FW: RHB FIC Credit Market Update - 6/8/14

6 August 2014

Credit Market Update

APAC Spreads Widen Amid Weaker China Data; Add SINOPEC 4/18

REGIONAL                      

¨      Softer flows on lackluster China Services PMI & escalating Ukrainian tensions. The JACI Composite saw widening (+1.5bps to 244.3bps) led by the IG (+1.6bps to 176.4bps) while the HY saw corresponding movement too (+1bp to 469.9bps) as the July HSBC China Services PMI shrank to 50.0 (June: 53.1), the lowest in 9 years. We observed softer flows yesterday amid the disappointing China Services PMI and escalating tensions in Ukraine. In China, flows were mixed while yields in HK marginally widened on papers like HUWHY and WHARF. The Singapore USD space saw better selling on names like CAPITA 3/18 and TEMASE 1/23. The 2y and 10y USTs stayed broadly unchanged at the low levels of 0.46% and 2.48% as markets digested news of escalating tensions in Ukraine.

¨      SGD credits traded on a firmer tone while the SGD swap rate curve was broadly unchanged. In the secondary credit space, we saw better buying among RM along the short- to mid-end in names such as Olamsp papers, Ouesp 17s and Wingta 18s.

MALAYSIA

¨      Local credits active on mid-duration papers. Secondary markets were active yesterday on above average trading volumes of MYR529m, mainly transacted on mid-duration papers across sectors. Overall, yield were traded lower yesterday tracking the performance of MGS. We saw tightening of government-guaranteed PASB where 2/19 and 6/19 edged lower to 4.001% (-4.8bps) and 4.017% (-0.2bps) respectively on cumulative MYR110m activities. AAA-rated ADCB 9/15 narrowed by 0.9bps closing at 4.046% with MYR30m reportedly done while Malakoff Power 12/19 gained by MYR0.18 as yield went 4.1bps downward to 4.95% on MYR30m transactions.

TRADE IDEA: USD

Bond	SINOPC 4/18 (Aa3/sta; A+/pos; NR) (price: 98.2; yield: 2.38%; z+94bps)
Comparable(s)	SINOPE 10/18 (Aa3/sta; A+/pos; NR) (price 100.1; yield: 2.47%; z+85bps) CNOOC 5/18 (Aa3/AA-/NR) (price: 99.0; yield: 2.02%; z+55bps)
Relative Value	We initiate an overweight view in SINOPC 4/18 which appears cheap relative to the group’s belly papers. Pursuant to S&P’s announcement of Sinopec Group and the related companies on CreditWatchPositive, the paper has narrowed c.7bps in yield. Nevertheless, we opine that there may be room for further narrowing given the potential rating upside of 1 notch to be at par with CNOOC’s rating. SINOPC 4/18 currently trades at c.40bps wider to CNOOC 5/18 in terms of z-spread. We opine that the spread may narrow (by c.20-40bps) should the rating upside crystallise.
Fundamentals	1)     High likelihood of systemic support, if needed. The group is ultimately owned by the Chinese government. Further, it plays a key role in the execution of the country’s energy policy and securing supplies of oil and gas for the country. 2)     Potential rating upside of 1 notch. The proposed partial sale of downstream marketing assets may significantly strengthen the financial and liquidity positions of the group. We expect to see debt/EBITDA ratio improve from 2.1x in FY13 to 1.6-1.8x although part of the sale proceeds (as high as CNY80bn-CNY100bn) may be distributed as dividends

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
Oversea-Chinese Banking Corporation	Banks	SG	2Q14 NP +54% Q-o-Q on China-related trade finance and wealth services. NIM improved to 1.7% (1Q: 1.64%) while NPL stood flat at 0.7%, and T1 at 14.7%	Mild positive. While results were driven by growing exposure in China, we are not overly concerned as Singapore banks are well-capitalised and the risk could be easily managed – OCBC’s NPL in China is just 0.3% in 2Q14.
CapitaLand Ltd	Property	SG	2Q14 results saw revenue fell to SGD875m (-13.2% YoY) net profit gain to SGD438.7m (+14.5%) at the back of improved operating PATMI, higher revaluation gains from investment properties and write-back of impairments.	Neutral. CapitaLand, like the other property developers in Singapore, have been impacted by Singapore’s property cooling measures which have seen private residential values slide for three consecutive quarters (ending June-2014). Nevertheless, CapitaLand will be able to withstand the property slowdown as 75% of its portfolio comprises of stable income generating investment properties as well as ease of access to capital markets. CapitaLand’s financial profile is largely stable, with 2Q14 Total Debt/ Assets 0.36x (FY2013: 0.37x), Debt/ EBITDA improved substantially to 8.6x (FY2013 18.6x) on higher revaluation gains of investment properties.
Gamuda	Construction	MY	Proposed to purchase 619ha for total consideration of MYR784m (c. RM11.77 psf) in Selangor next to ELITE Highway, expecting to be completed Oct-14. This will increase Gamuda’s landbank to 1,556ha. The land is located in a matured area of Selangor which expected to contribute positively to the Group’s earnings over medium to long term.	Positive. Financially, although the acquisition maybe partly funded by bank borrowings, we view that the purchase will not have material impact on Gamuda’s gearing. As at 30 Apr 2014, the Group has MYR1.27bn cash pile with low gearing of  0.44x. Overall, we maintain a supportive view of Gamuda based on its strong construction order book (MYR2.3bn as at Apr-14) and concession assets (c. 33% of PBT); low gearing; and good prospects in securing big infrastructure projects. However, we remain concerned over the deadlock in Splash, which contributed to 22% of PBT in 2013.
China Construction Bank (Asia) Corporation Limited (CCB Asia)	Banking	HK	Fitch assigned Hong Kong-based CCB Asia a long-term issuer default rating of A/Sta on extremely high probability of support from parent, China Construction Bank Corporation, and ultimately the Chinese government.	Neutral.
Hong Kong Telecommunications (HKT) Ltd.	Telcos	HK	S&P ratings has removed all of HKT’s ratings from CreditWatch negative and revised the company’s outlook to stable. The outlook revision is based on expectations that the completion of HKT’s rights issue, announced on 22-Jul, will substantially reduce leverage of HKT’s indirect parent, HKT Trust and HKT Ltd.	Neutral. This rating action follows from Moody’s outlook revision on 24-Jul for HKT to “stable”.