20220714-招银国际-China_AMCs_–_Opportunities_after_the_collateral_damage_6页_645kb

CMBI Credit Commentary Summary

Core Content

This document is a credit commentary from CMBI Fixed Income Department, analyzing the current market position and investment opportunities in the Chinese Asset Management Companies (AMCs) sector. The commentary highlights the impact of recent financial developments, including the delay in Great Wall's FY21 results, the recapitalization of Huarong, and regulatory support for AMCs.

Main Points

• Great Wall's Delay in FY21 Results: The delay in publishing Great Wall's FY21 results is attributed to company-specific issues, particularly related to accounting treatment of its exposure to HNA. The delay is not indicative of an industry-wide problem. Great Wall is expected to publish results before the end of the grace period (29 Aug 2022), and its capital adequacy ratio (CAR) is projected to remain above regulatory requirements.

• Credit Risk and Volatility: Although Great Wall is not a near-term default candidate, its bonds and perps may experience price volatility due to negative headlines such as rating downgrades and asset impairments. Moody's and S&P have placed Great Wall on review for downgrade, but this does not equate to a technical default.

• Huarong's Recapitalization: Huarong received significant government support through a capital injection of RMB42bn in Dec 2021, which restored its CAR to 12.95%. The Ministry of Finance (MOF) and CITIC Group remain major shareholders, with MOF owning 24.76% and CITIC Group owning 26.46% post-equity transfer. Despite the equity transfer, Huarong remains a central state-owned company with strong government backing.

• Sector Strategic Importance: The Chinese national AMCs are becoming increasingly important in the financial system, especially in the context of economic slowdown and rising non-performing loans (NPLs). The government's active involvement and support are evident through recapitalization efforts and regulatory guidance.

• Regulatory Support: CBIRC has issued guidance to expand the scope of distressed asset management for national AMCs and to reduce the risk weighting of their onshore bonds and capital papers from 100% to 25%. This is expected to encourage more onshore investment and improve funding access.

• Market Trends: Offshore issuance from the big-4 AMCs has declined since 2020, with a trend of net redemption in USD bond markets. Onshore issuance is on the rise, supported by a more favorable regulatory environment and increased capital availability.

Key Investment Opportunities

• HRINTHs (Huarong's Senior Unsecured Notes):

  • HRINTH 5.25% '25: Sr Unsecured, Offer Price 94.8, YTW 8.1%, T-spread 475.8, Modified Duration 2.2, Next Call Date N/A
  • HRINTH 4.25% PERP (Callable in Sep 2025): Subordinated, Offer Price 81.5, YTW 11.6%, YTC 11.3%, T-spread 816.1, Modified Duration 2.8, Next Call Date 30/9/2025

• CCAMCLs (China Cinda's Senior Unsecured Notes):

  • CCAMCL 3.25% '27: Sr Unsecured, Offer Price 93.0, YTW 5.1%, T-spread 197.4, Modified Duration 4.1, Next Call Date 28/10/2026
  • CCAMCL 3.0% '31: Sr Unsecured, Offer Price 81.5, YTW 5.8%, T-spread 278.8, Modified Duration 7.1, Next Call Date 20/10/2030
  • CCAMCL 4.4% PERP: Jr Subordinated, Offer Price 90.6, YTW 7.1%, YTC 7.0%, T-spread 379.3, Modified Duration 3.6, Next Call Date 3/11/2026

• GRWALLs (Great Wall's Senior Unsecured Notes):

  • GRWALL 4.25% '25: Sr Unsecured, Offer Price 90.3, YTW 8.6%, T-spread 515.8, Modified Duration 2.5, Next Call Date N/A
  • GRWALL 3.95% PERP: Sr Unsecured, Offer Price 88.9, YTW 10.6%, YTC 10.1%, T-spread 703.0, Modified Duration 1.8, Next Call Date 31/7/2024

Investment Recommendations

• Preferred Bonds/Perps: HRINTHs are preferred for better valuations, trading liquidity, and credit story improvements post-recapitalization. CCAMCLs are suitable for lower beta plays with stronger fundamentals.
• Great Wall: While not a near-term default candidate, its bonds/perps may face more volatility due to negative headlines.
• Regulatory and Government Support: The sector benefits from increased strategic importance and regulatory support, which may lead to more onshore funding and investment opportunities.

Appendix 1: Peer Comparison

Conclusion

The Chinese AMC sector presents a mix of investment opportunities, with HRINTHs and CCAMCLs offering better entry points due to their valuations, liquidity, and government support. Great Wall, while not a default candidate, faces potential volatility. The sector's strategic importance and regulatory support are expected to continue, with a shift towards onshore funding and investment.