HK/China Equity Long-Short

Osbert Tang, CFA

Quantitative Analysis

Our "Buy the Worst" strategy as laid out in <a href="https://www.smartkarma.com/insights/a-review-of-buy-the-worst-strategy-in-2020-and-can-it-beat-the-hang-seng-index-in-2021" target="_blank" data-smartkarma-citation="insights:46654" rel="noopener">A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021?</a> showed good performance YTD with a 20.9pp outperformance against the HSI. For most of the time in this year, the average performance for the 5 worst HSI stocks in 2020 - <a href="https://www.smartkarma.com/entities/citic-ltd" target="_blank" data-smartkarma-citation="entities:20590:1" rel="noopener">Citic Ltd (267 HK)</a>, <a href="https://www.smartkarma.com/entities/china-overseas-land-invest" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment Ltd (688 HK)</a>, <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a>, <a href="https://www.smartkarma.com/entities/aac-technologies-holdings-inc" target="_blank" data-smartkarma-citation="entities:6544:1" rel="noopener">AAC Technologies Holdings (2018 HK)</a> and <a href="https://www.smartkarma.com/entities/china-unicom-hong-kong-ltd" target="_blank" data-smartkarma-citation="entities:1016:1" rel="noopener">China Unicom Hong Kong (762 HK)</a> - has been ahead of the benchmark index. We will hold on these 5 stocks until the year end of 2021. For 2H21, we continue to see good room for them to outperform. On average, they are still off 41.6% from their 3-year high, vs. just 13% for HSI. With our anticipation of a volatile HSI over the next six months due to concerns on inflation, Sino-US tension, COVID-19 variants and regulatory measures on new economy companies, these old economy stocks with undemanding valuations are stand to see better performance, in our view.

Our "Buy the Worst" strategy as laid out in A Review Of "Buy the Worst" Strategy in 2020 and Can It Beat the Hang Seng Index in 2021? showed good performance YTD with a 20.9pp outperformance against the HSI. For most of the time in this year, the average performance for the 5 worst HSI stocks in 2020 - Citic Ltd (267 HK), China Overseas Land &amp; Investment Ltd (688 HK), CNOOC Ltd (883 HK), AAC Technologies Holdings (2018 HK) and China Unicom Hong Kong (762 HK) - has been ahead of the benchmark index. We will hold on these 5 stocks until the year end of 2021. For 2H21, we continue to see good room for them to outperform. On average, they are still off 41.6% from their 3-year high, vs. just 13% for HSI. With our anticipation of a volatile HSI over the next six months due to concerns on inflation, Sino-US tension, COVID-19 variants and regulatory measures on new economy companies, these old economy stocks with undemanding valuations are stand to see better performance, in our view. 

A Mid-Year Review of Our "Buy the Worst" Strategy: Outperformed HSI by 20.9pp

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

In very early January, the NYSE decided that <a href="https://www.smartkarma.com/entities/china-mobile-ltd" target="_blank" data-smartkarma-citation="entities:27:1" rel="noopener">China Mobile (941 HK)</a> ADRs needed to be delisted. Then they didn't need to be delisted. Then they again needed to be delisted and we are on a path to seeing that complete shortly.The stock was subject to Trump's Executive Order 13959 regarding Communist Chinese Military Companies as were the shares of other Chinese telcos and China Mobile shares were deleted from global indices. That event marked a local low in the first week of January and shares promptly rallied 30%, later settling at an easy 15-20% above the index deletion point. This, and the fact that China a couple of years ago created a method for overseas-jurisdiction Chinese companies to list in China - particularly for very high market cap "tech" companies aiming to take market share from the US for its high-trading value "exported tickers" meant that at some point, the Chinese telcos creating a secondary listing in China was not going to be a surprise. Taking the example of <a href="https://www.smartkarma.com/entities/china-telecom-corp-ltd-h" target="_blank" data-smartkarma-citation="entities:1015:1" rel="noopener">China Telecom Corp Ltd (H) (728 HK)</a> which received permission in April to list its shares in mainland markets, on 17 May China Mobile announced its board had decided to pursue a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0517/2021051701190.pdf" target="_blank" rel="noopener">Proposed RMB Share Issue</a>.A week later, and we have a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0524/2021052400195.pdf" target="_blank" rel="noopener">Circular</a>.China Mobile shareholders are being asked to accept that management issue some RMB 50+bn of shares for the stated purpose of investing in "the development of premium 5G networks, the development of new infrastructure for cloud resources, the development of gigabit broadband and smart home, the development of smart mid-end platform, the research and development of the next-generation information technology and digitalized and intelligent ecosystem."That sounds reasonable enough as a concept, but it ignores the fact that China Mobile has nine times that much money in available cash. and eight times that amount in net cash + securities holdings.If China Mobile shares were trading at a high multiple, this might be forgivable, but the shares are trading at a forward adjusted EV/EBITDA multiple of 1.6x and an ex-net cash &amp; securities PER of less than 4x. There are mitigants here. There is possible pricing at a premium to the Hs. There are "price stabilization measures". There are "shareholder return" measures. Some of these might be really worthwhile. The governance issues involved in this Circular and project remain problematic. But there are little stars here, twinkling in the darkness. More below the fold.

In very early January, the NYSE decided that China Mobile (941 HK) ADRs needed to be delisted. Then they didn't need to be delisted. Then they again needed to be delisted and we are on a path to seeing that complete shortly.The stock was subject to Trump's Executive Order 13959 regarding Communist Chinese Military Companies as were the shares of other Chinese telcos and China Mobile shares were deleted from global indices. That event marked a local low in the first week of January and shares promptly rallied 30%, later settling at an easy 15-20% above the index deletion point. This, and the fact that China a couple of years ago created a method for overseas-jurisdiction Chinese companies to list in China - particularly for very high market cap "tech" companies aiming to take market share from the US for its high-trading value "exported tickers" meant that at some point, the Chinese telcos creating a secondary listing in China was not going to be a surprise. Taking the example of China Telecom Corp Ltd (H) (728 HK) which received permission in April to list its shares in mainland markets, on 17 May China Mobile announced its board had decided to pursue a Proposed RMB Share Issue.A week later, and we have a Circular.China Mobile shareholders are being asked to accept that management issue some RMB 50+bn of shares for the stated purpose of investing in "the development of premium 5G networks, the development of new infrastructure for cloud resources, the development of gigabit broadband and smart home, the development of smart mid-end platform, the research and development of the next-generation information technology and digitalized and intelligent ecosystem."That sounds reasonable enough as a concept, but it ignores the fact that China Mobile has nine times that much money in available cash. and eight times that amount in net cash + securities holdings.If China Mobile shares were trading at a high multiple, this might be forgivable, but the shares are trading at a forward adjusted EV/EBITDA multiple of 1.6x and an ex-net cash &amp; securities PER of less than 4x. There are mitigants here. There is possible pricing at a premium to the Hs. There are "price stabilization measures". There are "shareholder return" measures. Some of these might be really worthwhile. The governance issues involved in this Circular and project remain problematic. But there are little stars here, twinkling in the darkness. More below the fold.

China Mobile (941 HK) - It Could Have Been Done Better, But It Ain't Bad for Hs

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

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 21 May. The constituent changes will be effective after the close of trading on 4 June.For the <a href="https://www.smartkarma.com/entities/hang-seng-china-enterprises-index" target="_blank" data-smartkarma-citation="entities:22900:1" rel="noopener">Hang Seng China Enterprises Index (HSCEI INDEX)</a>, there are 2 inclusions and 3 exclusions. This brings the number of index constituents back down to 50.The inclusions are <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> and <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a>, while <a href="https://www.smartkarma.com/entities/guangdong-investment-ltd" target="_blank" data-smartkarma-citation="entities:12109:1" rel="noopener">Guangdong Investment (270 HK)</a>, <a href="https://www.smartkarma.com/entities/china-unicom-hong-kong-ltd" target="_blank" data-smartkarma-citation="entities:1016:1" rel="noopener">China Unicom Hong Kong (762 HK)</a> and <a href="https://www.smartkarma.com/entities/china-tower-corp-ltd" target="_blank" data-smartkarma-citation="entities:27037:1" rel="noopener">China Tower (788 HK)</a> have been deleted from the index. This is exactly in line with our <a href="https://www.smartkarma.com/insights/hscei-june-2021-index-rebalance-preview-three-adds-four-deletes-possible" target="_blank" rel="noopener">forecast</a>.One-way turnover is estimated at 8.37% and will result in a one-way trade of HK$5.98bn. The largest passive inflows will be on <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> and <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a> as a result of the capping change from 5% to 8%, while the largest outflows will be on <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a>, <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> and <a href="https://www.smartkarma.com/entities/china-tower-corp-ltd" target="_blank" data-smartkarma-citation="entities:27037:1" rel="noopener">China Tower (788 HK)</a>.There are only 10 trading days to implementation of the changes and there should be some impact on the stocks even though the changes were largely expected (at least by us). <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> was widely expected to be included but <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> was not on everyone's list. With 4 days ADV to buy on <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a>, the stock could outperform till implementation date.

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 21 May. The constituent changes will be effective after the close of trading on 4 June.For the Hang Seng China Enterprises Index (HSCEI INDEX), there are 2 inclusions and 3 exclusions. This brings the number of index constituents back down to 50.The inclusions are BYD (1211 HK) and Evergrande Property Services (6666 HK), while Guangdong Investment (270 HK), China Unicom Hong Kong (762 HK) and China Tower (788 HK) have been deleted from the index. This is exactly in line with our forecast.One-way turnover is estimated at 8.37% and will result in a one-way trade of HK$5.98bn. The largest passive inflows will be on Meituan (3690 HK) and Alibaba Group (9988 HK) as a result of the capping change from 5% to 8%, while the largest outflows will be on Tencent (700 HK), China Construction Bank H (939 HK) and China Tower (788 HK).There are only 10 trading days to implementation of the changes and there should be some impact on the stocks even though the changes were largely expected (at least by us). BYD (1211 HK) was widely expected to be included but Evergrande Property Services (6666 HK) was not on everyone's list. With 4 days ADV to buy on Evergrande Property Services (6666 HK), the stock could outperform till implementation date. 

HSCEI Index Rebalance: BYD's Double Inclusion; Capping Changes Lead to High Turnover

Equity Bottom-Up

Share price of <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> has dropped by 12.3% in the last three days after the 7.5% new share placement to raise HK$11.6bn. While there will be EPS dilution over the next two years, we still see EPS growth at a decent level with ROE staying high at 22.8% for FY22F. In fact, the frequent corporate moves recently including exploring hydrogen energy, developing LNG terminal and co-operating with major central SOEs are encouraging developments.Its cooperation with <a href="https://www.smartkarma.com/entities/cnooc-ltd" target="_blank" data-smartkarma-citation="entities:175:1" rel="noopener">CNOOC Ltd (883 HK)</a> on hydrogen production and hydrogen refueling station will potentially open a growth driver to capture the numerous opportunities in this rapidly growing market segment. Meanwhile, the construction of LNG terminal will provide it a tighter grip on LNG cost and procurement. We see such strategic and operational developments positive to the long-term well-being of China Gas.

Share price of China Gas Holdings (384 HK) has dropped by 12.3% in the last three days after the 7.5% new share placement to raise HK$11.6bn. While there will be EPS dilution over the next two years, we still see EPS growth at a decent level with ROE staying high at 22.8% for FY22F. In fact, the frequent corporate moves recently including exploring hydrogen energy, developing LNG terminal and co-operating with major central SOEs are encouraging developments.Its cooperation with CNOOC Ltd (883 HK) on hydrogen production and hydrogen refueling station will potentially open a growth driver to capture the numerous opportunities in this rapidly growing market segment. Meanwhile, the construction of LNG terminal will provide it a tighter grip on LNG cost and procurement. We see such strategic and operational developments positive to the long-term well-being of China Gas.  

China Gas Holdings (384 HK): Placement, Hydrogen Energy, LNG Terminal and Unicom/Sinopec Co-Ops

David Blennerhassett

Last Week in Event SPACE: Xiaomi, AGL Energy, TOPIX's Big April Basket, Evergrande Auto

Hong Kong

China Unicom (Hong Kong) Limited is a telecommunications service provider in China, offering mobile and fixed-line broadband, GSM, ICT, data communications, and cloud services. It operates as the incumbent fixed-line operator in 10 northern Chinese provinces and the third-largest wireless operator nationwide. The company was incorporated in Hong Kong in February 2000.

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China Unicom (Hong Kong) (CHU US)

A Mid-Year Review of Our "Buy the Worst" Strategy: Outperformed HSI by 20.9pp

Our "Buy the Worst" strategy has outperformed HSI by 20.9pp so far in 2021; and we believe with the volatile outlook for 2H21, the 5 stocks in the...

Osbert Tang, CFA

China Mobile (941 HK) - It Could Have Been Done Better, But It Ain't Bad for Hs

China Mobile will follow China Telecom in issuing A-shares. The constructs are almost identical. Both suggest upside to the Hs, perhaps more for...

Travis Lundy

HSCEI Index Rebalance: BYD's Double Inclusion; Capping Changes Lead to High Turnover

The 2 adds and 3 deletes for the HSCEI are just what we expected. BYD is an inclusion in the HSI too and could move higher over the next 2 weeks....

Brian Freitas

China Gas Holdings (384 HK): Placement, Hydrogen Energy, LNG Terminal and Unicom/Sinopec Co-Ops

We are not too negative on the new share placement by China Gas. We think the recent strategic and operational initiatives position it well in the...

Osbert Tang, CFA

Last Week in Event SPACE: Xiaomi, AGL Energy, TOPIX's Big April Basket, Evergrande Auto

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

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