In our Model Portfolio TRANSACTION UPDATE, we keep our subscribers informed of the changes taking place to our investment positioning and the latest transactions effected in our MODEL PORTFOLIO.
Monday 29th October 2019
Increasing Chinese Equities
The technical picture of Chinese equities has improved markedly and the HSCEI index is giving signs of pulling out of its consolidation after a rebound on its Medium term moving average and a succession of higher lows. The target of the coming upphase is likely to be 11’000
As a result we have decided to average down on two of our positions and add a new position in transportation.
BUY 20’000 BYD CO LTD 1211 HK. @ HKD 39.05
Although BYD is not one of our preferred investments, even if it is one of Warren Buffet, te electric car maker and battery maker could deliver positive surprises on the battery side of things whgule the auto sector starts recovering in China.
The possibility of a re-instatement of incentives for Electric Vehicles could also act as a catalyst which is why we are holding on to this investment and just Averaged down by doubling on our position Buying 20’000 shares at HKD 39.05.
The technical picture is favourable with a. clear double bottom and a break out of the consolidation pattern. The next target is 43
BUY 300’000 CHINA ZHENGTONG 1728 HK @ HKD 2.48
We expect the Chinese auto market to have seen the worst and to start recovering from now with potentially new incentivisation measures.
China Zheng Tong is China’s largest independent luxury car retailer with a prince in almost every major city and the best portfolio of luxury brands from Europe, Japan and the USA.
The valuations of China ZHENTONG are ridiculously cheap considering the much better resilience of the luxury car market in China and the potential upside as more and more Chinesee become affluent and trade up in what remains the main status symbol there.
China Zheng tong trades at a forward P/E of 4.75x for a Dividend Yield of 9.86 %.
Its valuation has NEVER been that low in history
The company currently trades at 0.44 x Book Value meaning that investors buy it at a 56 % discount form its accounting value.
and offers a RETURn ON MARKET CAP of + 20.73 %, based on 2019 earnings of CNY 1’136 Million and on of +24.42 % based on projected 2020 earnings of 1’332
Technically, the stock seems to have been completing its fist higher low since the bear tree tarted in February and is breaking out of the down trend as hedge funds are covering their shorts.
To us, this is one of the most attractive opportunity in the Chinese Auto sector and the Chinese H-shares universe.
BUY 300’000 GUANGSHEN RAILWAYS 525HK @ HKD 2.54
GuangShen Railways is one of the major railway transportation company in China linking the industrial regions of Shenzhen and Guangzhou to the rest of the country.
Usually known as GSRC , it is the operator of Guangzhou-Shenzhen Railway (Guang-Shen Railway), the 152-kilometre railway hi -speed link between Guangzhou and Shenzhen and it is engaged in passenger and freight transportation between Shenzhen and Pingshi and certain long-distance passenger transportation services.
It also cooperates with MTR Corporation in Hong Kong in operating the Guangdong Through Train passenger service.
One of the main attractiveness of the company at this stage is linked to the unrest in Hong Kong as some of the trade and passenger traffic from ShenZhen is gradually being diverted from Hong Kong to mainland ports and particularily neighbouring Guangzhou.
China’s total railway passenger traffic rose 10.4% YoY to ~735 million passengers in the 2019 summer holidays. Proportion of high-speed rail passengers further grew to 62.5% during the period.
Container shipping climbed 5.8% as spot freight rates on Transpacific routes surged ahead of a new round of tariff hike. However, the rebound could be temporary due to increased tariffs and weak demand on Asia-Europe routes. As of 30 August 2019, the global dry Bulk trade climbed 47.3% YoY to 2,378 points. Cargo and container throughput in China’s major ports increased 4.9 % and 5.2% YoY, respectively, in the first 7 Months of 2019.
Overall the freight market remains on a growth path despite the trade sanctions and GSRC should benefit from that increase as well as from the specific increased passenger and cargo traffic between ShenZhen and Guangzhou.
At 10.90 x earnings, the company is not particularly expensive and the H-shares we are looking at are trading at a hefty discount form their A-shares which trade at 15.3 x earrings.
As the following graph shows, the company has NEVER traded at such a low Price to book/value in the past and investors can buy it at a 45 % discount form its accounting value and we believe that a re-rating is about to start to correct this anomaly.
Technically, the chart is extremely interesting with a clear break out after a down phase that started in January 2018 and has taken it from 5.8 then to the current levels of 2.53, a 56 % decline that is certainly not justified by the decline in earnings, but by a valuation de-rating.
Finally analysts are positive on the stock with the latest recommendation form HSBC published today putting a 12 Months Price Target at HKD 4.00 – a +58 % appreciation from here – and the best analyst Morning star putting at Target price at HKD 5.60 – a121 % appreciation form here.
This completes our transportation mix in our portfolio with China Southern airlines and our Auto stocks, and the combination of extremely cheap Price to book and the increased activity between ShenZhen aad Guangzhou should be a catalyst for a re-rating of the company.
The following is a summary of the transportation. sector valuations put together a month ago when GSR was trading at 2.75.
New Asset Allocation
As our result or the above transactions the new asset allocation of our portfolio is as follows :
and today’s performance stands at :
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