FW: RHB FIC Credit Market Update - 28/10/14

28 October 2014

Credit Market Update

Credits Stood Firm as China Borrowers Flood Market; Hold CHIRES 4/22   

REGIONAL                   

¨      Investors focus on supply flood from HK/China. UST yields tilted lower (unchanged to -1bp) amid weaker-than-expected US Markit services PMI (actual: 57.3, consensus: 57.8) and pending home sales (actual: 0.3%, consensus: 1.0%). Meanwhile, we expect investors’ focus to remain on primary tap ahead of the cues from FOMC meeting as well as potentially stronger consumer confidence and durable goods order tonight. USD credits traded on a firmer tone in HK/CN and SG space, while some selling was seen in MY and TH space. In HK/CN markets, property and SOE names at the long-end were better bid such as DALWAN 24, CNOOC 35 and SWIRE 23. Meanwhile, SG USD credit yields narrowed across the curve on papers such as TEMASE 42 and STESP 19. Papers where yields widened in the MY and TH space include PTTTB 35, PTTEPT 15 and PBKMK 36c16. Slight overall selling pressure pushed JACI IG spread 2bps wider (187bps) while the HY space stood unchanged at 517bps. iTraxx AxJ closed 2bps tighter at 116bps.

¨      On the primary front, King Power Capital (guaranteed by China Travel Services (Holding) (Baa3/BBB/NR)) priced its dual-tranche offering - USD300m 5y at T+240bps and USD700m 10y at T+345bps. China Hongqiao (NR/BB/BB) priced USD300m 3.5y at 6.875%. Tewoo (HK) (A1e/NR/NR), which markets semifinished metal products, priced USD400m 3y at T+210bps. In the pipeline, property player New World China (NR) is set to meet investors in HK from tomorrow with USD-denominated bonds while Hutchison Whampoa (A3/A-/A-) may price USD 3y and 10y bonds today at initial guidance of T+110bps and T+150bps area respectively.

¨      Profit-taking on SPSP from further electricity liberalization. SGD swap rates widened even as Treasuries marginally tightened due to investor speculation that the recent lackluster SG Sept industrial production numbers (actual -1.2%; previous: 4%) would see a downward revision of Q3 GDP advance estimates of 2.4%. The 3y and 5Y SOR rates broadened by between 1-3bps while the 3y/5y spread inched upwards by 1.8bps. We observed slightly better buying on short-dated O&G and property names, though there was profit-taking in SPSP papers across all durations with a one-day price drop of between -0.2% to -0.6%. Singapore’s Energy Market Authority announced yesterday that the electricity market will be further liberalised to allow more commercial users the option to buy electricity directly from retailers instead of via SP Services (wholly-owned by SP Power). In the primaries, Oxley Hldg (NR) is printing a SDG75m 2y at a final price of 5.15% while Loyz Energy Ltd (NR) is issuing a 2.5y at final price of 9%.

¨       

MALAYSIA

¨      Investors focused in short-tenure MGS before MPC meeting next week; PLUS and banking names fueled PDS market. Flows in MGS/GII space were active at MYR4.98bn where investor interest remains in the short-tenure MGS before final MPC meeting for this year on Nov 6 while reopening of 3y-GII scheduled this week. Yield for the local govies benchmarks moved sideways where the heavily traded 2y-MGS (MYR3.6bn) inched 0.6bps upward to 3.445% while the 3y, 5y, 7y and 10y-MGS benchmark was lightly traded settling at 3.472% (-0.9bps, MYR50m), 3.628% (unchanged, MYR16m), 3.775% (+1.3bps, MYR6m) and 3.779% (-2.9bps, MYR27m) respectively. In the corporate space, buying interest were seen in long-tenure PLUS 1/38 and 12/38 as yield closing lower at 4.851% (-0.9bps) and 4.909% (-4.1bps) with combined MYR110m transactions. Some bank names exchanged hands such as Imtiaz II on cumulative MYR60m trades tighten 0.9bps (4.103%) and 1.6bps (4.336%) for maturity 12/16 and 3/19; while Ambank Senior 3/15 broaden 7.6bps to 3.989% with MYR20m reportedly done.

TRADE IDEA: USD

Bond(s)	China Resources Gas Ltd, CHIRES 4/22 (3.68%; T+164bps) (Baa1/-/BBB+)
Comparable(s)	NTPC Ltd, NTPCIN 10/22 (4.21%; T+217bps) (Baa3/BBB-/BBB-)
Relative Value	We reiterate a preference for CHIRES 4/22, which has gained by c.20bps since we first mentioned it in our Credit Market Update (dated 11-Sept). We opine that a further yield tightening is warranted by 10-15bps based on continued strong energy outlook from recent China energy reforms as well as stable fundamentals.
Fundamentals	We maintain that China Resources Gas Ltd is a robust company as: 1)     Strong and stable fundamentals. It continues to benefit from robust credit profile with LTM Total Debt/ EBITDA at 3.8x (peers: 6.3x) while its EBITDA Interest Coverage is at 8.0x (peers: 4.3x). 2)     Over 80% of revenue comes from recurring gas sales. We expect continued stable income as the percentage of revenue from recurring gas sales now stands at 82.8% (as at June-2014) in comparison to one-off connection fees. 3)     Beneficiary from gas tariff increase. China recently increased the price of natural gas for non-residential users by 20.5% in September, and this was on the back of a 15% increase in July 2013. According to the China National Development and Reform Commission, the residential gas tariffs will be liberalised before end-2015. These developments are all positive catalyst for CHIRES. *Peers: Tenaga Nasional Berhad, Malakoff Corp Bhd, Sarawak Energy Bhd, SP Power Assets, CLP Power Hong Kong, HK Electric Co, Perusahaan Listrik Negara, Korea Electric Power Corp, NTPC Ltd, China Resources Power Hldg

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Bank of China Limited (BOC, A1/A/A)	Banks/FIs	CN	Moody’s and Fitch have assigned BOC’s upcoming B3T2 notes respective expected ratings of “Baa3” and “BBB+”. The notes to be issued under a USD10bn MTN programme. Both ratings reflect high loss severity given the notes’ full mandatory write-down feature at the PONV. Both rating agencies are of the opinion that authorities will pre-emptively intervene to prevent the bank from becoming non-viable.	Positive. This pipeline issue comes after BOC priced a landmark USD6.5bn B3 AT1 offering at 6.75% in mid-Oct 14. We expect the new B3T2 subdebt to further strengthen the bank’s overall capitalization (CAR) which stood at 11.78% as at 30-Jun 14.
Telekomunikasi Indonesia Persero Tbk PT (Telkom, Baa1/NR/BBB-)	Telcos	ID	Telkom’s 3Q14 revenue rose 7% YoY to IDR65.8trn, net profit increased 4.2% YoY to IDR16.3trn. EBITDA margin stood flat at 51%	Neutral. We note QoQ revenue was flat at 0.03%, possibly due to intensifying competition from XL and Indosat. EBITDA margins nonetheless remained strong despite higher operating expenses (8.7% YoY). Meanwhile, leverage increased with debt/LTM EBITDA ratio rising to 0.54x from 0.44x (FY13), although we still see current leverage levels as healthy.