RHB FIC Credit Market Update - 30/3/15

30 March 2015

Credit Market Update

Robust Bond Sales in March; Value in BABA 11/19 USD

REGIONAL                                                                                      

¨      Strong primary flows in March; mixed yield moves amid tighter CDS. The ITraxx AxJ declined 1.7bps last Friday, recovering some ground after widening 1.5bps the previous day. Meanwhile, credit yield moves were mixed with NOBLSP 1/20 and 1MDB Global Investments OGIMK 3/23 seeing the biggest yield declines at 24bps and 12bps respectively, while Korean policy bank, EIBKOR, saw its 5y and 10y notes widen 9-12bps. Elsewhere, Chinese real estate yields moves were generally positive, with the Franshion complex ending 5-6bps tighter. Meanwhile, following a weaker-than-expected US GDP QoQ growth of 2.2% (consensus: 2.4%; previous: 2.2%) but better Uni. of Michigan sentiment at 93.0 (consensus: 92.0; previous: 91.2) Asian credits have a decent start to the week; the UST curve ended 1-4bps flatter on Friday. However, UST gains may reverse as this week’s slew of data (e.g., NFP, ADP, PMI and consumer confidence) is expected to be generally positive. On the primary front, March sales volume thus far has proven to be strong at USD13.4bn, second highest on record compared to USD17.8bn in March 2013, despite Chinese real estate developers experiencing difficulty due to corruption probes on a few names like Kaisa and Agile. Nonetheless, we noted Chinese developer Zhongrong Enterprise Group Co Ltd (NR) has set plans to meet investors this week on a prospective first-time issuance.

¨      Potential MAS easing to be credit supportive. Last Friday’s swap curve generally steepened 1-6bps, mirroring overnight UST changes as the 3y and 5y SOR widened 1.95bps and 2.3bps to 1.73% and 2.03% respectively. Activity in the credit market was muted, although we did see slight gains in ANZ 25 senior, CENCHI 17 and GUOLSP 17s and 20s. Following Singapore’s weaker Feb Industrial Production numbers (actual: -3.6%; consensus: -2.2%), we reiterate our case for MAS to ease monetary policy via at least widening the currency bands to managed currency volatility (especially against the USD) at its next monetary policy meeting in mid-April.

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MALAYSIA

¨      Marginal gain in corporate credit; debutant Eternal Icon and KT Kira issued MYR bonds. Corporate bonds gained marginally last Friday amid robust flows of MYR871m. More than half of the trading activity was concentrated in quasi government bonds where yields inched marginally lower. Notably, PASB 2/19 led the chart with MYR170m exchanged hands, settled at 3.863% (-0.1bps). Elsewhere, we saw the debut trade of HSBC Amanah 3/20 closing at par 4.24%. Meanwhile, govvies flows were lackluster at MYR1.67bn before the tender closing for the new 7.5y MGS 9/22 today. Benchmark rates moved sideways with interests were heavier in the 5y and 10y-MGS, ended the day at 3.606% (+1.2bps) and 3.895% (+0.2bps) respectively.

¨      On the primary side, a total of MYR386m printed: - Property ABS - Eternal Icon issuing MYR86m Senior MTN with expected maturity 8-10 years at 4-9%-5.1%, which backed by Plaza 33 in PJ; while AA3-rated Turkish-bank KT Kira priced MYR300m 5y at 5.8%- the bank is 62%-owned by Kuwait Finance House (KFH), 2^nd largest bank in Kuwait. YTD total issuances hit MYR12.1bn, still playing catch-up with last year’s MYR21.6bn (in 1Q14), or only 14% from our targeted MYR85bn this year.

TRADE IDEA: USD

Bond(s)	Alibaba Group Holding Ltd (BABA) 11/19 (A1/A+/A+) (Price: 99.93; 2.51%; Z+103.3bps) (Amt o/s: USD2.25bn)
Comparable(s)	Tencent (TENCNT) 05/19 (A2/A-/NR) (Price: 103.55; YTM: 2.45%; Z+108.0bps) (Amt o/s: USD2bn) Tencent (TENCNT) 02/20 (A2/A-/NR) (Price: 101.1; 2.63%; Z+112.5bps) (Amt o/s: USD1.1bn) Baidu (BIDU) 06/19 (A3/NR/A) (Price: 100.99; YTM: 2.49%; Z+110.0bps) (Amt o/s: USD1bn)
Relative Value	We prefer BABA 19 over other Chinese internet media comparables TENCNT 19-20 and BIDU 19. BABA 19 trades 10-27bps higher after adjusting for its higher credit rating (10bps/notch) while being priced 1-3pts cheaper.
Fundamentals	We are comfortable with BABA's fundamentals given: 1)     Dominant market position as the world’s largest e-commerce company in terms of gross merchandise volume (GMV). Its three retail marketplaces accounted for 80% of China's total online shopping GMV generated a combined GMV of USD250bn in 2013, compared to eBay Inc.’s USD83bn and Amazon.com’s USD116bn; 2)     Growth potential from China's relatively low consumption-to-GDP ratio and Internet penetration, which means a large pool of potential shoppers have yet to come online; 3)     High profitability and uninterrupted earnings growth with wide EBITDA margin of 50.6% in Dec-14 (Sep-13: 55%), and revenue CAGR of 70% between FY05 and FY14 and 4)     Low leverage and sound liquidity with debt/EBITDA of 1.6x and cash-to-ST debt of 3.2x as at Dec-14.