HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

While <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> sustained its outperformance against <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> in its traffic in Feb, we have already seen some signs of positive factors for Air China emerging, leading us to believe that the unfavourable performance of our advocated <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a> YTD will soon come to an inflection point.<a href="https://www.smartkarma.com/insights/smartkarma-webinar-pair-trade-long-air-china-short-china-southern-still-an-opportunity" target="_blank" data-smartkarma-citation="insights:47857" rel="noopener"></a>The positive signs that we saw are: 1.) stronger passenger load MoM and cargo traffic YoY in Feb at Air China; 2.) now that the Rmb/USD has weakened; 3.) rise in jet fuel more negative to CSA; and 4.) pick-up in Air China's fare after CNY. In valuation terms, CSA's sharp rally has returned it to 1.16x P/B, more than 1SD above historical average, and back to the level in early-2019 before the outbreak - which is not cheap anymore.

While China Southern Airlines (1055 HK) sustained its outperformance against Air China Ltd (H) (753 HK) in its traffic in Feb, we have already seen some signs of positive factors for Air China emerging, leading us to believe that the unfavourable performance of our advocated 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK) YTD will soon come to an inflection point.The positive signs that we saw are: 1.) stronger passenger load MoM and cargo traffic YoY in Feb at Air China; 2.) now that the Rmb/USD has weakened; 3.) rise in jet fuel more negative to CSA; and 4.) pick-up in Air China's fare after CNY. In valuation terms, CSA's sharp rally has returned it to 1.16x P/B, more than 1SD above historical average, and back to the level in early-2019 before the outbreak - which is not cheap anymore.

2021 High Conviction Update: Chinese Airlines Pair Trade - Almost Getting to the Inflection Point

The big three Chinese airlines have announced the range of their expected FY20 losses over the weekend, and the general indication is that the 4Q20 results have returned to wider losses after an improvement in 3Q20. We rank their 4Q20 performance in the following descending order: <a href="https://www.smartkarma.com/entities/china-eastern-airlines-co-h" target="_blank" data-smartkarma-citation="entities:1079:1" rel="noopener">China Eastern Airlines Co (H) (670 HK)</a> &gt; <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> &gt; <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a>. Although we think the market should have anticipated the deterioration, the trend is not promising and we believe there will be near-term pressure on the sector's performance.In our view, weaker domestic passenger traffic, resurgence in cost pressure and fading positive impact of Rmb appreciation are some of the headwinds faced by the sector in 1Q21. However, we think this is a good opportunity to set up our high conviction trade - <a href="https://www.smartkarma.com/insights/2021-high-conviction-pair-trade-long-air-china-753-hk-short-china-southern-1055-hk" target="_blank" data-smartkarma-citation="insights:45584" rel="noopener">2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK)</a>.

The big three Chinese airlines have announced the range of their expected FY20 losses over the weekend, and the general indication is that the 4Q20 results have returned to wider losses after an improvement in 3Q20. We rank their 4Q20 performance in the following descending order: China Eastern Airlines Co (H) (670 HK) &gt; China Southern Airlines (1055 HK) &gt; Air China Ltd (H) (753 HK). Although we think the market should have anticipated the deterioration, the trend is not promising and we believe there will be near-term pressure on the sector's performance.In our view, weaker domestic passenger traffic, resurgence in cost pressure and fading positive impact of Rmb appreciation are some of the headwinds faced by the sector in 1Q21. However, we think this is a good opportunity to set up our high conviction trade - 2021 High Conviction: Pair Trade - Long Air China (753 HK), Short China Southern (1055 HK). 

Chinese Airlines: Initial FY20 Results Suggest Tough Market Has Already Begun

We see the joint announcement by five ministries/departments on the development of postal and express industry in the Guangdong-Hong Kong-Macau Greater Bay Area has positive implications on many of the logistics operators in China in the medium to long term. The supporting initiatives range from the strengthening of the strategic hubs of Guangzhou and Shenzhen airports to encouraging more industry consolidations.While many companies are expected to benefit from these GBA postal and express policies, we highlight some of the most important ones in this Insight - <a href="https://www.smartkarma.com/entities/guangzhou-baiyun-international-airport" target="_blank" data-smartkarma-citation="entities:10819:1" rel="noopener">Guangzhou Baiyun International Airport (600004 CH)</a> (GBIA) and <a href="https://www.smartkarma.com/entities/shenzhen-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:15522:1" rel="noopener">Shenzhen Airport Co A (000089 CH)</a>, <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a>, <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a>, <a href="https://www.smartkarma.com/entities/kerry-logistics-network-ltd" target="_blank" data-smartkarma-citation="entities:367:1" rel="noopener">Kerry Logistics Network (636 HK)</a>, <a href="https://www.smartkarma.com/entities/shenzhen-intl-holdings" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a> and <a href="https://www.smartkarma.com/entities/maanshan-dingtai-rare-a" target="_blank" data-smartkarma-citation="entities:4128:1" rel="noopener">S.F. Holding (002352 CH)</a>.

We see the joint announcement by five ministries/departments on the development of postal and express industry in the Guangdong-Hong Kong-Macau Greater Bay Area has positive implications on many of the logistics operators in China in the medium to long term. The supporting initiatives range from the strengthening of the strategic hubs of Guangzhou and Shenzhen airports to encouraging more industry consolidations.While many companies are expected to benefit from these GBA postal and express policies, we highlight some of the most important ones in this Insight - Guangzhou Baiyun International Airport (600004 CH) (GBIA) and Shenzhen Airport Co A (000089 CH), China Southern Airlines (1055 HK), Sinotrans (598 HK), Kerry Logistics Network (636 HK), Shenzhen Intl (152 HK) and S.F. Holding (002352 CH).

China Logistics: Key Beneficiaries of China's Greater Bay Area Postal and Express Development

Quality-first, Business-perspective, Long-term, Urbem (HK) Limited

Urbem Capital

Quality-first, Business-perspective, Long-term

<ul>
<li>China can be the first market to recover its travel industry post the pandemic;</li>
<li>We scan the industry in the search for decent-quality, decent-yield opportunities;</li>
<li>We limit ourselves to the widest-moat assets, which leaves us only two options in this market.</li>
</ul>


China can be the first market to recover its travel industry post the pandemic;
We scan the industry in the search for decent-quality, decent-yield opportunities;
We limit ourselves to the widest-moat assets, which leaves us only two options in this market.


Valuation Check-Up: Wide-Moat Assets Poised for China's Travel Recovery

While the aggregate losses of the Big Three Chinese airlines have reduced by Rmb1.8bn QoQ in 2Q20, <a href="https://www.smartkarma.com/entities/china-southern-airlines-co-ltd" target="_blank" data-smartkarma-citation="entities:1078:1" rel="noopener">China Southern Airlines (1055 HK)</a> is the only major contributor to such reduction (its losses reduced Rmb2.35bn, or 44.7%, QoQ). <a href="https://www.smartkarma.com/entities/air-china-ltd-h" target="_blank" data-smartkarma-citation="entities:8239:1" rel="noopener">Air China Ltd (H) (753 HK)</a> and <a href="https://www.smartkarma.com/entities/china-eastern-airlines-co-h" target="_blank" data-smartkarma-citation="entities:1079:1" rel="noopener">China Eastern Airlines Co (H) (670 HK)</a> are still seeing minimal improvements sequentially. In 1H20, CSA made the least losses (Rmb8.1bn, vs. Rmb9.4bn for Air China and Rmb8.5bn for CEA), outperformed these two peers in most operating and financial indicators and was the only one with QoQ margin expansion in 2Q20.We believe the 2Q20 improvement has set the stage for CSA to sustain outperformance into 2H20. CSA is best exposed to the current Rmb appreciation and least exposed to the initial losses of more resumption of international flights (as they will likely be operating below breakeven). These will add to its excellent exposure to domestic recovery and cost management as key appeals.

While the aggregate losses of the Big Three Chinese airlines have reduced by Rmb1.8bn QoQ in 2Q20, China Southern Airlines (1055 HK) is the only major contributor to such reduction (its losses reduced Rmb2.35bn, or 44.7%, QoQ). Air China Ltd (H) (753 HK) and China Eastern Airlines Co (H) (670 HK) are still seeing minimal improvements sequentially. In 1H20, CSA made the least losses (Rmb8.1bn, vs. Rmb9.4bn for Air China and Rmb8.5bn for CEA), outperformed these two peers in most operating and financial indicators and was the only one with QoQ margin expansion in 2Q20.We believe the 2Q20 improvement has set the stage for CSA to sustain outperformance into 2H20. CSA is best exposed to the current Rmb appreciation and least exposed to the initial losses of more resumption of international flights (as they will likely be operating below breakeven). These will add to its excellent exposure to domestic recovery and cost management as key appeals. 

Chinese Airlines: China Southern the Clear Winner in 1H20 - A Must Read Comparison on the Big Three

China

Shanghai International Airport Co., Ltd. operates Pudong Airport and Hongquiao airport in Shanghai.   The Company provides a full range of services including air traffic control, terminal management, cargo handling, advertising, space rental, and other related services.

Shanghai International Airport (600009 CH)

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Shanghai International Airport (600009 CH)

2021 High Conviction Update: Chinese Airlines Pair Trade - Almost Getting to the Inflection Point

Feb traffic is not too bad at CSA but we see some positive signs emerging at Air China, supporting a potential reversal of its underperformance...

Osbert Tang, CFA

Chinese Airlines: Initial FY20 Results Suggest Tough Market Has Already Begun

Chinese airlines posted weak 4Q20 result ranges and this is expected to put near-term pressure on share prices. However, we believe Air China is in...

Osbert Tang, CFA

China Logistics: Key Beneficiaries of China's Greater Bay Area Postal and Express Development

China's support of postal and express industry development in the Greater Bay Area has positive implications on many logistics companies. We...

Osbert Tang, CFA

Valuation Check-Up: Wide-Moat Assets Poised for China's Travel Recovery

China is hopeful of being the first market to recover its travel industry post the pandemic. Therefore, we are interested in scanning the industry...

Urbem Capital

Chinese Airlines: China Southern the Clear Winner in 1H20 - A Must Read Comparison on the Big Three

While the aggregate losses of the Big Three Chinese airlines have reduced by Rmb1.8bn QoQ in 2Q20, China Southern Airlines (1055 HK) is the only...

Osbert Tang, CFA

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52-week Range

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