Cachet's Insight 06/04/2020

Market Outlook

As of 2 April, JACI Total return index delivered +0.42% for the week. One new IG issuance last week and this is the first primary deal post the March crisis. There might be further pick up in primary activities in the coming weeks. US new jobless claims surpassed last week's 3.3m to reach a new historic high of 6.6m this week. This was far greater than expected. China's March PMI data surprised to the upside by jumping back to expansionary territory following Feb's record low. Official PMI was at 52 and 52.3 for manufacturing and non-manufacturing respectively, while Caixin China manufacturing PMI came in at 50.1. However, PMI figures across the US and Europe declined. Limit IPO market activity in the time being.

Despite signs of market stabilization post the recent sell-off, sentiments remain fragile as the COVID-19 situation continues to worsen. The number of cases reported worldwide now exceed 1million, and many economies remain in lockdown. 10Y UST yields tightened by 24bps this week to 0.61% as of 3 April close. Investors should keep a close to watch on developments of the coronavirus spread and oil price collapse, and their impact on market liquidity and issuer fundamentals, and maintain defensive posture, focus on liquidity through UST and cash.

President Trump claimed he expects Russia and Saudi Arabia to cut oil production by 10mil barrels a day, triggering an initial jump in oil prices last Thursday. Investor should closely monitor of geopolitical events especially Saudi-Russia oil price war, US-China trade progress and Middle east tensions as global geopolitics remain volatile. Better on a look out for attractive opportunities upon recent spread widening and may selectively add risk

Hot Topic

A private gauge of China's manufacturing activity in March rebounded from a record low, in line with official data suggesting early signs of economic recovery amid the coronavirus pandemic.

The Caixin China manufacturing purchasing managers index, which is tilted toward small, private manufacturers, rose to 50.1 in March from 40.3 in February, Caixin Media Co. and research firm Markit said last Wednesday. The March result is just above the 50 mark, which separates contraction from expansion.

Output expanded due to easing travel restrictions, but new orders declined, Caixin said, adding new export orders declined notably in March as the virus spreads quickly outside China.

The manufacturing sector faced dual challenges in March as "business resumption was insufficient; and worsening external demand and soft domestic consumer demand restricted production from expanding further," said Zhong Zhengsheng, an economist at CEBM Group, in a statement accompanying the data.

Meanwhile, employment data signaled a further reduction in headcount, though the rate of decline eased since February, Caixin said, citing a combination of voluntary leavers and employers' efforts to cut costs.

China's official manufacturing PMI, which focuses more on large, state-owned firms, jumped to 52.0 in March from a record low of 35.7 in February, the National Bureau of Statistics said last Tuesday. The official survey of manufacturers has a much larger sample than the private one.

Chart of the week

Despite giving up some of last week’s gains, whether the push higher in stocks from last Tuesday signals the start of a bear-market rally remains in play - that will depend on which level the S&P 500 hits first: the post-peak low at 2,237, or the all-time high at 3,386.

Trough to peak, we rallied 18% in three days last week -- violent, but not unprecedented. In October 1929, during the first bear market in the S&P 500’s history, prices jumped 18% in two days, and in 1932, also in two days, they jumped 16% before retracing to set new lows. Nor is it large by historic standards. There have been 16 bigger bounces contained in overall downtrends. The biggest of all, in 1938, saw prices rise 62% in 223 days before peaking and returning to extend the lows.

Which is to say, the latest relief rally (previous caveat applies) feels breathless while we’re in it but hasn’t yet troubled the history books. And for fun, here’s a look at the bear-market rallies greater than 15% in the S&P 500 since 1927 in full. It seems the bear market is not over yet.

Hot Stock

China Evergrande (3333.HK) Management unveiled a three-year plan on “Growing Sales, Controlled Scale & Reduced Leverage”. Chairman Hui Ka Yan emphasized that Evergrande is determined to its new strategy as follows:

  1. Growing sales – eyes RMB1trn by 2022 after the RMB650bn target in 2020 (but aims for RMB800bn internally), backed by abundant landbank (293mm sqm; 67% in tier 1/2 cities) and its online sales channels

  2. Controlled scale – take down its landbank scale (293mm sqm) by avg 30mm sqm a year (total 90mm sqm) to c.200mm sqm by 2022; and

  3. Reduced leverage – reduce debt scale by RMB150bn a year to c.RMB 400bn by 2022 on accelerated sales (80%+ cash collection from RMB800bn sales, i.e. RMB640bn cash) and paced-down land acquisition (60mm sqm a year) and deleverage (est. 30% net gearing by 2022 if successful). The company targets to lower RMB200bn debt in 2020.

Evergrande’s weak FY19 results were in line with expectations given the company had earlier issued a profit warning. Meanwhile, we believe its new three year plan is aggressive as 2020 is unlikely to be a market where sell-through rates are very strong , and Evergrande's lower average sell price means it is focused in low-tier cities, where sell-through rate is slower. If in 2020 Evergrande slows land banking, its 2021 contracted sales may drop and its margin may fall. We believe investors will need more clarity on earnings growth and track record on de-leveraging, as the company had similar targets in 2017 though did not fulfil in 2018 and 2019 with strategy shifts.

Year-to-date, Evergrande has issued issued USD6.0bn bonds and redeemed USD1.6bn bonds in the offshore market, while it has issued RMB4.5bn bonds and redeemed RMB4.5bn bonds in the onshore market. For its refinancing needs over the rest of 2020, it has USD1.8bn bonds to mature in the offshore market while it has RMB12.6bn bonds to mature and RMB8.2bn bonds to become puttable in the onshore market. We believe its refinancing risks for the rest of the year are manageable.

While the EVERRE and TIANHL curves offer attractive yield pickup over other solid B bonds in the China Property HY space, we would recommend clients to stay at the short end of the curves for now.

Investment Ideas

With global equity indices down 20-30% from their recent highs at the start of the year, we present FCN on Global Indices with a strike of 64% to 68% levels and 60% Knock-in - providing a further 40% downside buffer from current levels.

5 year charts showing 68% strike levels (red line) and 60% KI level (green line) as a guidance.

S&P 500 (SPX)

Eurostoxx 50 (SX5E)

Nikkei 225 (NKY)

Hang Seng Index (HSI)

Hang Seng China Enterprises Index (HSCEI)

Asset Allocation

Asia Bond Market

Dollar bond issuance in Asia surged to $2b this week as two investment-grade borrowers AIA Group and Baidu Inc. each sold $1b of notes. Chinese internet search giant Baidu Inc. breathed some life into Asia’s primary dollar bond market Wednesday with a two-part debt sale. Baidu sold $1b across five- and 10-year tranches at +275bps and +285bps, respectively, after IPT in the area of +312bps and +325bps of BofA Securities. Baidu priced $1 billion dual-trance debt offering overnight, one of a handful of companies braving market turmoil in recent weeks. Total sales last week jumped by 285% from $0.519b. China Evergrande Group unveiled a three-year plan Tuesday that outlined an aggressive strategy of cutting total debt load by 50%, boosting sales and trimming its land bank. Car Inc.’s dollar bonds and shares posted record declines Friday morning amid concern over the firm’s ties with Luckin Coffee Inc., which is facing an accounting problem. Average spreads on Asian IG dollar bonds have widened about 10 bps this week as of Thursday, while junk bond spreads widened by 36 bps during the same period.


  • 1942.HK MOG Holdings Limited (2020/03/28 - 04/06)

  • 8616.HK Sunray Engineering Group Limited (2020/03/31 - 04/07)

  • 8620.HK Asia-express Logistics Holdings Limited (2020/03/31 - 04/09)

Global Indices

  • SSE Composite Index was down 0.30% last week.

  • Hang Seng Index was down 1.06% last week.

  • Dow Jones Industrial Average index was down 2.70% last week.

  • NASDAQ Composite Index was down 1.72% last week.

  • S&P 500 Index was down 2.08% last week.

Analyst Recommendation

  1. Huatai Research gave its price target on Xiabuxiabu Catering Management China Holdings Co Ltd (0520.HK) to HK$10.80 a share and gave the buy rating.

  2. MorningStar gave its price target on Delta Air Lines Inc (DAL.US) to US$50.00 a share and gave the buy rating.

  3. HSBC gave its price target on Skshu Paint Co Ltd (603737.CH) to RMB$131.10 a share and gave the buy rating.

Result Announcement


  • Annual: 8353.HK Anacle Systems Ltd

  • Quarter: 8611.HK Mindtell Technology Ltd

  • Quarter: MAG.US MAG Silver Corp

  • Quarter: SMLP.US Summit Midstream Partners LP


  • Annual: 0520.HK Xiabuxiabu Catering Management China Holdings Co Ltd

  • Quarter: 8446.HK ITP Holdings

  • Quarter: LEVI.US Levi Strauss & Co

  • Quarter: VIR.US Vir Biotechnology Inc

  • Quarter: PLAY.US Dave & Buster's Entertainment Inc


  • Annual: 8383.HK Linocraft Holdings Ltd

  • Annual: 2000.HK SIM Technology Group Ltd

  • Annual: 002007.CH Hualan Biological Engineering Inc

  • Quarter: DAL.US Delta Air Lines Inc

  • Quarter: PSMT.US PriceSmart Inc


  • Interim:6288.HK Fast Retailing Co Ltd

  • Annual: 2799.HK China Huarong Asset Management Co Ltd

  • Annual: 603186.CH Zhejiang Wazam New Materials Co Ltd

  • Quarter: RAD.US Rite Aid Corp

  • Quarter: SLP.US Simulations Plus Inc


  • Annual: 603737.CH Skshu Paint Co Ltd

  • Annual: 603637.CH Zhenhai Petrochemical Engineering Co Ltd

  • Annual: 603363.CH Fujian Aonong Biological Technology Group Inc Ltd

  • Annual: 600775.CH Nanjing Panda Electronics Co Ltd

  • Quarter: SGRP.US SPAR Group Inc

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