RHB FIC Credit Market Update - 29/7/15

29 July 2015

Credit Market Update

           

Quiet Ahead of FOMC; Chinese Credits a Drag to SGD; Heavy Trades on Edaran SWM in MYR; Hold BIDU 3% 6/20          

APAC USD CREDIT MARKETS                                                    

¨      Asian markets stabilized; Primaries dry-up. Chinese equity markets were marginally lower despite the early volatility, with the iTraxx AxJ IG inched down 2.2bps to 109.4 as investor sentiments improved. Overnight, the UST fell 2-3bps across the curve as investors search for higher yielding assets while preparing for the US FOMC rate decision.

¨      IG banks and Corporates yields under our coverage were relatively flat at 2.27% and 3.15%. Chinese IG corporate widened 3-4bps on average, as investors’ appetite improved as they look to HY Chinese real estate credits for better yield pick-up. Chinese HY real estate names tightened 5bps on average with notable gains on SHIMAO 20-22s, COGARD 19-23s, AGILE 17-20s. We continue to observe the fall in Brent oil to USD53.14/bbl on supply risks, as IG & HY O&G names saw yields widened 3bps and 13bps respectively with the exception of WPLAU 19-25s and PTTTB 35.

¨      In the news, Chinese developers, including Evergrande Real Estate (B1/B+/BB-) and China Vanke (Baa1/BBB+/BBB+), reportedly used more cash for share buybacks amid the Chinese equity rout. This has sparked concerns that this trend would result in the deterioration of their leverage and liquidity profiles.

¨      On ratings, S&P downgraded China South City Holdings to B+ from BB- as the company’s aggressive debt-funded expansion weakened its liquidity and leverage profile, compounded by weaker sales numbers.

SGD CREDIT MARKETS

¨      Offloading in Chinese names from equity plunge. The short-to-mid curve was mostly unchanged, with only widening in the 3y (1bp to 1.78%) while the 5y was unchanged (2.22%). We saw offloading from Chinese names such as CENCHI, YLLGSP, CENSUN and SANYPH even as Chinese equities saw a deep plunge on Monday while some demand interest was seen in FCLSP and ARTSP.  In the primaries, Ezion Holdings (NR) is tapping the market with a committed funding backed note (from DBS), and is printing a 5y at initial guidance of around 4%.

MALAYSIA CREDIT MARKETS

¨      Heavy trades on Edaran SWM as yields tightened on potential upgrade. Corporate bond markets turned unusually active, largely contributed by the Edaran SWM’s whopping MYR910m which forms c.68% of total volume on Tuesday. To recap, Edaran’s rating outlook was parked under positive outlook in January by RAM on strong business profile and financial position. Edaran SWM 10/16-10/22 ended the day at 3.698%-4.577%, narrowed to 66bps-88bps above MGS which signaled the upgrade is pretty much on the cards.

¨      Active govvies with MYR4.577bn transaction with focus on very short dated papers. MGS 8/15 was the most active with over MYR1bn traded, tightened by 9bps to 3.10% while MGS 9/17 inched 7bps lower to 3.10%, we reckon the gains were driven by the foreign flows. Meanwhile. The benchmark 3y (10/17) and 10y (9/25) rose 2.3bps and 3.6bps to 3.16% and 3.97% respectively.

¨      Tenaga Rapi (AA2) rating outlook back to Stable (from positive). Formerly known as Anjung Bahasa, concession owner for the design, construction and operation of an office complex for Dewan Bahasa dan Pustaka (DBP), the outlook has been slashed back to stable as a result from issuer’s RM13 million investment in AA1-rated sukuk that will only mature after the last payment on the Bonds which led to thinner cash buffers. Higher-than-expected legal expenses had also trimmed its debt-coverage.

¨                         

TRADE IDEA: USD

Bond(s)	Baidu Inc BIDU 3% 6/20 (A3/NR/A) (Price: 99.36; YTM: 3.141%; Z+143.8bps) (Amt o/s: USD750m)
Comparable(s)	Alibaba Group Holding Ltd BABA 11/19 (A1/A+/A+) (Price: 99.07; YTM: 2.729%; Z+114.9bps) (Amt o/s: USD2.25bn) Tencent Holding Ltd TENCNT 5/19 (A2/A/A+) (Price: 102.14; YTM: 2.769%; Z+132.9bps) (Amt o/s: USD2bn) Baidu Inc BIDU 6/19 (A3/NR/A) (Price: 99.84; YTM: 2.794%; Z+132.4bps) (Amt o/s: USD1bn)
Relative Value	We recommend to hold BIDU 6/20 as its offers an attractive c.37-41bps absolute yield pick-up over Chinese internet peers, BABA 11/19 and TENCNT 5/19. We opine that its recent results (short of consensus causing a 15% drop in share price on 28-July) are still bolstered by continued revenue and cash flow growth as well as strong market position, which led to Moody’s revising its outlook to ‘Positive’ in March this year.
Fundamentals	We are comfortable with BIDU's fundamentals given its: 1.     Dominant market position as China's primary Internet search engine with over 80% market share, as well as a leader in mobile maps and app distribution with 62% of total daily active users and 42% by average daily app distribution respectively in 2014; 2.     Strong earnings with EBITDA growth of c.17% YoY to CNY16.8bn and margins of 29.6% (albeit thinning from 36.0% in the corresponding period a year ago); 3.     Strong cash generation evidenced by hefty 15.5% YoY growth in free cash flow to CNY13.9bn, cash flow from operations-to-total debt of 38.7%, and net cash position of CNY39.0bn (Dec-14: CNY12.0bn, 67.5% and CNY31.8bn); 4.     Rising Leverage with Debt/EBITDA of 2.13x and EBITDA interest cover of 21.8x (LTM Dec-14: 1.61x and 25.6x); 5.     Risks of thinning margins and concentration to the growth concerns in China, but mitigated by positive aforementioned factors. * All financials are last 12 months from Jun-15 (LTM Jun-15) unless stated otherwise.