Deutsche Bank Markets Research
Asia
Credit
Date 24 February 2016
Asia Credit Monthly
Back in our Bunker
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
Harsh Agarwal, CFA
Research Analyst
(+65) 6423 6967
Viacheslav Shilin, MBA
Research Analyst
(+65) 6423 5726
Colin Tan, CFA
Research Analyst
(+852) 2203 5720
Karen Kwan
Research Analyst
(+852) 2203 5930
Vikash Agarwalla, CFA
Research Analyst
(+65) 6423 5718
We turned tactically constructive on Feb 10 as Asian credit spreads (along with many other risk assets) hit mid-2012 wides. We also recommended selling iTraxx Asia at 170bp with stop at 180bp and target of 150bp. We were a day or two early with hindsight and the trade unfortunately got knocked out, but spreads are ~20bp tighter from the wides. Both CDS (iTraxx) and Cash (Markit index) are trading in the middle of the YTD range as we write (Figure 19). We turn neutral here as focus shifts to some big events on the horizon - ongoing oil talks, upcoming G20 summit, China's NPC in early March, Draghi on 10th March and FOMC in mid March. As argued in our 2016 Outlook, we think spreads this year will trade in a range, albeit ranges will be wider and more volatile than 2015. Sticking to that view, assuming no new macro developments, we will look to turn negative if spreads hit the tights, and positive as they go back the wides. It does feel like the current rally has more legs, but we prefer to be slightly ahead of the curve and watch from the sidelines. The 3 Cs - China, Commodities and Central Banks remain at the forefront in driving risk assets.
Key themes Sovereigns: Rating triggers for China, India & Indonesia Financials: Asian sub debt outperformance versus global peers IG corps: The correction in India IG, HK corps FX & Rates exposure, China
metals & mining rating risks HY corps: Assessing refinancing risks for short dated bonds
Highest-conviction trade ideas Sovereigns: Buy Pertamina and Indonesia 30Y, Pelindo II 25s, Philippines
31s; Sell Sri Lanka long-end Financials: Buy China Huarong long-end, Chinese B3T2 subs, Woori 24s
and BEA AT1; Sell Indian banks’ seniors, Citic Sec 19s, China Taiping perp IG corps: Buy Lenovo 19s, Franshion 19s HY corps: Buy Parkson 18s, Sell Tata Steel 20s, Buy China Aoyuan 19C17s
Key changes in recommendations Sovereigns: Upgrade Philippines 40s and 37s from Sell to Hold Financials: Upgrade China Orient 24s, OCBC 4.25% 24s, CCB Asia 24c19
and Bank of China 5% 24s to Buy from Hold. Upgrade Axis Bank 20s to Hold from Sell. Lower CITIC Bank Intl 24c19 to Hold from Buy
IG corps: Downgrade Beijing Enterprises 20 (EUR) from Buy to Hold China property HY: Upgrade from Hold to Buy Central China 20C17 All pricing levels in this report are as at Feb 23, unless stated otherwise.
24 February 2016
Credit
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Table Of Contents
Overall View .......................................................................... 3 The year so far in pictures .........................................................................................3 Strategy ....................................................................................................................6 Can credit keep outperforming equities? ..................................................................8
Sovereigns ........................................................................... 11 Asia’s potential rating moves that matter ............................................................... 11
IG Corporates ...................................................................... 16 India IG - Finally, the Correction! ............................................................................. 16 Hong Kong IG: FX and rates exposure .................................................................... 20 China IG metals and mining: Spotting the next downgrade candidate .................. 23
Banks .................................................................................... 26 Market volatility puts sub-debt at centre stage ....................................................... 26
HY Corporates ..................................................................... 30 Assessing refinancing risks ..................................................................................... 30
Changes in recommendations ........................................... 35
Top picks and pans ............................................................. 36
24 February 2016
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Deutsche Bank AG/Hong Kong Page 3
Overall View
The year so far in pictures
Figure 1: Asia credit is one of the few asset classes with
positive returns (driven by USTs and coupons)...
Figure 2: Within Asia credit though, IG total returns
(+1.7%) are positive versus HY being negative (-0.6%)
Asset Class YTD Total
Returns Asset Class
YTD Total
Returns
S&P 500 -4.5% EM Credit 0.5%
US IG 0.7% MSCI EM -5.5%
US HY -2.0% Asia Credit 1.4%
Euro Stoxx 50
(in EUR)
-10.0% MSCI Axia ex-
Japan
-7.4%
Commodities -3.6%
EM Local Sovs 0.0%
Euro credit (in
EUR)
0.6%
95
97
99
101
103
105
107
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
Asia IG Asia HY
Source: Markit, Bloomberg Finance LP, Deutsche Bank Source: Markit, Deutsche Bank
Figure 3: In the DM world, Europe has done relatively
better than US, both in IG & HY. Asia IG is 30bp wider
Figure 4: And Asia HY 90bp wider so far
50
70
90
110
130
150
170
190
210
230
250
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
bp
Asia IG EUR IG US IG
300
400
500
600
700
800
900
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
bp
Asia HY EUR HY US HY
Source: Markit, Deutsche Bank Source: Markit, Deutsche Bank
Figure 5: EM credit spreads have underperformed DM
slightly on the IG side...
Figure 6: But significantly outperformed in HY
50
70
90
110
130
150
170
50
100
150
200
250
300
350
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
bpDifference (R) US IG EM IG
(150)
(100)
(50)
-
50
100
150
200
350
450
550
650
750
850
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
bpDifference (R) US HY EM HY
Source: Markit, Deutsche Bank Source: Markit, Deutsche Bank
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Figure 7: Within EM, Asia has outperformed Latam &
Ceemea
Figure 8: In Asia, Financials have underperformed to no
surprise, while Corps & Sovs have moved in line
190
240
290
340
390
440
490
540
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
ASW LATAM ex-sov EEMEA ex-sov Asia ex-sov
160
180
200
220
240
260
280
300
320
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
ASWAsia Corp Asia Fin Asia Sov
Source: Markit, Deutsche Bank Source: Markit, Deutsche Bank
Figure 9: Country wise, India has been the worst
performer in IG...
Figure 10: While Indo has been the outperformer in HY
70
100
130
160
190
220
250
280
310
340
370
400
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
ASW China IG India IG Indon IG
Malay IG Korea IG
300
400
500
600
700
800
900
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
ASW
China HY India HY Indon HY
Source: Markit, Deutsche Bank Source: Markit, Deutsche Bank
Figure 11: BBBs have underperformed As... Figure 12: Albeit Bs vs. BBs is more mixed in HY
50
60
70
80
90
130
150
170
190
210
230
250
270
290
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
ASWDifference (R) Asia A Asia BBB
200
250
300
350
400
450
500
300
400
500
600
700
800
900
1,000
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
ASWDifference (R) Asia BB Asia B
Source: Markit, Deutsche Bank Source: Markit, Deutsche Bank
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Deutsche Bank AG/Hong Kong Page 5
Figure 13: Both cash vs. CDS spreads have bounced off
the wides and trading roughly in middle of YTD range
Figure 14: Indo and Malaysia have been the most
resilient in CDS (5yr) given wide levels & short base
80
100
120
140
160
180
200
160
180
200
220
240
260
280
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16
bpsASW Markit Asia Overall iTraxx Asia IG (R)
40
90
140
190
240
290
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16
bps China Korea Indonesia
Malaysia Thailand Philippines
Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Bond Radar, Deutsche Bank
Figure 15: We have seen a spate of negative rating
actions with the Upgrade/Downgrade ratio back to 2009
lows...
Figure 16: and we are likely not done yet, with the
current Outlook distribution suggesting more to come in
HY
50%
82%
17%
13%33%
5%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
HY IG
Stable Positive Negative
Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP
Figure 17: Supply has disappointed our already low
expectations so far...
Figure 18: Maturities too are light in 2016
-
5
10
15
20
25
30
Jan Feb Jan Feb Jan Feb Jan Feb Jan Feb Jan Feb TD
2011 2012 2013 2014 2015 2016
USD bnCorp HY Corp IG Financials Sovereign
Period IG HY NR Total
March 2.3 0.0 0.5 2.8
April 3.6 0.3 1.2 5.1
May 2.8 0.0 0.4 3.2
June 1.0 0.8 0.8 2.5
July 1.9 - 1.5 3.4
August 1.9 - 0.7 2.6
September 1.9 - 0.7 2.6
October 2.0 1.8 - 3.8
November 8.3 0.3 0.5 9.0
December 0.6 - 1.9 2.5
26.1 3.3 8.1 37.5 Source: Bloomberg Finance LP, Bond Radar, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank
24 February 2016
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Strategy
Markets We turned tactically constructive on Feb 10 as Asian credit spreads (along with many other risk assets) hit mid-2012 wides. We also recommended selling iTraxx Asia at 170bp with stop at 180bp and target of 150bp. We were a day or two early on hindsight and the trade unfortunately got knocked out, but spreads are ~20bp tighter from the wides. Both CDS (iTraxx) and Cash (Markit index) are trading in the middle of the YTD range as we write (Figure 19). We turn neutral here as focus shifts to some big events on the horizon - ongoing oil talks, upcoming G20 summit, China's NPC in early March, Draghi on 10th March and FOMC in mid March. As argued in our 2016 Outlook, we think spreads this year will trade in a range, albeit ranges will be wider and more volatile than 2015. Sticking to that view, assuming no new macro developments, we will look to turn negative if spreads hit the tights, and positive as they go back the wides. It does feel like the current rally has more legs, but we prefer to be slightly ahead of the curve and watch from the sidelines.
The 3 Cs - China, Commodities and Central Banks remain at the forefront in driving risk assets. On China, despite recent rhetoric from authorities, we believe they will be forced to devalue at some point. Our house view is still for RMB's gradual depreciation to 7 by year end with 2 rate cuts and 4 RRR cuts. For Commodities, the recent agreement between Russia and Saudi Arabia perhaps provides a floor to oil price, though a sustained recovery is questionable, in our view. The fizzing out of USD rally could also lend some support to the beleaguered complex. On this note, we do want to highlight one of the more bullish reports ("Why commodities will recover?") we have seen from the DB complex on commodities arguing that supply side adjustments and prices approaching marginal costs should lead to a bottom sooner rather than later. While Asia credit's own exposure to commodities is limited, the sticking point for us has been contagion from US HY & EM HY - we remain more worried about the former. Our US colleagues recently increased their default forecast for 2016 to around 7% and our European colleagues made an interesting point that every time in the past 100 years the US default rate crosses 4%, it ends up north of 10% in that cycle (Figure 20). As for the 3rd C - Central Banks - we are calling for a no hike by the Fed in March, albeit leaving June on the table. For ECB, DB's base case is: further rate cuts (possibly 10bp), temporary & marginal increase in pace of QE (EUR10 billion for say 6 months), and potentially unconditional LTROs to reduce concerns about funding position of banks. We do feel that it won't be politically easy for Draghi to pull through a European TARP and/or buying of corporate/bank bonds; hence we are counting on a disappointment on Mar 10 at this stage.
A new angle that has emerged for CBs this year has been a question mark on the effectiveness (or lack thereof) of their negative rates strategy. There are concerns that CBs are running out of ammunition (we disagree). Negative rates has in turn raised concerns on bank profitability and tightening of lending conditions. While all these arguments are fair, we are surprised that investors have suddenly decided to care about them. Some of them are not new, while others could have been seen coming for a while. More importantly, asset prices over reacted to these worries, at least for now. From an historical perspective, financial conditions are significantly looser than during the financial crisis There are many historical instances when moves of this magnitude have been more transitory and were subsequently reversed with limited impact on growth (Figure 21). In any case, we see them as more relevant for equities than credit, and DM than EM. Our broader view is that credit should keep outperforming equities in the medium term (more later), and within credit, EM should outperform DM, and Asia the rest of EM. We are
Figure 19: Asia cash vs. CDS
-
50
100
150
200
170
190
210
230
250
270
290
310
330
350
Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15
bpsASWMarkit Asia Overall iTraxx Asia IG (R)
Source: Markit, Bloomberg Finance LP, Deutsche Bank
Figure 20: US default rates
Source: Bloomberg Finance LP, Datastream, Deutsche Bank report ‘European Equity Strategy: Market overview - February 2016’ dated 15-Feb-16
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Credit
Deutsche Bank AG/Hong Kong Page 7
keeping an eye on rising NPLs in Asian bank balance sheets, collapsing trade data, high house hold leverage and tightening financial conditions in the region (Figure 22).
Figure 21: Financial conditions have deteriorated sharply
over the past several quarters
Figure 22: EM Bank Lending Conditions by Region
Source: Deutsche Bank note ‘Global Economic Perspectives’ dated 17-Feb-16 Source: IIF
Asia Credit Within Asia credit, we continue to prefer IG over HY with a medium term view (over the course of this year). With USTs at current levels, HY may outperform IG in the very near term on a total return, especially if the current rally has legs. IG is also likely to witness more supply, while net supply in HY could be negative with bonds getting tendered/called. Default rates in Asia HY should stay low with limited refinancing need. However, HY remains a potential minefield (Hsin Chong was latest experience) with worse trading liquidity. Plus, DB is calling for 10yr USTs to end the year at 1.75% in its base case, hence we don't see any material sell off in rates impacting IG. Separately, we retain our preference for Corporates over Financials & Sovereigns. Financials should see growing headline risk on rising NPLs and perhaps more supply than Corporates, while Sovereign balance sheets could deteriorate and delay further positive rating actions. Sector-wise, we are still largely avoiding commodities and cyclicals despite some support to prices with USD rally fizzing off, instead favouring utilities, telcos, green energy, property, and retail/consumer sectors.
Country-wise, we started the year largely neutral on China IG and stick to that view for the following reasons - spate of negative rating actions / warnings are likely to continue, offshore investors are still selling benchmark names (though select names have started offering value here?), outbound M&A spree could further pressure ratings / leverage, upcoming results season should be lack lustre, most benchmark investors are already O/W, and worries on possible restrictions on onshore investors on buying USD bonds or on corporates from retiring FX debt to avoid capital outflows in the light of RMB depreciation. This said, we are wary of lack of supply and the fact that onshore investors are still buying. We generally see better value in Indo IG quasis and parts of India IG corps. In HY, we have refrained from taking a country-specific view, focusing more on bottoms up analysis. Please see Figures 23 and 24 below for more details.
24 February 2016
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Figure 23: Strategy
IG HY
China Likes - High step up corp perps, Select property, Bank T2, AMCs; Dislikes - Bank AT1, Brokers, Bank seniors, Sovereign CDS.
Likes - Property names with positive catalysts (rating upgrades, IPOs, etc.), Short dated / Secured industrials with high yields; Dislikes - Tighter trading / Commodity sector industrials.
India Likes - Wider trading private corps; Dislikes - Banks.
Likes - Utilities / Infrastructure as defensive carry plays; Dislikes - Tight commodity credits.
Indonesia Likes - Sovereigns & Quasis; Dislikes - N/A.
Likes - Utilities & Higher yielding property / consumer plays; Dislikes - Tighter property names.
Philippines Likes - Sovereigns & Quasis; Dislikes - N/A.
Likes - High step up utility perps; Dislikes - N/A.
Frontier markets N/A Likes - Mongolia; Dislikes - Sri Lanka.
Source: Deutsche Bank
Figure 24: Performance of closed trades
Our recommendations Benchmark performance
IG corps +20bp Markit IG corps index +30bp iTraxx Asia
IG financials -30bp Markit IG financials index +35bp
Sovereigns -20bp Markit Sovereigns index +30bp
China property HY NA* Market average -0.5 point
Other HY +1 point Market average -1 point
Source: Deutsche Bank. Performance of our recommendations is a simple average of trades closed this year, irrespective of the duration, after accounting for bid/offer spreads (but excluding other transaction costs). Benchmark performance is YTD until Feb 22. Past performance is no guarantee of future results. Please refer to the Trades Closed tables at the end of this report- for more details. Additional information available upon request.. * there were no closed trades YTD
Can credit keep outperforming equities?
Reproduced from our note dated 16 February 2016
The outperformance Asia dollar credit has had an amazing run relative to equity here. In fact, we look at the performance for last 10 years (since data for credit is available), one could be excused for asking why invest in equities at all over the longer term? Figure 25 shows that credit's cumulative total returns are slightly higher than equities, and with a lot lesser volatility. But, if history is any guide, we are potentially coming to a tipping point where equities should bounce or credit should start following lower (as witnessed a few times in the past), i.e., either equities are cheap or credit is expensive. The first scenario will require something magical to change the current growth environment, while the second scenario will need a full-blown crisis. Neither of these are our base case, which is that credit's outperformance should continue for now, albeit at a slower pace. We are no equity experts, hence the arguments we present in this note are more pro-credit than anti-equity. Needless to say, we will need at least some of these factors to reverse for credit's performance to change course. Also, to be clear, our argument is more relative - in a world with high correlation between risk assets, it will be hard for credit to deliver positive returns while equities are negative. Separately, a comparison of equity vs. credit returns in EM as a whole shows the same trend, albeit with a starker outperformance for credit (Figure 26).
Figure 25: Asia ex-J Total Returns
65
85
105
125
145
165
185
205
225
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
MSCI Asia ex-J Asia Credit
Source: Markit, Bloomberg Finance LP
Figure 26: EM Total Returns
65
85
105
125
145
165
185
205
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
MSCI EM EM Credit
Source: Markit, Bloomberg Finance LP
24 February 2016
Credit
Deutsche Bank AG/Hong Kong Page 9
Why the outperformance? - It's simple! - Credit is meant to be a low-beta asset class, underperforming when markets rally and being more defensive in a risk off environment. As we return to a world where investors care more about return "of" capital than return "on" capital, credit's outperformance could continue;
- Ongoing market concerns relate primarily to growth, which hurts equities (Figure 27). A low growth environment is not bad for credit, especially as risk free rates are turning negative, it offers the spread pick up. Yes, things could change if we get an outright recession and default rates pick up meaningfully;
- However, default rates have been low in most parts of the world (Figure 28). Regions experiencing high default rate such as US and Latam, are likely already pricing it in their wide spread levels. Low defaults have been aided by capital markets being open for the past few years as corporates have actively lengthened debt maturity profiles (Figures 29 & 30), implying limited HY debt maturities in the near term;
Figure 28: Moody’s Trailing 12-Month Non Financial Corporate High-Yield Default Rate, January 2008 – July 2016
Source: Moody’s Investors Service. AP stands for Asia Pacific
Figure 29: EM HY corps debt maturities (USD billions -
excluding sovs)
Figure 30: US HY & leveraged loan maturities
35
73
110
149
202 209
219
146
71 69 78
13
30
71
130
216
234
116
7
0
50
100
150
200
250
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+
USD bn
HY bonds Loans
Source: Deutsche Bank, Bloomberg Finance LP. Data as of 30-Nov-15. Only bonds with issue size above USD150 million have been considered. We have considered only S&P ratings in the above chart. Source: Deutsche Bank report ‘US Credit Strategy Chartbook’ dated 30-Nov-15
- In Asia particularly, domestic rate cuts and RRR easing in major economies have further helped local liquidity, keeping a lid on defaults in the bond space, which we forecast to increase only marginally to about 3% this year. As an example, every 50bp RRR cut in China adds almost USD100 billion in bank liquidity. We know not all of this is being lent and a good portion is going into the bond markets. So, in 1H'15, just the big 5 Chinese banks increased their dollar bond investments globally by approx. RMB170 billion. Also, to be clear, there is material credit differentiation between sectors and not everyone is being treated equally by lenders. Also, we are worried about rising corporate leverage and negative rating actions (Figures 31 & 32);
Figure 27: Asia ex-Japan GDP
growth rate vs. MSCI Asia ex-Japan
1.5
3.5
5.5
7.5
9.5
11.5
100
200
300
400
500
600
700
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
MSCI Asia ex-J Asia ex-J GDP growth YoY (R)
Source: Bloomberg Finance LP
24 February 2016
Credit
Page 10 Deutsche Bank AG/Hong Kong
Figure 31: Gross leverage Trend Figure 32: Asia Upgrades to Downgrades Ratio
2.5x
3.5x
4.5x
5.5x
6.5x
2013 2014 1H15 3Q15
China Property HY
China Industrials HY
Indon HY
India HY
Source: Deutsche Bank, Company Data. For India, periods considered are FY14, FY15 Q1FY16 and Q2FY16. Most Chinese companies do not report 3Q15 numbers Source: Deutsche Bank, Bloomberg Finance LP
- Returns on credit are being supported by the UST rally that is offsetting some spread widening - there is an inverse correlation between the two (Figure 33). Plus, carry through coupons is higher than dividends, which in turn are arguably at the risk of being cut (unlike coupons) - Figure 34;
Figure 33: Markit Asia IG spreads vs. 5 yr treasury yields Figure 34: Asia - Coupons vs. Dividend yields
0.0
1.0
2.0
3.0
4.0
5.0
6.0
0
50
100
150
200
250
300
350
400
450
500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%ASWMarkit Asia IG spread 5 Yr Treasury yield (R)
1.5
2.5
3.5
4.5
5.5
6.5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%MSCI Asia ex-J Div yield Markit Asia Coupon
Source: Markit, Bloomberg Finance LP Source: Markit, Bloomberg Finance LP
- One country making a big difference to equity vs. credit performance in Asia is China, where the two asset classes have recently gone in completely opposite directions (Figure 35), thanks mainly to demand for USD credit from local investors and the surge in domestic bond issuance. With China now accounting for around 40% of Asia's G3 bond market, any change in fortunes there will be a big risk to overall Asia credit's performance;
- On equity valuations, we do acknowledge that P/E and P/B ratios (on historical measures) are back to the lows (Figure 36).
Figure 35: China - Equity vs. Credit total returns Figure 36: MSCI Asia ex-Japan valuation metrics
0
100
200
300
400
500
600
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Shanghai Comp TR Markit China TR
0.5
1.0
1.5
2.0
2.5
3.0
5
10
15
20
25
30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
P/E ratio P/B ratio (R)
Source: Markit, Bloomberg Finance LP Source: Bloomberg Finance LP
24 February 2016
Credit
Deutsche Bank AG/Hong Kong Page 11
Sovereigns
Asia’s potential rating moves that matter
Figure 37: Top Outperformers (spread change) Figure 38: Top Underperformers (spread change)
Bond Price YTM (%)Z-spd
(bp)
YTD spd
chg
Dvelopment Bank of Mongolia
5.75% '17
92 13.8 1,313 543
Mongolia 4.13% '18 86 12.5 1,175 507
Mongolia 5.13% '22 70 11.6 1,031 336
Sri Lanka 5.88% '22 88 8.4 709 160
Sri Lanka 5.13% '19 94 7.3 642 142
Pertamina 6.5% '41 91 7.3 543 50
Indonesia 8.5% '35 127 6.1 428 48
Ex-Im Bank of India 3.88% '19 104 2.8 182 46
PSALM 7.39% '24 131 3.3 181 43
Vietnam 4.8% '24 98 5.1 362 42
Bond Price YTM (%)Z-spd
(bp)
YTD spd
chg
PLN 7.25% '17 107 1.9 120 (60)
Ex-Im Bank of China 2.5% '19 104 1.3 32 (55)
Indonesia Exim Bank 3.75% '17 102 2.0 129 (33)
Ex-Im Bank of Korea 4% '17 103 1.1 39 (26)
Korea Development Bank 3.88%
'17
103 1.2 51 (21)
Korea Land & Housing 1.88% '17 101 1.5 74 (13)
Indonesia 6.88% '17 106 1.1 34 (12)
China Development Bank 2.5%
'20
103 1.9 81 (8)
Indonesia 6.88% '18 110 1.8 97 (5)
Pertamina 4.3% '23 96 5.0 370 (3)
Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank
A quick recap of sovereign bond performance YTD. One would immediately notice the large degree of dichotomy between the pace of underperformance, which in absolute spread terms ~10x larger than the best performing sovereign bonds in Asia. Frontier markets remain largely unloved, which, in our view, has gone beyond fundamental concerns for some names, and spread weakness is now hinged on poor technicals around the bonds. We still don’t think it’s the right time to go long Sri Lanka. On the other side of the scale, we still do not see signs of optimism from investors in going long duration as the front end of the Korean and Indo quasis dominate the list of top performing bonds. We remain positive on Indonesia and recommend investors staying OW this space.
YTD we have arguably seen the most aggressive move by the ratings agencies in pairing down the EM sovereign ratings in the recent years. While oil-related (e.g. Middle East) and idiosyncratic developments (e.g. Brazil) lead to final sovereign rating downgrades in wider EM of up to two-notches, Asia seems to stand out from these moves. To a contrary, we had evidenced an upwards trend in Asia sovereign ratings as recently as Dec-15 when Moody’s upgraded South Korea to Aa2. Given the persistent weakness of the individual
countries’ and also the Global economic data of late, the question on the
sustainability of Asian decupling from EM rating trends has become as acute
as ever. When it comes to Asia credit, we believe there are essentially three credit stories that influence the investor sentiment and positioning in the market and a material change in the rating trajectory could impact the country allocations and trading flows significantly. These three aspects are: China, India, and Indonesia.
24 February 2016
Credit
Page 12 Deutsche Bank AG/Hong Kong
How likely China’s ratings to start giving cracks? The short answer from us is: “Not within the next 6-9 months”. With Aa3 from Moody’s, AA- from S&P and A+ from Fitch, all ratings agencies have affirmed their current ratings and Stable outlook on China’s sovereign over the course of last three months. We generally find that all rating agencies take a considerable comfort from the determination of Chinese central government to continue with socio-economic reforms and moving the country away from its reliance on credit-driven investment spending to maintaining strong economic performance. Although progress thus far has yielded results of varying degree of success, considerable buffers that both the fiscal side of the central government, together with the capital and liquidity cushions accumulated by the banking sector, serve as very strong mitigating factors to periodical wobbles on the economic and corporate credit performance side.
China's speed of economic and financial reforms and the scope of policy easing had thus far exceeded expectations, but are fully commensurate with the current sovereign ratings. As the external environment, low commodity prices and unstable domestic consumption still pose near term risks, the ratings could have already come under pressure should the government not have delivered its reforms and extra liquidity injections for the economy. The hard work is yet to commence as the main pressure points emerge from the still high corporate leverage, uneven distribution of liquidity that has been poured onto banks, and inadequate transparency relating to the government's contingent liabilities. As the government increases its tolerance for the lower
economic growth, it is yet to be seen how it would respond to the rising
default rates especially when it would involve larger corporate players.
Should the economic performance fail to show signs of stabilisation in the course of the next 6-9 months, in response to various policy measures introduced by the government last year, the scrutiny over the sustainability of the aforementioned buffers and sustainability of credit ratings would intensify. In our view, there are three main factors to watch out for by investors, which
could be the precursors to the potential negative ratings action/lowering of
the outlook by the rating agencies:
1) Risk of the SOE contingent liabilities crystallising for the sovereign
balance sheet. In other words, this is the point when local banks would become less tolerant about rolling maturing loans for the SOEs with disrupted/negative cash flows and it would be up to the municipal/central government to decide whether to bail them out or let them go. We believe that corporate (incl. SOE) defaults will likely be more frequent in 2016, but should not spill into the mid-large-size companies of regional/national economic and social significance.
2) Risk of foreign currency reserves being depleted materially in the
scenario of accelerating capital flight from China. Despite a ~USD800bn loss of FX reserves over the past 1.5 years (currently at ~USD3.2trn), China remains strongly positioned vs. “A/AA” peers with its reserves/current external receipts and reserves/ST external several times higher than the peers median. Here we’d also highlight an additional risk of government’s attention to be potentially taken off its recently announced SOE reforms by the episodes of sharp equity markets volatility and pressure on RMB.
3) Risk of excessive fiscal engagement in providing economic stimulus
that would results in a material build-up of the government debt. The downward pressure on China ratings, in our view, is mitigated by the substantial room for potential fiscal easing that would complement the monetary easing that is set to continue in 2016. Thus far, the fiscal part of stimulus has been deployed in a disciplined
Figure 39: Select metrics for China
2015F 2016F 2017F
Fiscal def. 3.0% 3.0% 3.0%
FDI (net) $205bn $216.4bn $226.4bn
FX reserves $3.3trn $3.5trn $3.6trn
GDP 6.9% 6.7% 6.7%
Source: Deutsche Bank
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manner, in conjunction with macro-prudential measures too (e.g. easing of mortgage down-payment requirements etc.).
We believe that ratings agencies would wait until at least 3Q16 to reassess what impact would by then the recently introduced monetary, fiscal and macro-prudential policy measure have on the wider economy, the corporates and consumers. This time frame should also be sufficient to understand whether a moderately weaker RMB would improve competitiveness of Chinese exporters supporting current account surplus. Central government’s increased tolerance for lower GDP growth should not be seen as unilaterally negative sign by investors. Besides, the definition of a “hard landing” seems to have migrated lower over the years, indicating at a greater level of tolerance from the investor community too.
How likely is Moody’s to upgrade India, and others to follow suit? “What upgrade?” one may ask, in the midst of this doom and gloom surrounding global macroeconomic outlook. India does stand out from the rest of Asian and other global “BBB”-rated peers with its significantly higher level of GDP growth (even if discounted for the potential slight overstatements), greater degree of private sector participation in GDP accretion, and government’s low external debt exposure. India undoubtedly deserved credit
from rating agencies for having the guts to set out on the path of quite
painful economic and social reforms earlier in 2014 in conditions of quite
tight monetary policy and quite bad monsoons (the latter was repeated in
2015).
Despite market participant longing for a greater fiscal spending and more pro-growth easing, the government and RBI chose a scenario of relatively slow policy relaxation coupled with gradual fiscal consolidation. Stable inflation and gradual depreciation of INR of late provide a neutering environment for a healthier private consumption, credit intermediation and export growth. These are the conditions unseen in India for many years before. Of 125bp rate cuts delivered by RBI over the past 12 months, only ~60bp have been transmitted by the banks thus far, indicating at a still ample potential to boost credit growth and business development in the country.
Unlike China, India would remain the country of a slow catch-up play and not
deliver "big bang" reforms. The government has launched many initiatives that are paving the way to India's long term economic property and sustainability of growth; however, interim results have been mixed. Policy makers have perhaps had the greater degree of success in delivering tangible results with contained inflation being the strongest manifestation of this. Such long-debated bills as Land Acquisition and GST, should they materialise, would also not have an immediate impact on the government's finances, but will be an important milestone for investor sentiment to remain positive. What is needed for India to reach the next level of ratings boils down to: (i) strong
improvement in the FDI, which the government has been working on with varying success - it should open up additional private sectors for foreign investment in addition to, say, defence. (ii) The government providing a clear
strategy and delivering on the resolution of the banking systems' poor
capitalisation which in turn would help finance India's growth.
All rating agencies have affirmed India’s ratings and the outlooks over the past 4 months (Baa3/Positive by Moody’s, BBB-/Stable from both S&P and Fitch). What we believe really precludes India from making it to the next higher level of credit ratings is simply the weak readings of its several vital credit metrics: general government debt ~68% of GDP, government budget deficit ~6.7% of GDP and government budget revenues ~21% of GDP are significantly worse than the “BBB” median. The new federal budget (to be announced on 29-Feb)
Figure 40: Select metrics for India
2015F 2016F 2017F
Govt debt/GDP 68.4% 67.5% 65.3%
Fiscal def. 6.4% 6.3% 6.2%
CPI avg. 4.9% 5.3% 4.7%
GDP 7.5% 7.5% 7.8%
Source: Deutsche Bank
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will be key to watch for as there is a risk that the government would find it difficult to address the fiscal deficit reduction target.
Additionally, India is perhaps the only country amongst its rating peers
where the banking sector (especially the public part) is heavily
undercapitalised and is undergoing a significant bad loans clean-up exercise, which presents direct obligation on the government to recapitalise them. This represents an additional drag precluding rating agencies from taking a more optimistic stance on India’s credit trajectory. All-in-all, we believe that none of the rating agencies would move in an upwards trajectory India’s rating/outlook in the course of this year. Should the government deliver on its fiscal reforms, and the level of Government debt/GDP be on a strong trajectory towards 60% mark, then an upward ratings move would be more probable, which is likely to be a 2017 story. There are simply too many politically painful hurdles to be overcome this year, which require time to start bearing fruit.
Indonesia: which way will it go given the split rating and positive o/l from S&P? We were surprised back in May-15 when S&P revised the outlook on its BB+
ratings for Indonesia to Positive as it came at the time when the government
started to slip, in our view, with the implementation of its reform agenda, especially on the part of infrastructure spending, plummeting commodity prices and plunging BI’s FX reserves. Later in the year, the government came out with the multi-volume stimulus package, which included a reduction of fuel and energy prices, triggering series of cautions from the rating agencies warning of a potential back-tracking on its subsidy reforms. Remarkably, in four months time from now, Indonesia would “celebrate” the tenth anniversary of maintaining the same level of BB+ ratings from S&P - a period during which the country had already been once put on a Positive outlook (in 2009) and then revised back to Stable in 2013 without an eventual ratings upgrade.
Despite the overall disappointment with the lack of political will to pursue the original infrastructure investment and energy reforms agenda in 2015 we are encouraged with the prospects for Indonesia’s government to deliver on those in 2016. The fiscal drag has loosened its grip and the policy easing is yet to come providing additional boost to the economy. Politically, the President
appears to be better equipped to push through the reforms, given the
preceding changes in the cabinet. The government seems to be more realistic with its budgetary assumptions and any increase in the global commodity prices would be an upside. We recognise the rising pressure for capex financing on the part of quasi-sovereign entities, but we have seen the evidence of their relatively comfortable access to funding (incl. bilateral) both domestically and internationally.
Providing there are no material derailments in the economic performance this year that could come in the form of severe capital outflows, spike in IDR weakness and inability of the government to cut rates, we believe the
following factors would allow S&P to upgrade Indonesia to IG after a 10-year
wait: (i) strict adherence to its fiscal consolidation path; (ii) improvement in
the budget’s revenue collection (including tax compliance); (iii) enhancing
the quality of spending – i.e. more liberalisation of fuel prices and better execution of key infrastructure projects.
As the government is about to announce the revised budget for 2016 marking it to the lower oil price assumptions (i.e. USD35-40/bbl vs. USD45-50/bbl) any deviation towards expansionary and aggressively pro-growth policies would be detrimental to the positive ratings migration trend, in our view. This is not our base scenario though, but the ratings agencies would require at least two quarters of consistently stable-to-improving economic performance date backed up by the solid reform implementation track record, before they would
Figure 41: Select metrics for
Indonesia
2015F 2016F 2017F
Fiscal def. 2.5% 2.7% 2.7%
Govt. rev./GDP 13.0% 13.0% 13.3%
CAD 2.1% 2.0% 1.9%
GDP 4.8% 4.7% 5.0%
Source: Deutsche Bank forecasts
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make an upward ratings move. We believe it is equally relevant to Moody’s & Fitch. Hence, we believe the actual positive ratings change for Indonesia is unlikely to occur in the next 3-6 months from now. Even if growth does not
pick-up meaningfully this year, Indonesia would be amongst the fastest
expanding economies in “BBB” bucket in 2016.
What else would the rating agencies like to see improving in Indonesia’s credit story? We’d highlight the following key factors that could further boost the likelihood of an upward rating migration: (i) strengthening of institutional framework and corporate governance; (ii) deepening of the local capital markets, which could provide China-style back-stop support to the struggling HY corporate sector; (iii) diversification of budget revenue sources reducing its reliance on commodity segments; (iv) reduction of the government’s reliance on external financing, despite the relatively low levels of the absolute government debt in FX.
Top trade recommendations: Buy China 5Y CDS; Buy Philippines 31s; Buy
PGN 24s; Buy Pertamina & Indonesia long-end bonds; Buy Pelindo II 25s; Sell
long-end Sri Lanka bonds.
Main recommendation changes: Upgrade Philippines 40s and 37s to Hold
from Sell.
Please refer to the Top Picks and Pans section at the end of this report for the full list of trade recommendations, risks and rationale.
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IG Corporates
India IG - Finally, the Correction!
The underperformance India IG is 50bp wider YTD at the index level, underperforming overall Asia IG that’s 30bp wider. There are some interesting trends:
- Corporates and Banks have performed similarly; both ~50bp wider on average (Figure 42);
- Within corporates, SOEs have outperformed the private players. We believe this is mainly driven by the fact that private players such as Bharti & Reliance are big issuers (so easier to short) and their bonds are held widely by EM/Crossover investors;
- In the SOE space, only the upstream oil players (ONGC & Oil India) have widened materially by ~60bp, while others in the downstream and utility sectors have held in relatively better;
- Within banks, weaker credits that are already junk or at the risk of going there, i.e., IDBI, Bank of India, Indian Overseas Bank, etc. have done comparatively worse than stronger entities like SBI & ICICI;
- EUR bonds from the same issuer have marginally outperformed the USD ones;
- The underperformance in credit is in line with equities & FX (Figure 43).
Will it change? To answer this question, we look at reasons that caused the underperformance in the first place:
- More sellers than buyers! Sellers are mainly coming from two camps: US investors witnessing fund outflows and/or those seeing less value in Asia given sell off in US IG. And hedge funds that are shorting. However, given the verweight positioning that other investors already have in India I and the fact that PB bid from NRIs is missing, buyers are hard to find. Note that a bigger percentage of Indian IG bonds sit with offshore investors than other parts of Asia IG. Some also fear selling from Middle East holders. We believe this fear is overblown. Amongst listed ME banks that have good disclosure on their investment book, we don't see a high exposure to India IG;
- On the fundamental side, as mentioned before, there have been some name-specific headlines, but overall corporate fundamentals are still intact. We expect the ongoing results season to prove that India IG corps credit metrics continue to be better than China IG. Bank results have been weaker, albeit expected. Even on the ratings front, we only see Oil India at potential risk of going to HY. Banks are a completely different ball game though;
- As for the macro front, it seems old issues have come back to finally haunt investors; lack of reforms, higher fiscal deficit, bank NPLs, etc.; none of these are really new, but suddenly we have decided to care about them!
Net net, given that India IG was trading quite tight before, the recent market turmoil has started offering value in select corps, though banks remain
Figure 42: India Corps vs. Fins
80
100
120
140
160
180
200
130
180
230
280
330
380
430
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16
ASW
Difference (R) India Corp India Fin
Source:Markit, Deutsche Bank
Figure 43: Sensex and INR 1 year
performance
61.5
62.5
63.5
64.5
65.5
66.5
67.5
68.5
22,000
23,000
24,000
25,000
26,000
27,000
28,000
29,000
30,000
Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16
Sensex USDINR (R)
Source: Bloomberg Finance LP, Deutsche Bank
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expensive. It is hard to time when the above factors will change course, but we are hopeful that India's relatively better macro picture will eventually lead to it.
Key events to watch going forward Central government budget on Feb 29; State elections in April; RBI governor’s current term expiry in 3Q; Moody’s sovereign rating review likely late in the year (positive outlook since Apr’15). For the most near term event - budget - two big sectors to watch will be banks and oil & gas - both have underperformed recently. On former, we need to see if govt increases the planned capital infusion into public sector banks, and there are talks about formation of bad bank, new bankruptcy code, etc. On the oil & gas sector, it remains to be seen if there is any cut in cess/duties given the fall in oil price. If expectations are met, we could see a brief, small rally in these sectors; if not, it could get worse.
Best & Worst performers YTD No surprises here. As mentioned before, even the screening of individual bonds yields the same results - outperformers are short dated senior bank bonds, while underperformers are longer bonds from weaker banks and the oil & gas credits.
Figure 44: Top 10 Underperformers (spread change) Figure 45: Top 10 Outperformers (spread change)
Bond Price YTM (%)Z-spd
(bp)
YTD spd
chg
ICICI Bank 7% '20 114 3.8 266 108
Oil India 5.38% '24 105 4.7 325 99
Bank of India 3.13% '20 98 3.8 271 82
Syndicate Bank 3.88% '19 102 3.3 235 71
ONGC 4.63% '24 102 4.3 286 62
Bharat Petroleum 4% '25 98 4.3 280 59
Indian Oil 5.75% '23 110 4.2 286 53
Indian Overseas Bank 4.63% '18 102 3.5 268 50
State Bank of India 4.88% '24 108 3.7 232 48
Reliance Industries 4.5% '20 107 3.0 188 47
Bond Price YTM (%)Z-spd
(bp)
YTD spd
chg
Bank of Baroda 6.63% '22 104 3.4 268 (15)
State Bank of India 4.13% '17 103 1.9 116 2
Indian Railway Fin 3.42% '17 102 2.2 143 11
Ex-Im Bank of India 4% '17 103 2.0 129 11
IDBI Bank 4.38% '18 103 3.1 231 13
Axis Bank 5.13% '17 104 2.1 138 13
HDFC Bank 3% '18 101 2.4 156 14
NTPC 5.63% '21 112 3.2 200 15
ICICI Bank 4.7% '18 104 2.4 159 16
Syndicate Bank 4.13% '18 103 2.7 188 21 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to
avoid repetition, we have not included perps or bonds maturing in 2016 in the tables.
Results recap Banks: 3Q16 earnings were one of the worst in recent quarters underlined by significant asset quality deterioration and capital erosion. Starting from 3QFY16, RBI has mandated banks to do an 'Asset Quality Review' exercise and record the much delayed stress before the deadline of end-March 2017. PSU banks were hit the most on account of their book clean-up owing to their larger exposure to struggling industries and recorded a rise of the average Gross NPL from 4.5% at the end of 1Q16 to 7.7% at the end of 3Q16. Although proportion of restructured loans has remained fairly constant over the past two quarters, it is still substantial at 7.3% of loans. Banks other than BoB have mentioned that there will be at least one more quarter of similarly elevated bad loan provisioning and recognition of previously restructured loans as NPLs. We believe Bank of India and Syndicate Bank are the prime candidates to breach minimum CET1 norms within the next 3-6 months and to be put under RBI's “Prompt Corrective Action” – similarly to IOB back in Oct-15 as their credit metrics have worsened to the point where no more capital erosion can be tolerated. We view Canara Bank and UBI as next to possibly suffer negative ratings action as the pool of their restructured loans is still considerably higher than NPLs they have recognized thus far. Core profitability for the banks also remain under pressure given the series of policy rate cuts last year that still has not been fully passed through. In the light of the poor 3Q16 earnings, the Government has announced that it would infuse additional INR34bn into the
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PSU banks in 4QFY16, but this would be sufficient only to ensure compliance with regulatory norms. Private banks other than ICICI Bank remained less affected due to lower exposure to business loans. ICICI Bank reported an increase in Gross NPL from 3.5% at the end of 3Q15 to 4.9% at the end of 3Q16 and we think the trend could continue for the next 3-6 months.
Figure 46: Aggregate numbers for Indian Banks
USD million 9M FY15 FY15 9M FY16
Total Assets 1,139,012 1,220,114 1,193,459
Net Loans 714,049 755,599 743,900
Customer Deposits 891,748 944,642 923,462
Loans % Customer Deposits 81.40% 81.50% 82.50%
Gross NPLs % 3.74% 3.74% 5.36%
LLR % Gross NPLs 48.40% 48.10% 44.70%
LLP % Pre-prov. Income 40.10% 41.00% 54.60%
Net Interest Income 30,381 31,010 31,337
Non-int income % Operating inc. 33.50% 35.30% 35.20%
Pre-provision Income (PPI) 22,682 23,512 24,124
Net Income 10,620 9,368 7,401
Net Interest Margin 2.73% 2.74% 2.62%
Tier-I CAR 8.96% 9.55% 9.31%
Total CAR 12.21% 12.49% 12.45%
RoAA 0.87% 0.81% 0.58% Note: All income statement numbers are for the twelve months ending. Source: Company data, Deutsche Bank
Corporates: India IG corporates had a mixed results season. The Oil & Gas sector witnessed diverging performance in the upstream and downstream segments as could be expected in the current oil price environment. The upstream sector underperformed, witnessing ~10% QoQ revenues declines despite the absence of any subsidy burden in Q3. The downstream sector on the other hand outperformed with high GRMs and lower inventory losses in the quarter. Of the other private sector companies in our coverage, telecom saw a stable quarter underpinned by strong data growth while Adani ports’ results were slightly below average due to lower trade volumes. The utilities were also mixed; the genco’s revenues were impacted by lower demand while the transmission sector posted strong results. Overall, total India IG revenues declined 2.4% QoQ and 18.3% YoY while EBITDA margins (ex. investment income) were higher at 17.5%. (Figure 47) Most Indian companies do not disclose balance sheets in the third quarter; however, for the three private companies, overall net leverage declined marginally QoQ.
Figure 47: Aggregate Key Financials for India IG Corporates
Income Statement Q3FY15 Q2FY16 Q3FY16 FY14 FY15
INR mn INR mn INR mn INR mn INR mn
Total Revenues 3,276,707 2,744,649 2,678,327 15,578,718 14,346,873
EBITDA (excl. Investment income) 323,454 405,174 468,964 1,826,759 1,712,758
EBITDA ( incl. Investment income) 387,377 463,804 522,150 2,048,272 1,962,749
Interest Expense -61,811 -71,973 -59,962 -258,606 -280,952
Net Income 134,951 194,587 195,979 842,710 764,735
Key Ratios Q3FY15 Q2FY16 Q3FY16 FY14 FY15
Revenue Growth -6.8% -9.4% -2.4% 8.2% -7.9%
Gross Margin 19.2% 26.6% 29.1% 19.6% 21.6%
EBITDA Margin 9.9% 14.8% 17.5% 11.7% 11.9%
EBITDA Margin (incl invest income) 11.8% 16.9% 19.5% 13.1% 13.7%
EBITDA/Interest Expense 1.31x 1.41x 1.96x 1.77x 1.52x Source: Company data Note: Companies included - RILIN, BHARTI, ADSEZ, IOCLIN, BPCLIN, ONGCIN, OINLIN, NTPCIN and PWGRIN. For SOEs, quarterly numbers are standalone while annual numbers are consolidated. For private names all numbers are for consolidated entities.
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Strategy We are sticking with our preference for corporates over banks and private sector over SOEs. This strategy hasn't really served us well so far this year on account of technicals, but we are sticking to it for fundamental and valuation reasons.
Top picks: Reliance Industries 25s, Bharti 23s, ONGC 21s (EUR), Sell India
EximBank 5Y CDS
Top pans: Sell Bank of India 20s, Bank of Baroda 19s, both ICICI 20s, SBI 19s
and 24s and UBI 19s.
Changes in recommendations: Upgrade Axis Bank 20s to Hold from Sell.
Please refer to the Top Picks and Pans section at the end of this report for the full list of trade recommendations, risks and rationale.
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Hong Kong IG: FX and rates exposure
We have been negative on HK IG credits since late last year. Valuations are tight partly supported by the lack of bond supply. The fundamental outlook is far from rosy. The residential property market has cooled with secondary market transaction volumes now at a post-Lehman low. The retail sector is also under pressure given declining tourist flows (especially from China) partly driven by a strong HKD.
HK IG spreads have held up fairly well this year. We think the sector is vulnerable to a correction in the event of rise in supply and further macro weakness. On supply, we expect issuance volumes from HK IG to rise this year to around US$10bn (from around US$3bn in 2015). This is largely driven by refinancing needs but also potentially a debut issue from CK Property.
There has been increasing focus on a) the depreciation of HKD, b) tightening in HK interbank liquidity resulting in a spike in Hibor, c) a rise in Hong Kong's long term government bond yields, and d) weakness in the residential property market. In this section we discuss how HK IG corporate fundamentals could be affected by these factors.
FX impact: enerally we believe HK I corporates’ FX risk is manageable. This is primarily underpinned by DB House View that the HKD/USD peg will be maintained in the foreseeable future. Our table below shows that bulk of the issuers have active FX hedging policies or natural hedges when it comes to their offshore operations (mainly RMB). Companies such as Champion REIT, CLP, Hang Lung Properties and HKT have also swapped their USD debt exposure back to HKD via cross-currency swaps. For those that do not actively hedge their USD debt exposure (e.g. Lifestyle, New World Development, Sun Hung Kai Prop, Swire and Wharf) their reasoning largely rests on the stability of the HKD/USD peg. We would also highlight that Hang Lung Properties and Wharf have around 90% plus of cash denominated in non-HKD (mainly RMB) which we thought is a reasonably high percentage.
Figure 49: FX exposure summary
Company Sector Ticker % of revenue
in non HKD
% of debt in
non HKD
% of cash in
non HKD
FX risk hedging/
management
FX risk
exposure
Champion REIT Property CPREIT 0% 21% 0% Yes Low
CK Hutchison Conglomerate HUWHY 84% 84% 64% Yes Low
CLP Holdings Utility CHINLP 54% 71% NA Yes Low
Hang Lung Properties Property HLPPY 47% 57% 96% Yes Low
HKT Trust and HKT Telecom PCCW 23% 43% ~25% Yes Low
Hongkong Land Property HKLSP 27% 59% NA Yes Low
Hysan Development Property HYSAN 0% 40% 21% Yes Low
Kerry Properties Property KERPRO 59% 50% 72% Yes Low
Li & Fung Supply Chain LIFUNG 84% 100% NA No Low
Lifestyle International Retailing LIHHK 22% 83% 37% No Med
New World Development Property NWDEVL 46% 40% 56% No Med
Sun Hung Kai Properties Property SUNHUN 17% 38% 20% No Med
Swire Pacific Property SWIRE 64% 36% NA Yes Med
Swire Properties Property SWIPRO 16% 30% NA Yes Med
Wharf (Holdings) Property WHARF 47% 62% 90% No Med Source: Deutsche Bank, company data. Note: We use FY14 revenue breakdown by currency for PCCW, HKLSP, SWIRE, SWIPRO; we use FY14 debt breakdown by currency for HKLSP, LIFUNG, and WHARF; FY14 cash breakdown by currency for HYSAN, KERPRO, LIHHK and WHARF.
Figure 48: HK Resi Property Price
index and transaction volume
0
2000
4000
6000
8000
10000
12000
14000
16000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Jan-0
6
Jul-0
6
Jan-0
7
Jul-0
7
Jan-0
8
Jul-0
8
Jan-0
9
Jul-0
9
Jan-1
0
Jul-1
0
Jan-1
1
Jul-1
1
Jan-1
2
Jul-1
2
Jan-1
3
Jul-1
3
Jan-1
4
Jul-1
4
Jan-1
5
Jul-1
5
Jan-1
6
HK Midland Property Price 100 (HKD/sqft, lhs)
Price index average since 2006
HK Midland Secondary Resi Prop total volume (rhs)
Source: Deutsche Bank Equities Research, Bloomberg Finance LP, Midland
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Figure 50: FX exposure – commentary
Company Comment
Champion REIT Only FX exposure from USD term note which is hedged by CCS hence FX risk is hedged
CK HutchisonNatural hedges or for individual transactions (eg procurement) use forwards/swaps. Do not hedge overseas equity
investments
CLP HoldingsNatural hedges for local operations. Also hedges all its FX debt for full tenor and significant portion of USD fuel
purchases. Hedge committed and highly probable transactional exposure.
Hang Lung Properties USD debt exposure covered by CCS. RMB debt raised as a nautral hedge against RMB ops
HKT Trust and HKT Natural hedges for operations denominated in foreign currencies. Swaps and forwards to manage USD debt exposure.
Hongkong Land Natural hedges for operations denominated in foreign currencies. CCS to manage USD debt exposure.
Hysan Development Only FX exposure from USD term note which is hedged into HKD by appropriate instruments
Kerry Properties CCS and Forward to hedge USD debt and RMB debt
Li & FungMost cash in HKD and USD while most borrowings in USD. Revenue and payments mainly in USD. Residual exposures
hedged via forward.
Lifestyle International No comprehensive FX hedging policy as rely on HKD/USD peg effectiveness and RMB/USD has been relatively stable.
New World DevelopmentDebt mainly in RMB or HKD. Maintain appropriate level of natural hedging for RMB exposure. HKD/USD no hedging
policy but largely rely on peg.
Sun Hung Kai Properties Natural hedges for RMB operations.Minimal CCS hedging mainly relies on peg for HKD/USD stability
Swire PacificThe Group had historically hedged its significant FX funding exposures (ex USD) with forwards. Relies on peg for
HKD/USD stability
Swire PropertiesThe Group had historically hedged its significant FX funding exposures (ex USD) with CCS. Also has natural hedges.
Relies on peg for HKD/USD stability
Wharf (Holdings)Enters into forward and swaps to manage FX risk related to payments. Also hedges RMB funding exposure but relies on
the peg to maintain HKD/USD stability Source: Deutsche Bank, company data.
Rates impact 1: We think higher rates could affect HK corps via two transmission channel. All things being equal higher rates should negatively affect interest coverage ratios. In Figure 51 below we show the implied funding cost for HK corps under our coverage space and what a hypothetical 50bp, 100bp and 200bp increase in base rates could mean in terms of interest coverage. We are simplifying things a little here by assuming their credit margins remain unchanged but the main point here is to see who is most/least exposed in a rising rates environment. Our analysis suggests that Hysan would be most affected (but from a very strong base). HKT, HongKong Land, SHK Properties, and Wharf could also see their interest coverage drop by more than 1x in the event of a 50bp hike in borrowing cost.
Figure 51: If funding cost goes up – impact on interest coverage
50bp 100bp 200bp 50bp 100bp 200bp
Champion REIT CPREIT HY 30 June 2015 2.1% 5.1x 4.1x 3.4x 2.6x (1.0) (1.7) (2.5)
CLP Holdings CHINLP HY 30 June 2015 4.2% 7.4x 6.6x 6.0x 5.0x (0.8) (1.4) (2.4)
Hang Lung Properties HLPPY YE 31 Dec 2015 4.5% 4.0x 3.6x 3.3x 2.8x (0.4) (0.7) (1.2)
HKT Trust and HKT PCCW HY 30 June 2015 3.5% 9.1x 8.0x 7.1x 5.8x (1.2) (2.1) (3.4)
Hongkong Land HKLSP HY 30 June 2015 2.9% 8.0x 6.8x 5.9x 4.7x (1.2) (2.1) (3.3)
Hysan Development HYSAN HY 30 June 2015 2.8% 20.3x 17.2x 14.9x 11.8x (3.1) (5.4) (8.5)
Kerry Properties KERPRO HY 30 June 2015 3.7% 3.1x 2.8x 2.5x 2.0x (0.4) (0.7) (1.1)
Li & Fung LIFUNG HY 30 June 2015 5.7% 3.3x 3.0x 2.8x 2.5x (0.3) (0.5) (0.9)
Lifestyle International LIHHK HY 30 June 2015 3.9% 5.4x 4.8x 4.3x 3.6x (0.6) (1.1) (1.9)
New World Development NWDEVL YE 30 June 2015 4.2% 3.2x 2.9x 2.6x 2.2x (0.3) (0.6) (1.0)
Sun Hung Kai Properties SUNHUN YE 30 June 2015 3.2% 9.8x 8.5x 7.5x 6.1x (1.3) (2.3) (3.8)
Swire Pacific SWIRE HY 30 June 2015 3.6% 6.8x 5.9x 5.3x 4.4x (0.8) (1.5) (2.4)
Swire Properties SWIPRO HY 30 June 2015 4.1% 7.1x 6.4x 5.8x 4.8x (0.8) (1.4) (2.3)
Wharf (Holdings) WHARF HY 30 June 2015 2.7% 7.7x 6.5x 5.6x 4.4x (1.2) (2.0) (3.2)
TickerCompany
Impact on EBITDA interest
coverage
Pro-Forma EBITDA/Interest if
average funding cost goes up by…EBITDA/Int (x)Avg Funding
costPeriod
Source: Deutsche Bank, company data
Rates impact 2: The second derivative impact from higher rates will be on cap rates. In a cap-rate decompression scenario, gearing ratios could be
24 February 2016
Credit
Page 22 Deutsche Bank AG/Hong Kong
negatively impacted as IP asset values shrink. In Figure 52 below we list the landlords or developers with substantial IP exposure. We show the implied cap rate and show what a 50bp, 100bp and 200bp increase in cap rate would mean for their debt/asset ratios. Note we reverse calculated these cap rates by using reported net operating income/results over their respective IP portfolio’s asset values rather than actual cap rates reported b them. The main takeaway here is to show who is most exposed and our analysis suggests that Champion REIT, HK Land, and Swire Properties would be most affected. Hysan and Hang Lung Properties would be least affected.
Figure 52: If cap rate goes up – impact on gearing ratios
50bp 100bp 200bp 50bp 100bp 200bp
Champion REIT CPREIT HY 30 June 2015 3.5% 2.8% 22.4% 26.4% 30.3% 38.1% 4.0% 7.9% 15.7%
Hang Lung PropertiesHLPPY YE 31 Dec 2015 6.1% 5.1% 17.8% 18.3% 18.8% 19.5% 0.5% 1.0% 1.7%
HongKong Land HKLSP YE 31 Dec 2014 4.1% 3.5% 12.8% 14.0% 15.1% 16.9% 1.2% 2.2% 4.1%
Hysan HYSAN HY 30 June 2015 5.2% 4.6% 7.3% 7.9% 8.5% 9.7% 0.6% 1.2% 2.4%
Sun Hung Kai SUNHUN YE 30 June 2015 5.7% 4.4% 13.8% 14.3% 14.8% 15.6% 0.5% 1.0% 1.8%
Swire Properties SWIPRO HY 30 June 2015 5.0% 3.8% 13.8% 14.9% 15.9% 17.7% 1.1% 2.1% 3.9%
Wharf WHARF HY 30 June 2015 5.6% 4.9% 17.7% 18.5% 19.2% 20.5% 0.8% 1.5% 2.8%
Debt/Asset
Pro-Forma Debt/Asset if cap rate
goes up by…Impact on Debt/Asset
Company Ticker PeriodGross rental
yieldCap rate
Source: Deutsche Bank, company data
Impact from weaker housing market: The residential property prices have cooled off with transaction volumes now at a post-Lehman low (Figure 48). Table below shows the list of developers and their respective exposure to residential sales, leasing, and other operations. New Word Development stands out with 63% of operating income from property sales followed by Kerry Properties (28%) and SHK Properties (26%). Hysan and Champion REIT are pure landlords. Swire Properties, Hongkong Land and Hang Lung Properties have relatively high exposure to leasing income.
Figure 53: Revenue/Operating profit breakdown by segment
Total Sales Leasing Hotel/Other Total Sales Leasing Hotel/Other
Champion REIT HKD FY15 1,110 0% 100% 0% 878 0% 100% 0%
Hang Lung Properties HKD FY15 8,948 13% 87% 0% 6,548 13% 87% 0%
Hongkong Land USD 1H15 905 46% 54% 0% 487 17% 83% 0%
Hysan Development HKD 1H15 1,714 0% 100% 0% 1,527 0% 100% 0%
Kerry Properties HKD 1H15 4,204 41% 42% 17% 2,158 28% 68% 4%
New World Development HKD FY15 55,245 46% 4% 49% 10,857 63% 13% 24%
Sun Hung Kai Properties HKD FY15 66,783 26% 24% 49% 23,496 26% 53% 21%
Swire Properties HKD 1H15 9,386 36% 58% 6% 5,147 20% 81% 0%
Wharf HKD 1H15 17,638 37% 41% 22% 7,491 15% 79% 6%
Revenue Operating profitCurrency/
PeriodCompany
Source: Deutsche Bank, company data
HK IG credit strategy: We maintain our cautious view on HK corps given fundamental headwinds and rich valuations. We are not fully convinced that HK IG corps can be fully isolated against a China slowdown. We reiterate our Sell on Swire 23, Li & Fung 20, and Kerry Properties 21.
24 February 2016
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Deutsche Bank AG/Hong Kong Page 23
China IG metals and mining: Spotting the next downgrade candidate
As we discussed in the outlook we were expecting negative rating actions to outweigh positive ones this year on the back of a prolonged commodity down cycle and an ongoing slow down in China. We’ve seen a raft of negative rating actions lately on various China IG sectors affecting sectors such as Oil and Property. We were also fairly cautious on the metals and mining sector in the outlook and expected rating pressure for the sector to increase. We list the five metal and mining credits in China IG below, update their ratings trigger (with S&P and Moody’s) and our thoughts in terms of the likelihood of a credit rating downgrade. In summary we think the risk of a downgrade is high by Moody’s for Shenhua Energy, China National Gold Corp, and Minmetals. We think a negative rating action on Baosteel could also be high by Moody’s but should be fine with S&P for the time being. Chalco could also be a potential downgrade story in the 2H by S&P.
Figure 54: Metals & Mining – spotting the next potential downgrade candidate
Company and its
family ratings
(Moody's, S&P,
Fitch)
Downside triggers -
Moody's Downside test - per Moody's Downside triggers - S&P Downside test - per S&P Our Assessment
China Shenhua Energy
Co Ltd (Aa3/RPD, AA-
/Stable, A+/Stable)
Adjusted debt/EBITDA is
higher than 2x, and/or
retained cash flow/debt
lower than 35% for a
prolonged period.
Final rating incorporates BCA of
A3 and 3 notches of uplift based
on the high likelihood of
extraordinary support expected
from Shenhua Group. Although
we believe there is still some
buffer against key ratios (albeit
narrowing given sector
challenges), Moody's seems
worried about the weak credit
profile of parent Shenhua Group
amid the sluggish oil and coal
prices.
Adjusted gross leverage
exceeds 2x on a sustained
basis
S&P’s downgrade trigger of 2x
leverage offers some cushion
(albeit narrowing) relative to the
0.8x leverage at YE14 and
around 1.2x in June'15. SACP is
a+ now and a downgrade of
final rating requires SACP to fall
to a- (two notch cut). S&P is
also concerned about the
deteriorating credit profile of its
parent, Shenhua Group, amid
the challenging market
condition. A downgrade of
parent's credit profile may add
pressure to the listco's credit
rating.
We believe Shenhua is relatively resilient against
its stand alone credit rating buffer. Market
consensus expects positive FCF for FY16, and
EBITDA needs to essentially halve before it
reaches downgrade trigger. However, the credit
weakening of Shenhua Group (parent( driven by
slower-than-expected recovery of brent and coal
prices and significant overcapacity in China will
add downgrade pressure on Shenhua's listco. We
believe a Moody's downgrade is likely if its BCA
is lowered by a notch - in other words a 3 notch
uplift is max for now. S&P's risk is lower in our
view given SACP downside buffer still remains
although the agency highlights the weakening of
parentco credit as a potential downside trigger.
Likelihood: Moody's High, S&P Low.
Aluminum Corp of
China Ltd / Chalco
(NR, BBB-/Neg,
BBB+/Stable)
NA NA EBITDA interest coverage falls
below 1.0x for an extended
period.
S&P revised the outlook to Neg
from Stable on 11 Dec, 2015
given the agency’s view on the
aluminium sector. We estimate
Chalco's EBITDA interest
coverage at 1.5x at 1H15 (up
from 0.3x at YE14) hence a
meaningful recovery although
given the revised aluminum
price assumption to USD1,500/t
in 2016 and USD1,550/t in 2017
from USD1,650/t in 2016 and
USD1,750/t in 2017,
respectively the sector outlook
remains challenging hence
downgrade pressure remains on
the high side in the medium
term.
EBITDA/Int (of below 1x) is the key downgrade
trigger for S&P’s Negative outlook on its BBB-
rating. There is some headroom given Chalco’s
EBITDA interest coverage finishing 1H15 at
~1.5x, but we expect aluminum prices to remain
low in the near future, adding credit pressure on
the name. We think downgrade pressure remains
but probably a 2H story. Likelihood: S&P
Moderate (but rising)
China Gold
International
Resources Corp Ltd
(NR, BBB-/Neg, NR)
N.A. Moody has a rating for
its
parent (China National Gold
Group Corp, Baa3/CW
Neg). Adjusted
debt/EBITDA and/or
EBITDA interest coverage
fails to trend below 10x and
above 1.5x for an extended
period will add downgrade
pressure
Final rating incorporates BCA of
B1 and 4 notches of uplift based
on the expected government
support. Moody's expects gross
leverage and EBITDA interest
coverage standing at 15.0x and
1.4x in 2015 based on volatile
gold prices and large annual
capex related to its projects
under development.
SACP comes under pressure
when FFO-to-debt falls below
12% for an extended period.
Final rating will also be
affected if EBITDA interest
coverage of its parent, China
National Gold Group Corp
(CNGGC), falls below 2x for a
sustained period. S&P
believes gold price breakeven
for its EBITDA/Int ratio is
around US$1050/oz which is
not too far away from S&P's
2016 base case of US$1100/oz.
Per S&P the company's
FFO/debt at 7% in FY14 has
already breached its SACP
trigger. As China Gold
International Resources Corp
Ltd (CGIRC) is "Highly
strategic" to CNGGC
(BBB/Neg), its rating generally
is one notch below its parent.
CNGGC's EBITDA interest
coverage stood at 2.1x at YE14
which leaves very limited
headroom against trigger point.
S&P seems to think that the
company’s cost cutting
measures and lower capex plan
may not be sufficient to
stabilise the rating.
Gold price is a key driver for the credit in our
view. Average spot Gold in 2015 ($1160/oz) and
current spot today ($1200/oz), vs 2014 average of
$1266/oz, will bring the company closer to its
EBITDA/Interest trigger. Leverage is likely to
remain high due to large capex related to its
projects under construction and cost redution
measures may not be sufficient. We think the
rating buffer is limited for further weakening of
credit fundamentals and the final rating by S&P
could come under pressure given the limited
interest coverage headroom at the parent level.
For Moody's, parent co's metric has already
breached its downgrade trigger hence
downgrade pressure on parentco rating is high in
our view. Likelihood: S&P High; Moody's
High.
Source: Deutsche Bank, company data, S&P, Moody’s, Fitch
24 February 2016
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Page 24 Deutsche Bank AG/Hong Kong
Figure 55: Metals & Mining – spotting the next potential downgrade candidate (cont’d)
Company and its
family ratings
(Moody's, S&P,
Fitch)
Downside triggers -
Moody's Downside test - per Moody's Downside triggers - S&P Downside test - per S&P Our Assessment
China Minmetals Corp
(A3/RPD, NR,
BBB+/Stable):
Adjusted debt/capital ratio
exceeds 80%-90% and
adjusted debt/EBITDA fails
to improve to 6.0x by end
of 2017.
Moody's placed Minmetal on
review for downgrade on 22
Jan, 2016. Its final rating
incorporates BCA of Ba2 and 5-
notch uplift (limited room for
higher uplift). Adjusted gearing
ratio was 70.7% at YE14 and
leverage was 15.4x at end of
Jun'15. The merger of Minmetal
and MCC is a credit positive,
resulting in a expected LTM
leverage of 10.2x at end of
Jun'15, but Moody's is mindful
that the falling commodities
prices adds uncertainty towards
Las Bambas' EBITDA projection.
NA NA We see MCC’s merger, the integration of Las
Bambas and commodity prices (copper and
nickel) as the main drivers for the credit. We
think the merger with MCC at the minimum
reaffirms (if not elevate) Minmetal’s status as a
key central SOE. Las Bambas is expected to go
online Q1 2016 which is expected to generate
about half of Minmetal’s group EBITDA when
fully ramped up. However our back of the
envelop calculation suggests that, unless there is
a sharp rally in commodity prices, there is likely a
sizeable gap between Minmetal’s pro-forma
leverage (11-12x) (under fully ramped up Las
Bambas) versus what is needed (6x) to remain A3
with Moody’s. Likelihood: Moody's High.
Baosteel
Group(A3/RPD,
BBB+/Stable, A-
/Stable)
Adjusted debt/EBITDA rises
above 5.5x-6.0x and net
debt/EBITDA rises above
4.0x-4.5x.
Moody's placed Baosteel
Group's rating on review for
possible downgrade on 19 Feb,
2016. The review was driven by
a deteriorating credit profile
resulting from significant
overcapacity and soft steel
demand. The current rating
reflects a BCA of baa3 and a 3-
notch uplift. Moody's expects
Baosteel Group's adjusted
leverage to rise to above 6.0x in
2015, which will likely trigger a
BCA downgrade. In addition,
Moody's seems believe that a
the curremt 3-notch uplift will
not be extended.
EBITDA interest coverage falls
below 2.5x
S&P downgraded Baosteel
Group to BBB+ on 1 Feb, 2016,
due to weak industry
conditions. EBITDA/interest
ratio was 3.8x at YE14 and S&P
expects the ratio stays at 3.0x-
3.5x in 2016 and 2017.
Baoshan Iron & Steel
Co Ltd (A3/RPD,
BBB+/Stable, A-
/Stable)
A downgrade of Baosteel
Group
Moody's placed Baosteel
listco's rating on review for
possible downgrade on 19 Feb,
2016. This follows the
challenging operating
environment in China. Baosteel
reported a pre-tax profit of
RMB1.8bn in 2015, down 78%
yoy. Baosteel listco accounts for
over 60% of Baosteel Group's
revenue and a downgrade of
Baosteel Group will likely
trigger a downgrade of Baosteel
listco's rating.
Adjusted leverage remains
above 4.0x on a sustained
basis
S&P downgraded Baosteel
listco to BBB+ on 1 Feb, 2016,
due to challenging market
conditions. Under S&P's current
base case, leverage is expected
to stay above 3.0x-3.5x in 2016
and 2017.
We think Baosteel’s capex plans, the progress
around Zhanjiang’s project rampup and steel
spreads are the main drivers. We remain
concerned about excess capacity in the steel
sector and consolidation may take longer than
previously expected. Barring a significant
compression in steel spreads (not our base case),
both Baosteel Group and Baosteel listco should
still have some buffer against its downgrade
triggers with S&P post the downgrade as ratio
requirements have now eased. We will not be
surprised to see a downgrade from Moody's
given limited signs of a material recovery and the
agency's effort to recalibrate Baosteel's ratings in
its global mining portfolio. Likehood: S&P Low,
Moody's High
Source: Deutsche Bank, company data, S&P, Moody’s, Fitch
Best & Worst performers YTD China and HK IG outperformers YTD are largely dominated by short-dated bonds whereas longer-dated bonds have underperformed as investors pared back on duration. Sector wise we note that Chinese Property names and some of the cyclicals such as Huayi and Citic Ltd have also underperformed.
Figure 56: China & HK IG - Top outperformers Figure 57: China & HK IG - Top underperformers
Bond Price YTM (%)Z-spd
(bp)
YTD
spd chg
Far East Horizon 5.55% 'perp 104 9.5 144 (150)
Hutchison Whampoa 7.5% '27 137 3.6 196 (69)
China Aluminium 3.63% '19 105 2.2 122 (50)
Beijing Infrastructure 3.63% '19 104 2.1 120 (49)
BoC Aviation 3.88% '19 105 2.2 130 (45)
China Overseas Land 4.88% '17 103 2.1 134 (30)
Far East Horizon 4.63% '17 102 2.9 218 (24)
Lifestyle 5.25% '17 103 2.4 164 (21)
Bao-trans Enterprises 1.63% '18 100 1.4 156 (12)
China Shipping 4.25% '19 105 2.6 166 (8)
Bond Price YTM (%)Z-spd
(bp)
YTD
spd chg
Noble 3.63% '18 55 36.9 3,605 1,592
Wanda 7.25% '24 102 7.0 558 186
Sino Ocean 6% '24 100 6.0 459 138
Yuexiu Property 4.5% '23 91 6.0 473 116
CITPAC 8.63% 'perp 112 7.9 308 115
Sino Ocean 4.45% '20 99 4.6 361 113
Li & Fung 6% 'perp 103 6.2 374 100
Greenland 5.88% '24 98 6.1 472 91
Huayi 4% '19 97 5.0 398 87
China Railway Const 3.95% 'perp 103 7.2 222 67 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to
avoid repetition, we have not included perps or bonds maturing in 2016 in the tables.
24 February 2016
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Deutsche Bank AG/Hong Kong Page 25
Top picks: Lenovo 19s, Chalco 6.625% perps, China Railway Construction perps, Greenland Group 24s, Franshion 19s, Hang Lung Properties 22s, Noble 18s
Top pans: SWIRE 23s, Li & Fung 20s, Kerry Properties 21s, COSL 20s.
Changes in recommendation: downgrade Beijing Enterprises 20s (EUR) to Hold from Buy
Please refer to the Top Picks and Pans section at the end of this report for the full list of trade recommendations, risks and rationale.
24 February 2016
Credit
Page 26 Deutsche Bank AG/Hong Kong
Banks
Market volatility puts sub-debt at centre stage
We have maintained a negative stance on the valuations of AT1s in Asia since late 2014 on the premise of their expensiveness vs. European counterparts and Asian T2 bonds alike. On hindsight we welcome the yield/spread weakness for Chinese banks’ AT1 bonds that was evidenced earlier this month. We are cautious on the recent bounce in spreads for these bonds as we maintain our view that Chinese AT1 valuations have priced themselves beyond the global context. Early in Jan-16 they yielded 50-75bp less than European equivalents and about flat vs. US peers. The differentials at present stand at over 200bp. An unabating streak of negative headlines relating to China’s macro dynamics, a continuous trend of worsening asset quality, rising tolerance for defaults amongst China’s political circles, latest headlines on the potential revision down of regulatory norms for bad loan provisioning and a reversal of RRR cutting cycle at least for the mid-and-small-sized banks do not seem to be supportive of the rich bond valuations.
The relative richness of Asian banks’ AT1s has been recently highlighted by a
severe correction in DM AT1 instruments. We believe that the trigger for a sell-off in DM’s sub-debt space was mainly hinged on the re-emergence of fears of a repeated economic recession in Europe and the US coupled with the lack of ammunition by the regulators to stimulate growth and maintain liquidity in the domestic banking systems leading to the banks’ losses and inability to service the coupons on AT1 securities. The European banks’ AT1s were the
eye of the storm that hit the market in early Feb and sucked in Asian peers
with it. Our European strategists have recently released a report where they concluded that the widening in spreads/spike in yield for European AT1 bonds is more of a buying opportunity rather than a reflection of a “near default” scenario for the banks. Despite many Asian economies being in the deceleration mode, we believe that fundamentally, most of Asian banks are, similarly to their North European and Swiss peers, have substantial capital, liquidity and loan loss reserves to withstand a prolonged period of credit stress and are definitely not in a situation when investors should question their ability to service AT1 coupons.
Figure 58: lobal banks’ sub vs. senior index evolution Figure 59: Asia banks’ AT1, T2 and Snr yield evolution *
60
70
80
90
100
110
120
130
140
150
160
50
100
150
200
250
300
350
Sub Senior Differential
100
150
200
250
300
350
400
450
500
550
600
01/01/16 16/01/16 31/01/16 15/02/16
zsp, bps
B3AT1 index
B3T2 index
Senior index
Source: Deutsche Bank, Markit Source: Deutsche Bank, * average YTW for most liquid Asian bonds in respective capital structures
24 February 2016
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Deutsche Bank AG/Hong Kong Page 27
In Asia, lack of HY supply, especially in the China property space, has historically kept Chinese AT1 bonds in demand by the PB community. We remain wary of new AT1 supply from China in light of the recently announced TLAC rules and believe that the extension risk for the current paper is quite real. We recommend investors selling Chinese AT1 bonds as we believe they should be yielding at least ~50bp from the current levels to be more reflective of their underlying fundamentals. We highlight the following ideas as alternative re-investment/diversification options:
Bank of East Asia 5.5% AT1 call-20 – based in HK, it is the most attractively priced AT1 bond in Asia currently quoted at 92 price/7.5% YTC. The bank has superior capital ratios to many larger Chinese peers and has been taking proactive steps to clean-up its China-related loan book.
Woori Bank 5% 45c20 AT1 – the only AT1 bond issue by a Korean bank. It is rated a notch higher than some of Chinese AT1s, has lower supply risks and, most importantly, is issued out of jurisdiction with the most investor-friendly PONV language. The latter, in our view, calls for a 25-30bp premium (i.e. Woori trading at lower yield vs. Chinese peers) which has not been the case thus far.
China AMCs (Cinda, Huarong, China Orient) in the long end which provide an attractive yield-enhancement opportunities while remaining senior in the capital structure.
Select Chinese corporate perps with high likelihood for a call – e.g. Chalco 6.625% Perps ($105, 4.6% YTC), which is a senior perpetual structure with a strong 500bp step-up in coupon if not called on its first date (Oct-18).
Figure 60: Asian benchmark AT1s comparison Figure 61: Global benchmark B3T2 bonds comparison
250
300
350
400
450
500
550
600
650
700
01/01/16 16/01/16 31/01/16 15/02/16
zsp, bps BNKEA Perp c20 WOORIB 45 c20
BCHINA Perp c19 BOCOM Perp c20
CCB Perp c20 ICBCAS Perp c19
150
200
250
300
350
400
450
500
01/01/16 16/01/16 31/01/16 15/02/16
zsp, bpsBCHINA 24 WOORIB 24
ICBCAS 25 OCBC24
BAC 25 HSBC 25
UBS 24
Source: Deutsche Bank Source: Deutsche Bank
When it comes to B3T2 bonds issued by Asian banks, we note their material outperformance YTD vs. DM T2 bonds and their own AT1 instruments, which is understandable given the recent sell off in that asset class. At the same time, as the infamous “local bid” in China keeps supporting the senior banks bonds spreads in Asia, the most recent widening of T2 bond spreads presents a buying opportunity, in our view. This view is also supported by a pronounced bounce in European T2 instruments (chart above) vs. their AT1 equivalents. However, a more careful credit selection is required given the differences in
the Basel III, statutory bail-in and capital buffers amongst the countries. We expect new supply this year to come mostly from higher-rated Asian countries – Singapore, S. Korea and China, driven by D-SIB/G-SIB & TLAC requirements, while Hong Kong and Thai issuers would be more opportunistic in nature.
24 February 2016
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Page 28 Deutsche Bank AG/Hong Kong
Indian banks could be an outlier depending on the state of their asset-quality deterioration and capital infusion by the government. We estimate ~USD13.5bn worth of sub-debt (T2+AT1) to be issued by Asian banks in 2016.
Amongst the higher-rated jurisdictions in Asia, we note quite contrasting trends. Korean banks paper – especially B3T2 – has visibly underperformed
its peers in Singapore. If we extend the comparison to include Europe, Japan and Australia, we also note quite visible outperformance of Singapore credits on both a spread multiple and absolute spread basis. This, to an extent, is a reflection of the higher credit quality of Singaporean banks, lower probability of new sub-debt supply and scarcity of sub-debt in USD generally.
In South Korea, where last year banks demonstrated their ability to withstand fundamental headwinds (mostly driven by a worsening external environment), T2 bonds have materially lagged the yield compression of the senior peers and have been more resilient to the market volatility vs. AT1 bonds YTD. The richness of Singapore banks’ T2 bonds is also evident from the fact that they are the rare sub-debt paper in Asia that has fully recovered losses since the tights in Apr-15. For now we refrain though from recommending investors
sell Singapore banks’ sub-debt as we believe it is at FV and is benefitting
from a flight to quality in current market conditions. We would watch closely their spread performance and should European equivalents, even such equally-rated bonds as HSBC, fail to compress vs. Singapore banks (e.g. OCBC 24s) where YTM differential at present is ~95bp vs. ~25bp at the start of this year, there may be a case to switch out of the latter into the former.
Figure 62: Spread of CCB bonds across capital structure Figure 63: Spread of Woori bonds across cap structure
125
175
225
275
325
375
425
01/01/16 16/01/16 31/01/16 15/02/16
zsp, bps CCB 25 c20 (B3T2) CCB Perp c20 (B3AT1)
CCB 20 HRAM 25
HRAM 20
75
125
175
225
275
325
375
425
475
01/01/16 16/01/16 31/01/16 15/02/16
zsp, bps WOORIB 24 (B3T2) WOORIB 20
WOORIB 45c20 (B3AT1) WOORIB 37c17 (B2T1)
KEBHNB 24
Source: Deutsche Bank Source: Deutsche Bank
We do remain of the opinion that Asian banks’ B3T2 bonds remain the most value accretive as an asset class and would highlight the following samples as our preferred way of expressing such a view:
Woori Bank 4.75% 24s – the bonds remain attractive to us in terms of absolute spread and also as a multiple vs. senior. It currently trades about ~20bp lower yield-wise vs. European peers, but about ~45bp wider vs. Singapore banks’ T2s in similar duration (vs. historic differential of ~20bp). As we mentioned above, we consider S. Korea to have the most creditor-friendly PONV regulation when it comes to sub-debt, and the country is unlikely to follow a full-blown statutory bail-regime as we had seen in Europe.
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CCB 3.875% 25c20 – this bank was the latest one to issue a AT1 bond in 2015 (Dec), which perhaps is the main reason for relative underperformance of this T2 paper YTD. Despite its callable structure, it trades flat to BoChina’s 10Y T2 bond spread-wise and has also widened ~20bp vs. similarly dated callable bond of a weaker and smaller Bank of Communications. CCB has the lowest new supply risk amongst the big for banks in China in our view given its more conservative risk-taking approach and greater reliance on the local currency funding.
BNKEA 4.25% B3T2 24c19 - as they have visibly underperformed HK and Chinese peers since mid-Oct and more so YTD. Yield-wise the paper had first fully converged and now is ~20bp wider v.s. 10Y bullet B3T2 bonds of BCHINA (used to trade ~60bp tighter six months ago). We note that BEA already fully meets HKMA’s capital requirements prescribed to D-SIBs which should limit the future supply risk.
Figure 64: Top outperformers (spread change) Figure 65: Top underperformers (spread change)
Bond Price YTM (%)Z-spd
(bp)
YTD spd
chg
China Citic Bank 6% '24 109 4.7 217 (85)
ICICI Bank 7.25% 'perp 103 3.8 161 (64)
Bank of Ceylon 6.88% '17 102 5.3 460 (50)
Kookmin Bank 3.63% '17 102 1.3 59 (33)
Industrial Bank of Korea 2.38%
'17
101 1.3 55 (25)
Bank Negara Indonesia 4.13%
'17
102 2.4 166 (22)
Bank of Communications 2.13%
'17
100 1.6 87 (21)
Bank of China 2.13% '17 100 1.6 87 (20)
DBS Bank 2.35% '17 101 1.0 31 (19)
Shinhan Bank 4.38% '17 104 1.5 74 (19)
Bond Price YTM (%)Z-spd
(bp)
YTD spd
chg
Bank of East Asia 5.5% 'perp 93 5.6 609 200
National Savings Bank 5.15%
'19
90 8.5 751 188
Ind & Comm Bank of China 6%
'perp103 5.5 425 168
National Savings Bank 8.88%
'18
102 8.2 735 137
Woori Bank 5% '45 98 4.8 447 137
Bank of Communications 5%
'perp
100 4.7 392 118
ICICI Bank 7% '20 114 3.8 266 108
China Construction Bank 4.65%
'perp
99 4.4 377 102
Bank of East Asia 8.5% 'perp 114 7.1 337 95
Bank of Ceylon 5.33% '18 97 7.0 616 88
Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank
We note that Basel III-compliant AT1s have also underperformed the entire bank bond space in Asia, as above tables tell us. We continue to believe that valuations are still generally too rich for the AT1 space in Asia with the exception of Bank of East Asia bonds. Interestingly, China CITIC Int’l T2 bond spread compression has gone too far. The rest of the dynamics remain somewhat unexciting, in our view, with clients continuing to chase short-dated senior paper with limited appetite to deploy cash.
Sub debt top picks: Basel III T2 bonds in China, Korea and Hong Kong; Bank of East Asia 5.5% AT1.
Sub debt top pans: China Taiping Perp, China banks AT1s.
Changes in recommendation: upgrade OCBC 4.25% T2 bonds, CCB Asia 4.25% 24c19 and Bank of China 5% 24s to Buy from Hold. Upgrade CITIC Bank Int’l 6% 24s to Hold from Sell.
Please refer to the Top Picks and Pans section at the end of this report for the full list of trade recommendations, risks and rationale.
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HY Corporates
Assessing refinancing risks
2018/19 is a peak maturity year for HY not only in Asia but across EM. At the same time, the current off-shore debt market is not accessible for a large portion of existing Asian HY issuers except solid China property companies. Unsurprisingly, HY supply so far has been underwhelming and we expect it to remain so in 2016, limiting chances of prefunding the maturities. We also got lot of questions on potential refinancing options for upcoming HY maturities during our recent meetings. Thus, we look at bonds maturing in 2017 and 2018 in Asia HY and discuss our views on funding gap and potential refinancing options if USD bond market remains inaccessible.
Looking at Other HY (excl China property), there are two bonds (Maoye 17 and China Hongqiao 17) totalling USD700 million maturing in 2017 and nine bonds with total notional of USD3.4 billion maturing in 2018. We have looked at potential funding gap based on some simplistic assumptions for annual FCF run rate and last available cash balance. We have estimated period end cash balance (2016 for Maoye and 2017 for others) and compared it with offshore loan/bond maturities to estimate the funding gap. Based on our analysis, 10 out of 13 corporates have more than USD100 million funding gap as of end 2017 (Figure 70). This is clearly an extreme scenario where we have assumed that off shore loans /bond market remains completely shut. We do not expect offshore loan market to remain shut especially for more asset heavy companies though bond market may remain inaccessible for some. Apart from bank loans, other alternatives that companies with high funding gap can tap include onshore bond and asset sales. We have ignored equity injection for our analysis.
China property is still the segment that has good access to various funding channels both onshore and offshore. Onshore funding includes public and private corporate bonds, asset-backed securities (e.g., Shimao and Country Garden have tapped this market), and Panda Bonds (e.g., Country Garden and now pending ones including Agile). On the syndicated loans side, we have seen a few developers like Yuzhou and Central China paying off the offshore syndicated loans (these two have zero syndicated loans currently) while a few developers including Aoyuan has tapped syndicated loans recently. Having said this, evidence from some non-SOE backed China property companies suggests that transferring money from on-shore to off-shore may have become more difficult so far in 2016, as compared to in 2H15, when it was easy. We are also stress-testing the China property HY developers that have off-shore USD/SGD/HKD/CNH bonds that are due in 2H16-2018 under the same scenario as other Asia Credit HY issuers – what would their cash flows look like if they cannot tap the off-shore debt market? This is a stress-test and is not our base case scenario, as we expect the property issuers to be able to access on-shore and off-shore funding and receive policy support this year. Our analysis is based on DB forecasts for the company’s net operating cashflows (only Future Land and KW ’s 2016 cash inflow from contract sales and major cash outflow items are guided given they have announced FY15 results already). Even under such a scenario, we see minimal risks of non-repayment from these China HY developers. Agile, reentown, Logan, and Powerlong are “low” cash levels in the future, per our estimates in this scenario; but, for instance, Agile has applied for RMB15bn of Panda Bonds (private) and reentown’s largest share holder is SOE CCCG, which mitigate some of the refinancing risks. Those that show very high cash levels even assuming no tapping of additional new debt are Cifi and Yanlord, per our estimates (Figures 71 & 72).
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Top & Bottom performers YTD Some of the top underperformers were driven by negative headlines such as Future Land and Hsin Chong. Country Garden also saw some news headlines around its pending investment in Forest City and potential acquisition of Dah Sing Insurance (per newspapers). Evergrande was downgraded by one of the rating agencies in January. In the case of outperformers, some of them announced calling of bonds or early redemption of bonds (e.g., Hopson, China SCE for its 2017s).
Figure 66: China Property Top Outperformers Figure 67: China Property Top Underperformers
Bond PriceYTD
price chgYTM (%)
Z-spd
(bp)
China SCE 10% '20 108 2.6 7.7 665
Oceanwide 11.75% '19 110 1.0 8.4 759
Yuzhou Property 8.63% '19 105 0.9 6.8 591
Tuspak 5.38% '18 101 0.8 5.1 420
Powerlong 7.63% '18 100 0.5 7.7 684
Modern Land 12.75% '19 104 0.5 11.5 1,050
Road King 9.88% '17 105 - 6.5 449
Poly Property 4.75% '18 102 - 4.0 321
Hopson 9.88% '18 103 - 33.7 3,573
SOHO China 7.13% '22 106 (0.1) 6.0 456
Bond PriceYTD
price chgYTM (%)
Z-spd
(bp)
Hsin Chong 8.75% '18 87 (16.5) 15.9 1,504
Future Land 10.25% '19 105 (4.3) 8.7 775
Central China 8.75% '21 95 (3.8) 10.0 889
Evergrande 8.75% '18 99 (3.3) 9.1 819
Fantasia 10.75% '20 97 (2.8) 11.7 1,073
Beijing Capital Land 8.38% 'perp 105 (2.6) 12.0 501
Country Garden 7.5% '20 105 (2.6) 6.2 521
Greentown 5.88% '20 102 (1.5) 5.3 423
Shui On 10.13% 'perp 105 (1.5) 12.4 651
Longfor 6.75% '23 103 (1.5) 6.3 504 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to
avoid repetition, we have not included perps or bonds maturing in 2016 in the tables.
In Other HY space, top underperformers are mostly commodity players (Vedanta long end, Yanzhou, and Yingde) or event driven names (Rolta, Shanshui, etc.). Pactera, Stats Chippac and Hengdeli have also traded weak on potential earnings disappointment. On the other hand Vedanta’16 is the top performer given better clarity on redemption, followed by Indo credits. Indo HY in general has benefited from improved macro sentiments as well as attractive valuation at the beginning of the year. Longer-dated Tata Steel has also done well given recent policy support for steel players as well as relatively steeper curve at the beginning of the year.
Figure 68: HY (ex China Prop) Top Outperformers - Figure 69: HY (ex China Prop) Top Underperformers
Bond PriceYTD
price chgYTM (%)
Z-spd
(bp)
Vedanta 6.75% '16 99 8.6 10.2 967
Modernland 9.75% '19 99 6.9 10.0 906
Japfa Comfeed 6% '18 86 4.5 13.9 1,308
Alam Sutera 6.95% '20 90 4.1 10.0 896
Indiabulls 10.25% '19 96 4.1 11.7 1,070
MPM 6.75% '19 98 3.4 7.5 655
Star Energy 6.13% '20 99 3.1 6.4 544
Tata Steel 5.95% '24 87 3.0 8.1 668
China Oriental 7% '17 99 3.0 7.6 684
Delhi Intl Airport 6.13% '22 102 2.5 5.7 445
Bond PriceYTD
price chgYTM (%)
Z-spd
(bp)
Rolta 8.88% '19 31 (26.0) 56.5 5,562
Yingde Gases 7.25% '20 68 (10.8) 19.1 1,812
Pactera 8% '21 72 (8.8) 16.1 1,501
Shanshui 7.5% '20 81 (6.5) 13.7 1,267
Vedanta 9.5% '18 71 (5.8) 26.4 2,556
Yanzhou Coal 5.73% '22 86 (4.5) 8.7 744
Stats Chippac 8.5% '20 92 (4.5) 10.6 953
Hengdeli 6.25% '18 96 (4.4) 8.3 752
China Oil & Gas 5% '20 88 (3.6) 8.4 733
Vista Land 7.38% '22 102 (3.0) 7.0 573 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to
avoid repetition, we have not included perps or bonds maturing in 2016 in the tables.
Top picks for short dated bonds: China il & as’18, Parkson’18, Yingde’18, Multipolar’18, MNC Investama’18, Rolta’18, Aoyuan’18, reentown’18,
Top pans for short dated bonds: China Hongqiao’17.
Please refer to the Top Picks
and Pans section at the end of
this report for the full list of
trade recommendations, risks
and rationale.
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Figure 70: Other High Yield - Funding Gap
Current
CashLT Debt ST Debt EBITDA
Net
InterestCapex
Tax &
Dividend
s
FCF
China Oi l & Gas 1H15 HKD mln 3,013 4,985 1,155 1,100 (258) (800) (250) (208) 2,492 240 - (460) (71)
Parkson FY15 RMB mln 3,353 3,373 644 500 (99) (250) (300) (149) 3,056 510 - (704) (108)
Hengdel i 1H15 RMB mln 1,604 3,104 727 1,000 (210) (150) (350) 290 2,329 450 (78) (474) (73)
Yingde** 1H15 RMB mln 1,084 7,087 2,899 2,500 (596) (1,000) (600) 304 1,844 240 (1,133) (174)
Maoye* 1H15 RMB mln 1,030 4,602 6,728 1,200 (579) (600) (500) (479) 311 311 (1,271) (3,221) (496)
China Hongqiao** 1H15 RMB mln 7,184 26,114 20,403 12,000 (2,182) (10,000) (2,500) (2,682) 479 1,200 (4,401) (9,672) (1,488)
Tower Bersama** 9M15 IDR Bln 363 19,038 193 3,000 (1,427) (1,350) (1,000) (777) (1,385) 300 - (5,735) (425)
Japfa 9M15 IDR Bln 780 5,041 2,164 1,800 (611) (420) (350) 419 1,722 750 (209) (1,938) (144)
Gajah Tunggal 9M15 IDR Bln 916 7,259 543 1,600 (559) (945) (250) (154) 569 390 - (6,571) (487)
Multipolar*** 9M15 IDR Bln 1,300 3,346 290 297 (300) - (150) (153) 955 300 - (2,450) (181)
MNC Investama*** 9M15 IDR Bln 250 4,928 - 250 (284) - (100) (134) (53) 100 - (5,080) (376)
Vedanta*** Q3FY16 USD mln 400 8,053 - 159 (422) - - (263) (126) 20 345 (550) (550)
Rolta Q3FY16 INR mln 2,640 49,500 6,600 12,683 (4,630) (6,508) (1,030) 515 3,671 2,740 - (7,745) (113)
Company with
funding gap of $100
mln or more
Asset
sale
Access to
local bond
market
Access to
bank
funding
Refi risk
Parkson Yes Low
Yingde Yes High
Maoye Yes High
China Hongqiao Yes Yes High
Tower Bersama Yes Yes High
Japfa Yes Yes Low
Gajah Tunggal High
Multipolar Yes Yes Low
MNC Investama Yes High
Vedanta Yes Yes Yes Low
Rolta Yes High
Min cash
Funding gap
(reported
currency)
Other capital
market trans.
in 2016/17
Funding gap
(USD
equivalent)
Last reported Last
reported
period
Reported
currencyCompany
End
cash*
Annual FCF run rate
Source: Company data, Deutsche Bank Estimate
* For Maoye estimated end cash as at 2016 end as the only USD bonds mature in 1H17. For others estimated end cash as at 2017 end **PF numbers post recent bonds/syndicated loan (for Tower Bersama and Yingde) and rights issue (China Hongqiao) ***For Vedanta, MNC and Multipolar we have just assumed Holdco cashflows. EBITDA is primarily dividend from key opcos. Other assumptions:: 2% return on cash balance being set off against interest cost ST loans/onshore bonds gets refinanced/rolled over 2016 and 2017 FCF = EBITDA-Capex-Interest-Tax & Dividends Min cash assumed as 3% of sales or as per management Annual EBITDA and Tax & Dividends run rate is similar to 1H15/2014 Vedanta - Assuming entire USD2.2 billion intercompany loan (as of Dec-15) from Vedanta Ltd is repaid in 2016. Also assumed USD1 billion bank loan in 2018 is refinanced Rolta - Assumed 1) USD35 mln working capital outflows each year for the next 2 years (added to capex). 2) Bank loans of INR9.4bn maturing in 2016/17 and INR1.6bn in 2018 get refinanced.
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Figure 71: DB estimates for 2016F, 2017F, 1H2018F cashflow of HY China property names under coverage with off-shore USD/SGD/HKD/CNH bonds
maturing in 2H16-2018 under our stressed scenario
RMB bn Estimated cash inflow Estimated cash outflow Net operating cashflow
Est Cash
inflow
Construction
cost
SG&A Interests Taxes Est Cash
outflow
2016 Agile 41.8 1.8 43.6 -4.5 -18.0 -3.3 -3.6 -8.0 -4.5 -41.9 1.7
2017 Agile 41.8 1.8 43.6 -3.0 -18.0 -3.3 -3.6 -8.0 -4.5 -40.4 3.2
2016 Aoyuan 14.8 0.3 15.1 -5.3 -6.0 -1.0 -1.3 -1.6 -2 -17.2 -2.1
2017 Aoyuan 14.8 0.5 15.3 -2.0 -6.0 -1.1 -1.4 -1.6 -2.5 -14.6 0.7
1H2018 Aoyuan 8.0 0.3 8.3 -0.8 -3.0 -0.5 -0.7 -0.9 -1.3 -7.2 1.1
2016 Central China 15.6 0.3 15.9 -3.5 -6.5 -1.3 -1.0 -2.4 -3.0 -17.7 -1.8
2017 Central China 15.6 0.4 16.0 -2.0 -5.0 -1.4 -1.2 -2.5 -3.2 -15.3 0.7
1H2018 Central China 7.8 0.2 8.0 -1.0 -2.5 -0.7 -0.6 -1.3 -1.6 -7.65 0.4
2016 CIFI 30.6 0.6 31.2 -10.0 -8.5 -1.4 -1.5 -3.0 -1.5 -25.9 5.3
2017 CIFI 30.6 0.8 31.4 -9.0 -9.0 -1.7 -2.0 -3.7 -2.0 -27.4 4.0
1H2018 CIFI 13.8 0.4 14.2 -4 -4.5 -1.0 -1.2 -1.7 -0.3 -12.7 1.47
2016 Evergrande 200.5 2.5 203.0 -60.0 -68.0 -18.0 -23.0 -16.0 -18.0 -203.0 0.0
2017 Evergrande 200.5 2.9 203.4 -45.0 -74.8 -21.6 -27.6 -18.4 -20.7 -208.1 -4.7
1H2018 Evergrande 90.2 1.4 91.7 -18.0 -35.0 -10.8 -13.8 -9.2 -10.4 -97.2 -5.5
2016 Future Land 38.0 0.6 38.6 -15 -16 -2.0 -1.3 -3.5 -0.3 -38.1 0.5
2017 Future Land 38.0 0.6 38.6 -13 -16 -2.5 -1.5 -4.2 -0.5 -37.7 0.9
2016 Greentown 30.0 1.2 31.2 -8 -14 -3.0 -2.4 -4.8 -1.0 -33.2 -2.0
2017 Greentown 30.0 1.5 31.5 -5 -14 -3.3 -2.6 -5.5 -1.0 -31.4 0.1
2016 KWG 19.9 0.7 20.6 -5 -8.2 -1.65 -1.6 -2.4 -0.9 -19.7 0.9
2017 KWG 19.9 0.8 20.7 -4 -9 -1.75 -1.6 -2.6 -1.1 -20.1 0.7
2016 Logan 22.2 0.4 22.6 -10.0 -8.5 -1.4 -1.5 -2.5 -1.6 -25.5 -2.9
2017 Logan 22.2 0.6 22.8 -7.0 -9.5 -1.6 -1.7 -3.2 -2.0 -25.0 -2.2
2016 Longfor 52.2 2.0 54.2 -18.0 -24.0 -3.6 -3.4 -8.0 -1.8 -58.8 -4.6
2017 Longfor 52.2 2.7 54.9 -10.0 -22.0 -3.6 -3.5 -8.5 -1.8 -49.5 5.4
2016 Powerlong 13.0 2.0 15.0 -2.5 -7 -2.0 -2.0 -2.0 -0.3 -15.8 -0.8
2017 Powerlong 13.0 2.7 15.7 -1.0 -7.5 -2.5 -2.4 -2.7 -0.4 -16.5 -0.8
1H2018 Powerlong 5.9 1.7 7.6 -0.5 -3.5 -1.2 -1.1 -1.5 -0.2 -8.0 -0.4
2016 Sunac 32.0 0.4 32.4 -10.0 -11.0 -2.5 -3.0 -6.0 -1.7 -34.2 -1.8
2017 Sunac 32.0 0.5 32.5 -6.5 -12.0 -2.7 -3.2 -6.6 -1.9 -32.9 -0.4
1H2018 Sunac 14.4 0.2 14.6 -3.0 -6.0 -1.4 -1.6 -3.3 -1.0 -16.2 -1.6
2016 Yanlord 26.2 0.8 27.0 -7 -8.5 -1.1 -1.5 -2.5 -0.3 -20.9 6.1
2017 Yanlord 26.2 0.8 27.0 -5 -9 -1.5 -2.0 -3.5 -0.4 -21.4 5.6
2016 Yuzhou 14.3 0.5 14.8 -7.0 -5.7 -5.1 -17.8 -3.0
2017 Yuzhou 14.3 0.6 14.9 -3.0 -6.0 -5.5 -14.5 0.4
1H2018 Yuzhou 6.4 0.3 6.7 -1.5 -3.0 -3.0 -7.5 -0.7
Est net operating
cashflowYear Company
Est cash
proceeds
from
contract sales
Our est.
rental income, prop
management fees,
other income, etc
Our est.
land
premium
payment
Dividends
and
others
Note: All figures are DB estimates except for Future Land and KWG's 2016 cash flow numbers (other than KWG's landbanking numbers), which are guidances from FY15 results. For 2017, we just uniformly assume flat YoY contract sales in this sensitivity analysis and for 1H18, we assume 45% of 2018's contract sales figure (assuming FY18 flat YoY). In this stressed scenario, we assume developers will buy less landbank in 2017 than in 2016; we assume companies already took care of 1H16 off-shore debt due. Source: Company, Deutsche Bank Estimates
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Figure 72: Summary of cash availability to cover offshore debt in 2H16-2018 under our stressed scenario
RMB bn Estimated
total cash
on hand as
of start-2016
Est net
operating CF
in 2016F
2H16 off-
shore syn
loans due
(converted to
RMB bn)
End-
2016F
cash
Est net
opearating
CF in
2017F
2017 off-
shore syn
loans due
(converted
to RMB bn)
2017 off-
shore
bonds
End-
2017E
cash
2018 off-
shore
bonds due
2018 off-shore
syndicated loans
(converted to
RMB)
1H18F net
operating
cashflow
Cash level after
accounting for
1H18 CF and
2018 off-shore
debt due
Forecasted
till
Enough
to cover?
Risks of high
funding gap
Agile 13.5 1.7 15.2 3.2 -2.0 -10.8 5.7 2017 Yes Low
Aoyuan 7.8 -2.1 0 5.7 0.7 0 0 6.5 -2.3 -0.7 1.1 3.5 2018 Yes Minimal
Central China 9.0 -1.8 7.2 0.7 0 0 7.9 -2.6 0 0.4 5.3 2018 Yes Minimal
CIFI 14.0 5.3 0 19.3 4.0 0 0 23.3 -3.3 -1.2 1.5 18.8 2018 Yes Minimal
Evergrande 158.0 0.0 -0.3 157.7 -4.7 0 0 153.0 -9.8 0 -5.5 143.3 2018 Yes Minimal
Future Land 7.8 0.5 8.3 0.9 0 -1.6 7.6 2017 Yes Minimal
Greentown 12.0 -2.0 -1.6 8.4 0.1 0 0 8.5 -3.6 (Feb) 2017 Yes Low
KWG 12.6 0.9 13.5 0.7 -1.7 -2.6 9.9 2017 Yes Minimal
Longfor 18.5 -4.6 -0.5 13.4 5.4 -1.5 0 17.3 -2.0 -1.8 13.5 2018 Yes Minimal
Logan 10.5 -2.9 7.6 -2.2 -0.7 -1.6 3.0 2017 Yes Low
Powerlong 6.0 -0.8 5.2 -0.8 0 -1.5 2.9 -1.3 0 -0.4 1.6 2018 Yes Low
Sunac 18.0 -1.8 16.2 -0.4 -1.5 0 14.3 -2.6 -1.9 -1.6 9.8 2018 Yes Minimal
Yanlord 15.0 6.1 21.1 5.6 -1.6 -1.9 23.2 -2.6 (Mar) 2017 Yes Minimal
Yuzhou 9.2 -3.0 6.2 0.4 0 0 6.6 -2.0 0 -0.7 4.7 2018 Yes Minimal Note: We use spot FX rates in this analysis and did not take into currency fluctuations. FX rates used are: 6.5 for USDCNY, 1.2 for CNYHKD, and 4.7 for SGDCNY. We include restricted cash in our total cash estimates. We assume companies already took care of 1H16 off-shore debt due. ** Assumptions used are: For 2017, we just uniformly assume flat YoY contract sales in this sensitivity analysis and for 1H18, we assume 45% of 2018's contract sales figure (assuming FY18 flat YoY). In this stressed scenario, we assume developers will buy less landbank in 2017 than in 2016. *Longfor's syndicated loans are our assumptions. We have total syndicated loans amounts, but no exact maturities. We only put syndication loans’ maturity, without accounting for amortization for developers. All figures are DB estimates except for Future Land and KWG's 2016 cash flow numbers (other than KWG's landbanking numbers), which are guidances from FY15 results. Source: Company, Deutsche Bank Estimates
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Changes in recommendations
Figure 73: Recommendation changes
Bond Issue & Size
(USD mm) From To
Entry
price/
G-spd Price
YTM
(%)
G-
spd
(bp) Rationa le & Risks
Sovereigns
Philippines 3.95%
2040 (2000)
Cred itSell Cred itHo ld 97bp 107.4 3.5 114
Philippines 5% 2037
(1500)
Cred itSell Cred itHo ld 110bp 121.9 3.5 129
Financia ls
China Orient AM 5%
2024 (400)
Cred itHo ld Cred itBuy N/A 102.4 4.7 301 China Orient AMC which used to trade ~30bps inside of Cinda AMC 24s at the beginning of the year is
now trading flat. The spread widening is mainly on the back of investor fears that the acquisition of
Dalian Bank will be negative for the capital strength of Orient AMC. However it should be noted that
Orient's equity / assets has improved to 17.1% at the end of 1H15 from 12.6% in Dec-14. Last month,
Orient AMC started the process to establish itself as a JSC and eventually IPO the company in 2017.
This may result in ORIEAS bonds being excluded from EMBIG index, which in our view could present a
buying opportunity for investors. Key risks: spike in domestic corporate default rates, worsening of
RMB liquidity, failure by the recently announced government stimulus to yield tangible results.
OCBC 4.25% 24 sub
(1000)
Cred itHo ld Cred itBuy N/A 104.6 3.6 197 OCBC's 2024 B3T2 bond is one of the most prominent underperformers in the subordinated Asian
bonds space YTD, incl vs. IG-rated peers in DM. It used to trade ~25 bps wider vs. senior Bank of China
'25 at the beginning of the year which we believe was a fair differential; however it has now widened to
~75bps. Despite having a stable business profile and low regulatory uncertainty, its yield movement has
mirrored the ~60 bps widening of BCHINA '24 B3T2 bonds which we believe is a buying opportunity.
Key risks: material deceleration of Singapore's or China's economy, sharp negative correction of
property prices, failure to improve capital ratios.
Bank of China 5.0%
2024 sub (3000)
Cred itHo ld Cred itBuy N/A 104.1 4.4 276 Bank of China 2024 bond has underperformed the most in the Chinese B3T2 space with its spread
differential relative to Huarong AMC '25 reducing from ~60 bps at the beginning of the year to ~20 bps.
Also the bond is trading at its widest level in the last one year and its spreads have widened ~85 bps
yoy even though its financial performance continues to remain stable. BCHINA 24 used to trade 50bps
inside of ICBC 25s at the beginning of the year and now trades marginally wider than it. We believe the
bond spread should compress by at least 30 bps in the near future. Risks: derailment of banking
reforms, spike in domestic corporate defaults, faster than expected NPLs growth, negative ratings
action. China Construction
Bank Asia 4.25% 2024
(750) sub
Cred itHo ld Cred itBuy N/A 101.7 3.9 275 CCB Asia's B3T2 bonds have been affected by BEA bonds underperformance and its spread has
widened ~35 bps in the past 2 weeks alone. The bond which is used to trade ~15bps inside of weaker
Dah Sing Bank now trades wider to it by ~20 bps. CCB Asia '24c19 bonds have traded flat since the
beginning of the year and their underperformance stands in contrast to Citic Int'l 24c19 bonds which
have tightened by ~60 bps in the same period. Also CCB Asia's strong backing of a large established
Mainland parent should be reflected in its spreads compared to the other weaker Hong Kong based
peers. Key risks: slower than expected GDP growth in China, material worsening in HK property prices,
continued suppression of NIM coupled with spike in loan delinquencies.
Axis Bank 3.25% '2020 Cred itSell Cred itHo ld 149bp 101.2 2.9 182 Axis Bank has better capitalization (T1 CAR of 10.8%) and lower impaired loans (Gross NPL of 1.8%,
Net NPL of 0.8%) compared to other weaker state-owned peers and even private banks such as ICICI
Bank. The main reason for this is its low exposure to stressed sectors and high exposure to retail
lending. This should help the bank report stable and growing earnings when other banks struggle to
avoid losses and maintain adequate capitalization. Hence we believe further downside in spreads of
Axis Bank bonds is limited. Key risks: materially stronger economic data from India, sovereign ratings
upgrade, sharp depreciation of INR, sizeable new issuance.
CITIC Bank Int'l 6%
2024 (300) sub
Cred itBuy Cred itHo ld 290bp 108.5 4.7 263 CINDBK yield has dropped by ~40 bps since the beginning of the year. We close the trade based on
relative valuation. We noted the underperformance of bonds of the some of the well placed Hong Kong
banks vs. CINDBK, which we do not think is warranted. Further spread compression is limited as it is
now trading in-line with Bank of East Asia '24 bond - a stronger peer in the Hong Kong banking space.
Risks: slower than expected GDP growth in China, material worsening in HK property prices, continued
suppression of NIM coupled with spike in loan delinquencies.
Investment Grade Corporates
Beijing Enterprises
1.435% 2020
(EUR500)
Cred itBuy Cred itHo ld 200bp 98.3 1.9 229 Whilst we are comfortable with the downstream gas utilities sector in China but are worried about a
potential credit rating downgrade following the proposed EUR1.4bn acquisition of European energy
from waste company. The funding plan is still uncertain but it highlights Beijing Enterprises acquisitive
appetite away from its core Chinese market. We downgrade the EUR bonds to Hold. Key downside
risks include adverse gas tariff policies, reduced indirect ownership from Beijing SASAC or a significant
debt-funded acquisition. Key upside risks: Equity raising to fund its latest acquisition.
China Property HY
Central China 8%
2020 (USD200mn)
Cred itHo ld Cred itBuy na 95.25 9.5 847 We upgrade Central China 2020C17 from CreditHold to CreditBuy as we believe valuations seem to have
factored in a potential downgrade in credit rating and valuations look attractive, even against some solid
single B names. Its 2020s provides close to 200bp pick-up against Yuzhou 2019s new in Z-spreads.
Although its 2015 EBITDA margin is likely to be weak given considerable discounts in Tier-3 and 4 cities,
we believe its EBITDA margin would improve YoY in 2016 with higher bookings in Zhengzhou.
Downside risks include: more than one credit rating downgrade, aggressive expansion and/or higher-
than-expected JCE debt and exit of CapitaLand as a shareholder.
We remain constructive on Philippines, despite its slower pace of GDP expansion and the upcoming
Presidential elections in the country. We close these two trades on valuation grounds driven by the fact
that the spread widening in PHILIP long end has already reached 12M highs and has limited further
upside potential, even despite PHILIP's curve remaining inverted. We'd rather pick-up additional spread
by staying Long 15Y area of the curve. Risks: material strengthening of UST yields, continuous
outperformance of Asia IG vs. EM, material weakness in oil price, sovereign ratings upgrade.
Source: Deutsche Bank, Note: Entry price is cash price for HY names and G-spd for IG names
24 February 2016
Credit
Page 36 Deutsche Bank AG/Hong Kong
Top picks and pans
Figure 74: Asia sovereign credits Top trade ideas
Bond Issue & Size
(USD mm) Price
YTM
(%)
G-spd
(bp) Rationale & Risks
Buy CHINA 5Y CDS n.a. n.a. 135 China is still clearly not out of the woods in terms of its economic performance and the direction of the fiscal policy would
remain towards more easing. The pressure points remain unchanged: RMB & local bond markets valuations, local rates’
response to FED hikes, USD supply from China is relatively easier to short, should fund outflows re-occur China IG bonds
would be most vulnerable here due to their superior liquidity and still light positioning by Asian investors in such even
more vulnerable risk assets as Indo and MALAY. We believe it makes sense to hedge this risk via China 5Y CDS. Main
risks: a potential positive swift revival of the credit markets in Asia against the global rates volatility and concerns over Asia
funds outflows; visible recovery in global commodity prices.
Buy Philippines
7.75% 2031 (2069)
148.5 3.5 156
Buy PGN 5.125%
2024 (1350)
82.3 7.1 460
Buy Pertamina 4.3%
2023 (1325)
95.4 5.1 351
Buy Pertamina 6%
2042 (1250)
85.3 7.3 481
Buy Pertamina
5.625% 2043 (1625)
82.3 7.1 460
Buy PLN 5.5% 2021
(1000)
106.3 4.3 290
Buy Pelindo II 4.25%
2025 (1100)
92.5 5.3 359
Buy Indonesia 6.75%
2044 (2000)
111.3 5.9 339
Buy Indonesia
5.375% 2045 (2000)
95.5 5.4 286
Buy Indonesia 5.95%
2046 (1250)
104.4 5.6 302
Sel l Sri Lanka 5.875%
2022 (1000)
87.8 8.4 692
Sel l Sri Lanka 6.125%
2025 (650)
84.5 8.6 687
The past two months witnessed a considerable rebound in investor sentiment towards Indonesia mostly driven by light
client positioning and the preceding sell-off in wider EM. This has not, however, yet lead to a material duration extension by
investors and many quasis and the Sovereign curve itself lagged the profound flattening that has been observed for such
peers as Brazil and South Africa YTD. Despite many Indonesia’s vulnerabilities (e.g. high foreign ownership of local
government bonds, limited FX reserves, rising budget deficit), fundamentally, the country has much stronger government
in place to turn economy around and it is making steps in a right direction. The most recent rally has brought valuations of
many sovereign and quasi-sovereign bonds to the point where a further pull tighter should be driven by underlying credits’
fundamental idiosyncrasies, which in our view lack immediate strong positive catalysts. We note however that Pertamina's
and Sovereign curves remain exceptionally steep despite stabilising fundamentals for both. We think investors have been
wary of a potential new bond supply form Pertamina, which we believe the company can backload this year due to the
flexibility of its capex budget. Thus we maintain our Buy call on Pertamina's bonds intact. In the rest of Indonesia risk
complex we highlight INDON long-end and Pelindo II 10Y bonds as most attractive trades at this stage. Risks to our
recommendations: Upside – sovereign ratings upgrade, appreciation of IDR, material improvement in GDP and inflation
data, worsening geopolitics in wider EM. Downside – further drop in commodity prices, aggressive new supply by quasis,
Fed-related sentiment deterioration, abuse of energy sector’s budget for the benefit of the sovereign.
We welcome the recent weakness in SRILAN curve. At the same time we note that the 5Y-10Y slope in SRILAN still
remains too flat, which in our view makes its 7Y-10Y part look increasingly vulnerable for two main reasons: (i) the peer
bond spreads in wider EM are undergoing a material correction ; (ii) the positive catalysts for Sri Lanka seem to have all
played out and Sri Lankan economy find itself in the cycle of worsening fiscal, debt and FX metrics. Given the current
weakness of credit markets, we believe it pays to stay cautious and reduce the risk in the long-end of SRILAN curve. The
news on the potential agreement with IMF, in our view, could bring pressure on the current President and his cabinet due
to the bitter taste the similar precedent had left in the past. Key risks: revision of the budget to be less expansionary and
more realistic on the revenue streams, replacement of more costly debt, material u/p of bonds while EM peer assets rally.
We remain constructive on Philippines, despite its slower pace of GDP expansion and the upcoming Presidential elections
in the country. We recognise the fact that the spread widening in PHILIP long end has already reached 12M highs and has
lilmited further upside potential, even despite PHILIP's curve remaining inverted. We'd rather pick-up additional spread by
staying Long 15Y area of the curve. Risks: material strengthening of UST yields, continuous outperformance of Asia IG vs.
EM, material weakness in oil price, sovereign ratings upgrade.
Source: Deutsche Bank, Bloomberg Finance LP
24 February 2016
Credit
Deutsche Bank AG/Hong Kong Page 37
Figure 75: Asia Financials Top Buys
Bond Issue & Size
(USD mm) Price
YTW
(%)
G-spd
(bp)
Cal l
Date
Cal l
Price Rationale & Risks
Woori Bank 4.75%
2024 (1000) sub
103.2 4.3 251 N/A N/A
Woori Bank 6.208%
2037 (1000) sub
103.0 3.6 216 May-17 100.0
Bank of East Asia
5.5% perp c2020
(650) sub
91.5 7.7 645 Dec-20 100.0
Bank of East Asia
4.25% 2024 (500)
sub
98.6 4.7 365 Nov-19 100.0
Bank of Commn's
3.375% 2019 (500)
102.4 2.6 153 N/A N/A
Bank of Commn's
3.75% 2023 (500)
102.3 3.4 174 N/A N/A
BCHINA 5% 2024
(3000) sub
103.4 4.5 276 N/A N/A
Bank of Commn's
4.5% 2024 (1200) sub
102.2 3.8 267 Oct-19 100.0
China Construction
Bank 3.875% 2025
(2000) sub
99.5 4.0 280 May-20 100.0
CITIC Bank Int'l
3.785% 2022 (300)
sub
99.4 4.2 336 Sep-17 100.0
China Construction
Bank Asia 4.25%
2024 (750) sub
101.3 3.8 274 Aug-19 100.0 CCB Asia's B3T2 bonds have been affected by BEA bonds underperformance and its spread has widened
~35 bps in the past 2 weeks alone. The bond which is used to trade ~15bps inside of weaker Dah Sing
Bank now trades wider to it by ~20 bps. CCB Asia '24c19 bonds have traded flat since the beginning of the
year and their underperformance stands in contrast to Citic Int'l 24c19 bonds which have tightened by ~60
bps in the same period. Key risks: slower than expected GDP growth in China, material worsening in HK
property prices, continued suppression of NIM coupled with spike in loan delinquencies.
OCBC 4.25% 2024
sub (1000)
103.5 3.8 197 N/A N/A This bond is one of the most prominent underperformers in the subordinated Asian bonds space YTD, incl
vs. IG-rated peers in DM. It used to trade ~25 bps wider vs. senior Bank of China '25 at the beginning of the
year which we believe was a fair differential; however it has now widened to ~75bps. Despite having a
stable business profile and low regulatory uncertainty, its yield movement has mirrored the ~60 bps
widening of BCHINA '24 B3T2 bonds which we believe is a buying opportunity. Key risks: material
deceleration of Singapore's or China's economy, sharp negative correction of property prices, failure to
improve capital ratios. China Orient AM 5%
2024 (400)
101.7 4.8 301 N/A N/A
Huarong AM 4.5%
2020 (1200)
103.8 3.4 228 N/A N/A
Huarong AM 5.5%
2025 (1400)
105.5 4.7 296 N/A N/A
Cinda AM 5.625%
2024 (500)
105.8 4.8 304 N/A N/A
Cinda AM 4.25%
2025 (1700)
96.6 4.7 294 N/A N/A
Sell EximBank of India
5Y CDS
186 N/A N/A Eximbank’s entire curve displayed a considerable weakness ever since the new EXIMBK 21s was
announced in early Jan. In the India-only context, Eximbank’s bond spreads do look optically attractive given
the post-new issue weakness mentioned above (see charts below). However, considering our negative
view on 5-10Y part of Indian banks’ curves we believe that the upside for Eximbank’s paper is limited. CDS
displays greater degree of resilience and being the closest proxy to India sovereign, has u/p such high-beta
peers and Indonesia YTD. Risks: lack of political and economic reforms, spike in corporate defaults, material
primary supply, risk aversion by EM investors towards India.
Bank of East Asia's B3T2 '24 bond spread has underperformed similar B3T2 paper in HK by ~25 bps since
the beginning of Oct-15. It's AT1 Perp has also materially underperformed since its issuance in Dec-15 and
stands out as one of the cheapest AT1 in the Asian space. Although BNKEA has the largest exposure of
loans to Mainland compared to other HK banks, the risk is mitigated by its strong retail presence in HK and a
superior business profile. BNKEA has the strongest capital ratios amongst Asian peers and they improved
further following the AT1 issue. HKMA's decision to include BNKEA to the list of HK's D-SIBs underlines its
systemic importance vs. subsidiaries of Chinese banks such as ICBC, CCB and CITIC. Risks: slower than
expected GDP growth in China, material worsening in HK property prices, continued suppression of NIM
coupled with spike in loan delinquencies.
China CITIC International Bank has demonstrated a successful turnaround story over the past couple of
years. Although it relies on Mainland China in loan growth and overall revenue generation, its connection to
CNCB Bank in China provides additional cross selling and risk mitigating opportunities. We consider Basel-II
T2 notes issued by CINDBK amongst most attractive. We think that the bank is likely to follow BNKEA
example and exchange these into a longer-dated BIII instrument in 2016. Downside risks: slower than
expected GDP growth in China, material worsening in HK property prices, continued suppression of NIM
coupled with spike in NPLs.
Basel III T2 bonds issued by Chinese banks are featuring amongst the worst performing in Asia credit space
vs. the senior and even AT1 paper (lasts couple of weeks) . We believe that given the resilience in capital
ratios over the past two quarters and the expectation of slower loan growth this year vs. 2015 the banks
would be in a relatively lesser need vs. its peers in Asia to raise hybrid capital. Recently adopted TLAC rules
may force some banks to raise sub-debt in 2016, but BOCOM is not a part of that regulation and CCB has the
smallest shortfall of capital to cover. Bank of China 2024 bond has underperformed the most in the Chinese
B3T2 space with its sread differential relative to Huarong AMC '25 reducing from ~60 bps at the beginning
of the year to ~20 bps. BIII-to-BII and -to senior spread multiples look considerably more attractive vs. peers
in APAC too. Downside risks: derailment of banking reforms, spike in domestic corporate defaults, faster
than expected NPLs growth, failure or deposit run of a mid-sized bank, negative ratings action.
Despite visible spread widening of late, WOORIB’s sub debt continues to be attractive vs. peers from
Japan and Singapore. Woori's fundamental improvement is lagging behind other commercial banks in
Korea, but is on track and is yet to be priced in (e.g. recognition of legacy loans as NPLs and conservative
provisioning) and we expect the benefits of the recent reverse takeover of its holding company to bear fruit
too. AT1 bonds recently issued by the bank boost the recovery prospects of both existing T2 bonds. Key
risks: double-dip in corporate sector restructuring, Woori's privatisation failure, further slump in consumer
demand.
We believe that the recent u/p of these bonds vs. China IG peers is more down to investors chasing paper
shorter than 5Y in duration, thus creating crowded positions. The policy easing in China cannot be
underestimated, which would ultimately provide better liquidity conditions and availability of credit on the
domestic market, indirectly mitigating pressure on asset quality. BOCOM ranks very close to its larger
domestic peers in credit ratios, but supersedes those in NIM, liquid assets and T1 CAR. BOCOM also has
one of the smallest exposures to construction, real estate and mortgages segments. Downside risks:
derailment of banking reforms, spike in domestic corporate defaults, faster than expected NPLs growth,
negative ratings action, inability to raise equity or hybrid capital in mid-term.
We believe that the value still remains in the longer dated bonds of AMCs and that they still trade at a
meaningful distance (50-60bp) from the LTM tights yield-wise. AMCs are the net beneficiaries of Chinese
policy easing and the process of the balance sheets clean up by banks. China AMC’s display overall stable
credit profiles (government ownership, solid capitalization, sufficient liquidity and ongoing business
diversification). China Orient AMC which used to trade ~30bps inside of Cinda AMC 24s at the beginning of
the year is now trading flat. The spread widening is mainly on the back of investor fears that the acquisition
of Dalian Bank will be negative for the capital strength of Orient AMC. However it should be noted that
Orient's equity / assets has improved to 17.1% at the end of 1H15 from 12.6% in Dec-14. We believe that
the bonds of AMCs would recover faster within the context of China's financial paper across the curve. Key
risks: spike in domestic corporate default rates, worsening of RMB liquidity, failure by the recently
announced government stimulus to yield tangible results.
Source: Deutsche Bank, Bloomberg Finance LP
24 February 2016
Credit
Page 38 Deutsche Bank AG/Hong Kong
Figure 76: Asia Financials Top Sells
Bond Issue Price
YTW
(%)
G-spd
(bp)
Cal l
Date
Cal l
Price Rationale & Risks
China Taiping 5.45%
perp ‘c19
103.0 4.5 352 Sep-19 100.0 We are cautious on China Lifers because of their direct (albeit limited) reliance on the domestic equity
market investments in generating a part of their operating profit. We consider China Taiping’s perp to be
more susceptible to the market’s volatility and the company’s credit metrics (e.g. higher financial leverage)
to have lesser cushion should the underlying profitability indeed suffer. The bonds mid-YTC vs. CHLIIN
‘75c20 have corrected and is now flat although the latter bond is priced ~6 points lower and rated two
notches higher. We see more downside risk for CTIH bonds in the near term. Upside risks: Considerable
rebound in China equity markets, material improvement in China’s macro indicators, weaker than expected
market share erosion.Bank of India 3.125%
'2020
110.4 3.9 269 N/A N/A
Bank of Baroda
4.875% '19
105.7 3.1 212 N/A N/A
ICICI 4.8% '2019 105.6 3.0 203 N/A N/A
ICICI 5.75% '20 111.0 3.2 201 N/A N/A
ICICI 3.125% '20 99.8 3.2 202 N/A N/A
State Bank of India
3.622% '19
102.3 2.8 190 N/A N/A
State Bank of India
4.875% '24
107.1 3.9 224 N/A N/A
Syndicate Bank
3.875% '19
101.5 3.5 241 N/A N/A
Union Bank of India
4.5% '19
104.6 3.2 213 N/A N/A
Bank of China
3.125% 2019 (500)
102.8 2.1 123 N/A N/A
ICBC 3.231% 2019
(1000)
103.0 2.4 135 N/A N/A
Bank of China 6.75%
Perp (6400) pref share
104.7 5.3 271 Oct-19 100.0
ICBC 6% Perp (2940)
pref share
101.0 5.7 456 Dec-19 100.0
CITIC Securities 3.5%
'2019 (650)
100.4 3.4 232 N/A N/A
Haitong Securities
3.5% 2020 (670)
100.2 3.4 233 N/A N/A
We remain negative on the outlook for the drivers for these bonds' valuations. We also maintain our
cautious outlook on their fundamental trends which is mainly based on: increased policy risks for the sector,
very aggressive growth targets, highly fragmented nature of the sector which diminishes the probability of
the implied government support vs. that for AMCs and commercial banks. Despite trading wider in absolute
spread, Chinese broker bonds have outperformed those of banks, AMCs and also some comparable BBB-
rated corporates in China (e.g. Baosteel). Key risks: lack of supply from the sector, material improvement in
China’s macro data, more aggressive monetary policy easing in China.
BCHINA '19 and ICBCAS '19 spreads have outperformed the most in the similar dated senior banking peers
like BOCOM '19 and AMCs and within their own curves too. We believe their spreads could move ~25bps
wider from here to be closer to its FV. Also we believe both the banks are amongst the most strategic
players in the Chinese financial system and Government support should be forthcoming in an event of a
crisis. Also the PRC Government will be careful to pass on the impact of moderating economic growth to
the banking system and avoid any sudden and large surge in delinquencies. Upside Risks: China posting a
stronger economic growth than the expected moderating trend, China banks report stronger asset quality
and capitalization trends, PRC Government making large cash infusion in banks to shore up banks'
capitalisation.
We welcome the correction in the entire Indian banking bond cluster which was long overdue. We
continue to believe though that the spreads of even the fundamentally weaker entities in India are still
trading too tight vs. better rated entities in EM and Asia alike and the chances for a sovereign upgrade this
year for India sovereign are slim. We expect Indian banks' fundamentals to continue diverging from the
macro positivity in the country in the near term. Many PSU banks “de-facto” run negative equity as the
combined level of net NPLs and restructured loans is larger than their CET1 capital – a reality that investors
are becoming increasingly complacent with. Indian banks lack positive catalysts to drive spreads tighter vs.
peers, which was also manifested through the recent round of quite weak results. The strong technicals
underpinned by Middle East investors are also under increasing pressure due to the sell-off of the regional
bons in MENA. Upside risks: materially stronger economic data from India, sovereign ratings upgrade, sharp
appreciation of INR, sizeable capital injection by the state, prolonged absence of new issuance.
These two perpetual instruments have had a very good performance since the time of issue and have been
particularly resilient during the market weakness. In our view, the current valuations have put them outside
of the fundamental context as both perps are trading too rich even to their better rated IG European
counterparts (e.g. HSBC and Nordea). Although we remain constructive on China banks, we see only few
remaining value accredit opportunities in their senior bond space and those of T2 format. We believe that
both notes should be yielding 50bp more on average. Key risks: materially better than expected macro
performance in China, visible improvement in property prices, rally in European CoCo risk assets.
Source: Deutsche Bank, Bloomberg Finance LP
24 February 2016
Credit
Deutsche Bank AG/Hong Kong Page 39
Figure 77: Asia Investment Grade Top Buys
Bond Issue & Size (USD
mm) Price YTM (%)
G-spd
(bp) Rationale & Risks
Lenovo 4.7% 2019 (1500) 104.1 3.3 239 Management delivered on its cost out strategy in Q316 and we are starting to see some tangible improvements
in credit. Key ratios saw sequential improvement in Q3 despite significant macro/sector headwinds. We
appreciate concerns on a structurally declining PC market but Lenovo remains a market leader in the space and
we think is well positioned from a credit perspective. Mobile achieved operational break-even for the first time in
Q3 although helped by a better cost structure. Its Enterprise segment is promising although we are mindful of
potential competitive pressures in this area. Overall we continue to like the credit from a turnaround angle,
management’s execution track record, low near term refinancing, and its market position in key segments. The
ongoing focus on cost will remain a key driver for credit. We believe Lenovo offers credit investors a relatively
defensive exposure in a non-commodity related sector in Asia. We think bond valuations look attractive for one
that has around 3 years left to go before maturity. Key downside risks: Unexpected large scale M&A, delays in
turnaround, margin compression as competition intensifies.
China Railway Construction
3.95% 2049 (800)
100.5 3.8 283 We expect leverage improvement in FY15 but also a slight decline in backlog as less available projects in the
market due to slowdown of FAI growth. We think the outlook is stable in the near term due to 1) Central SASAC's
61% ownership, policy support (railway spend budget), 2) established record of good operating performance, 3)
prudent strategy in carrying out overseas projects and 4) longer term benefits from China's OBOR strategy. Our
view on the perpetuals also reflect our preference for stronger structured perps issued by a strong underlying
credit. China Railway Construction perps are senior ranked securities which offer a 500bp step up on its first call
date in April 2019. We think the perps offer better value than the senior 2023 bonds for a carry play. Downside
risks: reduced government support.
Chalco 6.625% 2049 (350) 105.0 4.6 375 We like the perps for mostly its strong structural features as well as valuation for a shorter-dated perps. The perps
offer investors a senior ranking security with a punitive 500bp step-up upon extension. Given the declining
onshore funding costs, we expect the perps to be called at its first call date Oct 2018. The perps offer investors a
good short-dated carry, in our view. Fundamentally, Chalco's credit metrics are under pressure given the
challenging sector outlook but we think downgrade risk is still manageable given S&P's downgrade trigger is
interest coverage based and onshore funding costs are declining which should offset some EBITDA pressure.
Key downside risks: Downward pressure in commodity prices resulting in margin pressure, signs of reduced
state support, large debt-funded M&A.
Greenland Group 5.875%
24 (600)
98.4 6.1 449 We were of the view that the company has bought themselves some time with rating agencies following a) its
proposed A-share placement, and b) its plan to reduce exposure to its loss-making Energy businesses (eg
deconsolidating Yunfung). This view is broadly unchanged but we also feel the weakness/volatility in China’s
equity markets in January raises some uncertainties around the proposed share placement. Downgrade risk is
perhaps higher today versus a month back. We maintain our Buy on GRNLGR’24 (96.97, 6.26%, G+443bp) as we
believe investors are adequately compensated. The bonds are trading at fairly similar yields to strong BB rated
names so a downgrade is partially priced in. Given the superior bond structure (the only cross-border guarantee
bond in the China IG property space), SOE background/linkage with the Shanghai government, we believe
Greenland should trade tighter than Wanda Commercial Properties. Key downside risks: Less support from
Shanghai SASAC, weaker than expected sales performance and aggressive expansion.
Franshion 5.75% 2019 (500) 105.0 4.0 308 We expect Franshion to report a stronger 2H FY15 result given the skew in delivery/settlement schedule in 1H vs
2H. 2H should account for about 70% of FY revenue. Franshion is a quality operator with high exposure in T1/2
cities, a relatively high degree of recurring income stream, and below (sector) average gearing. FRANSH’19
valuations still look attractive at these levels against similarly rated China IG comps. The recent news regarding its
Chairrman investigation has no immediate impact on the company's credit. We think China property sector
fundamentals will remain well supported by favourable government policies even though the outlook for 2H will
probably be more challenging than 1H. Downside risks: Sharp sector downturn in 2H15, signs of weaker support
from Sinochem, or aggressive debt funded expansion strategy.
Noble 3.625% 2018 (400) 54.0 37.5 3,673 Our view was largely underpinned by the improved liquidity buffer post the announced Agri sale back in
December last year. The bonds have underperformed in very thin markets along with the global sell-off in
commodity credits but we believe the idiosyncratic story is gradually improving (positive cash flows, debt
reduction,. conservative/timely mark-to-market, focus on liquidity and balance sheet). We expect the April/May
loan refinancing to go through albeit perhaps at a smaller size but would pay close attention to the key terms
(secured v unsecured). We have prefer NOBLSP'18 ($50, 40% YTM) 2018s over the 2020s ($47, 30% YTM,
CreditHold) given the inverted curve. Downside risk: a further leg down in commodity markets, material
structural subordination. Upside risk: Further asset sales/strategic investor, a successful bank refinancing in
April/May.
Source: Deutsche Bank, Bloomberg Finance LP
24 February 2016
Credit
Page 40 Deutsche Bank AG/Hong Kong
Figure 78: Asia Investment Grade Top Buys (Cont’d)
Bond Issue & Size (USD
mm) Price YTM (%)
G-spd
(bp) Rationale & Risks
Hang Lung Properties
4.75% 2022 (500)
105.9 3.7 227 We still find Hang Lung Properties as one of the more attractive names within the HK property space.
Performance of its leasing portfolio in 2015 is mixed; Shanghai assets continued to delivere good results with
stable margin, positive rental reversion of its shopping malls and high occupancy rate (~97%), which is partly
offset by the soft result of Forum 66 in Shenyang and Center 66 in Wuxi. Property sales and operating profit were
down 88% yoy and 89% yoy respectively mainly due to their small inventory and effort to maximize the return.
Hang Lung Properties is better positioned in a rising cap rate environment based on our calculation. The 2022
bonds are unrated but valuations are currently implying a weak BBB rating. We see Hang Lung Properties as a
solid BBB/weak single A credit. We like the company’s concservative management style, substantial recurring
income, a strong balance sheet (nearly net cash), a good mix of commercial property ownership, and a broadly
balanced geographic exposure between Hong Kong and China. Risks: a significant downturn in China and HK
retail, a more aggressive expansion strategy in China resulting in a weaker balance sheet
Oil & Natural Gas Corp of
India 2.75% 2021 (EUR525)
100.8 2.6 291 Despite the tumbling oil price, ONGC (along with Reliance) remains amongst the strongest credits in India on a
standalone basis. ONGC's standalone rating without government support is low single A / high BBB, albiet with
negative watch by Moody's. Even if oil goes to USD20 a barrel, ONGC's final rating should stay IG. Key downside
risks are M&A as the company looks to acquire assets abroad (though we expect this to be in the form of stake
acquisitions in large oil and gas fields) and possible bond supply to fund the same.
Reliance Industries 4.125%
2025 (1000)
100.0 4.1 247 RIL's fundamental strength is almost unquestionable. It should only improve further as the capex program draws
to a close and contribution from new projects start kicking in. We do acknowledge that valuations are not
particularly attractive, it's trading 20bps tighter than ONGC. However, this is not a year we want to be too greedy,
instead prefer sticking to quality. Separately, RIL 25s vs 20s curve is one of the steepest in the Asia IG space at
~60bp. Also, we treat this as a liquid way of playing our relatively positive view on India macro. Key downside
risks include decline in GRMs, lack of success with RJIO, new issues, etc
Bharti Airtel 5.125% 2023
(1500)
105.4 4.2 272 Although Reliance Industries has underperformed and Bharti 23s are now trading 25-30bps wider, we maintain
our Buy. End of the day, Bharti is a solid BBB telco for us with a commitment to deleveraging and maintaining its
IG rating, and has amongst the best disclosures in our universe with SingTel and Qatar's minority ownership. Key
downside risks are weak technicals, participation in spectrum auctions and possible sector disruption from
RJIO's entry. Source: Deutsche Bank, Bloomberg Finance LP
Figure 79: Asia Investment Grade Top Sells
Bond Issue & Size (USD
mm) Price YTM (%)
G-spd
(bp) Rationale & Risks
Swire 4.5% 2023 (700) 108.2 3.3 169 Our view is primarily underpinned by valuations and macro concerns around HK retail and residential property
trends. Credit fundamentals for Swire remain stable where bulk of its income is derived from quality recurring
rental streams from Hong Kong. Technicals have been supportive of HK Corps for quite some time but we think
valuations are tight versus other single-A rated HK corps. Retail trends are weakening in Hong Kong not helped by
a high HKD and secondary residential property market is also cooling off. Unlike one of its peers in Hong Kong,
Swire also has a high degree of asset concentration in the region and also has less diversified income streams.
Upside risk to recommendation: a sharp recovery in HK retail, a beta rally in Asia IG credit.
Li & Fung 5.25% 2020 (750) 109.3 2.9 179 We see Li & Fung as a potential candidate for negative rating action. Our view is underpinned by potential margin
pressure resulting from the challenging outlook for global trade/retail. Earnings visibility do not appear to be strong
to us in the near term. Li & Fung has promised slower acquisition activities which should support FCF generation,
but we think shareholders will be the prime beneficiary of this strategy as opposed to creditors. We believe Li &
Fung’s BBB+/Baa1 rating will be under pressure if the global retail outlook fails to recover meaningfully in the near
term. We think valuations still look rich versus other HK corps. Upside risks: A material turnaround in global trade
outlook, a recovery in US retail market.
Kerry Properties 5.875%
2021 (300)
110.3 3.7 239 Kerry Properties is a well established real estate developer/operator based in Hong Kong. The company has
development exposure in both China and HK and as such we expect cash flows to remain lumpy for some time
(even though we understand company is trying to build up its recurring income base). The 2021 bonds looks
expensive to us comparing to other China BBB names such as Franshion’19. Both are weak BBB credits but
Franshion'19 has Central SOE background and a shorter duration. The trade is consistent with our cautious view
on HK property market and our preference for large quality China IG credits. Upside risks: A sharp improvement in
HK property market sentiment, creditor-friendly activity (eg equity raise, asset sales).
China Oilfield Services Ltd
3.5% 2020 (500)
101.6 3.1 195 China Oilfield Services Ltd (COSL) is 50.5% owned by CNOOC Group with a high customer customer
concentration risk (CNOOC Ltd contributes ~64% of revenues in 1H15). We believe COSL's fundamentals will
remain under pressure as long as low crude oil prices pressure E&P firms to reduce capex. Moody's recently
downgrade to Baa1 is a reflection of that. Whilst COSL'25 has widened out a fair bit, we believe the G-spread gap
between COSL'20 and CNOOC'20 at ~15bp is too tight given the current brent level and outlook. Difficult to find a
direct comp for COSL but Baosteel'20 bond valuations appear to offer better downside cushion for a Baa1 peer
operating in a challenging cyclical sector. Key upside risk: a sharp rally in Brent, a capital raising shoring up
COSL's balance sheet.
Source: Deutsche Bank, Bloomberg Finance LP
24 February 2016
Credit
Deutsche Bank AG/Hong Kong Page 41
Figure 80: Asia High Yield Top-Buys (ex-China property)
Bond Issue & Size
(USD mm)
Offer
Price
YTM
(%)
Z-spd
(bp)
Cal l
Date
Cal l
Price Rationale & Risks
China Oil & Gas 5.25%
2018 (350)
97.8 6.4 556 Apr-16 102.6 We like relatively stable downstream piped city gas distribution business which is well supported by long
concession agreements and increased support of clean energy. Recent city-gas price decrease will help to
offset pending pass-through in Qingdao, which has been drag on company’s performance. Canadian
upstream business could remain weak in current oil price environment but do not expect any support from
China business at this stage. Bonds underperformed earlier in the year on the back of oil price volatility as
well as 2H15 profit warning. However, we expect financial profile to improve in 2016 and maintain our Buy
on 2018s. Key downside risks include any large upstream M&A, potential support to Canadian operation
and sharp RMB depreciation.
Parkson 4.5% 2018
(500)
89.1 10.2 934 NA NA We note that fundamental profile may not improve in the near term given overall sector challenges.
However, it is essentially a 2yr bond and trades much wider than longer dated Golden Eagle 23s as well as
Maoye 17s. Capex may remain high on transformation to lifestyle concept but Qingdao mall completion will
provide much needed relief. We also take comfort from Parkson’s stronger balance sheet and cash buffer
and do believe that company has the ability to refinance even if USD bond market remains closed. Key
downside risks include sharp decline is SSSG or margin, large acquisition/investment, aggressive equity
buyback or any other share holder friendly action and negative rating actions.
Yingde 8.125% 2018
(424)
76.9 22.2 2,135 Apr-16 104.1 Yingde’s 1H15 performances was better than expected with improved cash flow generation from better
working capital management and capex discipline. Recent fund raising has also helped in alleviating liquidity
concerns. We also take comfort from positive resolution to SOE customer dispute though recovery may be
staggered. Overall, we think Yingde with MTOP contracts and diversified customer base seems better way
to play steel sector recovery, in our view. We maintain our Buy on 2018s. Key downside risks include
further steel sector deterioration, worsening of receivable profile, aggressive capex and negative rating
actions.Stats ChipPAC 8.5%
2020
92.6 10.5 942 Nov-18 104.3 Capex intensive cyclical industry and potential weak results remain key concerns but conversion of
shareholder’s loan from the IC Fund into equity stake does provide some comfort. Company has also
managed to make some progress in procuring new business in China which should augur well for realizing
potential synergies. There are no perfect comps but bond look attractive compared to other HY SOE names
with much weaker business profile such as Zoomlion and Yanzhou. We also like the secured nature of the
bonds and thus maintain Buy. Key downside risks include loss of any contract leading to lower utilization,
exit by any key shareholders and potential rating downgrade.
Star Energy 6.125%
2020 (350)
99.0 6.4 552 Mar-17 103.1 Star Energy bonds have outperformed Indo HY space and we expect the bonds to maintain its
outperformance driven by credit profile improvement. With operations back in full swing, focus now shifts
to potential tariff revision for Unit 1&2 which should be substantially credit positive. Unit 3 capex also seems
manageable especially given that company will go ahead with the plan only with increased tariff. Thus we
maintain our Buy. Key downside risks include any other technical issues with resource availability and larger
than expected capex for Unit-3.
Multipolar 9.75% 2018
(230)
98.6 10.4 956 Jul-16 104.9 Multipolar’s recent performance has been impacted by losses from media business (Big TV) as well as
closure of hypermarket business in China. At the same time, Indo retail business, which drives majority of
company’s revenue, has been relatively stable. Fundamental credit profile may remain weak in the near term
but we take comfort from adequate holdco liquidity and relatively stronger bond structure. MLPL 18s is
among the wider trading Indo industrial names and looks cheap to us. Thus we maintain Buy. Key downside
risks include further large losses from media and china retail business, aggressive capex in non retail
business, and lower than expected dividends from MDS and MPPA.
MNC Investama
5.88% 2018 (365)
50.8 42.0 4,122 May-16 102.9 MNC Investama 18 has lagged other distress Indo HY bonds driven by upcoming refinancing concerns as
well as equity buybacks. However, we understand from the management that such buyback will continue to
be limited and at entities which has surplus cash. As regards MSKY refinancing, discussion with banks in
ongoing and the company is also looking to do an equity offering of Sky Vision Network with target
completion by 1H16. We continue to like the bonds with MSKY refinancing being the next positive trigger
and thus we maintain our Buy. Key downside risks include delay in refinancing of MSKY loan, sharp IDR
depreciation, big ticket equity buyback, large debt-funded capex/investments and further rating downgrade.
Modernland 9.75%
2019
(190)
99.1 10.1 911 Aug-17 104.9 Modernland 19s is the best performer Indo HY bond YTD and we continue to like the bond from a risk
reward perspective for a cyclical sector exposure versus other tighter trading names. We remain
comfortable with Modernland’s flagship Jakarta Garden City project and expect the project to do well in near
future especially if macro situation continue to turn around for Indonesia. Key downside risks include
material slowdown in Indo property market and further sharp depreciation in IDR.
Rolta India 10.75%
2018 (127)
37.0 70.9 7,006 May-16 105.4 We maintain our Buy on the 2018s. The bonds have dropped almost 20 points in the last 10 days due to
technical factors and are now trading in the mid to high 30s. On the fundamental side, despite a set of weak
Q3 results and continued working capital outflows, we still expect Rolta to keep paying coupons. It's debt
maturity profile is quite well spread out and the next capital market maturity is only in May'18. Separately, we
see opportunities in India opening up the defense sector to FDI (contributed ~30% of revenues). Key
downside risks include further deterioration in working capital, negative rating actions, etc.
Source: Deutsche Bank, Bloomberg Finance LP.
24 February 2016
Credit
Page 42 Deutsche Bank AG/Hong Kong
Figure 81: Asia High Yield Top-Buys (ex-China property)
Bond Issue & Size
(USD mm)
Offer
Price
YTM
(%)
Z-spd
(bp)
Cal l
Date
Cal l
Price Rationale & Risks
Greenko 8% 2019
(550)
106.4 5.9 497 Aug-17 104.0 We maintain our Buy on the 2019s as a good quality carry play in the Indian HY space. Greenko operates in
the right sector (clean energy) and is majority owned by GIC. We also don’t rule out the bond being called in
2017. It looks quite cheap to comps such as Olam (owned by Temasek) that has its 2020 trading at
~4.8%ytm. Unlike Olam, Greenko is rated and bonds are indirectly secured. Key downside risks are
aggressive growth plans and possible deterioration in transparency post delisting.
SMC Global Power
7.5% perp (300)
100.9 7.2 624 Nov-19 100.0 Our base case is still that SMC Power and PSALM will come to a negotiated settlement. Currently,
operations at all of their plants are normal and 2 new plants are on track to commence in 2016. Hence we
think that the 7.5% perps will be called on the first call date and we maintain our Buy recommendation. We
prefer these over the newer 6.75% perps (96 offer, 7.7% ytc) due to the higher coupon and shorter duration
to call. Key downside risks include worsening of the dispute with PSALM, aggressive capex plans and any
significant debt funded acquisitions.
Source: Deutsche Bank, Bloomberg Finance LP.
Figure 82: Asia High Yield Top-Sells (ex-China property)
Bond Issue & Size
(USD mm)
Bid
Price
YTM
(%)
Z-spd
(bp)
Cal l
Date
Cal l
Price Rationale & Risks
Tata Steel 4.85% 2020
(500)
95.8 6.1 507 NA NA We downgraded the 2020s to Sell again this year as they look expensive at just 6% ytm, not just within Asia,
but globally in the steel sector. This is especially given Tata’s consolidated leverage is one of the highest
amongst steel peers. Even on its own bond curve, the 2020s are more than 200bp tighter than the 2024s,
making it one of the steepest spread curves in Asia HY. They are also trading more than 650bp tighter than
the JSW Steel 2019s. Key upside risks include asset sales for deleveraging, promoter brand premium, etc.
Lippo Karawaci
6.125% 2020 (403)
95.8 7.2 611 Nov-16 103.1 Lippo bonds have had a volatile year so far though bonds have bounced back from lows this year. Recent
asset sale to REITS is somewhat comforting and also expects property sector to benefit from macro
improvements in general. However, we continue to see better value in other higher yielding property
players for a cyclical sector exposure. Separately, we find Lippo bonds a bit expensive relative to MLPL18s
(10-11%), a company owned by the same family. Thus maintain Sell. Key upside risks include improving
property markets and higher than expected monetization of assets through REIT.
Texhong 6.5% 2019
(200)
101.9 5.8 489 Jan-17 103.3 Texhong announced FY15 profit alert on the back of solid 1H15 performance but we remain concerned on
US-China cotton price compression, aggressive expansion, and potential impact from RMB depreciation.
Redemption of USD 2016 bonds should be positive for technicals but 2019s at ~5.5% ytm looks expensive
relative to other China Industrials. Key upside risks include moderation in capex plans, and international
cotton prices declining more than domestic prices.
China Hongqiao
7.625% 2017 (400)
100.0 7.6 808 NA NA Hongqiao’s capex plan looks aggressive to us in light of noise around over supply and recent production cuts
in China. Company also has significant ST maturities of RMB20.4 billion as of 1H15. Local liquidity should
remain supportive of maturities but we don’t see any upside on bonds trading close to par. We see potential
downside on the back of volatile commodity markets and potential RMB depreciation, thus maintain sell on
2017s. Key upside risks include recovery in aluminium price, lower than expected capex and further equity
raising. Source: Deutsche Bank, Bloomberg Finance LP.
24 February 2016
Credit
Deutsche Bank AG/Hong Kong Page 43
Figure 83: China property High Yield Top-Buys
Bond Issue & Size
(USD mm)
Price YTW
(%)
Z-spd
(bp)
Call
Date
Call
Price
Rationa le & Risks
Aoyuan 10.875% 2018
(USD250mn)
106.2 7.8 699 N/A N/A
Aoyuan 11.25% 2019
(USD300mn)
107.5 8.3 740 Jan-17 105.6
Central China 8% 2020
(USD200mn)
95.25 9.5 847 Jan-17 104.0 We upgrade Central China 2020C17 from CreditHold to CreditBuy as we believe valuations seem to
have factored in a potential downgrade in credit rating and valuations look attractive, even against
some solid single B names. Its 2020s provides close to 200bp pick-up against Yuzhou 2019s new in Z-
spreads. Although its 2015 EBITDA margin is likely to be weak given considerable discounts in Tier-3
and 4 cities, we believe its EBITDA margin would improve YoY in 2016 with higher bookings in
Zhengzhou. Downside risks include: more than one credit rating downgrade, aggressive expansion
and/or higher-than-expected JCE debt and exit of CapitaLand as a shareholder.
Evergrande 8.75%
2018 (USD1,500mn)
98.8 9.3 841 Oct-16 104.4 We maintain CreditBuy on Evergrande’s 18C16 on attractive YTM. Moody’s previously downgraded
Evergrande’s corporate family rating to B2 from B1 and its senior unsecured debt rating to B3 from B2
in January. It also has a negative outlook on Evergrande but we believe the more aggressive-than-
expected 2H15 landbanking has been largely priced in. With the on-shore bond market remaining open
and our expectation that policy would remain largely supportive, we believe Evergrande’s refinancing
would not face difficulties this year. Downside risks include more aggressive expansion, severe RMB
depreciation and unexpected macro changes.
Oceanwide 9.625%
2020 (USD400mn)
103.4 8.7 764 Aug-18 104.8 We maintain our CreditBuy on Oceanwide's 20C18 as we believe its yield is still attractive and the
company should fetch above-sector contract sales growth in 2016. We believe the weak credit profile
has been priced in; the company's debt maturity profile and cost of borrowing have been improving.
Downside risks include more-than-expected acquisitions and weaker execution in non-property
businesses.
Greentown 5.625%
2016 (RMB2,500mn)
99.6 7.4 169 N/A N/A
Greentown 8.5% 2018
(USD700mn)
104.5 5.1 460 Mar-16 104.3
GZ R&F 8.5% 2019
(USD1,000mn)
104.4 6.8 590 Jan-17 104.3 We maintain CreditBuy on GZ R&F's 19C17 and CreditHold on its 20C17 and 16s. The company guided
for a possibility of A-share listing in 2016. With 2H15's policy changes of re-opening of the A-share
listing market, we believe there the developer may be able to list and if so, would be a positive
development for GZ R&F. We also expect GZ R&F to see some credit improvement by YE15 vs. 1H15
given its conservative landbanking in FY15. Upside risks include faster A-share listing and more-than-
expected policy support. Downside risks include aggressive landbanking, unexpected macro or
political changes.
Powerlong 10.75%
2017 (RMB1,500mn)
98.4 11.9 608 N/A N/A We maintain CreditBuy on Powerlong's 2017 CNH bond. We like Powerlong's improvement in
execution. We also like its gradual increase in exposure to Tier-1 cities. Powerlong’s credit metrics
were largely stable in 1H15. Downside risks include aggressive landbanking, sharp decline in retail unit
rents, and unexpected macro developments.
Maintain CreditBuy on Greentown's 16s and 18s. Greentown has established a strong brand name in
the high-end segment, particularly in Hangzhou and Zhejiang. Its interim 2015 results were weak but
adjusted gearing ratio (assuming perps as 50% debt and 50% equity) dropped 13ppt HoH to 85.7% as
of June. Downside risks include weaker-than-expected support from CCCG and severe RMB
depreciation.
We maintain CreditBuy on Aoyuan's 18s and 19C17. We continue to like China Aoyuan as it is growing
as a developer and we believe its debt composition and costs of borrowing should improve at end-
2015 vs. end-June. Furthermore, we estimate its foreign debt exposure as a precentage of total debt to
drop from June-2015's 50% to below 40% as of end-FY15. Downside risks to our call include: more
aggressive land acquisitions than expected, severe RMB depreciation, and unexpected macro changes.
Source: Deutsche Bank, Bloomberg Finance LP
Figure 84: China property High Yield Top-Sell
Bond Issue & Size
(USD mm)
Price YTW
(%)
Z-spd
(bp)
Call
Date
Call
Price
Rationale & Risks
Agile 8.375% 2019
(USD500mn)
102.1 7.6 666 Feb-17 104.2 We maintain our CreditSell on Agile's 19C17. Overall, we view Agile's landbank as weak in
quality though pending on-shore bonds issuance should alleviate refinancing pressure.
Upside risks include better-than-expected improvement in execution and re-financing. We
believe its geographical exposures could limit sharp upside in pricing, unlike some peers
that have more Tier-1 and key Tier-2 cities exposure.
Source: Deutsche Bank, Bloomberg Finance LP
24 February 2016
Credit
Page 44 Deutsche Bank AG/Hong Kong
Figure 85: List of trades closed YTD
Trade Entry dateEntry
price/spreadExi t date
Exi t
price/spread
Sovereigns
Sell PHILIP 3.95% 2040 (2000) 7-Jan-16 97bp 23-Feb-16 118bp
Sell PHILIP 5% 2037 (1500) 7-Jan-16 110bp 23-Feb-16 136bp
Financials
Sell ORIEAS 5% 2024 (400) 12-Jan-16 255bp 5-Feb-16 304bp
Buy CINDBK 6% '24c19 (300) 7-Jan-16 290bp 23-Feb-16 263bp
Sell AXSBIN 3.25% 2020 (750) 7-Jan-16 149bp 23-Feb-16 181bp
IG Corporates
Buy ADSEZ 3.5% 2020 (650) 28-Jul-15 205bp 7-Jan-16 201bp
Buy BEIENT 1.435% 2020 (EUR500) 7-Jan-16 200bp 23-Feb-16 229bp
Sell Itraxx Asia 10-Feb-16 170bp 11-Feb-16 180bp
HY Corporates (excl. China property)
Sell TATAIN 4.85% 2020 (500) 8-Jan-16 95.0 14-Jan-16 91.5
Buy MPMXIJ 6.75% 2019 (200) 8-Jan-16 96.3 15-Feb-16 95.0
Sell SRITEX 9% 2019 (270) 8-Jan-16 98.0 15-Feb-16 96.5 Source: Deutsche Bank, Bloomberg Finance LP. Entry/Exit price is cash price for HY names and G-spd for IG names
The authors of this report wish to acknowledge the contribution made by Kalvin Fernandes, an employee of Deutsche CIB Centre Private Limited and also by Xiang Gao, Mary Mou and Yuvaraj Bhole, employees of CRISIL, a third-party provider to Deutsche Bank of offshore research support services.
24 February 2016
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24 February 2016
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Deutsche Bank AG/Hong Kong Page 45
Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Institution Disclosure
Central China Real Estate
CENCHI 8.75% notes due 2021 1,7,14
CENTRAL CHINA REAL ESTAT 8 20200128 1,7,14 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.
Important Disclosures Required by Non-U.S. Regulators
Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.
1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.
7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Harsh Agarwal/Viacheslav Shilin/Colin Tan/Karen Kwan/Vikash Agarwalla
24 February 2016
Credit
Page 46 Deutsche Bank AG/Hong Kong
Deutsche Bank debt rating key
CreditBuy (“C-B”): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.
CreditHold (“C-H”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.
CreditSell (“C-S”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.
CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating.
Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst.
DB Credit Opinion Definition : The DB Credit Opinion follows the same scale as S & P's credit ratings ranging from AAA for the Highest credit quality to C for the Weakest credit quality. It reflects our opinion on the creditworthiness of a company. We derive our Credit Opinion from fundamental credit analysis of the company, comparable analysis, benchmarking against rating agencies and qualitative judgement.
(a) Regulatory Disclosures
(b) 1.Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
(c) 2.Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
24 February 2016
Credit
24 February 2016
Error! Unknown document property name.
Deutsche Bank AG/Hong Kong Page 47
(d) Additional Information
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively
"Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources
believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.
If you use the services of Deutsche Bank in connection with a purchase or sale of a security that is discussed in this
report, or is included or discussed in another communication (oral or written) from a Deutsche Bank analyst, Deutsche
Bank may act as principal for its own account or as agent for another person.
Deutsche Bank may consider this report in deciding to trade as principal. It may also engage in transactions, for its own
account or with customers, in a manner inconsistent with the views taken in this research report. Others within
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denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to
the risks related to rates movements.
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Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk.
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Deutsche Bank AG/Hong Kong Page 49
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Copyright © 2016 Deutsche Bank AG
David Folkerts-Landau Chief Economist and Global Head of Research
Raj Hindocha Global Chief Operating Officer
Research
Marcel Cassard Global Head
FICC Research & Global Macro Economics
Steve Pollard Global Head
Equity Research
Michael Spencer Regional Head
Asia Pacific Research
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Deutsche Bank Research, Germany
Andreas Neubauer Regional Head
Equity Research, Germany
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