HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

Shenzhen International / Equity Bottom-Up

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<li>
<a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> has secured pre-tax gain of HK$2.8bn from deemed disposal of Qianhai Business and this is another example for its ability to realise underlying asset value.  </li>
<li>SZI still holds a 50% stake in Qianhai Business, allowing it to capture further upside from this project. The transaction should also improve cash flow as land fees are repaid.</li>
<li>Other logistics transformation projects like the South China Logistics Park, which has an area even larger than Qianhai Business, will provide upside for the longer term. </li>
</ul>



Shenzhen International (152 HK) has secured pre-tax gain of HK$2.8bn from deemed disposal of Qianhai Business and this is another example for its ability to realise underlying asset value.  
SZI still holds a 50% stake in Qianhai Business, allowing it to capture further upside from this project. The transaction should also improve cash flow as land fees are repaid.
Other logistics transformation projects like the South China Logistics Park, which has an area even larger than Qianhai Business, will provide upside for the longer term. 


Shenzhen Intl (152 HK): It's the Ability to Realise Underlying Value that Matters

<ul>
<li>
<a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> posted 11% profit decline for FY21, with Shenzhen Airlines the main drag. Stripping this and one-off items out, its bottom line would have grown by 46.6%.</li>
<li>Logistics growth pipeline is highly visible, and this adds to potential gains from logistics park transformation and strategic offload of matured and suitable projects through REIT or private fund.</li>
<li>The stock remains a deeply undervalued asset play at just 0.48x P/B. Its willingness to share gains with investors has put its dividend yield at 10.4% on current share price.</li>
</ul>



Shenzhen International (152 HK) posted 11% profit decline for FY21, with Shenzhen Airlines the main drag. Stripping this and one-off items out, its bottom line would have grown by 46.6%.
Logistics growth pipeline is highly visible, and this adds to potential gains from logistics park transformation and strategic offload of matured and suitable projects through REIT or private fund.
The stock remains a deeply undervalued asset play at just 0.48x P/B. Its willingness to share gains with investors has put its dividend yield at 10.4% on current share price.


Shenzhen Intl (152 HK): More Room to Realise Underlying Asset Value

Thematic (Sector/Industry)

<ul>
<li>Business transformation has supported share price of many companies in 2021, and we expect transformation will stay as an important theme for 2022 with more companies making related announcements.</li>
<li>We highlighted some interesting names in this theme including <a href="https://www.smartkarma.com/entities/yanzhou-coal-mining-company-limited-h" target="_blank" data-smartkarma-citation="entities:384:1" rel="noopener">Yankuang Energy Group Co (1171 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-energy-engineering-group" target="_blank" data-smartkarma-citation="entities:21017:1" rel="noopener">China Energy Engineering (3996 HK)</a> and <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co (548 HK)</a>. </li>
<li>While some have already seen share price rallied, many are still lagging other transformation plays. They are also mostly trading on low multiples with transformation potential not yet fully reflected.</li>
</ul>


Business transformation has supported share price of many companies in 2021, and we expect transformation will stay as an important theme for 2022 with more companies making related announcements.
We highlighted some interesting names in this theme including Yankuang Energy Group Co (1171 HK), Anhui Conch Cement (914 HK), China Energy Engineering (3996 HK) and Shenzhen Expressway Co (548 HK). 
While some have already seen share price rallied, many are still lagging other transformation plays. They are also mostly trading on low multiples with transformation potential not yet fully reflected.


Business Transformation Is the Theme in 2022 and Some Interesting Companies to Watch

<ul>
<li>By deconsolidating <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway (548 HK)</a> (SZX) from <a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> (SZI), SZI's net book value reached HK$16.4bn. Its current market cap of HK$18.9bn implies SZX is almost free. </li>
<li>SZI's high gearing is primarily due to SZX. Excluding SZX, SZI's gearing is just 32.3%. As Shenzhen's flagship SOE, there is consistent monitoring and huge support from the local government.   </li>
<li>SZI's 0.47x P/B is more than 2SD below historical average; but it has proven capability to realise value of underlying assets. Excluding SZX, SZI is on even cheaper 0.32x P/B. </li>
</ul>


By deconsolidating Shenzhen Expressway (548 HK) (SZX) from Shenzhen International (152 HK) (SZI), SZI's net book value reached HK$16.4bn. Its current market cap of HK$18.9bn implies SZX is almost free. 
SZI's high gearing is primarily due to SZX. Excluding SZX, SZI's gearing is just 32.3%. As Shenzhen's flagship SOE, there is consistent monitoring and huge support from the local government.   
SZI's 0.47x P/B is more than 2SD below historical average; but it has proven capability to realise value of underlying assets. Excluding SZX, SZI is on even cheaper 0.32x P/B. 


Shenzhen Intl (152 HK): Deep Dissection Indicates Truly Undervalued

<ul>
<li>China Education Sector, specifically <a href="https://www.smartkarma.com/entities/china-education-group-holdin" target="_blank" data-smartkarma-citation="entities:18218:1" rel="noopener">China Education Group (839 HK)</a>, should see better performance in 2022 as regulatory concerns gradually ease. 1H22 result for higher education segment should be a proof.</li>
<li>
<a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen International (152 HK)</a> could reverse the bad fortune in 2022 on the back of realisation of undervalued assets, expansion of logistics facilities and better performance at Shenzhen Airlines.</li>
<li>
<a href="https://www.smartkarma.com/entities/china-dongxiang-group-co" target="_blank" data-smartkarma-citation="entities:1068:1" rel="noopener">China Dongxiang (3818 HK)</a> remains an undervalued asset play. Its ability to realise value of its investment portfolio, potential resumption of dividend payout and recovery of sportswear business are drivers.</li>
</ul>


China Education Sector, specifically China Education Group (839 HK), should see better performance in 2022 as regulatory concerns gradually ease. 1H22 result for higher education segment should be a proof.

Shenzhen International (152 HK) could reverse the bad fortune in 2022 on the back of realisation of undervalued assets, expansion of logistics facilities and better performance at Shenzhen Airlines.

China Dongxiang (3818 HK) remains an undervalued asset play. Its ability to realise value of its investment portfolio, potential resumption of dividend payout and recovery of sportswear business are drivers.


Our Three Worst Calls in Last Year and Any Room for a Reversal in 2022?

China

Shenzhen Expressway Company Limited constructs, manages and operates toll highways and expressways in China.

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Shenzhen Expressway Co H (548 HK)

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