20230510-招银国际-Chinese_TMT__Buy_XIAOMI_0_27,_XIAOMI_30-31s,_MEITUA_0_27_and_PDD_0_25_6页_604kb

Summary of Chinese TMT Fixed Income Commentary

Overview

Despite regulatory uncertainties, sanctions, and slowing growth, the Chinese Technology, Media, and Telecommunications (TMT) sector demonstrates a strong credit story, driven by solid liquidity and cash reserves. Key companies analyzed include Xiaomi, Meituan, and Pinduoduo. Recommendations focus on specific bonds for improved risk-adjusted returns, with an emphasis on undervalued yield pickup opportunities and the moderating regulatory environment. Sanction risks are largely priced in, but ongoing concerns exist, particularly for companies with semiconductor or military ties.

Company-Specific Analysis

Xiaomi

• Credit Highlights: Xiaomi maintains a significant net cash position (RMB 44.1bn as of Dec 2022), with strong liquidity supporting its credit profile. Revenue dropped ~15% YoY due to global consumer electronics weakness, but expected recovery post-COVID. Despite profit declines, the company can repay bonds without refinancing.
• Bond Recommendations: Buy XIAOMI 3 3/8 04/29/30 (@ YTM c7%) and XIAOMI 2 7/8 07/14/31 (also c7%) for favorable risk-return compared to JD/WB/Meituan at similar ratings. Consider convertible bond XIAOMI 0 12/17/27 (YTP 6.8%, puttable 4.4 years early).
• Risks: Downgrade triggers if cash position deteriorates; however, downgrade pressure is limited in 1-2 years.

Meituan

• Credit Highlights: Recovering post-pandemic, Meituan booked strong revenue (RMB 220bn in FY22, up ~58% YoY from FY19), with improving gross profit margins (28.1% in FY22). Ample liquidity (RMB 112bn unrestricted cash), sufficient to cover redemption of USD 1.48bn CB in 2025.
• Bond Recommendations: Buy MEITUA 0 04/27/27 (trading at 87.8, YTP 7%) for yield pickup over senior notes, callable earlier than alternatives. Moody’s affirmed the Baa3 rating with stable outlook.
• Risks: Fined for anti-monopoly issues, but recovery is expected due to supportive policies.

Pinduoduo (PDD)

• Credit Highlights: Asset-light model and simple capital structure minimize debt exposure. Strong liquidity (USD 2bn unrestricted cash) supports redemption of USD 2bn CB in Dec 2023. EBITDA turned positive in 2021, reaching RMB 33.1bn in FY22.
• Bond Recommendations: Buy PDD 0 12/01/25 CB (trading at 95.8, YTP 8.4%) as a short-dated carry play, puttable in 7 months. Yield pickup opportunity with low funding costs.
• Risks: Model dependent on e-commerce, but regulatory support improves prospects.

Key Risk Factors

• Regulatory Uncertainties: Anti-monopoly actions have moderated, but ongoing scrutiny could impact finances. Positive signs include supportive government policies for TMT innovation.
• Sanction Risks: Prized in, implying risks weighed in pricing; incremental risk is diminishing, with Hong Kong secondary listings providing market backup.
• Economic Slowdown: Global consumption and specific sectors (e.g., consumer electronics) face headwinds, but TMT liquidity should help navigating challenges.

Financial Data Summary

• Key metrics include revenues, EBITDA margins, and debt levels. For instance, Xiaomi had net cash position of RMB 44.1bn vs RMB 23.6bn debt, while Meituan showed improvement in profitability. Bonds offer attractive yields over comparable U.S. peers, with spreads reflecting perceived risks.

Conclusion

The Chinese TMT sector offers compelling credit opportunities in a recovering economy, backed by strong liquidity. Focus on recommended bonds for specific yield and downside protection, but monitor external risks like regulatory shifts and global growth.