Cachet's Insight 04/05/2020

Market Outlook

As of 29 April, JACI Total return index delivered +0.11% last week. IG continues to lead primary market activity, both from sovereigns and corporates. BoJ cut Japan's growth forecasts for FY2020/2021 to -4.0% from +1.0%. They also announced more easing measures including unlimited government bond purchases and ramping up its capacity to purchase corporate bonds and commercial papers.


China's official manufacturing PMI eased to 50.8 in April (expected 51) from 52 in March, while non-manufacturing PMI rose to 53.2. Industrial profits dropped more than one-third in 1Q20 (-36.7% yoy) amidst a continued fall in external demand for goods.


Investor sentiment improved this week as more countries discussed plans for reopening their economies. While there are some signs of easing in the COVID-19 outbreak, cases reported worldwide continues to climb and now exceed 3.2million and many economies remain in lockdown. 10Y UST yields rose 3bps to 0.63% as of 29 April close. Investors should keep a close watch on developments of the coronavirus spread and oil price collapse, and their impact on market liquidity and issuer fundamentals. Better look for attractive opportunities upon recent spread widening and may selectively add risk, with preference for more liquid positions within the IG segment and shorter dated names.


US GDP shrank an annualized 4.8% in 1Q 20, the slowest since 2008. The Fed left interest rates unchanged this week, and highlighted concerns on longer-term economic damage from Covid-19. Close monitoring of geopolitical events esp. Saudi-Russia oil price war, US-China trade progress and Middle east tensions as global geopolitics remain volatile. Investors may participate selectively as new issuance begins to pick up in the IG space.


After Amazon (AMZN-US) announced that its profit in the first quarter was worse than expected, the stock price plunged 7.6% on Friday. Amazon expects operating income to reach a break-even in the second quarter. Although revenue growth in the first quarter was better than expected, costs have also risen, because Amazon has hired 175,000 more to respond to e-commerce needs for home office and home study Employees.


Amazon CEO Jeff Bezos said that the Covid-19 crisis is showing the adaptability and durability of Amazon's business, which is unprecedented and the most difficult moment. "Under normal circumstances, the company expects to generate more than US $ 4 billion in operating profit in the second quarter, but expects that the money will be used in full or even more on Covid-related expenses to provide customers with products and protect employee safety. He mentioned that Amazon now has a dedicated team dedicated to improving Covid-19 detection capabilities.

Even so, Amazon is still the biggest winner on Wall Street in the 2019 coronavirus disease epidemic, while physical stores and real economy are suffered much. no company has benefited more from the market value of the stock than Amazon. With millions of consumers following the epidemic prevention regulations and staying at home, they no longer go shopping on the street. This change of the economic behavior could eventually hurt the real economy.


Hot Topic

Warren Buffett has been waiting years for stocks to look more attractive. He apparently did not think the first-quarter plunge was that opportunity.


The famed investor’s Berkshire Hathaway Inc. spent the quarter building its massive cash pile to a record $137 billion as the coronavirus slowdown started to grip the U.S. That was up almost $10 billion from the end of 2019, while Buffett spent just a net $3.5 billion buying shares of his and other companies.


Buffett, who will host Berkshire’s annual meeting virtually later Saturday, has largely stayed in the shadows as the pandemic hammered the global economy and stock markets. That’s a contrast to the financial crisis in 2008, when his Omaha-based company dipped into its vast cash reserves to gain lucrative preferred shares and rescue businesses teetering on the edge of collapse. While Berkshire’s operating earnings climbed in the first quarter, Buffett warned of pain from the virus’s fallout.


“As efforts to contain the spread of the Covid-19 pandemic accelerated in the second half of March and continued through April, most of our businesses were negatively affected, with the effects to date ranging from relatively minor to severe,” the company said in a regulatory filing Saturday.


Berkshire’s Class A shares have dropped about 19% this year through Friday’s close, worse than the 12% decline in the S&P 500 over the same time period. Berkshire bought $1.8 billion of stocks on a net basis in the period, and repurchased just $1.7 billion of its own stock, less than it did in the last three months of 2019. The company recently disclosed that it pared back stakes in Delta Air Lines Inc. and Southwest Airlines Co. as airlines have been pummeled by travel restrictions and stay-at-home orders worldwide.


Buffett, Berkshire’s chairman and chief executive officer, has been on the hunt for higher-returning investments such as acquisitions or stock purchases for years, but has struggled amid what he called “sky-high” prices. That has prompted a range of questions about whether he can continue the market-beating run that turned Berkshire into one of the world’s most valuable companies.


The conglomerate’s first-quarter net income plunged to a loss of $49.7 billion, driven by $55.5 billion in unrealized losses in the massive stock portfolio. Gains in the insurance unit’s investing portfolio helped push operating earnings up almost 6% to $5.87 billion.

Berkshire started to see the Covid-19 pandemic affect units including its railroad, BNSF, which reported a 5.2% decrease in volume in the first quarter. Precision Castparts reported lower sales across all of its major markets, partially because of the pandemic and Boeing Co.’s 737 Max issues.

Chart of the Week

Energy stocks closed out April on a strong note amid what was one of the worst periods ever for crude oil. The SPDR S&P Oil & Gas Exploration & Production ETF rallied 65% last month. Its 10-day win streak --the longest since November 2010 -- ended Friday, with a drop of as much as 7.9%. April 20 will go down in oil-market history as the day when the U.S. benchmark price for crude dropped below zero for the first time -- and then kept falling.

“Sector performance has benefited from a broader market move driven by hopes that the global economy will perhaps begin to open up sooner,” Bank of America analysts said in a note to clients. The bank also cited items including the “unprecedented” move in West Texas Intermediate Crude prices along with investor positioning.


Major oil companies posted first-quarter earnings Friday, with Exxon Mobil Corp. showing its first loss in at least 32 years while Chevron Corp. deepened spending cuts amid the economic and industrial devastation wrought by the Covid-19 contagion.


Cautious sentiment is creeping back into the picture as analysts weigh liquidity risk for shale firms. Small-cap driller Oasis Petroleum Inc. saw its borrowing base slashed to $625 million from $1.3 billion last Thursday. Two analysts downgraded their recommendations to sell after the news.


Investment Ideas

Zhongliang (2772.HK) is a Chinese developer and ranked #23 in terms of contracted sales, of RMB152b, in 2019. Mr Yang Jian and families owned 82.94% of Zhongliang, the rest is held by public shareholders.


Ratings: S&P /Moody’s/Fitch: B+stable/B1stable/ B+stable. Local rating is AA+ by United (Lianhe) Ratings.


In terms of focus, Zhongliang is in 1) the Yangtze River Delta region and increasingly, Midwest regions and 2) Tier 3 and Tier 2 cities. It expanded to Tier 4 cities from 2015-2018 but reverted to T2/T3 cities driven by market fundamentals. It typically buys smaller land parcels, typically under RMB500m in value or 120m sqm in GFA, for faster asset turnover. For instance, lead time from land acquisition to project pre-sale is 6-10 months, and construction period is another 18-26 months.


Zhongliang is a newcomer to the capital markets, being listed on HKSE only in July 2019. It obtained current international ratings in Aug 19 and issued first USD bond in Sep 2019.

Contracted sales in 2019 recorded RMB152 b (+50% yoy) and was 17% above target. The ASP was RMB10,300/sqm. The sell through rate rate of 70% and cash collection rate of 90% compared well with industry peers. Despite the Covid-19 impact, Zhongliang expects contracted sales growth to grow 10% to RMB160b in 2020, on the back of RMB260 b worth of saleable resources.


Revenue and margins improved yoy: FY19 revenue recorded RMB56.6 b, +87% yoy from RMB30.2 b recorded in FY18. Such high growth rate mirrored contracted sales growths of 242% in 2017 and 56% in 2018, taking into consideration that contracted sales take 1-2 years to translate into revenue upon delivery of the units to the home buyers.


Gross and net profit margins improved gradually to 23.3% (FY18: 22.9%) and 11.0 % (FY18: 8.0 %) and compared well with the averages of B-rated peers. The management expects GPM to be lower in 2020 given the higher land bank costs overtime.


Liquidity is adequate: Cash balance stood at RMB26.5 b and covered short term debt by 1.2x, a deterioration from FY18’s 1.6x) Zhongliang has sensitized its cash flow with the scenario of zero sales from Feb to April 2020. It expects to have a minimum cash balance of RMB10-15bor even in such scenario.

Leverage and financing:


  • Gearing (net debt/equity) rose to 65.6% from 58% a year ago. Despite, 65.6% is still relatively low and we expect it to further rise to a tolerable range of 70-90% for its B1 rating. The average financing cost is 9.4% which is higher than 7-9% of the B-rated property players on average.


  • Trust loan is 40% of total debt (RMB16 b) as at Dec 19 compared to 58% as at Dec 18, and the management intends to reduce the ratio to 30% by end-2020. Zhongliang’s average trust loans financing cost was relatively high at 12% compared to the <10% of peer developers.


  • Baby steps achieved in establishing other financing channels: Zhongliang obtained an inaugural syndicated loan of USD20m from Hang Seng bank in March 2020 as well as a RMB2b ABS quota onshore in April. While the amounts were small, we expect the company to build on these new financing platforms, providing them with diversified sources of funding going forward

Zhongliang’s financial metrics are better than those of Zhenro and Evergrande:

  • Compared with these two peers of similar ratings, Zhongliang fared better in terms of margins and debt service capability in FY19. However, debt structure could be better as short-term debt portion, mostly trust loans, is still high at 54% of total debt.

Conclusion and Recommendation

  • In FY19, Zhongliang’s revenue recorded RMB56.6 b, +87% yoy from RMB30.2 b recorded in FY18. Such high growth rate mirrored the contracted sales growths of 242% in 2017 and 56% in 2018, Gross and net profit margins improved gradually to 23.3% (FY18: 22.9%) and 11.0 % (FY18: 8.0 %) and compared well with the averages of B-rated peers. Net debt/equity rose to 65.6% from 58% a year ago. Despite, 65.6% is still relatively low and we expect it to further rise to a tolerable range of 70-90% for its B1 rating.


  • The company managed to secure USD20m syndicated loans and RMB2 b onshore ABS quota in Mar-April 2020. While the amounts were small, we expect the company to build on these new financing platforms, providing them with diversified sources of funding going forward.


  • When stacked against similarly rated peers, Zhongliang’s financial metrics are better than those of Zhenro and Evergrande, specifically margins and debt coverage ratios. However, debt structure could be better as the portion of short-term debt (most of it trust loans) is still high at 54% of total debt. Despite the overall improvement, we would like to see such improvement on a sustained basis as Zhongliang has a relatively short capital market track record. We maintain the credit direction at Neutral.


Relative Value:

  • Despite the stronger ratings, Zhongliang trades wider than most B-rated issues that we cover; and at similar levels as Evergrande’s. We think Zhongliang has lesser idiosyncratic risks than Evergrande (uncertainties about A-share listing, cash burn on non-property businesses). Given the improvement in performance, we think Zhongliang bonds are trading at attractive levels of 13-15%.

*Please noted that product prices are indicative only subject to refresh before trade, the prices change subject to market conditions.

Downside risks: tighter-then-expected liquidity conditions affecting its business, aggressive expansion slowing the deleveraging process, slower-than-expected expansion to secure/improve its current market position.

Asset Allocation


Asia Bond Market

Two borrowers -- Shuifa Group and Nan Hai Corp. -- sold dollar bonds to investors last Wednesday, but credit markets were otherwise quiet with Japan closed for a public holiday. Wharf REIC attracted over $7.6b orders for $750m Bond. Last Tuesday, Hong Kong developer Wharf REIC price a five-year note after the Republic of the Philippines sold its dual-tranche sovereign dollar bond. The Southeast Asian nation attracted over $9 billion of orders for its dual-tranche $2.35 billion offering as governments seek to shield their economies from the coronavirus pandemic. The nation’s 25Y bonds rose as much as 1.75 points in secondary trading on Tuesday morning, amid a broader market that was moving sideways, according to a trader. Korea East-West got $3.85b orders for a $500m bond sold earlier this week. China Dollar Bonds Worth $51.9 Billion Are Yielding Above 15%. Tianqi lithium warns of risks due to liquidity pressure.

Shuifa Group

  • PRICED: $350m 3Y Bond at 4.3%

  • IPT was 4.6% area.

  • Issuer: Shuifa International Holdings (BVI) Co., Ltd

  • Guarantor: Shuifa Group Co., Ltd.

  • Guarantor Rating: Baa3 Stable (Moody’s)

  • Expected Issue Rating: Baa3 (Moody’s)

  • Format: Reg S only, Category 1, Registered form

  • Status: Fixed Rate Senior Unsecured Bonds

  • Settlement Date: May 8, 2020 (T+5)

  • Use of Proceeds: Project construction and refinancing of the Group’s existing indebtedness in the PRC

  • Change of Control Put: 101%

  • Details: SEHK Listing; US$200k/US$1k Denoms; English Law

  • Clearing: Euroclear / Clearstream

  • Joint Global Coordinators, Joint Lead Managers and Joint Bookrunners: Guotai Junan International (B&D), China International Capital Corporation, Zhongtai International, Bank of China and Standard Chartered Bank

  • Joint Lead Managers and Joint Bookrunners: ICBC International, SPDB International, China Securities International, ABC International, China Everbright Bank Hong Kong Branch and China Minsheng Banking Corp., Ltd., Hong Kong Branch

Nan Hai Corp

  • PRICED: $500m 2NC1 Bond at 3.5%

  • Final guidance was 3.5% (the number); IPT was at 4% area.

  • Issuer: Amber Treasure Ventures Limited

  • Guarantor: Nan Hai Corporation Limited (0680.HK)

  • SBLC Provider: China CITIC Bank Corporation Limited, Shenzhen Branch

  • SBLC Provider Ratings: Baa2 Stable/ BBB+ Stable/ BBB Stable (Moody’s/S&P/Fitch)

  • Expected Notes Rating: BBB+ (S&P)

  • Format: Regulation S only, Registered, Category 1

  • Status: Fixed Rate, Credit enhanced senior unsecured

  • Size: US$500m (capped)

  • Tenor: 2NC1

  • Settlement Date: May 8, 2020 (T+5)

  • Maturity Date: May 8, 2022

  • Details: HKEX Listing, US$ 200K/US$1K Denoms, Hong Kong Law

  • Use of Proceeds: Repayment of mid- to long-term offshore indebtedness due within one year

  • Sole Global Coordinator, Sole Bookrunner and Sole Lead Manager: China CITIC Bank International (B&D)

IPO

  • 1936.HK Ritamix Global Limited (2020/04/24 - 2020/05/04)

  • 8496.HK Singapore Food Holdings Limited (2020/04/29 - 2020/05/06)

Newly Listed

  • 1376.HK Raffles Interior Limited (2020/05/07)


Result Announcement

2020/05/04

  • Quarter: SHAK.US Shake Shack Inc

  • Quarter: SRE.US Sempra Energy

  • Quarter: AIG.US American International Group Inc

  • Quarter: PEG.US Public Service Enterprise Group Inc

  • Quarter: WEC.US WEC Energy Group Inc

2020/05/05

  • Quarter: 0880.HK SJM Holdings Ltd

  • Quarter: TRI.US Thomson Reuters Corp

  • Quarter: MELI.US MercadoLibre Inc

  • Quarter: ATVI.US Activision Blizzard Inc

  • Quarter: DIS.US Walt Disney Co/The

2020/05/06

  • Quarter: 0751.HK Skyworth Group Ltd

  • Quarter: AEP.US American Electric Power Co Inc

  • Quarter: GSX.US GSX Techedu Inc

  • Quarter: PYPL.US PayPal Holdings Inc

  • Quarter: GOLD.US Barrick Gold Corp

2020/05/07

  • Quarter: 0388.HK Hong Kong Exchanges & Clearing Ltd

  • Quarter: GM.US General Motors Co

  • Quarter: WEN.US Wendy's Co/The

  • Quarter: DLR.US Digital Realty Trust Inc

  • Quarter: UBER.US Uber Technologies Inc

2020/05/08

  • Quarter: AVA.US Avista Corp

  • Quarter: ABC.US AmerisourceBergen Corp

  • Quarter: LAMR.US Lamar Advertising Co

  • Quarter: XEL.US Xcel Energy Inc

  • Quarter: THS.US TreeHouse Foods Inc

Analyst Recommendation

  • Daiwa Securities gave its price target on China Merchants Bank Co Ltd (3968.HK) to HK$42.00 a share and gave the buy rating.

  • Nomura gave its price target on Anhui Conch Cement Co Ltd (0914.HK) to HK$61.20 a share and gave the buy rating.

  • Deutsche Bank gave its price target on Altria Group Inc (MO.US) to US$51.00 a share and gave the buy rating.

  • First Sheunghai gave its price target on TAL Education Group (TAL.US) to US$60.00 a share and gave the buy rating.

  • UOB Kay Hian gave its price target on Kweichow Moutai Co Ltd (600519.CH) to RMB$1399.00 a share and gave the buy rating.

  • Citic Securities gave its price target on Jiangsu Hengshun Vinegar Industry Co Ltd (600305.CH) to RMB$23.00 a share and gave the buy rating.

Global Indices:

  • SSE Composite Index was up 0.50% last week.

  • Hang Seng Index was up 3.41% last week.

  • Dow Jones Industrial Average index was down 0.22% last week.

  • NASDAQ Composite Index was down 0.34% last week.

  • S&P 500 Index was down 0.21% last week.

Cachet Group

28/F YF Life Tower,
33 Lockhart Road, Wanchai,

Hong Kong

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