FW: RHB FIC Credit Market Update - 3/11/14

3 November 2014

Credit Market Update

HY Credits Continued to be Supported; Hold HKLSP 1/24   

REGIONAL                   

¨      HY space led Asian credit performance, IG names traded wider. IG credits continued to widen last Friday across most parts of the region, particularly along the belly of the curve. In the HK/CN space, CMHI 18, BIDU 18 and HSBC 19 traded several bps wider. Over in SG, MY and TH, we saw selling on papers like OCBCSP 37c17, OGIMK 23 and PTTTB 35 where yields widened a couple of bps. JACI IG spread ended a tad wider at 185bps (+2bps) while the HY spread continued to outperform, closing at 498bps (-12bps). iTraxx AxJ reflected lower credit protection costs as it closed tighter at 109bps (-3bps). Over in US, consensus-beating University of Michigan Confidence (actual: 86.9, consensus: 86.4) overshadowed weaker-than-expected personal spending (actual: -0.2%, consensus: 0.1%), pushing UST yields 2-4bps higher. This may be mitigated with some risk-off sentiment arising from generally weaker economic conditions in Asia. Over the past few days, we saw weaker China manufacturing  and non-manufacturing PMI prints as well as lower unemployment rate in SG, although this morning’s HSBC China manufacturing print shows 50.4, in line with expectations.

¨      On the primary front, China Oil & Gas Group (Ba1/BB+/NR) is eyeing up to USD300m 5.5NC3.5 bonds at initial guidance of 5.375% area.

¨      Flows expected to pick-up today as China HSBC PMI meets expectations. The short-to-mid SORs traded wider yesterday, with the 3y and 5y closing at 1.1% (+1.7bps) and 1.67% (+1.75bps) respectively while the 3y/5y was broader at 5bps, in tandem with Treasury movement. Bonds traded a tad lighter, though there was keen buying into the REIT space on names such as FCTSP, CAPITA and CCTSP while safe-haven SGD names such as TEMASE and MRTSP traded a couple of bps wider. We expect market flows to trade stronger today as the Oct China Manufacturing PMI met consensus expectations at 50.4. GITI Tire Pte Ltd (NR) is currently meeting investors for a planned SGD issuance.

¨       

MALAYSIA

¨      Banking names led PDS flows; MGS curve moved upward. PDS secondary flows slowed down to MYR240m last Friday after being actively traded in the earlier part of the week (Last week’s daily average: MYR561m). We saw a few banking names traded, such as CIMB Thai B3T2 7/24c19 and TF Varlik 6/19 closing flat at 5.213% (MYR40m) and 5.683% (MYR30m) respectively. CMBS 12/15 realigned 10.8bps upward to 3.860% on MYR40m transactions. MGS benchmark yields generally edged higher last Friday, ahead of the MPC meeting this week and GDP data next week. Total govies activity was robust at MYR3.0bn compared to YTD daily average of MYR1.35bn. At the end of the day, yields for 2y, 3y, 7y and 10y MGS moved up to 3.538% (+7.4bps, MYR148m), 3.504% (+3.7bps, MYR7m), 3.768% (+2.3bps, MYR263m) and 3.847% (+5.6bps, MYR190m) respectively, with the exception of 5y MGS inching slightly lower to 3.625% (-0.9bps, MYR32m). Top-traded was the 10y GII, closing near its previous level of 4.177% (-0.4bps) on the back of MYR990m reportedly done.

TRADE IDEA: USD

Bond(s)	Hongkong Land, HKLSP 1/24 (yield: 3.69%; T+133bps) (A2/A-/-)
Comparable(s)	Swire Property, SWIPRO 6/22 (yield: 3.48%; T+144bps) (A2/A-/A)
Relative Value	We reiterate a preference for USD HKLSP 1/24 which has marginally widened by c.7bps since we first mentioned it in our Credit Market Update (dated 13-Oct). We advocate a hold position in this paper due to its solid fundamentals and near-term strong recovery prospects in the property sector from the HK unrest.
Fundamentals	We like HKLSP 6/22 for the following reasons: 1)      Superior credit quality, debt servicing and leverage vis-à-vis peers. The company has a better financial profile compared to similar regional property peers, with LTM EBITDA Interest Coverage at 7.6x (peers*: 6.3x) while LTM Total Debt/ EBITDA is at 5.1x (peers*:7.5x). 2)      Stable cash flow from rental income. 68.9% of operating profit is derived from commercial investment properties, mainly its Central office portfolio in HK with low vacancy rates at c.5%, while retail segment remained 100%-occupied.  3)      HK unrest deemed temporary and impact to be minimal. HK rental yields have been climbing so far this year (YTD: 3%) while monthly transaction volume has grown by 54% in Aug (compared to Jan-2014). We expect Sept-Oct property data to slow, though we opine that the unrest is tapering away, hence we expect the property market to pick-up by Jan-2015.  *Regional peers: Shimao Property, Swire Properties, Sun Hung Kai, Capitaland, UEM Sunrise, Lippo Karawaci

CREDIT BRIEF

Company/ Issuer	Sector	Country	Update	Impact
KT Corporation (KT Corp, Baa1/A-/A-)	Telcos	KR	KT Corp’s 3Q14 revenue rose 1.02% QoQ (YoY: 3.85%) to KRW5.96trn as a result of wireless subscriber growth, while EBITDA margin improved to 21.5% (3Q13: 20.8%) over the last quarter’s figure of 2.12%, which was suppressed by higher marketing costs and one-time expenses from the company’s early retirement program.	Neutral. KT Corp’s debt/EBITDA although still elevated, trimmed down to 4.01x from 4.18x within the quarter. We expect leverage measures to decline as the company plans to reduce its 2014 capex guidance to  KRW1.0trn (FY13: KRW1.3trn) as well as decrease dividend payouts and sell two of its financial subsidiaries, KT Rental and KT Capital Co. Ltd. Notwithstanding, intensifying competition in the LTE segment could hinder EBITDA growth.