenses have partly absorbed margin contraction. Its new contract value for 1Q22 has also reached record high.
With government's aggressive special purpose bond issue and infrastructure investment, we expect new contract momentum to pick up. Trading at 3.2x PER and 0.22x P/B, CCCC is massively undervalued.


China Comm Const (1800 HK): Grossly Undervalued by the Market

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> targets for at least 6% growth in revenue with slight operating margin expansion for FY22; and these should sustain its stable growth trend. </li>
<li>It will increase focus on "big city" projects where there are more opportunities. We think its target of at least 11.8% new contract value growth in FY22 is conservative.</li>
<li>Reduction in losses at concessionary projects, improvement in operating cash flow and lowering of gearing levels all indicate that CCCC is moving in the right direction.</li>
</ul>



China Communications Construction (1800 HK) targets for at least 6% growth in revenue with slight operating margin expansion for FY22; and these should sustain its stable growth trend. 
It will increase focus on "big city" projects where there are more opportunities. We think its target of at least 11.8% new contract value growth in FY22 is conservative.
Reduction in losses at concessionary projects, improvement in operating cash flow and lowering of gearing levels all indicate that CCCC is moving in the right direction.


China Comm Const (1800 HK): Takeaways from Post-FY21 Result Call

China Everbright Environment / Equity Bottom-Up

<ul>
<li>China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.</li>
<li>NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.</li>
<li>Both <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> and <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a> are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.</li>
</ul>


China's special purpose bonds (SPB) issuance by local governments stayed high for 4Q21; but as from NDRC, proceeds of these bonds will be used in 1Q22 to boost economic growth.
NDRC has already made early release of Rmb1.46trn SPB quota for 2022 to local governments, and provided guidance and supervision to ensure speedy and targeted use of proceeds in early-2022.
Both China Everbright Environment (257 HK) and China Communications Construction (1800 HK) are well placed to capture SPB-funded projects. Yet their valuations are still very appealing despite good YTD performance.


Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

China

China Railway Group Limited offers transportation facility construction services. The Company builds railways, roads, tunnels, and bridges. China Railway Group also conducts engineering survey, equipment manufacturing, real estate development, and investment businesses.

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China Railway Group (601390 CH)

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

Hong Kong Connect Flows Monthly (May): Meituan, CNOOC, Tencent

Inflows last month amounted to USD 5.7bn which marks sixth months of inflows. Top three stocks southbound investors bought were Meituan, CNOOC, and...

Ke Yan, CFA, FRM

China Comm Const (1800 HK): Grossly Undervalued by the Market

CCCC's 1Q22 result reversed the trend of declining earnings momentum in 2H21, thanks to revenue recovery and improved cost dynamics. We take this...

Osbert Tang, CFA

China Comm Const (1800 HK): Takeaways from Post-FY21 Result Call

We expect CCCC to maintain a stable earnings trend in FY22. Reduction in losses at concessionary projects, better operating cash flow and lower...

Osbert Tang, CFA

Special Purpose Bonds in 2022: Benefiting China Everbright Env (257 HK) & China Comm Const (1800 HK)

We see local governments' special purpose bonds issuance and uses for 4Q21 and 1Q22 to benefit environmental and infrastructure construction...

Osbert Tang, CFA

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