Cachet's Insight 18/05/2020

Market Outlook

As of 14 May, JACI Total return index delivered +0.71% last week. Primary activity in the market continues to be led by IG this week. A single B Chinese developer Zhenro Properties Group (6158.HK) successfully priced a bond last week, which may mark the return of high yield primary activity.

US Fed Chair Powell warned of a 'highly uncertain' outlook and a lasting downturn which may worsen without additional government stimulus. US jobless claims totalled 2.98m for last week, higher than expected.

Investor sentiment was poor this week amid heightened US China tensions and poor economic data. While there are some signs of easing in the COVID-19 outbreak, second waves are emerging in several cities and cases reported worldwide now exceed 4.4million. 10Y UST yields tightened 2 bps to 0.62% as of 14 May 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 better look out for attractive opportunities upon recent spread widening and may selectively add risk.

The Indian government announced a special economic package of USD266b to mitigate the impact from Covid-19. The first part of the package, amounting to USD80 billion, focuses on the revival of small and medium sized businesses with cheap loans. 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. Investors may participate selectively as new issuance begins to pick up in the IG space.

China retail sales drop 7.5% in April, worse than expected, while industrial output came in stronger than expected and rose for the first time since Covid-19, at +3.9%. The central bank also injected net RMB100b of liquidity into the banking system this week, and kept the 1Y lending rate unchanged. Investors may reduce China exposure on heightened US-China tensions

Hot Topic

Jerome Powell, Chairman of the Federal Reserve System, noted that the FOMC's view on negative rates has not changed and reiterated that it is not something they are looking at. “The Fed intends to continue using tools it has already tried," Powell noted while responding to questions an event organized by the Peterson Institute for International Economics. "Previous minutes on negative rates debate says all FOMC participants were against them."

Powell, therefore, somewhat cautiously, makes the case for more government support, arguing that “additional fiscal support could be costly, but worth it if it helps avoid long-term economic damages and leaves us with a stronger recovery”. Powell himself highlights the fact that the crisis is driving inequality by citing that the Fed’s own analysis shows nearly 40% of households making less than $40,000 per year had lost a job in March. We are projecting another 12 million decline in payrolls in May so we would not be surprised to. The text of his speech consists of concerns about long-lasting damage, lower productivity, and other dire projections.

There is also clear concern that with tens of millions of Americans having lost their job, consumer demand may not come back as rapidly as in the Global Financial Crisis. This suggests to us the Fed’s stimulus will remain in play for many more months with very little prospect of a rate hike away from the emergency lower bound within the half year. Negative interest rates make investing in the stock market more attractive as letting money sit incurs losses. For the dollar, it means the Fed is competing with the European Central Bank and the Bank of Japan – that already have sub-zero borrowing costs. By holding up positive rates, the greenback is more attractive.

Hang Seng Index Company will include the companies with different rights in the same stock and the second listed company to Hang Seng Index and Hang Seng China Enterprise Index in the stock selection after market closes on Monday, this will benefit the stock’s performance of Meituan Dianping (3690.HK), Alibaba (9988.HK) and Xiaomi Group (1810.HK), etc.

Hot Stock

Tencent Holdings Ltd. reported better-than- expected sales after pandemic-induced lockdowns helped spur growth in its suite of online offerings from gaming to social media.

The WeChat operator’s revenue rose 26% to 108.1 billion yuan ($15.2 billion) in the coronavirus-stricken March quarter.

That compared with the average estimate of 101.07 billion yuan. Net income rose 6% to 28.9 billion yuan from a year earlier, when Tencent booked an 11-billion-yuan one-time gain on investments.

The company is among the most resilient of players in a Chinese internet sector emerging from the worst of the outbreak.

It gained more than $42 billion in market value since Covid-19 first broke out, defying a global market rout and a record Chinese economic contraction. A surge in social media and gaming traffic drew new ad revenue to help offset shrinking traditional online marketing budgets.

Thoughts & key interesting snippets:

Tencent’s online games revenue jumped 31% from a year earlier -- that’s the fastest growth the bread-and-butter division has managed to pull off since 2017’s final quarter.

For digital content, Tencent’s video subscriptions rose 26% to 112 million and music subscriptions grew 50% to 43 million.

Mini programs on WeChat saw a boost, with daily active users surpassing 400 million.

Tencent reported better-than-expected sales after pandemic-induced lockdowns helped spur growth in its suite of online offerings from gaming to social media.

The company’s social-ad business could continue to grow strongly, despite challenging industry conditions, on high demand and new inventory released in mid-February, but its fintech and business services segment could deliver slower growth as offline payments declined during the pandemic and some cloud computing projects were delayed.

Naspers Climbs 3.4% to Record After Tencent Beats Estimates!

Chart of the Week

Risk markets may take in their stride rising new virus cases from reopenings.

After an astonishing rebound from the March meltdowns, equities have entered a correction mode this week, on concern over a second wave of infections as new virus cases increased in South Korea, China, and Germany.

If reopenings lead to renewed outbreaks of Covid-19, there will be no recovery in the economy, causing stocks to unwind their remarkable gains so far. In such case, the global economy may well be doomed to face an I-shaped eternal depression as Dr. Doom Nouriel Roubini forecast.

But the pace of new cases especially in Korea and China is much slower than during the first phase of this pandemic. The two countries, the initial hot spots which have effectively put the virus under control, offer an important guide to those economies that are preparing for reopenings.

As long as second waves are mild enough to avoid the sort of impact that would alter the rebound mindset to a recessionary one, markets won’t likely give up on hopes for a post-lockdown rebound of the global economy. And that’s already seen in today’s resilience of Asian equities.

Investment Ideas

Gold has soared in 2020, hitting the highest in more than seven years as investors sought a time-tested haven from the dislocation unleashed by the outbreak. The metal remains supported even as governments worldwide are now moving towards easing anti-virus lockdowns, aided by prospects for sustained stimulus from central banks, exploding liabilities for governments, and weaker currencies.

One of the key factors pushing up gold prices is the low interest rate environment and with the Fed funds futures curve moving to price in the possibility of negative interests rates, we could yet see the highest point for Gold in 2020. The US Central Bank’s policy rate is already near-zero and it is not entirely out of the question that borrowing costs could go to negative territory, even though this has been an option that has so far been shunned by senior Federal Reserve decision makers.

Today we provide different route to markets for investors who share a positive view on Gold through the Gold ETF (GLD.US), GLD UP. For more bullish investors, consider the Digital note or Booster on GLD UP.

Product: Digital Note on GLD UP

Investors will receive a flat coupon of 6% in 3 months (or returns of 24% p.a.) if GLD UP closes above its initial levels.

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

Maturity Redemption

If underlying closes above strike at maturity, investor receives flat coupon

If not, physical delivery of underlying at strike

Booster on GLD UP

Investors are able to have a leveraged participation on the upside up to the Call Strike Cap. The max returns for this version are at (105% * 110%) – 1 = 10.5% over 3 months (or 42% p.a.)

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

Maturity Redemption

If underlying closes above strike at maturity, investor receives leverage performance up to Call Strike Cap, i.e. 1 + [Participation rate * min (Final/Strike – 1, Call Strike Cap – 1)].

Otherwise, physical delivery of underlying at strike.

Asset Allocation

Asia Bond Market

Weekly Asian dollar bond issuance slid 37% to $4.1 billion in a quiet week perked up by a rare high-yield note offering from a Chinese developer - Zhenro Properties Group (6158.HK) . New dollar bond issues from high-yield Chinese developers have been rare after a global shortfall of dollars saw issuance dry up in March. Times China Holdings priced a $200m 364-day note late April. Zhenro Properties Group (6158.HK) sold a $200m 3.8Y NCNP2.8 bond at 8.35% after initial guidance in the area of 8.9%, secured more than $1.4 billion orders. Orderbooks were strong for other deals this week. Indonesia Asahan secured more than $15.9b of orders for three-tranche $2.5b note, REC saw over $2.5b of orders for $500m note. In the secondary market, Tus-Holdings’ dollar bonds are indicated higher after news of a capital injection plan. Elsewhere, Indonesia’s central bank should buy sovereign bonds at yields lower than it can get at auctions, according to a lawmaker. Fitch expects record global downgrades for corporates and financial institutions in 2020 because of the coronavirus impact. MIE Holdings Corp. became the first casualty of the spectacular oil price slump in China’s offshore bond market, after defaulting on a dollar note.

This 3.8y bond from Zhenro Properties Group (6158.HK) (maturing Mar 2024) is interesting because of the puttable feature at 2.8y (Mar 2023). According to the company, this provides flexibility for investors to put back in Mar 2023 and thus enjoyed the yield-to-put of 8.9% which is much higher than the existing ask-YTM of 7.80% (price 101.50) for its 8.65% Jan 23 and ask-YTM of 8.28% (price 101.75) for its existing 9.15% May 23. It is concurrently callable on Mar 23, to allow the company to call back the bond should its rating, and thus financing costs, be much favorable comes Mar 2023. We think the fair value of the new bond is around 8.50% building in 10-20bps of new issue premium. We expect more HY developers to tap the market soon given 1) the healthy sentiment in the secondary bond market and 2) recovery in contracted sales in April and May in China.

On the tender offer, we remain indifferent between the tender price of 100.35 and the market last traded price of 100.50 before transaction costs (at the time of writing).

On Covid-19 update, the company saw 1Q20 contracted sales declined by 30% yoy, but April and May sales caught up fast and exceeded those of the same periods last year. Overall, 1H20 sales are expected to the flattish.

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.

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

Newly Listed

  • 8496.HK Singapore Food Holdings Limited (2020/05/18)

  • 9939.HK Kintor Pharmaceutical Limited (2020/05/22)

Result Announcement


  • Annual:0303.HK VTech Holdings Ltd

  • Quarter:IQ.US iQIYI Inc

  • Quarter:SOHU.US Ltd

  • Quarter:BIDU.US Baidu Inc

  • Quarter:BILI.US Bilibili Inc


  • Interim:0717.HK Emperor Capital Group Ltd

  • Quarter:WMT.US Walmart Inc

  • Quarter:SINA.US SINA Corp/China

  • Quarter:WB.US Weibo Corp

  • Quarter:NTES.US NetEase Inc


  • Annual:0992.HK Lenovo Group Ltd

  • Quarter:1810.HK Xiaomi Corp

  • Quarter:ZTO.US ZTO Express Cayman Inc

  • Quarter:HUYA.US HUYA Inc

  • Quarter:YY.US JOYY Inc


  • Quarter:9988.HK Alibaba Group Holding Ltd

  • Quarter:BTI.US British American Tobacco PLC

  • Quarter:INTU.US Intuit Inc

  • Quarter:HRL.US Hormel Foods Corp

  • Quarter:MDT.US Medtronic PLC


  • Quarter:BABA.US Alibaba Group Holding Ltd

  • Quarter:PDD.US Pinduoduo Inc

  • Quarter:ICLK.US iClick Interactive Asia Group Ltd

  • Quarter:DE.US Deere & Co

  • Quarter:FL.US Foot Locker Inc

Analyst Recommendation

  • Morningstar gave its price target on Alibaba Group Holding Ltd (9988.HK) to HK$250.00 a share and gave the buy rating.

  • Soochow Securities gave its price target on Xiaomi Corp (1810.HK) to HK$16.45 a share and gave the buy rating.

  • China Renaissance gave its price target on Pinduoduo Inc (PDD.US) to US$49.00 a share and gave the buy rating.

  • China Merchant Securities gave its price target on Bilibili Inc (BILI.US) to US$32.00 a share and gave the buy rating.

  • TH Capital LLC gave its price target on Baidu Inc (BIDU.US) to US$120.00 a share and gave the buy rating.

  • Nomura gave its price target on NetEase Inc (NTES.US) to US$439.00 a share and gave the buy rating.

Global Indices

  • SSE Composite Index was down 0.93% last week.

  • Hang Seng Index was down 1.79% last week.

  • Dow Jones Industrial Average index was down 2.65% last week.

  • NASDAQ Composite Index was down 1.17% last week.

  • S&P 500 Index was down 2.26% last week.

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