Cachet's Insight 17/02/2020
Updated: Feb 19
JACI Total return index delivered +0.39% for the week. Active primary market with deals flowing from both IG and HY space and strong book building activity.
The Fed is closely monitoring the impact of the COVID-19 outbreak on the global economy but stopped short of suggesting any rate cuts or change of baseline outlook for the US. US non-farm payrolls for January also came in better than expected.
China surprised markets by adding almost 15,000 new cases of COVID-19 on 13 Feb due to a revised methodology of counting infections, sending total confirmed cases over 60,000. This hit investor sentiment as markets previously thought new cases appeared to be peaking. 10Y UST yields tightened 4bps to 1.61%. Investors should keep a close watch on developments of the coronavirus spread and impact on markets and maintain current portfolio duration.
Besides, as part of the Phase one deal with the US, China last week announced to halve tariffs on US$75bn of US products beginning 14 Feb, suggesting that China remains committed to the deal even while dealing with COVID-19 outbreak. Geopolitical events esp. US-China trade progress and Middle east tensions as global geopolitics remain volatile. After cut longer dated and /or weaker China holdings earlier, investors should monitor closely and maintain current exposure to China for now while monitoring market liquidity and issuer fundamentals as the situation develops
During the past week, a number of cities including Shanghai, Tianjin, Anhui, Wuxi, Xian, Nanchang, Zhongshan, and Hangzhou have rolled out supportive policies for developers, aiming at relieving liquidity pressure for developers. Such measures include: (1) grace period/adoption of installment payments for land premium; (2) lower deposit ratio for land tenders; (3) grace period for developer loan repayment; (4) more favorable pre-sale conditions; and (5) grace period for project delivery. We have also seen a number of issuers (Central China, Hopson, Kaisa, Zhongliang) come to the market with 364-day issuances over the past 2 weeks.
The recent round of easing measures by the various local governments is credit positive for the sector and we expect more cities to follow, as the health of developers is crucial for local governments given the financial system's large exposure to property and the revenue stream reliance from land sales. We also believe there could also be further relaxation in policies on developers' financing, e.g. onshore and offshore bond quota, trust financing.
We also expect more developers will come to the market with 364-day issuances to enhance their liquidity cushion as their presale activities are largely under suspension for the time being due to the coronavirus situation. The 364-day issues have been well received by the market due to strong technical, therefore we don’t anticipate much spread widening due to the potential increase in supply.
Please see below for the short-dated bonds within 3 years in the China Property top picks.
Asia Bond Market
Deal flow in Asia’s primary dollar bond market was steady on Monday, deal tempo continued as risk assets rallied despite concerns about the new coronavirus. Chinese companies are flocking to issue new bonds in the name of fighting coronavirus, to gain from the nation’s policy easing to contain the public health crisis. Chinese property developer Zhongliang Holdings sold a debt offering. Agricultural Development Bank and China Zhengtong marketed taps while China Communications Construction and S. F. Holding plan roadshows. CICC’s New Dollar Bond Spreads Tighten in Secondary Market.
Goldman Sachs is forecasting 3% Asia HY corporate default rate in 2020 and sees “no reasons to shift that for the viral outbreak” given its expectation for China’s economy to rebound after 1Q. China’s Stressed Borrowers Face Wall of Debt Coming Due in March. Fitch believed Shandong Private Firms Face High Default Risks in 2020, Moody expected the
liquidity at China HY Industrials Reaches Worst-Ever.
$250m 364-day bond at 9%, final guidance at 9%
Expected issue rating: Unrated
Reg S registered form, Cat 1
JGCs, JBRs and JLMs: Standard Chartered Bank (B&D), CCB International, Credit Suisse, Guotai Junan International, UBS
$400m 364-day bond at 6.75%; FPG 6.75%, IPT was 7.125% area
Expected issue ratings: Unrated
Reg S, Registered form, Cat 1
JGCs/JBRs/JLMs: Credit Suisse, Deutsche Bank (B&D)
$700m 10Y bond at +137.5bp; FPG +140 (+/-2.5bp) area, IPT was +170bp area
Expected issue ratings: A3 / A- / A- (Moody’s / S&P / Fitch)
Reg S (Cat 1), Registered form
JGCs/JBRs/JLMs: Bank of China (Hong Kong), DBS Bank Ltd., HSBC, ICBC International
China Comms Construction
$1b PNC5/$500m PNC7 at 3.425%/3.65%, IPT 3.7%/4% area
Expected issue ratings: Baa1 (Moody’s)
Reg S (Cat 1), Registered form
JGCs/JLMs/JBRs: Credit Suisse, HSBC (B&D)
Chart of the week
China Developers' Virus-Stricken Land Banks to Hit Sales, Cash Contracted sales and cash flow of Yuexiu, Logan, Greentown and Agile should be most at risk of the virus outbreak given their land bank exposure to the provinces with the most infections, where local governments contemplate city lockdowns and travel restrictions. Sunac, Longfor, R&F and COLI's land bank are the least exposed.
Yuexiu, Logan, Greentown, Agile's Sales are at Biggest Risk. Land bank exposure to Hubei, Guangdong and Zhejiang, the provinces with the highest numbers of infections, should put Yuexiu and Logan's contracted sales at the biggest risk from the coronavirus outbreak. The three provinces made up 78% and 72% of Yuexiu and Logan's land bank respectively, followed by over 40% for Greentown, Agile and KWG, vs. a peer average of 31%. Diversified land bank positioning means R&F, Sunac and Longfor should be more immune, with exposure limited to 16%, while the ratios are also low for Yuzhou, Seazen, Evergrande and COLI at no more than 18%.
Country Garden, KWG, Jinmao are also exposed. Expanding the scope to the five-most infected provinces including Henan and Hunan, Yuexiu, Logan, Agile and Greentown's sales remain the most at risk, while land bank exposure for Country Garden (44%), KWG (42%) and Jinmao (37%) were also higher than the 35% peer average. At least 30% of CR Land and CIFI's land banks concentrate on these five provinces, followed by 29% for Vanke and Evergrande, and 27% for Shimao and Sino-Ocean.
Developers Forced to Seek Out Online Sales. Desperation for cash inflow from sales amid a shutdown of showcase apartments could push Chinese developers online in a bid to close transactions. Country Garden rolled out its Phoenix Cloud platform on its web site and social network Wechat on Jan. 10, offering promotions, access to salespersons and online purchases of its properties. Evergrande could step up its offering after listing 100 discounted units on Suning during its spring sales. Developers had tapped e-commerce platforms during Singles' Day in 2019, including COLI, Sunac, Vanke, Logan, Times China and Poly's collaboration with JD.com. R&F, Sino-Ocean, Jinmao, CIFI, Shimao and KWG's projects were listed online via agencies.
Though coronavirus-related concerns may hurt near-term growth, Alibaba's balance-sheet strength has never been stronger and should enable spending on organic and inorganic investments that drive long-term expansion well above its technology peer group. Cash increased $20 billion in the quarter following its equity offering and $11 billion in free cash flow.
Alibaba already holds a slight cash balance and liquidity advantage vs. its Chinese counterparts, a differential that has grown considerably following its Hong Kong equity capital raise in fiscal 3Q. With total debt of almost $16 billion, Alibaba's net leverage remains negative with a net cash position of $33 billion. Uses of the cash remain uncertain but would likely target incremental investment opportunities and M&A vs. shareholder returns.
Cash was buoyed in the quarter to $50 billion via a 52% increase of free cash of $11.2 billion.
Over the next five years, about $10 billion in Alibaba bonds and loans are due, which is manageable based on cash on hand and expectations of $20 billion in annual free cash flow. In addition to over $50 billion in available cash and short-dated investments, Alibaba has a $5.15 billion undrawn revolving credit facility available that's due in 2022.
Alibaba maintains ample access to reasonably priced capital. In December 2017, the company raised $7 billion via a five-tranche bond issue, with interest rates ranging from 2.8% for debt maturing in 2027 to 4.4% for notes due in 2057. Since 2017, Alibaba hasn't raised additional U.S. dollar term debt.
SSE Composite Index was up1.43% last week.
Hang Seng Index was up 1.50% last week.
Dow Jones Industrial Average index was up 1.02% last week.
NASDAQ Composite Index was up 2.21% last week.
S&P 500 Index was up 1.58% last week.
CICC gave its price target on Ping An Insurance Group Co of China Ltd (2318.HK) to HK$114.00 a share and gave the outperform rating.
HSBC gave its price target on Yuexiu Transport Infrastructure Ltd (1052.HK) to HK$9.70 a share and gave the outperform rating.
Huatai Research gave its price target onVipshop Holdings Ltd (VIPS.US) to US$17.20 a share and gave the buy rating.
Credit Suisse gave its price target on Domino's Pizza Inc (DPZ.US) to US$300.00 a share and gave the outperform rating.
HSBC gave its price target on Melco Resorts & Entertainment Ltd (MLCO.US) to US$35.00 a share, gave the buy rating.
2263.HK Fu Shek Financial Holdings Limited (2020/2/19)
Annual: 1052.HK Yuexiu Transport Infrastructure Ltd
Quarter: OTTR.US Otter Tail Corp
Quarter: FLS.US Flowserve Corp
Quarter: OMAB.US Grupo Aeroportuario del Centro Norte SAB de CV
Quarter: ESSA.US ESSA Bancorp Inc
Annual: 0005.HK HSBC Holdings PLC
Annual: 0011.HK Hang Seng Bank Ltd
Quarter: MLCO.US Melco Resorts & Entertainment Ltd
Quarter: FELE.US Franklin Electric Co Inc
Quarter: GSX.US GSX Techedu Inc
Annual: 0023.HK Bank of East Asia Ltd/The
Quarter: NTES.US NetEase Inc
Quarter: FUN.US Cedar Fair LP
Quarter: ATHM.US Autohome Inc
Quarter: VIPS.US Vipshop Holdings Ltd
Annual: 2318.HK Ping An Insurance Group Co of China Ltd
Annual: 0992.HK Lenovo Group Ltd
Quarter: DPZ.US Domino's Pizza Inc
Quarter: ADC.US Agree Realty Corp
Quarter: EHTH.US eHealth Inc
Annual: 1928.HK Sands China Ltd
Semi-annual: WBC.US WABCO Holdings Inc
Quarter: RY.US Royal Bank of Canada
Quarter: B.US Barnes Group Inc
Quarter: CNK.US Cinemark Holdings Inc