Cachet's Insight 08/06/2020

Market Outlook

Investor sentiment improved last week as more economies begin to recover after reopening. However, US-China tensions continued to worsen, and economic data remains weak. While there are some signs of easing in the COVID-19 outbreak, second waves are emerging in several cities. Cases reported worldwide now exceed 6.6million. 10Y UST yields widened 13 bps to 0.82% as of 4 June 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. Investors may look out for attractive opportunities upon recent spread widening and may selectively add risk.

The ECB announced to expand its emergency bond-buying program by 600b euros and extend their duration until at least end June 2021, a move that is larger than expected. Germany also approved a larger-than-expected stimulus package of EUR 130billion.

Investors should closely monitor the geopolitical events especially Saudi-Russia oil price war, US-China trade progress and Middle east tensions as global geopolitics remain volatile. As new issuance begins to pick up in the IG and HY space, investors may participate selectively.

On economic data, US May manufacturing PMI came below expectations at 43.1, though it may indicate some stabilization from its lows of 41.5 in April. China's official manufacturing PMI rose for a 3rd consecutive month to 50.6, though slightly below expectations (51.0). Its official non-manufacturing PMI rose to 53.6 in May, up from 53.2 in the previous month. Investors may reduce China exposure on heightened US-China tensions.

US China tensions rose further as China told major state-run agricultural companies to stop imports of some agricultural goods from the US, putting the Phase one trade deal in jeopardy. The Trump administration is also suspending passenger flights to the US by Chinese airlines, in retaliation for China barring US carriers from re-entering China.

The May jobs report showed an unexpected rise in non-farm payrolls across the economy and a drop in the unemployment rate from April, averting what economists expected would be a rise in the jobless rate to the highest level since the Great Depression amid the coronavirus pandemic.

The Labor Department released the May jobs report Friday at 8:30 a.m. ET. Here were the main results from the report, compared to Bloomberg consensus data: Change in non-farm payrolls: +2.509 million vs. -7.5 million expected, Unemployment rate: 13.3% vs. 19.0% expected.

However, someone pointed out that the figures are published with footnotes at the bottom indicating that there are major "errors", indicating that the unemployment rate is likely to be higher than the announced 13.3%.

China’s No. 2 online retailer Inc. (JD.US)’s Hong Kong share offering of as much as $4.1 billion is multiple times oversubscribed by institutional investors, according to people with knowledge of the matter. People asked not to be identified as the information is private. JD is offering 133 million new shares at a maximum price of HK$236 (UD$30.45) each. A representative for the company declined to comment. Pricing is slated for June 11 while trading is expected to begin on June 18. Bank of America Corp., UBS Group AG and CLSA Ltd. are joint sponsors of JD’s Hong Kong share sale.

Gold price sank to 4-week lows at $1681 per ounce in London trade last Friday, losing over $45 for last week as major government bond prices also fell, pushing interest rates higher, following a shock jump in the US government's employment estimate. Gold’s reputation as the ultimate safe haven asset took a real beating lately. Yet, that might be about to change. With central banks unleashing a tsunami of quantitative easing (QE) at a time when fear is running rampant in the markets and government debts are about to explode, this seems like the perfect cocktail that could push gold back to record highs.

Hot Stock

Evergrande could be running out of ammunition to support its valuation, as a minimum free-float requirement handcuffs its ability to repurchase its shares. The developer's May buyback spree is at odds with its priority of paring debt amid its thin cash coverage, looming maturities, and lofty leverage.

Evergrande's ability to sustain its equity valuation via share repurchases has been limited by May's buybacks, which amounted to HK$1.7 billion on 105 million shares, or 0.8% of issued capital. The developer got approval to repurchase up to 10% of its shares outstanding following its annual general meeting in June 2019, yet securities regulations require it to maintain a minimum public float of 22.04%, keeping buybacks on a short leash. Evergrande's free float was 23.17% as of end-2019, as Chairman Hui Ka Yan holds the remaining 76.83%.

Constraints on Evergrande's stock buybacks suggest the valuation boost they deliver could be fleeting. Near-term profitability concerns following 2H19's margin plunge, the impact of deleveraging on its long-term growth prospects, and cash burn from its push into electric vehicles may stifle investor sentiment.

Evergrande's stock buyback spree in May is at odds with its priority to deleverage, as the developer has pledged to halve its debt burden to less than 400 billion yuan in 2022. Cancelled share repurchases threaten to boost net debt as a percentage of equity, which at 159% was the third highest of Chinese developers we track.

Hot Bond

Seazen just issued this new FUTLAN 6.45 06/11/22, trading in secondary now. Yield is attractive for short term 2 years.

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

Bond Funds Comparison

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

UBS Asian High Yield - P- DIST

  1. Mainly invest in high-yield corporate bonds in Asia (non-investment grade Asian sovereign, semi-sovereign and corporate bonds), allowing fund managers to invest up to 20% of their positions in opportunistic local currency debt bonds.

  2. YTD income -3.62%, 2019 income 14.10%, annualized return rate 2.78% in the past 3 years.

  3. Annualized dividend pay-out ratio reaches 4.8%.

Merian Financial Coco F USD Merian

  1. Mainly invest in financial emergency convertible bonds of banks or insurance companies in the banking industry, including investment grade and non-investment grade, through interest income and capital appreciation to achieve the fund's return target.

  2. YTD earnings -3.43%, 2019 earnings 22.97%

  3. Annualized dividend payout ratio reaches 6.02%

Schroder Global Credit Income A – Distribution

  1. Global government and corporate bonds, mainly invested in fixed coupon or floating interest, have a fixed 5% dividend pay-out rate, and have some flexibility in the investment of bonds and fixed income securities

  2. YTD earnings -0.77%, 2019 earnings 11.26%

  3. Annualized dividend pay-out ratio reaches 5.07%

Investment Ideas

2020 carries on its impressive path of destruction with large scale riots breaking out in major US cities, virus situation out of control in South America and India and an economy in shambles in Europe. Having been the first country to face the virus outbreak and despite the unstable situation it faces in Hong Kong, China is well on path to recovery. One key figure that came out over the weekend is the Manufacturing PMI reading for April at 50.6 (below estimate of 51.1 but above 50, which indicates an expansion). This bodes well for the property market in China, which also posted the first monthly gain since 2019 in April (+8.9%), although YoY figures still have not fully recovered. Looking at property would allow to benefit from the recovery in China, while providing some level of immunity to volatile foreign news flow.

Today we provide a route to market on select China Property companies with decent indicative yields via a BEN payoff with an out of the money strike (suitable for range bound to bullish view).

Source: Bloomberg 03 Jun 2020

With a buffer of 5.00% on strike and yielding an 8.7% flat coupon if maturity conditions are met in 3 months or 18.20% flat coupon if maturity conditions are met in 6 months, respectively. An 8.7% flat coupon for 3 months is equivalent to 34.8% p.a. returns. An 18.20% flat coupon for 6 months is equivalent to 36.40% p.a. returns.

Product: Bonus Enhance Note

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

Payoff Mechanism:

  • At maturity, if the worst of underlying closes at or above the strike level, Investors receive 100% of Investors nominal, plus the higher of the bonus (flat) coupon or the upside performance of the worst of underlying from the initial level.

  • Otherwise, Investors receive delivery of the worst of underlying at the strike level.




Source: Bloomberg, 03 June 2020

Asset Allocation

Asia Bond Market

Asian dollar-bond sales dropped more than 50% last week to $5.6 billion, according to data compiled by Bloomberg. Volumes declined despite a greater number of issuers as there was no jumbo deal such as Tencent’s $6 billion offering. Casino operator Sands China’s $1.5 billion, dual-part offering was the biggest last week, followed by a $750 million note sold by Singapore Telecommunications. Thirteen borrowers tapped the market, including three junk-rated Chinese property developers: Kaisa Group Holdings, Zhenro Properties Group and Seazen Group. Asia dollar bonds headed for a sixth straight week of declines, the longest such drop since October 2017, a Bloomberg Barclays gauge indicated. Among the offerings this week, Thailand’s biggest oil driller PTT Exploration and Production’s $500 million bond received more than $7.4 billion in orders. Utility Korea Electric Power started investor calls from June 4 for a green bond, adding to the region’s upcoming dollar offerings.

Central China Real Estate Limited (0832.HK)

  • SUBSIDIARY GUARANTORS: Certain of the Company’s Restricted Subsidiaries outside the PRC

  • SECURITY: Share pledges from certain Subsidiary Guarantors

  • ISSUER RATINGS: Ba3 Stable (Moody’s) / B+ Stable (S&P) / BB- Stable (Fitch)


  • FORMAT: Reg S only, Category 1, Registered Form

  • STATUS: Fixed Rate Senior Notes

  • SIZE: US$ Benchmark

  • TENOR: 3.2NC2.2


  • SETTLEMENT DATE: June 15th, 2020 (T+5)

  • FIRST COUPON PAYMENT DATE: February 27th,2021

  • MATURITY DATE: August 27th, 2023

  • USE OF PROCEEDS: To refinance the existing medium to long term indebtedness, which will become due within one year

  • COVENANTS: Customary high-yield Covenants

  • TERMS: SGX-ST listing, US$200k/US$1k denoms, New York Law

  • CLEARING: Euroclear and Clearstream

  • JBRs and JLMs: BNP PARIBAS, BofA Securities, China CITIC Bank International, Citigroup, Credit Suisse, Haitong International, Morgan Stanley, Standard Chartered Bank, B&D Haitong International


Greenland Global Investment (600606.CH)

  • Guarantor: Greenland Holding Group Co. Ltd

  • CORPORATE RATINGS: Ba1 by Moody’s (Stable) / BB by S&P (Positive) / BB- by Fitch (Stable)


  • FORMAT:  Reg S Only, Registered, Category 1

  • STATUS: Senior unsecured notes, drawdown off the Issuer’s US$8bn Guaranteed MTN Programme

  • CURRENCY & SIZE:   US$ Benchmark

  • TENOR: 2.5NP1.5

  • SETTLEMENT DATE:  16 June 2020 (T+6)

  • MATURITY DATE: 16 December 2022

  • INVESTOR PUT OPTION:   At 100.0%, puttable on December 16, 2021

  • PRICE GUIDANCE: 7.00% Area

  • USE OF PROCEEDS: Offshore refinance indebtedness and general corporate purposes

  • LISTING: Hong Kong Stock Exchange

  • CLEARING: Euroclear/Clearstream

  • DENOMINATION: US$200,000 and integral multiples of US$1,000 in excess thereof

  • GOVERNING LAW: English Law (except for the Deed of Guarantee which is governed by Hong Kong Law)

  • CHANGE OF CONTROL: Change of control put at 101%

  • JGCs, JBRs & JLMs: BOC International (B&D), Haitong International, Shenwan Hongyuan HK

  • JBRs & JLMs: CLSA, Guotai Junan International

Newly Listed

  • 6812.HK Winson Holdings Hong Kong Limited (2020/06/11)

  • 9999.HK NetEase, Inc. (2020/06/11)

Result Announcement


  • Annual: 0113.HK Dickson Concepts International Ltd

  • Quarter: ODC.US Oil-Dri Corp of America

  • Quarter: THO.US Thor Industries Inc


  • Quarter: RENN.US Renren Inc

  • Quarter: CHWY.US Chewy Inc

  • Quarter: HDS.US HD Supply Holdings Inc


  • Quarter: DNK.US Phoenix Tree Holdings Ltd

  • Quarter: MNDO.US Mind CTI Ltd


  • Annual: 1929.HK Chow Tai Fook Jewelry Group Ltd

  • Quarter: LULU.US Lululemon Athletica Inc

  • Quarter: ADBE.US Adobe Inc


  • Quarter: 2858.HK Yixin Group Ltd

Analyst Recommendation

  1. Yuanta Securities gave its price target on Chow Tai Fook Jewelry Group Ltd (1929.HK) to HK$7.40 a share and gave the buy rating.

  2. Jefferies gave its price target on Adobe Inc (ADBE.US) to US$450.00 a share and gave the buy rating.

  3. Morningstar gave its price target on HD Supply Holdings Inc (HDS.US) to US$46.00 a share and gave the buy rating.

Global Indices

  • SSE Composite Index was up 2.75% last week.

  • Hang Seng Index was up 7.88% last week.

  • Dow Jones Industrial Average index was up 6.81% last week.

  • NASDAQ Composite Index was up 3.42% last week.

  • S&P 500 Index was up 4.91% last week.

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