HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Worldwide, inflation is surging and outlook is for it to stay elevated for an extended period of time. Meanwhile, we are seeing retreats in some commodity prices lately. </li>
<li>We witnessed that some stocks have showed divergences against the downward movement of their input prices, and this made them look interesting.</li>
<li>Share prices for <a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a>, <a href="https://www.smartkarma.com/entities/want-want-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:355:1" rel="noopener">Want Want (151 HK)</a> and <a href="https://www.smartkarma.com/entities/shenzhou-intl-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10415:1" rel="noopener">Shenzhou Intl (2313 HK)</a> are still at low levels while their input costs have already come down sharply.</li>
</ul>


Worldwide, inflation is surging and outlook is for it to stay elevated for an extended period of time. Meanwhile, we are seeing retreats in some commodity prices lately. 
We witnessed that some stocks have showed divergences against the downward movement of their input prices, and this made them look interesting.
Share prices for CPMC Holdings (906 HK), Want Want (151 HK) and Shenzhou Intl (2313 HK) are still at low levels while their input costs have already come down sharply.


China Industrials: Positioning for Lower Inflation? If Yes, Here Are Three Names of Interest...

Equity Bottom-Up

<ul>
<li>FY21 result of <a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> indicated it is under pressure from higher input costs in 2H21, as profit growth rate has slowed to 3.1%, from 36.5% in 1H21. </li>
<li>1H22 will stay challenging, but management guided for improvement in 2H22. That said, CPMC expects gross margin for FY22 can be marginally higher than in FY21.</li>
<li>Structural story of higher can demand, rise in industry concentration and increase de-plasticisation remains intact. We see any pull-back in share price as opportunity. </li>
</ul>


FY21 result of CPMC Holdings (906 HK) indicated it is under pressure from higher input costs in 2H21, as profit growth rate has slowed to 3.1%, from 36.5% in 1H21. 
1H22 will stay challenging, but management guided for improvement in 2H22. That said, CPMC expects gross margin for FY22 can be marginally higher than in FY21.
Structural story of higher can demand, rise in industry concentration and increase de-plasticisation remains intact. We see any pull-back in share price as opportunity. 


CPMC Holdings (906 HK): Short Term Tough but Long Term Story Intact

<a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> looks to have kept its input cost managed and alleviated such pressure through hedging of raw material costs and raising product prices. The recent retreat in commodity prices upon the government's efforts to keep them under control also partly mitigates the pressure. Interestingly, the company sees influx of orders previously placed with smaller competitors as they are badly affected by elevated cost and power storage.The company revealed that its production has not experienced material interruption during power shortage as its plants are highly-graded by local governments. It continued to expect a stable margin for FY21 despite all disruptive factors in 2H21. At 7.8x PER and 0.65x P/B for FY22F, we think that CPMC is appealing after a 26% retreat in share price from the peak. Its ROE of 9.7% for FY22F is also a historically high level.

CPMC Holdings (906 HK) looks to have kept its input cost managed and alleviated such pressure through hedging of raw material costs and raising product prices. The recent retreat in commodity prices upon the government's efforts to keep them under control also partly mitigates the pressure. Interestingly, the company sees influx of orders previously placed with smaller competitors as they are badly affected by elevated cost and power storage.The company revealed that its production has not experienced material interruption during power shortage as its plants are highly-graded by local governments. It continued to expect a stable margin for FY21 despite all disruptive factors in 2H21. At 7.8x PER and 0.65x P/B for FY22F, we think that CPMC is appealing after a 26% retreat in share price from the peak. Its ROE of 9.7% for FY22F is also a historically high level. 

CPMC (906 HK): Cost Pressure Appears Controlled While Demand Looks Firm

<a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a> has staged another set of good result with net profit grew 36.5% YoY and 20.6% HoH to a record of Rmb249.4m. It is encouraging to see that, even with sharp rise in raw material prices, its gross margin has just contracted marginally and gross profit still rose 20.1% YoY. We think this demonstrated the solid underlying product demand and its ability to pass on a significant portion of higher costs.In the post-result call, management looks to be very optimistic about 2H21, expecting good HoH recovery in margin. The ramp up in production capacity, further price hikes and solid structural demand growth are key drivers. We think CPMC will be able to achieve an ROE of 10% by FY22, and with record profit for next two years, its current 0.76x 12-month forward P/B is clearly not sufficient in reflecting its improvement in profitability over the horizon.

CPMC Holdings (906 HK) has staged another set of good result with net profit grew 36.5% YoY and 20.6% HoH to a record of Rmb249.4m. It is encouraging to see that, even with sharp rise in raw material prices, its gross margin has just contracted marginally and gross profit still rose 20.1% YoY. We think this demonstrated the solid underlying product demand and its ability to pass on a significant portion of higher costs.In the post-result call, management looks to be very optimistic about 2H21, expecting good HoH recovery in margin. The ramp up in production capacity, further price hikes and solid structural demand growth are key drivers. We think CPMC will be able to achieve an ROE of 10% by FY22, and with record profit for next two years, its current 0.76x 12-month forward P/B is clearly not sufficient in reflecting its improvement in profitability over the horizon.  

CPMC Holdings (906 HK): Healthy 1H21 Despite Rising Cost, Highlights from Post-Result Call

While rising input cost is a challenge to <a href="https://www.smartkarma.com/entities/cpmc-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10427:1" rel="noopener">CPMC Holdings (906 HK)</a>, we found the company able to manage the impact following our brief chat with management. Pricing mechanism will allow the company to shift part of the higher cost to customers, while the good volume growth YTD can also alleviate the cost pressure. In our view, there may not be significant negative impact on margin on combination of these two factors.CPMC's new capacity plan has been moving ahead according to its schedule and this is expected to support stronger earnings for 2H21 as well. We believe CPMC's 0.85x 12-month forward P/B multiple (+1SD above historical average) can be justified by the escalating ROE since FY18 and the improvement in financial position.

While rising input cost is a challenge to CPMC Holdings (906 HK), we found the company able to manage the impact following our brief chat with management. Pricing mechanism will allow the company to shift part of the higher cost to customers, while the good volume growth YTD can also alleviate the cost pressure. In our view, there may not be significant negative impact on margin on combination of these two factors.CPMC's new capacity plan has been moving ahead according to its schedule and this is expected to support stronger earnings for 2H21 as well. We believe CPMC's 0.85x 12-month forward P/B multiple (+1SD above historical average) can be justified by the escalating ROE since FY18 and the improvement in financial position.   

CPMC Holdings (906 HK): Catch-Up with Company Indicates Cost Pressure Manageable

China

CPMC Holdings Ltd. manufactures food packaging products.

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CPMC Holdings (906 HK)

China Industrials: Positioning for Lower Inflation? If Yes, Here Are Three Names of Interest...

Share prices of CPMC Holdings, Want Want and Shenzhou Intl have not yet reacted to reflect the recent declines in input costs due to the retreat in...

Osbert Tang, CFA