Cachet's Insight 10/02/2020

Updated: Feb 19, 2020

Market Outlook

Despite the virus outbreak cases continuing to increase, markets resumed a surge towards end of this week (after an initial sell off early in the week) on increasing confidence that China may contain the virus outbreak and sustained global expansion. 10Y UST yield widened 6bps to end 6 Feb at 1.65. Better to keep a close watch on developments of the coronavirus spread and impact on markets, and to add duration risk on expectation of slower growth due to virus spread.

Central banks across SEA signaled supportive policy action to stem the economic blow from the viral outbreak. China combined lower borrowing costs and massive liquidity injections. Thailand and Philippines both cut benchmark interest rates, Singapore signals room for currency easing, and Indonesia promises to keep accommodative policies. Better to close monitor of geopolitical events especially US-China trade progress and Middle east tensions as global geopolitics remain volatile, and to dial down portfolio risks due to worsening coronavirus spread, mainly by reducing longer-dated and /or weaker China holdings.

China official manufacturing PMI fell to 50, the weakest since October. Caixin Services PMI at 51.8, below estimates of 52. US ISM manufacturing PMI came in strong at 50.9. Full impact of virus unlikely captured in figures.

JACI Total return index delivered +0.12% for the week. Some deal activity resumed this week as concerns over coronavirus subside, mainly from IG companies.

IPO market activity likely to be low as both issuers and investors are still assessing market impact from the spread of coronavirus. Cash level raised to reduce portfolio risk and for potential future deployment.

Hot Topic

The 2019 Novel Coronavirus' (2019-nCov) cash flow effect on Macau's gaming operators will be significant as the virus spreads and regional governments' precautionary measures continue, says Fitch Ratings. However, the solid credit profiles of casino operators covered by Fitch should enable them to withstand this pressure. Absent an unprecedented duration, we do not expect the 2019-nCov outbreak to lead to widespread downgrades.

Macau is a special administrative region in southern China and the only place where casino gambling is legal in greater China. Macau's visitation has dropped 80% according to Las Vegas Sands (LVS) since the outbreak started and, effective January 30, China's authorities are restricting visas for travel to Macau and rail transport. Macau's regulators are also restricting ferry and air transport.

During the H1N1 (swine flu) pandemic in Asia, Macau's gaming revenue and visitation declined 17% and 16%, respectively, in June 2009, the first month Macau reported its first case of swine flu. Revenue stabilized sequentially thereafter and started to recover in September 2009. The swine flu was preceded by the effects from the global recession, which makes a separation of attribution more difficult. However, given the regulators' swift action to combat the spread of 2019-nCoV, the results could be more severe than H1N1.

Under a severe scenario, all four US-listed gaming issuers with exposure to Macau have adequate liquidity to withstand the potential FCF effects from reduced visitation. All have access to ample liquidity and have no major maturities in 2020. The four issuers are major debt issuers in the US and include LVS, Wynn Resorts, MGM Resorts International and Melco Resorts & Entertainment inclusive of its Studio City joint venture. Macau represented significant consolidated property-level revenues of approximately 64% for LVS, 72% for Wynn, 22% for MGM, and 88% for Melco for the LTM period ending Sept. 30, 2019.

Assuming first-quarter and second-quarter 2020 revenue from Macau declines by 50% and 25%, respectively, the combined hit to the four operators' cash flow would be $2.0 billion relative to about $11.0 billion of EBITDA and $1.3 billion of FCF Fitch previously forecast under a status quo 2020 scenario. This $2.0 billion cash flow effect scenario considers the operators' expense structure and further assumes 50% of the revenue decline flows down to EBITDA.

The aforementioned operators have ample debt capacity and/or cash to fund the cash impact of the virus within the context of their rating or credit opinion sensitivity thresholds. The four operators have a combined $7.0 billion of excess cash and $7.8 billion revolver availability.

Long lasting effects on Macau's tourism beyond the period of the outbreak are not anticipated. Assuming the outbreak does not last more than two quarters, 2019-nCoV will mainly have a temporary cash flow impact on casino operators. However, should the 2019-nCoV outbreak extend beyond two quarters or cause significantly greater revenue declines, the credit effects could be more profound. Beyond a near-term credit impact, some possible residual effects may include an impact on the regional economy and players trying new venues and illegal channels such as online gaming.

Asia Bond Market

Asia’s bond bankers are being forced to recalibrate after a record $41 billion of issuance in the first few weeks of January. Investment-grade issuers again led dollar deals Thursday as some markets bounce back from the scare Asian stock benchmarks advanced, with Japan, Hong Kong and South Korea rising more than 2%, as China’s announcement that it plans to cut tariff on American imports added to optimism.

Asia’s primary dollar bond market got off to a muted start on Tuesday after Chinese property developer Jiayuan International priced the first deal in a week Monday following the reopening of mainland Chinese financial markets. The impact from the coronavirus is weighing on market sentiment and making it more difficult for Chinese issuers to get out and sell notes.

Since Wednesday, Asia’s primary dollar bond market had its busiest day of sales in about two weeks, with a handful of issuers from around the region marketing deals, as investors put concerns about the coronavirus to the side for a while. Most of the deals in the market Wednesday were for investment-grade offerings, with Kexim offering double-A rated notes; Central China Real Estate was marketing a 364-day note at 7.5% area. Spreads for Asian investment-grade bonds were indicated little changed Wednesday morning, according to traders. Asian equities saw the first back-to-back daily gain since concerns about the coronavirus erupted two weeks ago, though came off their highs late in Wednesday’s session. A handful of issuers sold more than $2b of notes Wednesday, the biggest one-day tally in a fortnight after the Lunar New Year holidays and the coronavirus concerns muted issuance.

Hyundai Capital America

  • $1b 3Y/$500m 5Y/$500m 7Y bonds at +95bps/+122.5bps/+147.5bps vs IPT +120-125bps/+145-150bps/+165-170bps

  • Format: 144A/Reg S without Registration Rights

  • Expected issue ratings: Baa1 (Moody’s)/BBB+ (S&P)

  • Bookrunners: MUFG (B&D), HSBC, JPM, LLOYDS, SMBC, TDSECS


  • $500m 5Y bond at +47.5bps, IPT +70bps area

  • FORMAT: SEC-Registered

  • EXPECTED ISSUE RATINGS: Aa2 (Moody’s)/AA (S&P)/AA- (Fitch)

  • JBRs: BofA Securities, JPMorgan, Morgan Stanley

Central China Real Estate

  • $300m 364-day note at 7%, IPT 7.5% area

  • Format: Regulation S only

  • Expected Issue Rating: Unrated

  • Joint Bookrunners and Joint Lead Managers: AMTD, BNP PARIBAS, BofA Securities, DBS Bank Ltd., Deutsche Bank

CSSC (HK) Shipping

  • $400m 5Y/$400m 10Y at +110bp/+137.5bp, IPT +145bp area/+175bp area

  • Expected issue ratings: A- (S&P)/A (Fitch)

  • Reg S

  • JGCs/JBRs/JLMs: Bank of China (Hong Kong), Barclays, CCB International, DBS Bank

Chart of the week

Retreat of Asian currencies looks to paint a downbeat Friday for regional stocks. The MSCI Asia Pacific Index is headed for its strongest weekly advance in a year, halting two weeks of virus-induced losses. China lowered rates and added liquidity this week to shore up confidence in the economy amid speculation the pandemic will be contained. In the U.S., key equity benchmarks all climbed to fresh record highs.

FX traders seem to be unconvinced, however. The Bloomberg JPMorgan Asia Dollar Index is on course for its third weekly decline, and a further retreat is likely as the Bloomberg Dollar Spot climbed to 2020’s high ahead of the U.S. payrolls data.

Perky techs may still lend support to regional stocks at open, but any gains are likely to fizzle out later in the day as profit takers start to lock in this week’s gains. That will help stocks re-align with regional currencies.

Hot Stock

Tesla shares jump above $900 to record high as analyst says it could be worth over $1 trillion. After six months of rises there has been an even more extraordinary recent surge, with the share price more than doubling since the start of the year and up by more than a third this week.

Even before the results, which marked a second consecutive quarter of profit, sparked this acceleration, Tesla had already overtaken Volkswagen as the world’s second-most valuable car company. There are several reasons why this defies belief. Tesla delivered 367,500 cars last year, a fine achievement for a company that only launched its first mass-market car in 2017 and delivered just 31,655 vehicles half a decade ago. But compare that to Volkswagen, the company it just overtook in market cap. In 2018 that firm set its own record for deliveries -of 10.83m.

Tesla's positive financial results have undoubtedly helped inspire confidence but drill down on the numbers and it’s not all good news. A profit was made, but it was down on the previous quarter. Year-on-year gross profit growth was tiny. Revenue also increased by a tiny amount year on year, just 2pc.

While the cheaper Model 3 is seeing strong sales growth, interest in the more expensive and higher-margin Models S and X is dropping off. It is due to release the Model Y SUV in the spring, and the futuristic-looking Cybertruck next year, which could boost figures again, but it hasn’t released any pre-order numbers for either, so we don’t know by how much. But none of this has stopped the Tesla bulls predicting that the company’s value has much further to grow.

On Friday, New York analyst ARK Investment Management predicted the company's share price could increase to as much as $7,000 a share, up from the $908 shares reached on Tuesday, which would make it worth almost $1.3 trillion, equivalent to Apple and Microsoft, and more than five-fold the value of Toyota, the world’s most valuable car company. The firm, one of the most bullish Tesla analysts, revised its target upwards from $4,000, arguing that Tesla's efficiency and margins would continue to improve.

ARK has set out in great detail the reasoning behind its price targets, and almost none of it is based on Tesla’s financial results. Instead, it has made detailed predictions about the future of its self-driving abilities, the progress for its factories and its market share in electric vehicles.

Confidence has building in part because of Tesla’s success in building the Shanghai Gigafactory ahead of schedule, an impressive achievement not least because it is the first wholly foreign-owned car plant in China. Access to the Chinese market is a huge opportunity for Tesla, and its ability to churn out Model 3 cars on the ground is key to reaching production efficiency, which until now has been a challenge.

Tesla’s chief executive Elon Musk has also laid out plans for car owners to let their cars form part of a self-driving taxi network when not in use, with profits split between the company and the owner.

Like almost all Tesla bulls, ARK’s case is based on a belief in Tesla’s abilities. It predicts a “flywheel” effect created by an autonomous taxi network, which creates capital to be invested in hyper-efficient factories, which then build more money-printing taxis.

Global Indices

  • SSE Composite Index was down 3.38% last week.

  • Hang Seng Index was up 4.15% last week.

  • Dow Jones Industrial Average index was up 3.00% last week.

  • NASDAQ Composite Index was up 4.04% last week.

  • S&P 500 Index was up 3.17% last week.

Analyst Recommendation

  • Cormark Securities gave its price target on Manulife Financial Corp (0945.HK) to HK$181.25 a share and gave the outperform rating.

  • Daiwa Securities gave its price target on Ping An Healthcare and Technology Co Ltd (1833.HK) to HK$75.00 a share and gave the outperform rating.

  • Bernstein gave its price target on Alibaba (BABA.US) to US$270 a share and gave the buy rating.

  • Credit Suisse gave its price target on MercadoLibre Inc (MELI.US) to US$750.00 a share and gave the outperform rating.

  • Industrial Alliance Securities gave its price target on Enbridge Inc (ENB.US) to US$48.96 a share, gave the strong buy rating.

Investment Idea

Interest Rate Note

Asset Allocation

Newly Listed

  • 6813.HK Daikiya Group Holdings Limited (2020/2/14)

  • RVMD.US REVOLUTION Medicines Inc (2020/2/13)

Result Announcement


  • Annual: 3918.HK NagaCorp Ltd

  • Quarter: MELI.US MercadoLibre Inc

  • Quarter: ELY.US Callaway Golf Co

  • Quarter: WTS.US Watts Water Technologies Inc

  • Quarter: DVA.US DaVita Inc


  • Annual: 1833.HK Ping An Healthcare and Technology Co Ltd

  • Quarter: HAS.US Hasbro Inc

  • Quarter: MAS.US Masco Corp

  • Quarter: WU.US Western Union Co/The

  • Quarter: UA.US Under Armour Inc


  • Annual: 6823.HK HKT Trust & HKT Ltd

  • Quarter: MCO.US Moody's Corp

  • Quarter: SLF.US Sun Life Financial Inc

  • Quarter: CSCO.US Cisco Systems Inc

  • Quarter: MGM.US MGM Resorts International


  • Annual: 0945.HK Manulife Financial Corp

  • Annual: 0981.HK Semiconductor Manufacturing International Corp

  • Quarter: BABA.US Alibaba Group Holding Ltd

  • Quarter: AIG.US American International Group Inc

  • Quarter: NVDA.US NVIDIA Corp


  • Annual: 6055.HK China Tobacco International HK Co Ltd

  • Quarter: PPL.US PPL Corp

  • Quarter: YNDX.US Yandex NV

  • Quarter: POR.US Portland General Electric Co

  • Quarter: ENB.US Enbridge Inc

64 views0 comments

Recent Posts

See All