RHB FIC Credit Market Update - 24/6/15

24 June 2015

Credit Market Update

                                       

Global Sentiment Uplift Benefits New Supply; BOC to Issue ‘Silk Road’ Bonds; Value in New Baidu 6/20 USD

REGIONAL                                                                                      

¨      Global sentiment uplift benefits new supply; Bank of China to deliver ‘Silk Road’ bonds today. Risk sentiment remained intact following Greece’s proposed concessions at the emergency summit on Monday; the iTraxx AxJ IG tightened 0.4bps to close at 106.3bps. In the US, treasury rates pushed up 1-4bps on gains in Eurozone markets, despite new economic data being mixed, reflected by flat manufacturing PMI data, better new home sales and weaker durable goods orders. As for Asian credits, IG corporate and bank yields once again traced up 1-2bps on average as new supply drew some market interest after over a week of drought. On the flipside, HY corporates maintained strength with yields cutting 9-10bps in general.  Nonetheless, there were losers in China Shanshui Cement’s 2020s, which weakened after Fitch place the issuer on negative watch, as well as Winsway 2016s on news continued negative sentiment as it attempts to secure an agreement with a ‘white knight.’ Meanwhile, new bond sales were led by Baidu (A3/NR/A) with USD750m 5y and USD500m 10y notes priced at T+135bps (IPT: T+160bps) and T+175bps (IPT: T+200bps) respectively; followed by Export-Import Bank of Korea’s (Aa3/A+/AA-) new USD600m 5.5y and USD400m 3.25% 2026 prints priced at T+97.5bps (IPT: T+105bps) and T+95bps (IPT: T+110bps) respectively, oversubscribed 1.83x and 2.25x; and Singapore Telecommunications Ltd’s (Aa3/A+/A+) USD500m 10y print priced at T+97.5bps (IPT: T+110bps), oversubscribed 2.5x. Coming up today, Bank of China (A1/A/A) is expected to deliver 3y, 5y and 10y prints starting at T+140bps, T+150bps and T+180bps respectively. These prints should form part of the bank’s anticipated multi-currency Reg S bond tap, possibly up to USD7.0bn equivalent in USD, SGD and CNH, to support a USD40.0bn Silk Road Fund which aims to improve Asia’s infrastructural links to Europe. Also expected today is Korea Resources Corp’s (Aa3/A+/NR) USD 2019 bond sale which will start in the T+100bps area. In the pipeline, Shanghai Construction Group (guarantor rating: Baa1/BBB/BBB) will host a roadshow tomorrow for a USD Reg S issuance.  On key economic data, the US will release revised GDP figures today.

¨      Keen perpetual activity ahead of well-received ARTSP issuance. We observed a steepening in the short-to-mid curve, with the 3y and 5y rising by +2.9bps and +4.25bps to close at 1.70% and 2.18% respectively. We saw activity pick-up in the perpetual space on names like MAPLSP, CHEUNG and SCISP ahead of the Ascott Residence Trust (Baa3) perp issuance, which printed a Pnc5 at 4.68%. This was tighter then initial guidance of around 5%, with keen demand as seen by the BTC of over 4x.

¨                   

MALAYSIA

¨      Bank and toll road bonds fueled credit flows; Gamuda’s 3Q15 results within expectation, MRT2 expected to roll-out by Mid-16.  Government bonds ended mostly in positive territory amid optimistic development in Greece’s ongoing debt crisis. At the end of the day, the 3y, 7y and 10y-MGS benchmarks fell 1bps-2bps closing at 3.18%, 3.94% and 3.99% respectively, although we also saw 5y-MGS inched bps higher to 3.61%. Corporate flows stayed strong at MYR839m total volume. Activity were heavy in banking and highway space – notably, PLUS complex widened by 0.1bps-3.2bps; while yields hiked by 7bps-15bps for T1 and T2 instruments from CIMB Bank, CIMB Thai and Public Bank.

TRADE IDEA: USD

Bond(s)	Baidu Inc BIDU 3% 6/20 (A3/NR/A) (Price: 99.87; YTM: 3.019%; T+135bps) (Amt o/s: USD750m) BIDU 4.125% 6/25 (A3/NR/A) (Price: 99.83; YTM: 4.147%; T+175bps) (Amt o/s: USD500m)
Comparable(s)	Alibaba Group Holding Ltd BABA 11/19 (A1/A+/A+) (Price: 99.12; YTM: 2.711%; Z+104.1bps) (Amt o/s: USD2.25bn) BABA 11/24 (A1/A+/A+) (Price: 96.50; YTM: 4.050%; Z+164.0bps) (Amt o/s: USD2.25bn) Tencent Holding Ltd TENCNT 5/19 (A2/A/A+) (Price: 102.46; YTM: 2.698%; Z+117.6bps) (Amt o/s: USD2bn) TENCNT 2/20 (A2/A/A+) (Price: 99.77; YTM: 2.929%; Z+121.1bps) (Amt o/s: USD1.1bn) TENCNT 2/25 (A2/A/A+) (Price: 97.43; YTM: 4.126%; Z+170.2bps) (Amt o/s: USD900m) Baidu Inc BIDU 6/19 (A3/NR/A) (Price: 100.16; YTM: 2.708%; Z+115.5bps) (Amt o/s: USD1bn) BIDU 11/22 (A3/NR/A) (Price: 98.82; YTM: 3.683%; Z+147.9bps) (Amt o/s: USD750m)
Relative Value	We opine that the newly priced BIDU 6/20 and BIDU 6/25 seem cheap-to-fairly priced among the Chinese Internet bonds and recommend a switch to BIDU 6/20 from BABA 19. The new prints hold value with 5y tranche having an attractive yield pickup of 9bps against TENCNT 2/20 and 31bps against BABA 11/19; while the 10y tranche has slightly fairer 2bps pickup against TENCNT 2/25 and 10bps to BABA 11/24. Considering BIDU's lower ratings, smaller tranche size and slightly longer duration into valuation, we opine that BIDU 20 still offers fair value pickup of c.5-10bps against BABA 19. Furthermore, we are comfortable with the switch idea given Moody's positive outlook on BIDU as a potential catalyst for further gain in value against BABA, which has suffered from the slowing consumption in China.
Fundamentals	We are comfortable with BABA's fundamentals given: 1.     Dominant market position as China's primary Internet search engine with over 80% market share, as well as a leader in mobile maps and app distribution with 62% of total daily active users and 42% by average daily app distribution respectively; 2.     Strong earnings with EBITDA growth of 21% YoY to CNY16.8bn churning at 34.2% EBITDA margin (FY13: 43.3%), which remains high despite higher increasing CAPEX (rising to CNY4.8bn from CNY2.8bn in FY13) and marketing costs; 3.     Strong cash generation evidenced by hefty 19% YoY growth in free cash flow to CNY13.1bn, cash flow from operations-to-total debt of 69%, and net cash position of CNY31.8bn. * All financials as at FY14

CREDIT IDEA

Company/ Issuer	Sector	Country	Update	RHBFIC View
Gamuda Bhd (AA3)	Construction	MY	3Q15 YTD NP +9% yoy to MYR570m. Gearing stable at 0.53x (2Q15: 0.55x) and annualized debt-to-EBITDA stayed healthy at 3.4x (FYE7/14: 2.7x).	Neutral. Debt profile remain conformable with gearing of 0.53x and debt-to-ETBIDA of 3.4x (Industry average: 0.7x, 6.4x). MRT2 will only roll-out in mid-16, hence we expect lower earnings guidance for FY15 and FY16 as jobs for MRT1 to be completed by 2015. Nevertheless, we continue to view Gamuda as the best proxy to the construction sector, given its dominant role in the MRT project. It managed to record property sales worth a total of MYR810m up to 9MFY15, on track to reach its MYR1.2bn FY15 sales guidance.