AMTD Research - 8 November 2017

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Chinese High Yield Properties


Chinese high yield properties overview

The story in 2017 is playing safely & holding for carry. Asian bond market continued to enjoy abundant liquidity while Chinese funding contributing increasing shares. Supplies from property sector dominate the Chinese HY names due to depressed onshore bond issuance and a strong physical property market in China. This has compressed the yields.

For 2018, we expect policy tightening to continue in physical market. We don’t think Chinese HY properties will continue to tighten against Chinese HY industrials and Chinese HY consumers. Chasing new issuances which have higher coupon should be safe in a very tight secondary market. Among Chinese HY property names, we prefer B rating names over BB names. Our top picks are CENCHI 8.75 21 & FTHDGR 7.357 21.

The physical property market has a wonderful year in 2017. But turning point appeared in 2H17, stricter policy tightening has come. Growth of contracted sales has slowed down in 3Q17. We estimate the issuers’ contracted sale growth in 2018 will be much lower than that of 2017 in a tightening environment. Especially, we expect growth of contracted sales to significantly slowdown in 3rd or lower tier cities.

Lowering funding cost would be a reason for USD bonds issuance in offshore market, compared to onshore bond market. However, developers must acquire approvals from National Development and Reform Commission (NDRC) before USD bond issuance, which will be a barrier for new issuance. Our observation indicated that NDRC prefers to approve refinancing purpose rather than incremental issuance. Therefore, the net issuance should increase, but it will highly depend on approval process of NDRC.

Lastly, in current tightening situation, new approval of bond issuance will reduce significantly in 2018 in domestic market. The trend has shown in 2017. Financing in domestic market will be more challenging in 2018.

2018 Outlook & Our picks

High demand from Chinese funds will continue chasing new issuance of China HY prop. Coupon rate of new issuance might hover around similar level but slightly wider than that of mid-2017. In the meantime, we believe callable bonds will be called in 2017 and 2018 to lower issuers’ funding cost. Chasing new issuances which have higher coupon should be safe in a very tight market environment of secondary market, and we see policy risks in physical market and minimum single name risks.

The physical property market has a wonderful year in 2017. Most of developers have achieved over 50% YoY growth of contracted sales; leaders have achieved over 100% YoY growth. Good day comes fast and goes faster. Turning point appeared in 2H17, stricter policy tightening has come: mortgage rate hike, resold restriction, home price cap, more requirements for qualified home buyer in 1st and 2nd tier cities. Growth of contracted sales has slowed down from 3Q17. We estimate sale growth in 2018 will be much lower than that of 2017 in tightening environment. Especially, we expect growth of contracted sales to significantly slow down in 3rd or lower tier cities.

Our view of the impact from US rate hike: higher chance for Fed would be led by dovish chairman. Currently we can see nominees Jerome Powell is dovish, has less comments on monetary policy and supports easing financial regulations. His past speeches showed that he is in support of gradual interest rate increased, which is unchanged of Yellan’s path and suitable for Trump’s plan of economy simulation. Therefore, our guestimate rate hike may be a gradual process. China HY prop might face less impact.

Overall, although HY China prop’s spread pickup over consumers and industrials has narrowed, HY China prop names have more stable cash inflow and better yield over HY industrial and HY consumer. In addition, HY China prop have less concern on single name risk.

With regard to maturity, we still prefer the short end, although strong demand has partly offset the impact of UST hike expectation. We prefer 3-5 yrs paper rather than over 5 yrs paper to minimize yield curve risk. We prefer B rating names over BB names; the main reason is upgrade probability of BB to BBB is much less than before: 1) profitability is affected by home price cap; 2) mortgage tightening slows down sale-through rate; 3) capex expansion is still ahead).

We don’t suggest to fish B names with >5 yrs maturity, mainly due to yield curve of HY china prop is flattened, (Figure 2). We suggest undervalued names with >2 yrs maturity, more assets in 1st and 2nd tier cities of China. Look for new issuance with higher coupon is safer in current tight market condition.

Outperform on FTHDGR 7.375 21: FTHDGR 21 (Moody’s B3) has 160 bps yearly pick up of z spread over PWRLNG 20 (Moody’s B2); and some value at 122 bps of z spread over PWRLNG 21. The company will launch its new projects in Shenzhen in 4Q17, which should improve its cash inflow.

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