RHB FIC Credit Market Update - 3/4/15

3 April 2015

Credit Market Update

Activity Slows for Good Friday; Hold Preference for CENCHI 17 SGD

REGIONAL                                                                                      

¨      Quiet markets ahead of Good Friday; Ping An Insurance to buy Cogard stake. The iTraxx AxJ closed 0.31bps tighter to 110.5bps yesterday amid better initial jobless claims (actual: 268k; consensus: 286k) and factory orders data (actual: 0.2%; consensus: -0.4%). Asian credit markets were quiet ahead of Good Friday and Easter break. However, high yield markets were more active following news of Ping An Insurance buying a 9.9% stake in Chinese property developer, Country Garden, which saw its 7.5% 2023 notes’ prices jump at least 4.0 price points and yields narrow 73bps. Meanwhile, Brent crude prices declined 3.8% to USD54.95/bbl, following news of Iran and world powers reaching an agreement to end nuclear disputes, thereby allowing Iran to raise oil exports. Nonetheless, IG O&G names stood firm, with PETMK complex seeing yields tighten 7-9bps, KOROIL 24s yields declining 7bps and PERTIJ complex closing 2-3bps tighter. Tonight, we expect the US nonfarm payroll data release to remain strong (i.e. >200k), which in turn could potentially cap USD bond gains.

¨      Property names remain favourites in SGD; SOR narrowed as PMI contracts in March. The short-to-mid SOR curve saw a downward shift, with the 3y and 5y swaps tightening by around -5.3bps to close at 1.67% and 1.97% respectively. We observed some buying into real estate names like FCTSP, HPLSP and Chinese developer VANKE. The SG Mar PMI came in largely within expectations at 49.6 (previous: 49.7), signaling projected sluggish industrial production expectations.

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MALAYSIA

¨      Buying interest pushed yields lower. The credit market continued its positive momentum with yields moved downward yesterday. DanaInfra bonds remained top-traded on MYR230m, narrowed by 1bps-11bps before its new MYR3.5bn issuances next week (Issue date: 6-Apr). We noted yields dipp 1-19bps in power names such as YTLPI, TTPC and KEV. Meanwhile, the MGS curve flattened as yields fell 0.2-2.6bps from the belly onwards while the 3y-MGS rate increased 1.9bps. Overall, the govvies market continued its gaining trend post-GST implementation, amid stronger MYR at 3.6690/USD. Trading activity was strong in both corporate and govvies, reflected by MYR779m and MYR5.98bn in transaction volume respectively.

TRADE IDEA: SGD

Bond(s)	Central China Real Estate; CENCHI 5/17 (yield: 6.3%; SOR+c.490bps) (Ba3/BB-/-) (O/S amount: SGD200m)
Comparable(s)	Yanlord Land Group; YLLGSP 5/17 (yield: 6.17%; SOR+c.480bps) (Ba3/B+/-) (O/S amount: SGD400m)
Relative Value	We reiterate a preference for CENCHI 5/17 which has widened by c.20bps since first mentioned in the Credit Market Update (dated: 8-Dec). This is in comparison to its other SGX-listed peer, which has broadened by c.83bps over the same period on concerns of its high-end market exposure to a slowly recovering Chinese market and recent downgrades in outlook in Nov-2014 (BB-/Neg from BB-/Sta) and rating in April-2015 (B+/Sta from BB-/Neg).
Fundamentals	We believe that Central China Real Estate (CCRE) will continue to be a robust pick as: 1)     Stable and improved financials. The Henan-based property developer’s LTM Total Debt/ EBITDA improved in FY2014 to 4.4x (FY2013: 5.0x) while EBITDA Interest Coverage is at 4.6x (FY2013: 2.9x). This is in comparison to Yanlord which has not fared as well, with its respective ratios in  FY2014 at 7.3x (FY2013: 5.3x) and 11.4x (15.8x) 2)     Slow recovery in China property market.  Recovery in the China property market has been sluggish, even as we saw property loosening regulations such as the favourable mortgage refinancing framework and liquidity injections in 4Q2014, with only +9 (out of 70 cities) cities showing MoM housing price improvement in Feb-2015 (Feb-2014: +55 cities). In lieu of this, we opine that CCRE, a mass-market property developer, will comparatively gain more from these policy changes compared to a high-end developer. 3)     Strong parentage. The company is 27% owned by CapitaLand, hence we opine that CCRE will benefit from this strategic tie-up with the well-known and established Singaporean developer.