HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

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

Equity Bottom-Up

Guangzhou Baiyun International Airport / Equity Bottom-Up

<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) has another solid month in Nov, continuing the promising trend in Oct and logging a massive 20.2% YoY surge in domestic aircraft movement and a 4.8% leap in domestic passenger traffic. Moreover, the decline in cargo and mail throughput has narrowed to 1.3% YoY only, the best in the last 5 months. We believe this set of traffic performance signals that there is no abatement in its growth paces.Despite the positive trend, GBIA has underperformed <a href="https://www.smartkarma.com/entities/shanghai-international-airport-co-ltd" target="_blank" data-smartkarma-citation="entities:6511:1" rel="noopener">Shanghai International Airport (600009 CH)</a> (SIAC) by a significant 16.4pp YTD. It is true that the construction of a new Guangzhou airport and the closer co-operation between the Hong Kong airport and Zhuhai airport are challenges in the future. However, with a favourable base for YoY comparison in 1Q21 and the sustained strength in domestic traffic in the next few months, we believe there is room for GBIA to narrow its performance gap against SIAC in the near term.

Guangzhou Baiyun International Airport (600004 CH) (GBIA) has another solid month in Nov, continuing the promising trend in Oct and logging a massive 20.2% YoY surge in domestic aircraft movement and a 4.8% leap in domestic passenger traffic. Moreover, the decline in cargo and mail throughput has narrowed to 1.3% YoY only, the best in the last 5 months. We believe this set of traffic performance signals that there is no abatement in its growth paces.Despite the positive trend, GBIA has underperformed Shanghai International Airport (600009 CH) (SIAC) by a significant 16.4pp YTD. It is true that the construction of a new Guangzhou airport and the closer co-operation between the Hong Kong airport and Zhuhai airport are challenges in the future. However, with a favourable base for YoY comparison in 1Q21 and the sustained strength in domestic traffic in the next few months, we believe there is room for GBIA to narrow its performance gap against SIAC in the near term.

Guangzhou Baiyun Intl Airport (600004 CH): No Abatement in Growth Paces

While <a href="https://www.smartkarma.com/entities/shenzhen-investment-ltd" target="_blank" data-smartkarma-citation="entities:17281:1" rel="noopener">Shenzhen Investment (604 HK)</a> has a positive outlook based on its good margin, low leverage, asset injection and good pre-sale performance, as revealed in its online investor meeting last Friday. Its Sep and Oct contracted sales momentum has gathered strength with over 50% YoY growth. Despite so, we see it less attractive than <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> in terms of investment merits. In our view, the key concerns on SZ Inv are its diversification out of Greater Bay Area, shrinking land bank, risk of investment in Hengda Real Estate and the limited upside on Shenzhen property price. Share price of SZ Inv has underperformed that for SZ Int by 3.1pp and we continue to advocate a <a href="https://www.smartkarma.com/insights/the-shenzhen-story-a-look-at-the-pair-trades-on-sz-int-sz-exp-and-sz-inv" target="_blank" data-smartkarma-citation="insights:44508" rel="noopener">"long SZ Int, short SZ Inv"</a> pair trade strategy.

While Shenzhen Investment (604 HK) has a positive outlook based on its good margin, low leverage, asset injection and good pre-sale performance, as revealed in its online investor meeting last Friday. Its Sep and Oct contracted sales momentum has gathered strength with over 50% YoY growth. Despite so, we see it less attractive than Shenzhen Intl (152 HK) in terms of investment merits. In our view, the key concerns on SZ Inv are its diversification out of Greater Bay Area, shrinking land bank, risk of investment in Hengda Real Estate and the limited upside on Shenzhen property price. Share price of SZ Inv has underperformed that for SZ Int by 3.1pp and we continue to advocate a "long SZ Int, short SZ Inv" pair trade strategy. 

Shenzhen Investment (604 HK): Good Story yet Less Attractive than Shenzhen International (152.HK)

Shenzhen International / Equity Bottom-Up

In this Insight, we look at the pair trades involving the three key Shenzhen state-owned enterprises - <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>, <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> and <a href="https://www.smartkarma.com/entities/shenzhen-investment-ltd" target="_blank" data-smartkarma-citation="entities:17281:1" rel="noopener">Shenzhen Investment (604 HK)</a>.  We believe the best trade will be a "Long Shenzhen Int, short Shenzhen Inv" strategy as we believe the catalysts include growth in logistics business, recovery of air and toll road traffic and REIT issuance of toll roads will drive outperform of SZ Int against SZ Inv (which is primarily a property company).We also think that SZ Int is best place to benefit from the supportive policies introduced by the government, given its business mix and its size. Our overall ranking of these three stocks are: 1.) SZ Int, 2.) SZ Exp, and 3.) SZ Inv. <a href="https://www.smartkarma.com/entities/shenzhen-investment-holdings-bay-area-development" target="_blank" data-smartkarma-citation="entities:12134:1" rel="noopener"></a>

In this Insight, we look at the pair trades involving the three key Shenzhen state-owned enterprises - Shenzhen Intl (152 HK), Shenzhen Expressway Co H (548 HK) and Shenzhen Investment (604 HK).  We believe the best trade will be a "Long Shenzhen Int, short Shenzhen Inv" strategy as we believe the catalysts include growth in logistics business, recovery of air and toll road traffic and REIT issuance of toll roads will drive outperform of SZ Int against SZ Inv (which is primarily a property company).We also think that SZ Int is best place to benefit from the supportive policies introduced by the government, given its business mix and its size. Our overall ranking of these three stocks are: 1.) SZ Int, 2.) SZ Exp, and 3.) SZ Inv. 

The Shenzhen Story: A Look at the Pair Trades on SZ Int, SZ Exp and SZ Inv

Shenzhen Airlines (SZA), <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>'s 49%-owned associated company, posted a sharp turnaround in 3Q20 with a profit of Rmb239m, compared with a loss of Rmb2.2bn in 1H20. This has very positive implications on SZIH given that SZA is its major profit contributor. Adding to that is the full recovery at its 51.56%-owned <a href="https://www.smartkarma.com/entities/shenzhen-expressway-co-h" target="_blank" data-smartkarma-citation="entities:2875:1" rel="noopener">Shenzhen Expressway Co H (548 HK)</a> (SZEX) which recorded a 1.9% YoY profit growth in 3Q20. We estimate that SZEX and SZA together will generate a massive positive swing of HK$1.7bn in SZIH's bottom line in 3Q20 when compared with 1H20.In our view, the solid results of these two operating entities showcased a good momentum on SZIH's business segments in 2H20. With further improvement in its logistics business, we are positive on SZIH's recovery in 2H20. From the COVID-19 trough, the stock has underperformed the share price rebounds of the H-share airlines and H-share toll roads, yet SZEX and SZA normally contribute 86-87% of SZIH's recurrent earnings. That said, we see good value in SZIH which trades on undemanding 0.87x P/B.

Shenzhen Airlines (SZA), Shenzhen Intl (152 HK)'s 49%-owned associated company, posted a sharp turnaround in 3Q20 with a profit of Rmb239m, compared with a loss of Rmb2.2bn in 1H20. This has very positive implications on SZIH given that SZA is its major profit contributor. Adding to that is the full recovery at its 51.56%-owned Shenzhen Expressway Co H (548 HK) (SZEX) which recorded a 1.9% YoY profit growth in 3Q20. We estimate that SZEX and SZA together will generate a massive positive swing of HK$1.7bn in SZIH's bottom line in 3Q20 when compared with 1H20.In our view, the solid results of these two operating entities showcased a good momentum on SZIH's business segments in 2H20. With further improvement in its logistics business, we are positive on SZIH's recovery in 2H20. From the COVID-19 trough, the stock has underperformed the share price rebounds of the H-share airlines and H-share toll roads, yet SZEX and SZA normally contribute 86-87% of SZIH's recurrent earnings. That said, we see good value in SZIH which trades on undemanding 0.87x P/B.

Shenzhen Intl (152 HK): Shenzhen Airlines Returned to Profit in 3Q20

Hong Kong

Shenzhen International Holdings Limited operates as a holding company. The Company, through its subsidiaries, provides investment, construction, and operation of logistic infrastructure facilities, as well as offers value-added logistic services. Shenzhen International serves customers worldwide.

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Shenzhen International (152 HK)

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

Guangzhou Baiyun Intl Airport (600004 CH): No Abatement in Growth Paces

No sign of slowing traffic growth and decline for cargo throughput have further moderated in Nov. Having underperformed SIAC significantly YTD,...

Osbert Tang, CFA

Shenzhen Investment (604 HK): Good Story yet Less Attractive than Shenzhen International (152.HK)

While SZ Inv has a positive outlook with a pick-up in pre-sale performance in Sep and Oct, we consider it less attractive than SZ Int; and we...

Osbert Tang, CFA

The Shenzhen Story: A Look at the Pair Trades on SZ Int, SZ Exp and SZ Inv

We rank the three Shenzhen SOEs in the following order: SZ Int (152 HK), SZ Exp (548 HK) and SZ Inv (604 HK); and believe "Long SZ Int, short SZ...

Osbert Tang, CFA

Shenzhen Intl (152 HK): Shenzhen Airlines Returned to Profit in 3Q20

We estimate that Shenzhen Airlines and Shenzhen Expressway together will generate a positive swing of HK$1.7bn in Shenzhen Intl's 3Q20 bottom line...

Osbert Tang, CFA

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