Daily Hong Kong: H/A Spread & Southbound Monitor – Going Into Year End and more

In this briefing:

1. H/A Spread & Southbound Monitor – Going Into Year End
2. Xinyi Energy IPO Valuation: Asking More Than What It Is Paying to Acquire Target Portfolio
3. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
4. Natural Foods IPO Trading Update – Not Expensive but Needs to Show a Clear Turnaround
5. China Mobile and SK Telecom Defensive Plays and Top Trade Set Ups

1. H/A Spread & Southbound Monitor – Going Into Year End

An H/A Spread Monitor Project offering a brief look at recent changes in H-Share and A-Share spreads, Southbound flow and impact, and where the spreads are trading within their own historical ranges.

There are five sets of data for now:
1.   HK-Shanghai Connect Southbound Turnover and Net Buying vs Indices and HKEx Turnover
2.   Top 20 Net Southbound buys and sells over the last 5 days
3.   H-Share/A-Share Discounts, Changes in Discount over 1 and 4 wks, Changes in Southbound Flow
4.   Southbound Flow as a % of Volume and Float on All Eligible Stocks
5.   H-Share/A-Share Sector Discount Ranges and Averages Charted Over the Last 12 months 

Net Southbound flows continue to be somewhat lacklustre. November was negative after a couple of positive months. December so far is very mildly positive. Northbound had been strongly positive for months, but say RMB 5.8bn of outflows in October only to rebound to RMB +32.5bn in November. So far this month, NB is positive too.

2. Xinyi Energy IPO Valuation: Asking More Than What It Is Paying to Acquire Target Portfolio

Xinyi Energy Holdings Ltd (1671746D HK) is a solar farm operator seeking a listing on Hongkong stock exchange raising up to US$680M (including Greenshoe). The company announced a price range of HK$1.89/share to HK$2.42/share valuing the company between HK$12.5B to HK$16B. The company is issuing 1.9B shares and 282M shares of Greenshoe as part of the IPO. The offer price will be announced on 13^th December. The shares are expected to trade on Hongkong Stock Exchange on the 21^st December. 

Based on GER’s analysis valuations appear rich and the investors should avoid the IPO which are priced at a significant premium at the lower end of offer price compared to its peers. 

3. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns

At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price.  The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.

Summary China Tower forecasts: 

4. Natural Foods IPO Trading Update – Not Expensive but Needs to Show a Clear Turnaround

Natural Food International H (1837 HK)‘s  IPO was priced at the low-end at HKD1.62/share. The retail tranche was 1.4x covered and the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insight, 

• Natural Food IPO – Quick Take – Network Expansion Can Only Go so Far, SSSG Might Have Turned -Ve

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

5. China Mobile and SK Telecom Defensive Plays and Top Trade Set Ups

We are playing any surprise bounce via Shanghai A 50 futures and the HSCE.

RIO tactical bounce trade presented.

Duration defensive long set ups outlined with stops and rally targets in China Mobile and SK Telecom.

KLSE bear triangle second trade in the making for a press toward 1,620/15.

In Europe, Italy is lagging the break down and a prime short candidate for a break below triple lows/out of flat congestion.

S&P tactical break points outlined with a bounce set up in the DJI. Base case view is to short a bounce.

Higher conviction pivot levels for a USD/JPY short are laid out with action turn levels and risk points.