RHB FIC Credit Market Update - 19/10/15

19 October 2015

Credit Market Update

           

China’s Sub-7% Growth to Keep Investors on Defensive Mode 

APAC USD CREDIT MARKETS                                                    

¨      Slower 3Q15 growth in China may support IG credits. Last Friday, credit protection via the iTraxx AxJ IG was c.2bps tighter at 139bps on better investor risk appetite. Separately, 2y and 10y UST traded sideways at c.0.60% and c.2.03% respectively on growing consensus on a delayed Fed rate hike after investors digested the -0.2% fall in September US Industrial production print (consensus: -0.2%; revised: -0.1%) despite the better than expected October consumer sentiment as reported by University of Michigan at 92.1 (consensus: 89; prior: 87.2).

¨      Asian IG credit spreads tightened 2.5bps to 158.7bps*. Average yields of IG credits was unchanged on Friday at c.3.0%*, high grade HK credits tightened 5-10bps as observed in HUWHY 22, Swire Pacific 22 along with Indonesian SOE like PLN 21 and Perusahaan Gas 24, while decliners were Korean papers KT Corp 19 and Korea Electric 18 widening 3bps.

¨      Investors switch to HY bonds; average yields compressed 13bps to 9.26%*. Similarly with the gains in global equities last week, HY credits performed well tightening 15-60bps as seen with Chinese real estate names Evergrande 18-20s, Sunac China 19, Shimao 20, Central China Real Estate 18, together with select commodities players – Vedanta 16-23, Yingde Gases 18 and China Hongqiao 17. On the other hand, the notable underperformer was SOHO China 17 trading 17bps wider.

¨      China GDP slows to 6.9% in 3Q15 was indeed weaker but was better than expected vs. consensus at 6.8% (2Q15: 7.0%), while China’s YoY retail sales and industrial production numbers came in at 10.9% (consensus: 10.8%; prior: 10.8%) and 5.7% (consensus: 6.0%; prior: 6.1%) respectively.

*based on RHBFIC internally-generated index.

SGD CREDIT MARKETS

¨      Firmer flows post-MAS decision. The 2y and 5y benchmark SOR curve widened on Friday, rising by 5.8bps (to 1.60%) and 3.9bps (to 2.17%) respectively but still c.25bps lower on a month-to-date basis fueled by rising bets of Fed delay and MAS second round of easing. There was more decisive flows, with interest seen in real estate papers like MAPLSP and also AREIT perps from PBs. Other names like NOLSP and OLAMSP traded between 5-10bps tighter (based on Bloomberg). Guocoland’s 1QFY6/16 results came in strong, its credit profile showing an improving trend, with LTM Debt/ EBITDA at 9.5x and EBITDA Interest Coverage at 6.7x. Further details in our credit update section. Meanwhile, Sept’s NODX also came in better than consensus at 0.3% (consensus: -3.9%; Aug: -8.4%).

MYR CREDIT MARKETS

¨      AAA bonds drove trading volume. Moderate trading session in corporate market last Friday with MYR361m exchanged hands. More than half of the activity was concentrated in the AAA bonds. In the banking space, HSBC Amanah 3/20 rose 4bps to 4.36% on MYR60m trades. On similar trading volume, Korean bank Kexim 2/17 slipped 10bps to 4.042%, in-line with its peers KDB and IBK which tightened 16bps last week. Elsewhere, AA1-rated YTLPI 10/21-10/24 realigned 4bps-10bps higher to 4.7%-4.9%.

¨      Market cautious before China’s 3Q GDP number and Malaysia’s Budget 2016. Local govvies moved sideways last Friday with 3y-10y MGS settled at 3.61%-4.11% (flat to -1bps) on thin trading day as investors probably stayed cautious before China releases its 3Q GDP number today; while Malaysia to announce Budget 2016 this Friday. Meanwhile, the Ringgit ended weaker at 4.18/USD last Friday as USD gained against EM currencies post Fed’s vice chairman speech who sees that a rate hike by end-2015 is still possible. The IRS curve steepened with the 3y-10y edging 1bps-5bps higher to 4.04%-4.60%.

¨      On the primary market, Maybank printed MYR2.2bn AA1-rated B3T2 10nc5 at 4.9%; while Cagamas (AAA) priced its MYR1.5bn 3y at 4.2%.

CREDIT UPDATE

Company/Issuer	Sector	Country	Update	RHB FIC View
WCT Holdings Bhd (WCT) (AA-/Neg)	Construction	MY	In relation to the recent negative outlook by MARC on WCT, the management is planning to reduce its net gearing 0.5x by next year, from 0.79x in 2Q15, based on newspaper report. This is to achieve via the expected proceed from the exercise of Warrant C and WCT REIT. WCT said that its REIT plans likely to be implemented in 2Q16 in line with the opening of Paradigm Mall Johor Bharu. Currently, WCT’s existing malls (i.e. Paradigm Mall, AEON Bukit Tinggi, Gateway@KLIA2) are valued at MYR2.2bn.	Maintain marketweight. We will continue to monitor the REIT progress. The management’s initiative to improve its net gearing to 0.5x in FY16 is in-line with the industry average net gearing of 0.53x.
Guocoland Ltd	Property	SG	1QFY6/2016 revenue surged by 97% YoY to SGD439.8m attributed to its Singapore’s Leedon Residence sales and profit recognition from Shanghai Guoson Centre office block sale while net profit jumped by more than 20x YoY to SGD551.6m (SGD25.5m previously) due to recognition of  the gain from the disposal of its China’s Dongzhimen project (net gain of approx. SGD480m).	Mild underweight. We continue to monitor Guocoland’s fundamentals for sustained improvements amid a weaker outlook for the Singapore property market. Stripping out the one-off gain from asset disposal, the company’s LTM Debt/ EBITDA has improved to 9.5x (1Q6/15: 20.3x) with a similar trend seen in EBITDA Interest Coverage at 6.7x (1Q6/15: 3.1x). Its inventories fell to SGD2.6bn (4QFY6/15: SGD4.71bn) due to its disposal of the Dongzhimen project, a low level (5y inventory level c.SGD4.7bn), signifying a potential need to replenish its orderbook. Guocoland’s business is predominantly oriented towards Singapore (close to 60%) while around 30% is from China.