HK/China Equity Long-Short

Osbert Tang, CFA

Thematic (Sector/Industry)

<ul>
<li>Surging by 19.4% since the trough on 19-Apr, the HSI is now only 3.2% shy away from the psychological resistance of 20,000. We look at some potential profit-taking names. </li>
<li>Heavy-Weights like <a href="https://www.smartkarma.com/entities/meituan" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan (3690 HK)</a> and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent (700 HK)</a> are among the best-performing ones YTD and since the trough. Hence they are more exposed, particularly for Meituan.</li>
<li>
<a href="https://www.smartkarma.com/entities/haidilao-international-holding" target="_blank" data-smartkarma-citation="entities:27044:1" rel="noopener">Haidilao International Holding (6862 HK)</a> and <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> are another two on the list. Their valuations are no longer inexpensive relative to 3-year earnings CAGR.</li>
</ul>


Surging by 19.4% since the trough on 19-Apr, the HSI is now only 3.2% shy away from the psychological resistance of 20,000. We look at some potential profit-taking names. 
Heavy-Weights like Meituan (3690 HK) and Tencent (700 HK) are among the best-performing ones YTD and since the trough. Hence they are more exposed, particularly for Meituan.

Haidilao International Holding (6862 HK) and ENN Energy (2688 HK) are another two on the list. Their valuations are no longer inexpensive relative to 3-year earnings CAGR.


HK Strategy: To Sell or Not to Sell, that Is the Question

Equity Bottom-Up

China Tourism Group Duty Free / Equity Bottom-Up

China Tourism Group Duty Free Corporation Limited engages in sales of duty free goods and tax goods. The Company sells tobacco, wine and spirits, perfume, cosmetics, fashion and accessories, watches, jewelry, food, luggage products,and other products. China Tourism Group Duty Free also engages in investment and development of tourism destination commercial complexes.

<ul>
<li>While its share price has collapsed, <a href="https://www.smartkarma.com/entities/china-tourism-group-duty-free" target="_blank" data-smartkarma-citation="entities:36229:1" rel="noopener">China Tourism Group Duty Free (1880 HK)</a> is still facing many challenges and uncertainties which render it unattractive at current level.</li>
<li>Average duty free spending per customer in Hainan is 46% lower than the peak and 26% lower YoY in Mar 2024, and the downtrend looks to continue.</li>
<li>The government's efforts to strike down purchasing agents in Hainan duty free products and the island's change to a duty-free zone are also negative developments.</li>
</ul>


While its share price has collapsed, China Tourism Group Duty Free (1880 HK) is still facing many challenges and uncertainties which render it unattractive at current level.
Average duty free spending per customer in Hainan is 46% lower than the peak and 26% lower YoY in Mar 2024, and the downtrend looks to continue.
The government's efforts to strike down purchasing agents in Hainan duty free products and the island's change to a duty-free zone are also negative developments.


Sa Sa International Hldgs / Equity Bottom-Up

Sa Sa International Holdings Limited, through its subsidiaries, retails and wholesales cosmetics. The Company also provides beauty and health club services to members.

<ul>
<li>Masked by a high base, 4Q FY24 sales of <a href="https://www.smartkarma.com/entities/sa-sa-international-hldgs" target="_blank" data-smartkarma-citation="entities:20143:1" rel="noopener">Sa Sa International Hldgs (178 HK)</a> edged down by 4.1% YoY. However, sales for mainland China have increased by 18.2%.</li>
<li>Overall sales for FY24 are in line with market projections and there is potential for further margin expansion. Its 6.7x and 5.9x PERs for FY25F and FY26F are inexpensive.</li>
<li>The addition of more mainland cities to the Hong Kong individual visit scheme, promotion of Hong Kong tourism, and weaker USD in the medium term are all positive factors.</li>
</ul>


Masked by a high base, 4Q FY24 sales of Sa Sa International Hldgs (178 HK) edged down by 4.1% YoY. However, sales for mainland China have increased by 18.2%.
Overall sales for FY24 are in line with market projections and there is potential for further margin expansion. Its 6.7x and 5.9x PERs for FY25F and FY26F are inexpensive.
The addition of more mainland cities to the Hong Kong individual visit scheme, promotion of Hong Kong tourism, and weaker USD in the medium term are all positive factors.


Sa Sa Intl (178 HK): Steady Recovery, but Biased by High Base

COSCO Shipping Ports Limited, through its subsidiaries, provides shipping container leasing services worldwide.  The Company also operates container terminals and provides container handling, storage, transportation and management services, as well as depot handling and stevedoring services.

<ul>
<li>China's two national port companies <a href="https://www.smartkarma.com/entities/china-merchants-port-holdings-company-ltd" target="_blank" data-smartkarma-citation="entities:15155:1" rel="noopener">China Merchants Port (144 HK)</a> and <a href="https://www.smartkarma.com/entities/cosco-shipping-ports-ltd" target="_blank" data-smartkarma-citation="entities:360:1" rel="noopener">Cosco Shipping Ports (1199 HK)</a> have underperformed, but exports have picked up. We see an opportunity here.</li>
<li>With a 9.2% increase in container throughput, CSPL even down by 4.8% YTD, underperformed CMPH by 12.9pp. There is room for it to catch up.</li>
<li>CSPL is also cheaper at 7x and 6.3x PERs for the next two years, making it more attractive on a relative basis.</li>
</ul>


China's two national port companies China Merchants Port (144 HK) and Cosco Shipping Ports (1199 HK) have underperformed, but exports have picked up. We see an opportunity here.
With a 9.2% increase in container throughput, CSPL even down by 4.8% YTD, underperformed CMPH by 12.9pp. There is room for it to catch up.
CSPL is also cheaper at 7x and 6.3x PERs for the next two years, making it more attractive on a relative basis.


China Port Pair Opportunity: COSCO Shipping Ports Vs. China Merchants Port

Anhui Conch Cement Company Limited manufactures cement products. The Company produces silicate cements, slag silicate cements, composite silicate cements, cement clinkers, and other products. Anhui Conch Cement Cement markets its products throughout China and worldwide.

<ul>
<li>Stable cement price, good cost control, and a better base for comparison will lift <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>'s profitability recovery in 2-4Q24.  <a href="https://www.smartkarma.com/entities/anhui-gourgen-traffic-cons-a" target="_blank" data-smartkarma-citation="entities:30237:1" rel="noopener"></a>
</li>
<li>Anhui Conch's earnings outperformed in 1Q24. Its peers are making losses and hence will reduce excess supply. Stabilisation of the real estate market will lower the pressure on demand.</li>
<li>Net cash equals 46% of the current share price, and its valuations (both PER and P/B) are inexpensive relative to peers and ROE.  </li>
</ul>


Stable cement price, good cost control, and a better base for comparison will lift Anhui Conch Cement (914 HK)'s profitability recovery in 2-4Q24.  

Anhui Conch's earnings outperformed in 1Q24. Its peers are making losses and hence will reduce excess supply. Stabilisation of the real estate market will lower the pressure on demand.
Net cash equals 46% of the current share price, and its valuations (both PER and P/B) are inexpensive relative to peers and ROE.  


Anhui Conch Cement (914 HK): Increasingly Favourable Odds

Osbert Tang is an equity analyst with over 20 years of experience with focuses on China transport, infrastructure, industrials and utilities sectors. He has been based in Shanghai since 2003, accumulated nearly 20 years of on-ground knowledge on the Chinese economy and financial markets, and has a wealth of contacts with China corporates and government entities. 

Osbert has received votes from top-tier institutional investors and has been a highly-ranked transport and infrastructure analyst in the Asiamoney, Institutional Investors and Greenwich surveys. In addition to his extensive experience with international investment banks including RBS, ABN AMRO (both served as Shanghai Chief Representative), Paribas Asia Equity, Maybank Kim Eng and DBS Securities, he has been a senior analyst with Moody’s Investors Service with focus on ratings of China infrastructure and related LGFV issuers. He has also worked in the area of strategic development at Sun Hung Kai Properties Limited. 

Osbert holds a BBA from the Chinese University of Hong Kong, an MBA from the University of Texas at Austin and a MSSc in Applied Psychology from the City University of Hong Kong. He was accredited with the CFA charter in 1997, and is a member of both British Psychological Society and Hong Kong Psychological Society.