Cachet's Insight 28/07/2020

Updated: Jul 29


Market Outlook: The first listed electronic cigarette manufacturers

Smoore International (6969.HK) is the first listed e-cigarette manufacturer in Hong Kong, with a market value of nearly HK$250 billion. The predecessor of Smoore, McWell, was listed on the National Equities Exchange and Quotations, rose for 10 times in 2 years until delisted. Two weeks after listing in Hong Kong, Smoore was included in the Hang Seng Composite Index, Hang Seng Consumer Goods Manufacturing and Services Index, and Hang Seng Stock Connect New Economy Index. Smoore is the leader in the e-cigarette foundry market, and its market share is still growing rapidly, showing its strong business capabilities.


Cachet’s View

Since e-cigarettes still have a single-digit penetration rate in the cigarette market, and there is a huge room for growth, we are very optimistic about the growth of the e-cigarette market. The pioneering marketization of Smoore can expand its strength through capital means, which will help increase the company's reputation, and it will be easier to attract domestic and foreign peers and the capital market's attention. With the government's increasingly strict supervision of e-cigarettes, we believe that the integration of the industry will cause small-scale e-cigarette manufacturers to face bankruptcy or annexation, which will benefit leading companies and further consolidate market share.


Market Outlook: Spot gold price breaks through $1,900

The U.S.-China tensions saw another escalation Friday when China retaliated for Houston's consulate closure by ordering the U.S. to close its consulate in the city of Chengdu. "The U.S. move seriously breached international law, the basic norms of international relations, and the terms of the China-U.S. Consular Convention. It gravely harmed China-U.S. relations," China's foreign ministry said in a statement. This rise in tensions, along with a weaker U.S. dollar, is creating a very gold-supportive environment for investors. In Asia’s early trading hours on Monday, spot gold broke through $1915, approaching a historical high.


Cachet’s View

Tensions between China and the United States, a weaker U.S. dollar, declining yields, more fiscal stimulus measures, and the rising number of new crown virus cases are all important factors driving the surge in gold prices last week. Currently the most active gold futures contract, COMEX gold futures December contract, rose to $1,935.10 in the Asian market on Monday, a record high. We believe that the preliminary US second-quarter gross domestic product (GDP) data released this Thursday is critical to the mid-line trend of gold prices. If the U.S. economy falls into a severe recession, the Fed will have the opportunity to implement negative interest rates, which will give a huge impetus to the price of gold exceeding $2,000.


Market Outlook: U.S. technology stock index uptrend reverses

The year’s best-performing U.S. stock sector, technology, landed at the bottom of the heap this week and lost momentum against the broader market for a second straight period -- something it has not done since early June. Back then, investors were rotating away from the stay-at-home trade and into shares that do well in times of normal business activity. But with Covid-19 spreading unabated in many U.S. states, the landscape has shifted yet again, to one of concern over a stalling American economy. Due to the year-on-year decrease in sales of its cloud computing service Azure, Microsoft (MSFT.US) fell after the release of the quarterly report, discontinuing its continued strength.


Cachet’s View

U.S. technology stock indexes (Nasdaq and S&P 500 technology stock indexes) have all peaked and declined in the past week. As Microsoft's stock price is dragged down by the slowdown in cloud computing business growth, we believe that cloud computing concept stocks will be adjusted due to overbought in the short term, and investors need to be cautious. Hong Kong's Hang Seng Index Company officially released the Hang Seng Technology Index on Monday, which is composed of 30 new economic technology companies. The market is optimistic about the Hang Seng Technology Index as the " Hong Kong Nasdaq ". We believe that with the further reform of the Hong Kong market, funds will gradually enter the pursuit of the Hang Seng Technology Index. On the one hand, the new index can attract investors from the Nasdaq to the Hong Kong technology index; on the other hand, it attracts more high-quality Chinese-funded technology companies to switch to Hong Kong for listing. Therefore, in addition to the Hong Kong Stock Exchange (0388.HK), Alibaba (9988.HK), Tencent Holdings (0700.HK), Meituan Dianping (3690.HK), and ByteDance (the parent company of Tiktok), which have the opportunity to be listed in Hong Kong in the future, are all of our suggestion of core hold assets in the long run.


Investment Idea

China property perpetuals provide significant yield pickup over city bank AT1s, though many property bonds have recovered to pre-Covid-19 levels. Expectations of non-call for many property perpetuals could be a key reason, given the relatively low resets if not called, but this also applies to bank AT1s. Jinmao 6% perpetuals, callable in February, resets to just 4.657% over treasuries, and provide the highest pick-up. Other low-reset examples are the Jinmao 5.75% and 4.875% and Sino-Ocean Land 4.9%. One should avoid these issues.

In contrast, perpetuals with high step-ups could be called. One that also offers higher yield is Zhenro's 10.25% callable in January 2022 with a reset to 13.41% over treasuries. The likely hood of call is extremely high .

Current trading levels yield around 8.8%

Moody's rated B2

Zhenro's liquidity is likely to improve on early access to credit markets and an extension of maturity profile. The reshuffle of its debt mix in 2019 further reduced refinancing risk and reliance on trust loans. Short-term debt fell after various debt and equity funding exercises in 2019-20.


Zhenro has $400 million 10.5% offshore bonds due this June and 700 million yuan onshore bonds due in November, vs. a cash balance of over 20 billion yuan, including $500 million sitting offshore. It obtained an issuance quota of $750 million offshore and 2 billion bonds onshore on top of unused credit lines of around 245 billion yuan. It is about to close around $320 million of offshore syndicated loans. The developer should maintain a relatively high cash balance after the upgrades by three rating agencies last year. Management aims to use around 26 billion yuan for land banking this year, less than 20% of its expected contracted sales of 140 billion yuan . The Light repayment schedules and abundant quotas make us comfortable with this name.



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


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