HK/China Equity Long-Short

Osbert Tang, CFA

Equity Bottom-Up

<ul>
<li>While we like <a href="https://www.smartkarma.com/entities/sinotrans-limited-h" target="_blank" data-smartkarma-citation="entities:1321:1" rel="noopener">Sinotrans (598 HK)</a> in the long term, we are caution that 1Q23 result may be disappointing. Its 4Q22 earnings already showed 49.1% YoY and 73.3% QoQ decline.</li>
<li>Indicators including China's PMI new export orders, export growth, container shipping freight rates (SCFI) and airfreight rates all showed that the recovery trend is weak. </li>
<li>9% of FY22 profit is from exchange gain as Rmb depreciated, and this may not happen again. Consensus forecast of just 10% decline in FY23 net profit seems overly optimistic. </li>
</ul>


While we like Sinotrans (598 HK) in the long term, we are caution that 1Q23 result may be disappointing. Its 4Q22 earnings already showed 49.1% YoY and 73.3% QoQ decline.
Indicators including China's PMI new export orders, export growth, container shipping freight rates (SCFI) and airfreight rates all showed that the recovery trend is weak. 
9% of FY22 profit is from exchange gain as Rmb depreciated, and this may not happen again. Consensus forecast of just 10% decline in FY23 net profit seems overly optimistic. 


Sinotrans (598 HK): We Are Concerned About the near Term Challenges

<ul>
<li>We stay bearish on <a href="https://www.smartkarma.com/entities/sitc-international-holdings" target="_blank" data-smartkarma-citation="entities:15301:1" rel="noopener">SITC International (1308 HK)</a> despite record net profit in FY22. The collapse in spot freight rate will take a toll on FY23 earnings.</li>
<li>Management is also conservative on outlook, citing both demand and supply issues. It expects gross margin to return to pre-pandemic levels (17-20%) in the future, vs. 41.8% in 2H22.</li>
<li>Market consensus is just too optimistic, projecting just 37% YoY decline in earnings for FY23. We believe actual earnings may be at least 18-27% lower than current street forecasts. </li>
</ul>


We stay bearish on SITC International (1308 HK) despite record net profit in FY22. The collapse in spot freight rate will take a toll on FY23 earnings.
Management is also conservative on outlook, citing both demand and supply issues. It expects gross margin to return to pre-pandemic levels (17-20%) in the future, vs. 41.8% in 2H22.
Market consensus is just too optimistic, projecting just 37% YoY decline in earnings for FY23. We believe actual earnings may be at least 18-27% lower than current street forecasts. 


SITC International (1308 HK): Still Not Easy to Find the Bright Spot

Asia Pac ECM and Index Rebal, Shenton Research

Ke Yan, CFA, FRM

Asia Pac ECM and Index Rebal

Asia Pac IPO & Placement Research, China Biotech

DZT Research

DZT Research is an independent Asia Pacific equity specialist. Our quantitative research covers index rebalancing flows, alongside exchange data analytics accross Asia Pacific. On the equity capital markets side, we focus on Asia Pacific ECM, especially biotech and TMT. Our lead analyst is frequently cited by international media.

Quantitative Analysis

<ul>
<li>We analyzed the latest HK SFC report for aggregate short position as of Dec 16th. </li>
<li>Top short increases and decreases were tabulated for one week and four week period. </li>
<li>We highlight short changes in SITC, CMB, Hua Hong Semiconductor, Yum China, Wharf Real Estate.</li>
</ul>


We analyzed the latest HK SFC report for aggregate short position as of Dec 16th. 
Top short increases and decreases were tabulated for one week and four week period. 
We highlight short changes in SITC, CMB, Hua Hong Semiconductor, Yum China, Wharf Real Estate.


HK Short Interest Weekly: SITC, CMB, Hua Hong Semiconductor, Yum China, Wharf Real Estate

Orient Overseas (International) / Equity Bottom-Up

<ul>
<li>1H22 is a fantastic period for <a href="https://www.smartkarma.com/entities/orient-overseas-international" target="_blank" data-smartkarma-citation="entities:801:1" rel="noopener">Orient Overseas International (316 HK)</a> with record earnings. However, with retreat in freight rates YTD, it is likely to mark the cycle peak.</li>
<li>OOIL has not seen the usual peak season for transpacific market yet.  Also, supply pressure is mounting as record vessel delivery is scheduled for the next two years.</li>
<li>The elevated share price has not reflected that profitability will decline in FY23 and FY24. We see significant downside risk as the market becomes more realistic on earnings.</li>
</ul>


1H22 is a fantastic period for Orient Overseas International (316 HK) with record earnings. However, with retreat in freight rates YTD, it is likely to mark the cycle peak.
OOIL has not seen the usual peak season for transpacific market yet.  Also, supply pressure is mounting as record vessel delivery is scheduled for the next two years.
The elevated share price has not reflected that profitability will decline in FY23 and FY24. We see significant downside risk as the market becomes more realistic on earnings.


Orient Overseas Intl (316 HK): Don't Overlook the Downhill Risks

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Index Rebalance

<ul>
<li>Currently at 69 constituents, it is unlikely that we reach 80 member by year end. Hang Seng Indexes is finding it tough to reach the target by excluding unprofitable companies.</li>
<li>We list 11 stocks that could be added to the index in September - with one-way turnover just over 5%, the actual number of inclusions will be lower.</li>
<li>There are a few potential inclusions where short interest is over 5% of the free float. These stocks could see short covering ahead of announcement of the changes.</li>
</ul>


Currently at 69 constituents, it is unlikely that we reach 80 member by year end. Hang Seng Indexes is finding it tough to reach the target by excluding unprofitable companies.
We list 11 stocks that could be added to the index in September - with one-way turnover just over 5%, the actual number of inclusions will be lower.
There are a few potential inclusions where short interest is over 5% of the free float. These stocks could see short covering ahead of announcement of the changes.


HSI Index Rebalance Preview: Finding the Balance

Hong Kong

SITC International Holdings Co., Ltd. is a leading shipping logistics company in the intra-Asia area. It provides integrated transportation and logistics solutions, including container liner shipping, freight forwarding, shipping agency, and warehousing services. The company was founded in 1991 and is headquartered in Hong Kong.

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SITC International (1308 HK)

Sinotrans (598 HK): We Are Concerned About the near Term Challenges

After a weak 4Q22 result, we think there are risks that 1Q23 and 1H23 earnings may not come out as expected. Market consensus forecast of 10% net...

Osbert Tang, CFA