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CMBI April 2021 Credit Compendium Summary

Core Content

This document outlines CMBI's credit strategy for April 2021, focusing on opportunities in the Chinese credit market amidst ongoing volatility and regulatory changes. The report highlights the firm's preference for certain sectors and issuers, while also providing an analysis of market conditions and credit risk assessment.

Main Views

• Credit Market Volatility: The Chinese USD bond market has experienced increased volatility due to recent credit events, especially the default of China Fortune Land and restructuring headlines from Huarong. This has prompted offshore investors to reassess credit risk parameters.

• Onshore Credit Conditions: Despite local SOE defaults, the onshore credit market has remained stable. Onshore investors are becoming more selective, avoiding provinces with recent defaults. However, the market is not facing systemic risk due to the relatively small proportion of credit bonds in major banks' assets and the preparation of provisions.

• Regulatory Impact: The Chinese government is gradually removing implicit guarantees for SOEs, which is part of a broader effort to normalize monetary policy and promote economic growth. The "three red lines" policy has led to improved debt management among developers, with some moving from red to yellow or green status.

• Bond Connect Potential: The upcoming Southbound Bond Connect is expected to increase demand for offshore Chinese bonds, offering a more convenient and effective way for domestic investors to access overseas bonds compared to the current QDII framework.

• Investment Strategy: CMBI recommends overweight positions in certain high-yield credits, particularly in short-end bonds with strong carry and liquidity. They highlight specific developers and bonds as attractive investment opportunities.

Key Investment Ideas

Overweight

• CHIGRA 2022 – Yield: 17%

  • Robust auto sales data supports operating performance.
  • Good onshore market access and successful refinancing in 2020.
  • Improved inventory management led to mild deleveraging.
  • Expected to regain access to onshore corporate bonds.

• DAFAPG 2021-2022 – Yield: 12%-15%

  • Withdrawal of S&P rating removes overhang.
  • Manageable liquidity and modest debt growth.
  • Active land replenishment and strong pre-sales growth.
  • Debt structure improved with reduced non-standard borrowings.

• DEXICN 2022 – Yield: 9%-10.6%

  • Resilient credit profile supported by quality land reserves.
  • Improved balance sheet transparency and financial results.
  • Adequate contract liabilities to cover 2021 booking targets.
  • Quality land bank covers 3 years of development.

• JIAYUA 2022-2023 – Yield: 10.5%-12.8%

  • Improved credit profile with active debt management and assets injection.
  • Strong 2020 financial results and improved balance sheet.
  • Shandong project injection strengthens credit metrics.
  • Upgrade is likely based on meeting rating triggers.

• KAISAG 2022-2023 – Yield: 7.1%-8.5%

  • Good profitability and diversified land acquisition channels.
  • Prominent URP conversion pipelines.
  • Net gearing below 100% is a positive surprise.
  • Strong 2021 guidance with clear sales and funding cost targets.

• SINHLD 2021-2022 – Yield: 9.5%-10.5%

  • Stable credit profile and improved capital structure.
  • Liquidity weakened slightly, but bullet debt is minimal.
  • Prudent land acquisition supports leverage stability.
  • Transparent pre-sales reporting is expected.

• YUZHOU 2022-2023 – Yield: 8%-10.5%

  • Adequate contract liabilities support revenue targets.
  • Gradual improvement in gross margin and liquidity.
  • Banks have waived loan covenant breaches.
  • Expected to restore investor confidence with a recovering interim result.

• TSIGTF 2022 – Yield: 9%

  • Borrowing from CNNC to replenish working capital.
  • Likely approval of private equity placement by CSRC.
  • Operational improvement and controlled deleveraging expected.

Neutral

• CARINC 2022 – Yield: 7.2%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• CENCHI 2021-2025 – Yield: 6.4%-11%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• CAPG 2022-2027 – Yield: 5.5%-7.7%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• HONGQI 2022-2023 – Yield: 5.8%-6.5%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• EHOUSE 2022-2023 – Yield: 7.3%-9.7%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• GRNLGR 2022-2023 – Yield: 10%-13%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• JINGRU 2021-2023 – Yield: 14%-15%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• MOLAND 2022-2023 – Yield: 8.7%-12%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• RISSUN 2021-2022 – Yield: 13%-15%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• RONXIN 2022-2025 – Yield: 7%-9.5%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

• ZHPRHK 2021-2026 – Yield: 5%-8.5%

  • Moderate debt growth and acceptable liquidity.
  • Onshore investors may be cautious due to market volatility.

Underweight

• YESTAR 2021 – Yield: ~47 cash price
  • High risk of default and poor liquidity.
  • Not recommended for investment due to poor financial position.

Key Information

• Credit Spread Tightening: The launch of Southbound Bond Connect is expected to tighten credit spreads for lower-rated offshore issuers due to the onshore-offshore yield difference.

• Liquidity Metrics: Most developers have improved liquidity conditions, with most meeting the unrestricted cash/short-term debt ratio. Only a few, like Evergrande and Guangzhou R&F, fall short, but they are actively addressing liquidity issues.

• Three-Red-Line Policy: This policy has helped reduce debt growth and improve balance sheet management. Developers who have met the criteria have moved from red to yellow or green status.

• Balance Sheet Transparency: CMBI highlights the importance of transparency, particularly in minority interests, external guarantees, and contract liabilities. Some developers have high levels of these, which may affect credit assessment.

• Market Volatility: Increased volatility is expected in onshore bond markets due to the rising number of defaults. This may impact investor sentiment and require better liquidity management for developers.

• Investment Opportunities: CMBI identifies specific developers and bonds as having attractive risk-reward profiles, with yields ranging from 5.1% to 17%.

Conclusion

CMBI's April 2021 credit compendium emphasizes the importance of selective investment in high-yield credits, particularly in the property and industrial sectors. The firm highlights the positive impact of regulatory changes and the potential of Southbound Bond Connect on the offshore bond market. Despite the recent credit events and volatility, the onshore market remains stable, and most developers have adequate liquidity to cover short-term obligations. The report also underscores the need for improved balance sheet transparency and better liquidity management.