RHB FIC Credit Market Update - 13/4/15

13 April 2015

Credit Market Update

Firm Credits and Healthy Liquidity; AAA MYR Gains the Spolight; Keep HKCGAS 8/18 USD

REGIONAL                                                                                      

¨      Credits ended firm; strong response to Shinhan Bank USD sale reflects healthy liquidity. Asian USD credit protection costs continued their downward trend, declining 0.4bps to 105bps last Friday. Meanwhile, credit markets opened to a generally flatter UST curve, which saw the 2y and 3y yields increased 1-2bps overnight while the 5y-30y rates marginally flattened (0.3-2bps). In the IG space, yields moved sideways in general but we saw tightening (2-9bps) mostly in real estate and O&G names including SINOCE 19-20s, FRANSH 19-21s, CNOOC 35 and PETMK 45, Chinese credits benefitting from expectations of policy easing while O&G credits took cues from the rebound in crude prices (Brent: USD57.87/bbl). On financials, EIBKOR 19 yields were driven 10bps tighter following the new SHNHAN 20 sale which closed flat last Friday at 2.23%; on the other hand, KDB 17 closed 16bps wider. Elsewhere, we noted NOBLSP 15 significantly widening 43bps while STSP 31 and CINDBK 20 yields were less pressured, increasing 7-8bps. In the HY space, Kaisa 18 notes gained (yields declined 45bps) on news that its founder, Kwok Ying Shing, has returned as chairman.

¨      Quieter trading expected ahead of MAS announcement. We saw marginal widening by +0.7bps (to 1.55%) and +1.18bps (+1.87%) in the 3y and 5y respectively, with the 3y/5y spread closing at 32bps. We saw quieter flows on Friday, with this trend expected to continue today as investors await the MAS monetary policy announcement tomorrow. There was some buying interest in HK oriented property names such as HKLSP and CHEUNG as well as GUOLSP. In the primary market, UOL Group (NR) printed a SGD175m 3y at 2.5%, 10bps inside initial guidance. Meanwhile, Ascendas Pte Ltd is looking to buyback of its SGD300m 4.75% Perps (callable 2017) at 101.00.

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MALAYSIA

¨      Gain in AAA space amid robust credit flows. Corporate flows stayed strong reflected by the above-average trades of MYR967m on Friday. We saw yield tightened in heavily traded AAA space – notably, ADCB 9/15 and PLUS 1/28 inched 2bps-3bps lower to 3.836% and 4.68% with MYR100m dealt each. Manjung complex 11/18-11/20 also narrowed 2bps-10bps, settled at 3.999%-4.2% following news on commencement of commercial operation of the power plant on 12 April 2015. Meanwhile, MGS curve moved upward with 5y, 7y and 10y benchmarks increased by 1bps-2bps as MYR depreciate to MYR3.6670/USD, following weaker IPI growth of 5.2% y-o-y in Feb (Jan-15: 7%, Dec-14: 7.4%) on slower manufacturing sales. As a result, our economist expects real GDP growth to expand by around 5.0% y-o-y in 1Q 2015 (4Q14: 5.8%). Investors to focus on the MYR4bn 5.5y MGS 10/20 with auction closing tomorrow, 14-Apr.

TRADE IDEA: USD

Bond(s)	HKCGAS 8/18 (ytm: 2.16%; T+ c.125bps) (A1/A+/-)
Comparable(s)	BEIENT 5/21 (ytm: 3.35%; T+c.195bps) (A3/BBB+/-)
Relative Value	We reiterate our preference for HKCGAS 8/18 as the paper has slightly tightened by around 8 bps since initiation (Credit Market Update dated 24-Nov-2014). We opine that there is room for pick-up of about 10-20bps if compared to BEIENT 5/21, adjusting for difference in duration and rating.
Fundamentals	We like Hong Kong & China Gas Co (Towngas) as: 1)     Displays solid fundamentals. Hong Kong’s sole gas provider has better fundamentals compared to its gas peers in the mainland, with its EBITDA Interest Coverage at 8.8x (peers: 6.8x) and Total Debt/ EBITDA at 3.6x (peers: 4.8x). 2)     Hong Kong monopoly with China growth story. The company has a regulated monopoly in Hong Kong, hence it provides stable and uninterrupted cash flows. It also has exposure to the less-regulated gas supply business in mainland China via its 62.39% holding in Towngas China, thus providing some potential upside 3)     Comfortable and stable EBITDA margins. Towngas has historical EBITDA margins of around 30%, with around 90% of EBITDA derived from its regulated business. As Towngas is expanding into the less-regulated business in mainland China, this may see more cyclicality in revenue, though margins are expected to improve correspondingly. China gas peers: Beijing Enterprise, China Gas , China Resources Gas, ENN Energy