HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Foreign exchange gains/losses are major swing factors in FY22 results of many companies and we think investors may have overlooked their importance in driving FY23 earnings. </li>
<li>With Rmb/USD exchange rate appreciated YTD, reversing the 8.5% depreciation in last year, the demons of many companies in last year will become positive earnings contributor. </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>, <a href="https://www.smartkarma.com/entities/enn-energy-holdings-ltd" target="_blank" data-smartkarma-citation="entities:316:1" rel="noopener">ENN Energy (2688 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 (548 HK)</a> and <a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a> are key beneficiaries, while <a href="https://www.smartkarma.com/entities/cimc-enric-holdings-ltd" target="_blank" data-smartkarma-citation="entities:47:1" rel="noopener">CIMC Enric (3899 HK)</a> may turned into exchange losses.</li>
</ul>


Foreign exchange gains/losses are major swing factors in FY22 results of many companies and we think investors may have overlooked their importance in driving FY23 earnings. 
With Rmb/USD exchange rate appreciated YTD, reversing the 8.5% depreciation in last year, the demons of many companies in last year will become positive earnings contributor. 

Shenzhen International (152 HK), ENN Energy (2688 HK), Shenzhen Expressway (548 HK) and Kunlun Energy (135 HK) are key beneficiaries, while CIMC Enric (3899 HK) may turned into exchange losses.


China Strategy: It Is the Foreign Exchange Impact, Stupid!

<ul>
<li>China's Central Document No.1 emphasizes the need to boost the agricultural industry and improve well-being of the peasants. We see the directions positive for the agricultural sector.</li>
<li>Direct beneficiaries are <a href="https://www.smartkarma.com/entities/sinofert-holdings-ltd" target="_blank" data-smartkarma-citation="entities:893:1" rel="noopener">Sinofert Holdings (297 HK)</a>, <a href="https://www.smartkarma.com/entities/china-xlx-fertiliser-ltd" target="_blank" data-smartkarma-citation="entities:5679:1" rel="noopener">China Xlx Fertiliser (1866 HK)</a>, <a href="https://www.smartkarma.com/entities/first-tractor-co-h" target="_blank" data-smartkarma-citation="entities:12416:1" rel="noopener">First Tractor Co H (38 HK)</a> and <a href="https://www.smartkarma.com/entities/xinjiang-tianye-water-saving-irrigation" target="_blank" data-smartkarma-citation="entities:10975:1" rel="noopener">Xinjiang Tianye Water Saving Irrigation (840 HK)</a>. </li>
<li>Growing rural affluence is positive to <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>, <a href="https://www.smartkarma.com/entities/haier-smart-home-co-ltd-b3ef445f-0f54-4586-8c58-9073de98d60e" target="_blank" data-smartkarma-citation="entities:31105:1" rel="noopener">Haier Smart Home (6690 HK)</a> and <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a>, while cold chain network buildout is good to <a href="https://www.smartkarma.com/entities/shenzhen-international-holdings-limited" target="_blank" data-smartkarma-citation="entities:9:1" rel="noopener">Shenzhen Intl (152 HK)</a>. </li>
</ul>


China's Central Document No.1 emphasizes the need to boost the agricultural industry and improve well-being of the peasants. We see the directions positive for the agricultural sector.
Direct beneficiaries are Sinofert Holdings (297 HK), China Xlx Fertiliser (1866 HK), First Tractor Co H (38 HK) and Xinjiang Tianye Water Saving Irrigation (840 HK). 
Growing rural affluence is positive to BYD (1211 HK), Haier Smart Home (6690 HK) and Pinduoduo (PDD US), while cold chain network buildout is good to Shenzhen Intl (152 HK). 


China Agricultural Sector: A Read into China Central Document No.1

<ul>
<li>Infrastructure, new energy, consumer discretionary and, to a lesser extent, transportation and logistics are sectors that will benefit from extensive government economic supportive policies over the last few days. </li>
<li>Acceleration of special purpose bonds will drive <a href="https://www.smartkarma.com/entities/china-communications-construction-co-ltd" target="_blank" data-smartkarma-citation="entities:265:1" rel="noopener">China Communications Construction (1800 HK)</a>. We see <a href="https://www.smartkarma.com/entities/china-longyuan-power-group-corp-ltd" target="_blank" data-smartkarma-citation="entities:14215:1" rel="noopener">China Longyuan Power (916 HK)</a> and <a href="https://www.smartkarma.com/entities/dongfang-electric-corporation-limited" target="_blank" data-smartkarma-citation="entities:1251:1" rel="noopener">Dongfang Electric (1072 HK)</a> benefit from new energy initiatives.</li>
<li>
<a href="https://www.smartkarma.com/entities/li-ning-co-ltd" target="_blank" data-smartkarma-citation="entities:6047:1" rel="noopener">Li Ning (2331 HK)</a> will be the near-term winner in the consumer discretionary space and so as <a href="https://www.smartkarma.com/entities/haier-smart-home-co-ltd-b3ef445f-0f54-4586-8c58-9073de98d60e" target="_blank" data-smartkarma-citation="entities:31105:1" rel="noopener">Haier Smart Home Co Ltd (6690 HK)</a>.</li>
</ul>


Infrastructure, new energy, consumer discretionary and, to a lesser extent, transportation and logistics are sectors that will benefit from extensive government economic supportive policies over the last few days. 
Acceleration of special purpose bonds will drive China Communications Construction (1800 HK). We see China Longyuan Power (916 HK) and Dongfang Electric (1072 HK) benefit from new energy initiatives.

Li Ning (2331 HK) will be the near-term winner in the consumer discretionary space and so as Haier Smart Home Co Ltd (6690 HK).


Roundup of Government Economic Supportive Policies: Key Winners

<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?

<p>With the Hang Seng Index pulled back by 8.6% from its recent high in late-Jun, we take a look on our universe to identify the key opportunities and risks in our coverage.  In our view, the three stocks that look attractive after the recent market retreat are: 1.) <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a>, 2.) <a href="https://www.smartkarma.com/entities/kunlun-energy-co-ltd" target="_blank" data-smartkarma-citation="entities:10054:1" rel="noopener">Kunlun Energy (135 HK)</a> and <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>. On average, they are off 9.8% from the recent peak.</p><p>The three stocks to avoid are: 1.) <a href="https://www.smartkarma.com/entities/cosco-shipping-energy-tran-h" target="_blank" data-smartkarma-citation="entities:646:1" rel="noopener">Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK)</a>, 2.) <a href="https://www.smartkarma.com/entities/beijing-capital-international-airport-bcia" target="_blank" data-smartkarma-citation="entities:10626:1" rel="noopener">Beijing Capital International Airport (BCIA) (694 HK)</a> and 3.) <a href="https://www.smartkarma.com/entities/china-maple-leaf-educational" target="_blank" data-smartkarma-citation="entities:78:1" rel="noopener">China Maple Leaf Educational Systems (1317 HK)</a>. They have declined an average of 20.2% from their peak, and despite the low valuations, fundamentals remain unappealing.  </p>

With the Hang Seng Index pulled back by 8.6% from its recent high in late-Jun, we take a look on our universe to identify the key opportunities and risks in our coverage.  In our view, the three stocks that look attractive after the recent market retreat are: 1.) Sinotrans (598 HK), 2.) Kunlun Energy (135 HK) and Shenzhen International (152 HK). On average, they are off 9.8% from the recent peak.The three stocks to avoid are: 1.) Cosco Shipping Energy Transportation Co. Ltd. (H) (1138 HK), 2.) Beijing Capital International Airport (BCIA) (694 HK) and 3.) China Maple Leaf Educational Systems (1317 HK). They have declined an average of 20.2% from their peak, and despite the low valuations, fundamentals remain unappealing.  

Three Stocks Look Attractive and Three to Avoid Amid the Sell-Off

Hong Kong

Shenzhen International Holdings Limited invests in, constructs, and operates logistics infrastructure facilities, including logistics parks, toll roads, and ports. The company also provides third-party logistics services, logistics information services, and general environmental protection businesses, offering value-added services like intelligent warehousing and integrated cold chain solutions. The company is headquartered in Hong Kong.

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Shenzhen International (152 HK)

China Strategy: It Is the Foreign Exchange Impact, Stupid!

Shenzhen Intl, ENN Energy, Shenzhen Expressway and Kunlun Energy are the key beneficiaries of the reverse in Rmb/USD depreciation trend in FY23,...

Osbert Tang, CFA

China Agricultural Sector: A Read into China Central Document No.1

Directions in China's Central Document No.1 in 2023 are positive for the agricultural sector. We see direct benficiaries being Sinofert, China XLX...

Osbert Tang, CFA

Roundup of Government Economic Supportive Policies: Key Winners

We expect the government economic supportive policies released in the last few days to drive the infrastructure, new energy, consumer discretionary...

Osbert Tang, CFA

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

China Education Sector, Shenzhen Intl and China Dongxiang are the three worst calls that we made in last year. We believe there is room for a...

Osbert Tang, CFA

Three Stocks Look Attractive and Three to Avoid Amid the Sell-Off

We think the three stocks that look attractive after the recent market retreat are: 1.) Sinotrans (598 HK), 2.) Kunlun Energy (135 HK) and Shenzhen...

Osbert Tang, CFA

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