asia credit monthly -...

Deutsche Bank Markets Research

Asia

Credit

Date 24 February 2016

Asia Credit Monthly

Back in our Bunker

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.

Harsh Agarwal, CFA

Research Analyst

(+65) 6423 6967

[email protected]

Viacheslav Shilin, MBA

Research Analyst

(+65) 6423 5726

[email protected]

Colin Tan, CFA

Research Analyst

(+852) 2203 5720

[email protected]

Karen Kwan

Research Analyst

(+852) 2203 5930

[email protected]

Vikash Agarwalla, CFA

Research Analyst

(+65) 6423 5718

[email protected]

We turned tactically constructive on Feb 10 as Asian credit spreads (along with many other risk assets) hit mid-2012 wides. We also recommended selling iTraxx Asia at 170bp with stop at 180bp and target of 150bp. We were a day or two early with hindsight and the trade unfortunately got knocked out, but spreads are ~20bp tighter from the wides. Both CDS (iTraxx) and Cash (Markit index) are trading in the middle of the YTD range as we write (Figure 19). We turn neutral here as focus shifts to some big events on the horizon - ongoing oil talks, upcoming G20 summit, China's NPC in early March, Draghi on 10th March and FOMC in mid March. As argued in our 2016 Outlook, we think spreads this year will trade in a range, albeit ranges will be wider and more volatile than 2015. Sticking to that view, assuming no new macro developments, we will look to turn negative if spreads hit the tights, and positive as they go back the wides. It does feel like the current rally has more legs, but we prefer to be slightly ahead of the curve and watch from the sidelines. The 3 Cs - China, Commodities and Central Banks remain at the forefront in driving risk assets.

Key themes Sovereigns: Rating triggers for China, India & Indonesia Financials: Asian sub debt outperformance versus global peers IG corps: The correction in India IG, HK corps FX & Rates exposure, China

metals & mining rating risks HY corps: Assessing refinancing risks for short dated bonds

Highest-conviction trade ideas Sovereigns: Buy Pertamina and Indonesia 30Y, Pelindo II 25s, Philippines

31s; Sell Sri Lanka long-end Financials: Buy China Huarong long-end, Chinese B3T2 subs, Woori 24s

and BEA AT1; Sell Indian banks’ seniors, Citic Sec 19s, China Taiping perp IG corps: Buy Lenovo 19s, Franshion 19s HY corps: Buy Parkson 18s, Sell Tata Steel 20s, Buy China Aoyuan 19C17s

Key changes in recommendations Sovereigns: Upgrade Philippines 40s and 37s from Sell to Hold Financials: Upgrade China Orient 24s, OCBC 4.25% 24s, CCB Asia 24c19

and Bank of China 5% 24s to Buy from Hold. Upgrade Axis Bank 20s to Hold from Sell. Lower CITIC Bank Intl 24c19 to Hold from Buy

IG corps: Downgrade Beijing Enterprises 20 (EUR) from Buy to Hold China property HY: Upgrade from Hold to Buy Central China 20C17 All pricing levels in this report are as at Feb 23, unless stated otherwise.

24 February 2016

Credit


Table Of Contents

Overall View .......................................................................... 3 The year so far in pictures .........................................................................................3 Strategy ....................................................................................................................6 Can credit keep outperforming equities? ..................................................................8

Sovereigns ........................................................................... 11 Asia’s potential rating moves that matter ............................................................... 11

IG Corporates ...................................................................... 16 India IG - Finally, the Correction! ............................................................................. 16 Hong Kong IG: FX and rates exposure .................................................................... 20 China IG metals and mining: Spotting the next downgrade candidate .................. 23

Banks .................................................................................... 26 Market volatility puts sub-debt at centre stage ....................................................... 26

HY Corporates ..................................................................... 30 Assessing refinancing risks ..................................................................................... 30

Changes in recommendations ........................................... 35

Top picks and pans ............................................................. 36

24 February 2016

Credit


Overall View

The year so far in pictures

Figure 1: Asia credit is one of the few asset classes with

positive returns (driven by USTs and coupons)...

Figure 2: Within Asia credit though, IG total returns

(+1.7%) are positive versus HY being negative (-0.6%)

Asset Class YTD Total

Returns Asset Class

YTD Total

Returns

S&P 500 -4.5% EM Credit 0.5%

US IG 0.7% MSCI EM -5.5%

US HY -2.0% Asia Credit 1.4%

Euro Stoxx 50

(in EUR)

-10.0% MSCI Axia ex-

Japan

-7.4%

Commodities -3.6%

EM Local Sovs 0.0%

Euro credit (in

EUR)

0.6%

95

97

99

101

103

105

107

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16

Asia IG Asia HY

Source: Markit, Bloomberg Finance LP, Deutsche Bank Source: Markit, Deutsche Bank

Figure 3: In the DM world, Europe has done relatively

better than US, both in IG & HY. Asia IG is 30bp wider

Figure 4: And Asia HY 90bp wider so far

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250

Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15

bp

Asia IG EUR IG US IG

300

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500

600

700

800

900


bp

Asia HY EUR HY US HY

Source: Markit, Deutsche Bank Source: Markit, Deutsche Bank

Figure 5: EM credit spreads have underperformed DM

slightly on the IG side...

Figure 6: But significantly outperformed in HY

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bpDifference (R) US IG EM IG

(150)

(100)

(50)

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bpDifference (R) US HY EM HY


24 February 2016

Credit


Figure 7: Within EM, Asia has outperformed Latam &

Ceemea

Figure 8: In Asia, Financials have underperformed to no

surprise, while Corps & Sovs have moved in line

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490

540


ASW LATAM ex-sov EEMEA ex-sov Asia ex-sov

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ASWAsia Corp Asia Fin Asia Sov


Figure 9: Country wise, India has been the worst

performer in IG...

Figure 10: While Indo has been the outperformer in HY

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ASW China IG India IG Indon IG

Malay IG Korea IG

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900


ASW

China HY India HY Indon HY


Figure 11: BBBs have underperformed As... Figure 12: Albeit Bs vs. BBs is more mixed in HY

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ASWDifference (R) Asia A Asia BBB

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ASWDifference (R) Asia BB Asia B


24 February 2016

Credit


Figure 13: Both cash vs. CDS spreads have bounced off

the wides and trading roughly in middle of YTD range

Figure 14: Indo and Malaysia have been the most

resilient in CDS (5yr) given wide levels & short base

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Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

bpsASW Markit Asia Overall iTraxx Asia IG (R)

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90

140

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240

290


bps China Korea Indonesia

Malaysia Thailand Philippines

Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Bond Radar, Deutsche Bank

Figure 15: We have seen a spate of negative rating

actions with the Upgrade/Downgrade ratio back to 2009

lows...

Figure 16: and we are likely not done yet, with the

current Outlook distribution suggesting more to come in

HY

50%

82%

17%

13%33%

5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

HY IG

Stable Positive Negative

Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP

Figure 17: Supply has disappointed our already low

expectations so far...

Figure 18: Maturities too are light in 2016

-

5

10

15

20

25

30

Jan Feb Jan Feb Jan Feb Jan Feb Jan Feb Jan Feb TD

2011 2012 2013 2014 2015 2016

USD bnCorp HY Corp IG Financials Sovereign

Period IG HY NR Total

March 2.3 0.0 0.5 2.8

April 3.6 0.3 1.2 5.1

May 2.8 0.0 0.4 3.2

June 1.0 0.8 0.8 2.5

July 1.9 - 1.5 3.4

August 1.9 - 0.7 2.6

September 1.9 - 0.7 2.6

October 2.0 1.8 - 3.8

November 8.3 0.3 0.5 9.0

December 0.6 - 1.9 2.5

26.1 3.3 8.1 37.5 Source: Bloomberg Finance LP, Bond Radar, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank

24 February 2016

Credit


Strategy

Markets We turned tactically constructive on Feb 10 as Asian credit spreads (along with many other risk assets) hit mid-2012 wides. We also recommended selling iTraxx Asia at 170bp with stop at 180bp and target of 150bp. We were a day or two early on hindsight and the trade unfortunately got knocked out, but spreads are ~20bp tighter from the wides. Both CDS (iTraxx) and Cash (Markit index) are trading in the middle of the YTD range as we write (Figure 19). We turn neutral here as focus shifts to some big events on the horizon - ongoing oil talks, upcoming G20 summit, China's NPC in early March, Draghi on 10th March and FOMC in mid March. As argued in our 2016 Outlook, we think spreads this year will trade in a range, albeit ranges will be wider and more volatile than 2015. Sticking to that view, assuming no new macro developments, we will look to turn negative if spreads hit the tights, and positive as they go back the wides. It does feel like the current rally has more legs, but we prefer to be slightly ahead of the curve and watch from the sidelines.

The 3 Cs - China, Commodities and Central Banks remain at the forefront in driving risk assets. On China, despite recent rhetoric from authorities, we believe they will be forced to devalue at some point. Our house view is still for RMB's gradual depreciation to 7 by year end with 2 rate cuts and 4 RRR cuts. For Commodities, the recent agreement between Russia and Saudi Arabia perhaps provides a floor to oil price, though a sustained recovery is questionable, in our view. The fizzing out of USD rally could also lend some support to the beleaguered complex. On this note, we do want to highlight one of the more bullish reports ("Why commodities will recover?") we have seen from the DB complex on commodities arguing that supply side adjustments and prices approaching marginal costs should lead to a bottom sooner rather than later. While Asia credit's own exposure to commodities is limited, the sticking point for us has been contagion from US HY & EM HY - we remain more worried about the former. Our US colleagues recently increased their default forecast for 2016 to around 7% and our European colleagues made an interesting point that every time in the past 100 years the US default rate crosses 4%, it ends up north of 10% in that cycle (Figure 20). As for the 3rd C - Central Banks - we are calling for a no hike by the Fed in March, albeit leaving June on the table. For ECB, DB's base case is: further rate cuts (possibly 10bp), temporary & marginal increase in pace of QE (EUR10 billion for say 6 months), and potentially unconditional LTROs to reduce concerns about funding position of banks. We do feel that it won't be politically easy for Draghi to pull through a European TARP and/or buying of corporate/bank bonds; hence we are counting on a disappointment on Mar 10 at this stage.

A new angle that has emerged for CBs this year has been a question mark on the effectiveness (or lack thereof) of their negative rates strategy. There are concerns that CBs are running out of ammunition (we disagree). Negative rates has in turn raised concerns on bank profitability and tightening of lending conditions. While all these arguments are fair, we are surprised that investors have suddenly decided to care about them. Some of them are not new, while others could have been seen coming for a while. More importantly, asset prices over reacted to these worries, at least for now. From an historical perspective, financial conditions are significantly looser than during the financial crisis There are many historical instances when moves of this magnitude have been more transitory and were subsequently reversed with limited impact on growth (Figure 21). In any case, we see them as more relevant for equities than credit, and DM than EM. Our broader view is that credit should keep outperforming equities in the medium term (more later), and within credit, EM should outperform DM, and Asia the rest of EM. We are

Figure 19: Asia cash vs. CDS

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Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15

bpsASWMarkit Asia Overall iTraxx Asia IG (R)

Source: Markit, Bloomberg Finance LP, Deutsche Bank

Figure 20: US default rates

Source: Bloomberg Finance LP, Datastream, Deutsche Bank report ‘European Equity Strategy: Market overview - February 2016’ dated 15-Feb-16

24 February 2016

Credit


keeping an eye on rising NPLs in Asian bank balance sheets, collapsing trade data, high house hold leverage and tightening financial conditions in the region (Figure 22).

Figure 21: Financial conditions have deteriorated sharply

over the past several quarters

Figure 22: EM Bank Lending Conditions by Region

Source: Deutsche Bank note ‘Global Economic Perspectives’ dated 17-Feb-16 Source: IIF

Asia Credit Within Asia credit, we continue to prefer IG over HY with a medium term view (over the course of this year). With USTs at current levels, HY may outperform IG in the very near term on a total return, especially if the current rally has legs. IG is also likely to witness more supply, while net supply in HY could be negative with bonds getting tendered/called. Default rates in Asia HY should stay low with limited refinancing need. However, HY remains a potential minefield (Hsin Chong was latest experience) with worse trading liquidity. Plus, DB is calling for 10yr USTs to end the year at 1.75% in its base case, hence we don't see any material sell off in rates impacting IG. Separately, we retain our preference for Corporates over Financials & Sovereigns. Financials should see growing headline risk on rising NPLs and perhaps more supply than Corporates, while Sovereign balance sheets could deteriorate and delay further positive rating actions. Sector-wise, we are still largely avoiding commodities and cyclicals despite some support to prices with USD rally fizzing off, instead favouring utilities, telcos, green energy, property, and retail/consumer sectors.

Country-wise, we started the year largely neutral on China IG and stick to that view for the following reasons - spate of negative rating actions / warnings are likely to continue, offshore investors are still selling benchmark names (though select names have started offering value here?), outbound M&A spree could further pressure ratings / leverage, upcoming results season should be lack lustre, most benchmark investors are already O/W, and worries on possible restrictions on onshore investors on buying USD bonds or on corporates from retiring FX debt to avoid capital outflows in the light of RMB depreciation. This said, we are wary of lack of supply and the fact that onshore investors are still buying. We generally see better value in Indo IG quasis and parts of India IG corps. In HY, we have refrained from taking a country-specific view, focusing more on bottoms up analysis. Please see Figures 23 and 24 below for more details.

24 February 2016

Credit


Figure 23: Strategy

IG HY

China Likes - High step up corp perps, Select property, Bank T2, AMCs; Dislikes - Bank AT1, Brokers, Bank seniors, Sovereign CDS.

Likes - Property names with positive catalysts (rating upgrades, IPOs, etc.), Short dated / Secured industrials with high yields; Dislikes - Tighter trading / Commodity sector industrials.

India Likes - Wider trading private corps; Dislikes - Banks.

Likes - Utilities / Infrastructure as defensive carry plays; Dislikes - Tight commodity credits.

Indonesia Likes - Sovereigns & Quasis; Dislikes - N/A.

Likes - Utilities & Higher yielding property / consumer plays; Dislikes - Tighter property names.

Philippines Likes - Sovereigns & Quasis; Dislikes - N/A.

Likes - High step up utility perps; Dislikes - N/A.

Frontier markets N/A Likes - Mongolia; Dislikes - Sri Lanka.

Source: Deutsche Bank

Figure 24: Performance of closed trades

Our recommendations Benchmark performance

IG corps +20bp Markit IG corps index +30bp iTraxx Asia

IG financials -30bp Markit IG financials index +35bp

Sovereigns -20bp Markit Sovereigns index +30bp

China property HY NA* Market average -0.5 point

Other HY +1 point Market average -1 point

Source: Deutsche Bank. Performance of our recommendations is a simple average of trades closed this year, irrespective of the duration, after accounting for bid/offer spreads (but excluding other transaction costs). Benchmark performance is YTD until Feb 22. Past performance is no guarantee of future results. Please refer to the Trades Closed tables at the end of this report- for more details. Additional information available upon request.. * there were no closed trades YTD

Can credit keep outperforming equities?

Reproduced from our note dated 16 February 2016

The outperformance Asia dollar credit has had an amazing run relative to equity here. In fact, we look at the performance for last 10 years (since data for credit is available), one could be excused for asking why invest in equities at all over the longer term? Figure 25 shows that credit's cumulative total returns are slightly higher than equities, and with a lot lesser volatility. But, if history is any guide, we are potentially coming to a tipping point where equities should bounce or credit should start following lower (as witnessed a few times in the past), i.e., either equities are cheap or credit is expensive. The first scenario will require something magical to change the current growth environment, while the second scenario will need a full-blown crisis. Neither of these are our base case, which is that credit's outperformance should continue for now, albeit at a slower pace. We are no equity experts, hence the arguments we present in this note are more pro-credit than anti-equity. Needless to say, we will need at least some of these factors to reverse for credit's performance to change course. Also, to be clear, our argument is more relative - in a world with high correlation between risk assets, it will be hard for credit to deliver positive returns while equities are negative. Separately, a comparison of equity vs. credit returns in EM as a whole shows the same trend, albeit with a starker outperformance for credit (Figure 26).

Figure 25: Asia ex-J Total Returns

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

MSCI Asia ex-J Asia Credit

Source: Markit, Bloomberg Finance LP

Figure 26: EM Total Returns

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205

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

MSCI EM EM Credit

Source: Markit, Bloomberg Finance LP

24 February 2016

Credit


Why the outperformance? - It's simple! - Credit is meant to be a low-beta asset class, underperforming when markets rally and being more defensive in a risk off environment. As we return to a world where investors care more about return "of" capital than return "on" capital, credit's outperformance could continue;

- Ongoing market concerns relate primarily to growth, which hurts equities (Figure 27). A low growth environment is not bad for credit, especially as risk free rates are turning negative, it offers the spread pick up. Yes, things could change if we get an outright recession and default rates pick up meaningfully;

- However, default rates have been low in most parts of the world (Figure 28). Regions experiencing high default rate such as US and Latam, are likely already pricing it in their wide spread levels. Low defaults have been aided by capital markets being open for the past few years as corporates have actively lengthened debt maturity profiles (Figures 29 & 30), implying limited HY debt maturities in the near term;

Figure 28: Moody’s Trailing 12-Month Non Financial Corporate High-Yield Default Rate, January 2008 – July 2016

Source: Moody’s Investors Service. AP stands for Asia Pacific

Figure 29: EM HY corps debt maturities (USD billions -

excluding sovs)

Figure 30: US HY & leveraged loan maturities

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149

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71 69 78

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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+

USD bn

HY bonds Loans

Source: Deutsche Bank, Bloomberg Finance LP. Data as of 30-Nov-15. Only bonds with issue size above USD150 million have been considered. We have considered only S&P ratings in the above chart. Source: Deutsche Bank report ‘US Credit Strategy Chartbook’ dated 30-Nov-15

- In Asia particularly, domestic rate cuts and RRR easing in major economies have further helped local liquidity, keeping a lid on defaults in the bond space, which we forecast to increase only marginally to about 3% this year. As an example, every 50bp RRR cut in China adds almost USD100 billion in bank liquidity. We know not all of this is being lent and a good portion is going into the bond markets. So, in 1H'15, just the big 5 Chinese banks increased their dollar bond investments globally by approx. RMB170 billion. Also, to be clear, there is material credit differentiation between sectors and not everyone is being treated equally by lenders. Also, we are worried about rising corporate leverage and negative rating actions (Figures 31 & 32);

Figure 27: Asia ex-Japan GDP

growth rate vs. MSCI Asia ex-Japan

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11.5

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1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

MSCI Asia ex-J Asia ex-J GDP growth YoY (R)

Source: Bloomberg Finance LP

24 February 2016

Credit


Figure 31: Gross leverage Trend Figure 32: Asia Upgrades to Downgrades Ratio

2.5x

3.5x

4.5x

5.5x

6.5x

2013 2014 1H15 3Q15

China Property HY

China Industrials HY

Indon HY

India HY

Source: Deutsche Bank, Company Data. For India, periods considered are FY14, FY15 Q1FY16 and Q2FY16. Most Chinese companies do not report 3Q15 numbers Source: Deutsche Bank, Bloomberg Finance LP

- Returns on credit are being supported by the UST rally that is offsetting some spread widening - there is an inverse correlation between the two (Figure 33). Plus, carry through coupons is higher than dividends, which in turn are arguably at the risk of being cut (unlike coupons) - Figure 34;

Figure 33: Markit Asia IG spreads vs. 5 yr treasury yields Figure 34: Asia - Coupons vs. Dividend yields

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%ASWMarkit Asia IG spread 5 Yr Treasury yield (R)

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%MSCI Asia ex-J Div yield Markit Asia Coupon

Source: Markit, Bloomberg Finance LP Source: Markit, Bloomberg Finance LP

- One country making a big difference to equity vs. credit performance in Asia is China, where the two asset classes have recently gone in completely opposite directions (Figure 35), thanks mainly to demand for USD credit from local investors and the surge in domestic bond issuance. With China now accounting for around 40% of Asia's G3 bond market, any change in fortunes there will be a big risk to overall Asia credit's performance;

- On equity valuations, we do acknowledge that P/E and P/B ratios (on historical measures) are back to the lows (Figure 36).

Figure 35: China - Equity vs. Credit total returns Figure 36: MSCI Asia ex-Japan valuation metrics

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Source: Markit, Bloomberg Finance LP Source: Bloomberg Finance LP

24 February 2016

Credit


Sovereigns

Asia’s potential rating moves that matter

Figure 37: Top Outperformers (spread change) Figure 38: Top Underperformers (spread change)

Bond Price YTM (%)Z-spd

(bp)

YTD spd

chg

Dvelopment Bank of Mongolia

5.75% '17

92 13.8 1,313 543

Mongolia 4.13% '18 86 12.5 1,175 507

Mongolia 5.13% '22 70 11.6 1,031 336

Sri Lanka 5.88% '22 88 8.4 709 160

Sri Lanka 5.13% '19 94 7.3 642 142

Pertamina 6.5% '41 91 7.3 543 50

Indonesia 8.5% '35 127 6.1 428 48

Ex-Im Bank of India 3.88% '19 104 2.8 182 46

PSALM 7.39% '24 131 3.3 181 43

Vietnam 4.8% '24 98 5.1 362 42


(bp)

YTD spd

chg

PLN 7.25% '17 107 1.9 120 (60)

Ex-Im Bank of China 2.5% '19 104 1.3 32 (55)

Indonesia Exim Bank 3.75% '17 102 2.0 129 (33)

Ex-Im Bank of Korea 4% '17 103 1.1 39 (26)

Korea Development Bank 3.88%

'17

103 1.2 51 (21)

Korea Land & Housing 1.88% '17 101 1.5 74 (13)

Indonesia 6.88% '17 106 1.1 34 (12)

China Development Bank 2.5%

'20

103 1.9 81 (8)

Indonesia 6.88% '18 110 1.8 97 (5)

Pertamina 4.3% '23 96 5.0 370 (3)

Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank

A quick recap of sovereign bond performance YTD. One would immediately notice the large degree of dichotomy between the pace of underperformance, which in absolute spread terms ~10x larger than the best performing sovereign bonds in Asia. Frontier markets remain largely unloved, which, in our view, has gone beyond fundamental concerns for some names, and spread weakness is now hinged on poor technicals around the bonds. We still don’t think it’s the right time to go long Sri Lanka. On the other side of the scale, we still do not see signs of optimism from investors in going long duration as the front end of the Korean and Indo quasis dominate the list of top performing bonds. We remain positive on Indonesia and recommend investors staying OW this space.

YTD we have arguably seen the most aggressive move by the ratings agencies in pairing down the EM sovereign ratings in the recent years. While oil-related (e.g. Middle East) and idiosyncratic developments (e.g. Brazil) lead to final sovereign rating downgrades in wider EM of up to two-notches, Asia seems to stand out from these moves. To a contrary, we had evidenced an upwards trend in Asia sovereign ratings as recently as Dec-15 when Moody’s upgraded South Korea to Aa2. Given the persistent weakness of the individual

countries’ and also the Global economic data of late, the question on the

sustainability of Asian decupling from EM rating trends has become as acute

as ever. When it comes to Asia credit, we believe there are essentially three credit stories that influence the investor sentiment and positioning in the market and a material change in the rating trajectory could impact the country allocations and trading flows significantly. These three aspects are: China, India, and Indonesia.

24 February 2016

Credit


How likely China’s ratings to start giving cracks? The short answer from us is: “Not within the next 6-9 months”. With Aa3 from Moody’s, AA- from S&P and A+ from Fitch, all ratings agencies have affirmed their current ratings and Stable outlook on China’s sovereign over the course of last three months. We generally find that all rating agencies take a considerable comfort from the determination of Chinese central government to continue with socio-economic reforms and moving the country away from its reliance on credit-driven investment spending to maintaining strong economic performance. Although progress thus far has yielded results of varying degree of success, considerable buffers that both the fiscal side of the central government, together with the capital and liquidity cushions accumulated by the banking sector, serve as very strong mitigating factors to periodical wobbles on the economic and corporate credit performance side.

China's speed of economic and financial reforms and the scope of policy easing had thus far exceeded expectations, but are fully commensurate with the current sovereign ratings. As the external environment, low commodity prices and unstable domestic consumption still pose near term risks, the ratings could have already come under pressure should the government not have delivered its reforms and extra liquidity injections for the economy. The hard work is yet to commence as the main pressure points emerge from the still high corporate leverage, uneven distribution of liquidity that has been poured onto banks, and inadequate transparency relating to the government's contingent liabilities. As the government increases its tolerance for the lower

economic growth, it is yet to be seen how it would respond to the rising

default rates especially when it would involve larger corporate players.

Should the economic performance fail to show signs of stabilisation in the course of the next 6-9 months, in response to various policy measures introduced by the government last year, the scrutiny over the sustainability of the aforementioned buffers and sustainability of credit ratings would intensify. In our view, there are three main factors to watch out for by investors, which

could be the precursors to the potential negative ratings action/lowering of

the outlook by the rating agencies:

1) Risk of the SOE contingent liabilities crystallising for the sovereign

balance sheet. In other words, this is the point when local banks would become less tolerant about rolling maturing loans for the SOEs with disrupted/negative cash flows and it would be up to the municipal/central government to decide whether to bail them out or let them go. We believe that corporate (incl. SOE) defaults will likely be more frequent in 2016, but should not spill into the mid-large-size companies of regional/national economic and social significance.

2) Risk of foreign currency reserves being depleted materially in the

scenario of accelerating capital flight from China. Despite a ~USD800bn loss of FX reserves over the past 1.5 years (currently at ~USD3.2trn), China remains strongly positioned vs. “A/AA” peers with its reserves/current external receipts and reserves/ST external several times higher than the peers median. Here we’d also highlight an additional risk of government’s attention to be potentially taken off its recently announced SOE reforms by the episodes of sharp equity markets volatility and pressure on RMB.

3) Risk of excessive fiscal engagement in providing economic stimulus

that would results in a material build-up of the government debt. The downward pressure on China ratings, in our view, is mitigated by the substantial room for potential fiscal easing that would complement the monetary easing that is set to continue in 2016. Thus far, the fiscal part of stimulus has been deployed in a disciplined

Figure 39: Select metrics for China

2015F 2016F 2017F

Fiscal def. 3.0% 3.0% 3.0%

FDI (net) $205bn $216.4bn $226.4bn

FX reserves $3.3trn $3.5trn $3.6trn

GDP 6.9% 6.7% 6.7%


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manner, in conjunction with macro-prudential measures too (e.g. easing of mortgage down-payment requirements etc.).

We believe that ratings agencies would wait until at least 3Q16 to reassess what impact would by then the recently introduced monetary, fiscal and macro-prudential policy measure have on the wider economy, the corporates and consumers. This time frame should also be sufficient to understand whether a moderately weaker RMB would improve competitiveness of Chinese exporters supporting current account surplus. Central government’s increased tolerance for lower GDP growth should not be seen as unilaterally negative sign by investors. Besides, the definition of a “hard landing” seems to have migrated lower over the years, indicating at a greater level of tolerance from the investor community too.

How likely is Moody’s to upgrade India, and others to follow suit? “What upgrade?” one may ask, in the midst of this doom and gloom surrounding global macroeconomic outlook. India does stand out from the rest of Asian and other global “BBB”-rated peers with its significantly higher level of GDP growth (even if discounted for the potential slight overstatements), greater degree of private sector participation in GDP accretion, and government’s low external debt exposure. India undoubtedly deserved credit

from rating agencies for having the guts to set out on the path of quite

painful economic and social reforms earlier in 2014 in conditions of quite

tight monetary policy and quite bad monsoons (the latter was repeated in

2015).

Despite market participant longing for a greater fiscal spending and more pro-growth easing, the government and RBI chose a scenario of relatively slow policy relaxation coupled with gradual fiscal consolidation. Stable inflation and gradual depreciation of INR of late provide a neutering environment for a healthier private consumption, credit intermediation and export growth. These are the conditions unseen in India for many years before. Of 125bp rate cuts delivered by RBI over the past 12 months, only ~60bp have been transmitted by the banks thus far, indicating at a still ample potential to boost credit growth and business development in the country.

Unlike China, India would remain the country of a slow catch-up play and not

deliver "big bang" reforms. The government has launched many initiatives that are paving the way to India's long term economic property and sustainability of growth; however, interim results have been mixed. Policy makers have perhaps had the greater degree of success in delivering tangible results with contained inflation being the strongest manifestation of this. Such long-debated bills as Land Acquisition and GST, should they materialise, would also not have an immediate impact on the government's finances, but will be an important milestone for investor sentiment to remain positive. What is needed for India to reach the next level of ratings boils down to: (i) strong

improvement in the FDI, which the government has been working on with varying success - it should open up additional private sectors for foreign investment in addition to, say, defence. (ii) The government providing a clear

strategy and delivering on the resolution of the banking systems' poor

capitalisation which in turn would help finance India's growth.

All rating agencies have affirmed India’s ratings and the outlooks over the past 4 months (Baa3/Positive by Moody’s, BBB-/Stable from both S&P and Fitch). What we believe really precludes India from making it to the next higher level of credit ratings is simply the weak readings of its several vital credit metrics: general government debt ~68% of GDP, government budget deficit ~6.7% of GDP and government budget revenues ~21% of GDP are significantly worse than the “BBB” median. The new federal budget (to be announced on 29-Feb)

Figure 40: Select metrics for India

2015F 2016F 2017F

Govt debt/GDP 68.4% 67.5% 65.3%

Fiscal def. 6.4% 6.3% 6.2%

CPI avg. 4.9% 5.3% 4.7%

GDP 7.5% 7.5% 7.8%


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will be key to watch for as there is a risk that the government would find it difficult to address the fiscal deficit reduction target.

Additionally, India is perhaps the only country amongst its rating peers

where the banking sector (especially the public part) is heavily

undercapitalised and is undergoing a significant bad loans clean-up exercise, which presents direct obligation on the government to recapitalise them. This represents an additional drag precluding rating agencies from taking a more optimistic stance on India’s credit trajectory. All-in-all, we believe that none of the rating agencies would move in an upwards trajectory India’s rating/outlook in the course of this year. Should the government deliver on its fiscal reforms, and the level of Government debt/GDP be on a strong trajectory towards 60% mark, then an upward ratings move would be more probable, which is likely to be a 2017 story. There are simply too many politically painful hurdles to be overcome this year, which require time to start bearing fruit.

Indonesia: which way will it go given the split rating and positive o/l from S&P? We were surprised back in May-15 when S&P revised the outlook on its BB+

ratings for Indonesia to Positive as it came at the time when the government

started to slip, in our view, with the implementation of its reform agenda, especially on the part of infrastructure spending, plummeting commodity prices and plunging BI’s FX reserves. Later in the year, the government came out with the multi-volume stimulus package, which included a reduction of fuel and energy prices, triggering series of cautions from the rating agencies warning of a potential back-tracking on its subsidy reforms. Remarkably, in four months time from now, Indonesia would “celebrate” the tenth anniversary of maintaining the same level of BB+ ratings from S&P - a period during which the country had already been once put on a Positive outlook (in 2009) and then revised back to Stable in 2013 without an eventual ratings upgrade.

Despite the overall disappointment with the lack of political will to pursue the original infrastructure investment and energy reforms agenda in 2015 we are encouraged with the prospects for Indonesia’s government to deliver on those in 2016. The fiscal drag has loosened its grip and the policy easing is yet to come providing additional boost to the economy. Politically, the President

appears to be better equipped to push through the reforms, given the

preceding changes in the cabinet. The government seems to be more realistic with its budgetary assumptions and any increase in the global commodity prices would be an upside. We recognise the rising pressure for capex financing on the part of quasi-sovereign entities, but we have seen the evidence of their relatively comfortable access to funding (incl. bilateral) both domestically and internationally.

Providing there are no material derailments in the economic performance this year that could come in the form of severe capital outflows, spike in IDR weakness and inability of the government to cut rates, we believe the

following factors would allow S&P to upgrade Indonesia to IG after a 10-year

wait: (i) strict adherence to its fiscal consolidation path; (ii) improvement in

the budget’s revenue collection (including tax compliance); (iii) enhancing

the quality of spending – i.e. more liberalisation of fuel prices and better execution of key infrastructure projects.

As the government is about to announce the revised budget for 2016 marking it to the lower oil price assumptions (i.e. USD35-40/bbl vs. USD45-50/bbl) any deviation towards expansionary and aggressively pro-growth policies would be detrimental to the positive ratings migration trend, in our view. This is not our base scenario though, but the ratings agencies would require at least two quarters of consistently stable-to-improving economic performance date backed up by the solid reform implementation track record, before they would

Figure 41: Select metrics for

Indonesia

2015F 2016F 2017F

Fiscal def. 2.5% 2.7% 2.7%

Govt. rev./GDP 13.0% 13.0% 13.3%

CAD 2.1% 2.0% 1.9%

GDP 4.8% 4.7% 5.0%

Source: Deutsche Bank forecasts

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Credit


make an upward ratings move. We believe it is equally relevant to Moody’s & Fitch. Hence, we believe the actual positive ratings change for Indonesia is unlikely to occur in the next 3-6 months from now. Even if growth does not

pick-up meaningfully this year, Indonesia would be amongst the fastest

expanding economies in “BBB” bucket in 2016.

What else would the rating agencies like to see improving in Indonesia’s credit story? We’d highlight the following key factors that could further boost the likelihood of an upward rating migration: (i) strengthening of institutional framework and corporate governance; (ii) deepening of the local capital markets, which could provide China-style back-stop support to the struggling HY corporate sector; (iii) diversification of budget revenue sources reducing its reliance on commodity segments; (iv) reduction of the government’s reliance on external financing, despite the relatively low levels of the absolute government debt in FX.

Top trade recommendations: Buy China 5Y CDS; Buy Philippines 31s; Buy

PGN 24s; Buy Pertamina & Indonesia long-end bonds; Buy Pelindo II 25s; Sell

long-end Sri Lanka bonds.

Main recommendation changes: Upgrade Philippines 40s and 37s to Hold

from Sell.

Please refer to the Top Picks and Pans section at the end of this report for the full list of trade recommendations, risks and rationale.

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IG Corporates

India IG - Finally, the Correction!

The underperformance India IG is 50bp wider YTD at the index level, underperforming overall Asia IG that’s 30bp wider. There are some interesting trends:

- Corporates and Banks have performed similarly; both ~50bp wider on average (Figure 42);

- Within corporates, SOEs have outperformed the private players. We believe this is mainly driven by the fact that private players such as Bharti & Reliance are big issuers (so easier to short) and their bonds are held widely by EM/Crossover investors;

- In the SOE space, only the upstream oil players (ONGC & Oil India) have widened materially by ~60bp, while others in the downstream and utility sectors have held in relatively better;

- Within banks, weaker credits that are already junk or at the risk of going there, i.e., IDBI, Bank of India, Indian Overseas Bank, etc. have done comparatively worse than stronger entities like SBI & ICICI;

- EUR bonds from the same issuer have marginally outperformed the USD ones;

- The underperformance in credit is in line with equities & FX (Figure 43).

Will it change? To answer this question, we look at reasons that caused the underperformance in the first place:

- More sellers than buyers! Sellers are mainly coming from two camps: US investors witnessing fund outflows and/or those seeing less value in Asia given sell off in US IG. And hedge funds that are shorting. However, given the verweight positioning that other investors already have in India I and the fact that PB bid from NRIs is missing, buyers are hard to find. Note that a bigger percentage of Indian IG bonds sit with offshore investors than other parts of Asia IG. Some also fear selling from Middle East holders. We believe this fear is overblown. Amongst listed ME banks that have good disclosure on their investment book, we don't see a high exposure to India IG;

- On the fundamental side, as mentioned before, there have been some name-specific headlines, but overall corporate fundamentals are still intact. We expect the ongoing results season to prove that India IG corps credit metrics continue to be better than China IG. Bank results have been weaker, albeit expected. Even on the ratings front, we only see Oil India at potential risk of going to HY. Banks are a completely different ball game though;

- As for the macro front, it seems old issues have come back to finally haunt investors; lack of reforms, higher fiscal deficit, bank NPLs, etc.; none of these are really new, but suddenly we have decided to care about them!

Net net, given that India IG was trading quite tight before, the recent market turmoil has started offering value in select corps, though banks remain

Figure 42: India Corps vs. Fins

80

100

120

140

160

180

200

130

180

230

280

330

380

430


ASW

Difference (R) India Corp India Fin

Source:Markit, Deutsche Bank

Figure 43: Sensex and INR 1 year

performance

61.5

62.5

63.5

64.5

65.5

66.5

67.5

68.5

22,000

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000


Sensex USDINR (R)

Source: Bloomberg Finance LP, Deutsche Bank

24 February 2016

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expensive. It is hard to time when the above factors will change course, but we are hopeful that India's relatively better macro picture will eventually lead to it.

Key events to watch going forward Central government budget on Feb 29; State elections in April; RBI governor’s current term expiry in 3Q; Moody’s sovereign rating review likely late in the year (positive outlook since Apr’15). For the most near term event - budget - two big sectors to watch will be banks and oil & gas - both have underperformed recently. On former, we need to see if govt increases the planned capital infusion into public sector banks, and there are talks about formation of bad bank, new bankruptcy code, etc. On the oil & gas sector, it remains to be seen if there is any cut in cess/duties given the fall in oil price. If expectations are met, we could see a brief, small rally in these sectors; if not, it could get worse.

Best & Worst performers YTD No surprises here. As mentioned before, even the screening of individual bonds yields the same results - outperformers are short dated senior bank bonds, while underperformers are longer bonds from weaker banks and the oil & gas credits.

Figure 44: Top 10 Underperformers (spread change) Figure 45: Top 10 Outperformers (spread change)


(bp)

YTD spd

chg

ICICI Bank 7% '20 114 3.8 266 108

Oil India 5.38% '24 105 4.7 325 99

Bank of India 3.13% '20 98 3.8 271 82

Syndicate Bank 3.88% '19 102 3.3 235 71

ONGC 4.63% '24 102 4.3 286 62

Bharat Petroleum 4% '25 98 4.3 280 59

Indian Oil 5.75% '23 110 4.2 286 53

Indian Overseas Bank 4.63% '18 102 3.5 268 50

State Bank of India 4.88% '24 108 3.7 232 48

Reliance Industries 4.5% '20 107 3.0 188 47


(bp)

YTD spd

chg

Bank of Baroda 6.63% '22 104 3.4 268 (15)

State Bank of India 4.13% '17 103 1.9 116 2

Indian Railway Fin 3.42% '17 102 2.2 143 11

Ex-Im Bank of India 4% '17 103 2.0 129 11

IDBI Bank 4.38% '18 103 3.1 231 13

Axis Bank 5.13% '17 104 2.1 138 13

HDFC Bank 3% '18 101 2.4 156 14

NTPC 5.63% '21 112 3.2 200 15

ICICI Bank 4.7% '18 104 2.4 159 16

Syndicate Bank 4.13% '18 103 2.7 188 21 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to

avoid repetition, we have not included perps or bonds maturing in 2016 in the tables.

Results recap Banks: 3Q16 earnings were one of the worst in recent quarters underlined by significant asset quality deterioration and capital erosion. Starting from 3QFY16, RBI has mandated banks to do an 'Asset Quality Review' exercise and record the much delayed stress before the deadline of end-March 2017. PSU banks were hit the most on account of their book clean-up owing to their larger exposure to struggling industries and recorded a rise of the average Gross NPL from 4.5% at the end of 1Q16 to 7.7% at the end of 3Q16. Although proportion of restructured loans has remained fairly constant over the past two quarters, it is still substantial at 7.3% of loans. Banks other than BoB have mentioned that there will be at least one more quarter of similarly elevated bad loan provisioning and recognition of previously restructured loans as NPLs. We believe Bank of India and Syndicate Bank are the prime candidates to breach minimum CET1 norms within the next 3-6 months and to be put under RBI's “Prompt Corrective Action” – similarly to IOB back in Oct-15 as their credit metrics have worsened to the point where no more capital erosion can be tolerated. We view Canara Bank and UBI as next to possibly suffer negative ratings action as the pool of their restructured loans is still considerably higher than NPLs they have recognized thus far. Core profitability for the banks also remain under pressure given the series of policy rate cuts last year that still has not been fully passed through. In the light of the poor 3Q16 earnings, the Government has announced that it would infuse additional INR34bn into the

24 February 2016

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PSU banks in 4QFY16, but this would be sufficient only to ensure compliance with regulatory norms. Private banks other than ICICI Bank remained less affected due to lower exposure to business loans. ICICI Bank reported an increase in Gross NPL from 3.5% at the end of 3Q15 to 4.9% at the end of 3Q16 and we think the trend could continue for the next 3-6 months.

Figure 46: Aggregate numbers for Indian Banks

USD million 9M FY15 FY15 9M FY16

Total Assets 1,139,012 1,220,114 1,193,459

Net Loans 714,049 755,599 743,900

Customer Deposits 891,748 944,642 923,462

Loans % Customer Deposits 81.40% 81.50% 82.50%

Gross NPLs % 3.74% 3.74% 5.36%

LLR % Gross NPLs 48.40% 48.10% 44.70%

LLP % Pre-prov. Income 40.10% 41.00% 54.60%

Net Interest Income 30,381 31,010 31,337

Non-int income % Operating inc. 33.50% 35.30% 35.20%

Pre-provision Income (PPI) 22,682 23,512 24,124

Net Income 10,620 9,368 7,401

Net Interest Margin 2.73% 2.74% 2.62%

Tier-I CAR 8.96% 9.55% 9.31%

Total CAR 12.21% 12.49% 12.45%

RoAA 0.87% 0.81% 0.58% Note: All income statement numbers are for the twelve months ending. Source: Company data, Deutsche Bank

Corporates: India IG corporates had a mixed results season. The Oil & Gas sector witnessed diverging performance in the upstream and downstream segments as could be expected in the current oil price environment. The upstream sector underperformed, witnessing ~10% QoQ revenues declines despite the absence of any subsidy burden in Q3. The downstream sector on the other hand outperformed with high GRMs and lower inventory losses in the quarter. Of the other private sector companies in our coverage, telecom saw a stable quarter underpinned by strong data growth while Adani ports’ results were slightly below average due to lower trade volumes. The utilities were also mixed; the genco’s revenues were impacted by lower demand while the transmission sector posted strong results. Overall, total India IG revenues declined 2.4% QoQ and 18.3% YoY while EBITDA margins (ex. investment income) were higher at 17.5%. (Figure 47) Most Indian companies do not disclose balance sheets in the third quarter; however, for the three private companies, overall net leverage declined marginally QoQ.

Figure 47: Aggregate Key Financials for India IG Corporates

Income Statement Q3FY15 Q2FY16 Q3FY16 FY14 FY15

INR mn INR mn INR mn INR mn INR mn

Total Revenues 3,276,707 2,744,649 2,678,327 15,578,718 14,346,873

EBITDA (excl. Investment income) 323,454 405,174 468,964 1,826,759 1,712,758

EBITDA ( incl. Investment income) 387,377 463,804 522,150 2,048,272 1,962,749

Interest Expense -61,811 -71,973 -59,962 -258,606 -280,952

Net Income 134,951 194,587 195,979 842,710 764,735

Key Ratios Q3FY15 Q2FY16 Q3FY16 FY14 FY15

Revenue Growth -6.8% -9.4% -2.4% 8.2% -7.9%

Gross Margin 19.2% 26.6% 29.1% 19.6% 21.6%

EBITDA Margin 9.9% 14.8% 17.5% 11.7% 11.9%

EBITDA Margin (incl invest income) 11.8% 16.9% 19.5% 13.1% 13.7%

EBITDA/Interest Expense 1.31x 1.41x 1.96x 1.77x 1.52x Source: Company data Note: Companies included - RILIN, BHARTI, ADSEZ, IOCLIN, BPCLIN, ONGCIN, OINLIN, NTPCIN and PWGRIN. For SOEs, quarterly numbers are standalone while annual numbers are consolidated. For private names all numbers are for consolidated entities.

24 February 2016

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Strategy We are sticking with our preference for corporates over banks and private sector over SOEs. This strategy hasn't really served us well so far this year on account of technicals, but we are sticking to it for fundamental and valuation reasons.

Top picks: Reliance Industries 25s, Bharti 23s, ONGC 21s (EUR), Sell India

EximBank 5Y CDS

Top pans: Sell Bank of India 20s, Bank of Baroda 19s, both ICICI 20s, SBI 19s

and 24s and UBI 19s.

Changes in recommendations: Upgrade Axis Bank 20s to Hold from Sell.


24 February 2016

Credit


Hong Kong IG: FX and rates exposure

We have been negative on HK IG credits since late last year. Valuations are tight partly supported by the lack of bond supply. The fundamental outlook is far from rosy. The residential property market has cooled with secondary market transaction volumes now at a post-Lehman low. The retail sector is also under pressure given declining tourist flows (especially from China) partly driven by a strong HKD.

HK IG spreads have held up fairly well this year. We think the sector is vulnerable to a correction in the event of rise in supply and further macro weakness. On supply, we expect issuance volumes from HK IG to rise this year to around US$10bn (from around US$3bn in 2015). This is largely driven by refinancing needs but also potentially a debut issue from CK Property.

There has been increasing focus on a) the depreciation of HKD, b) tightening in HK interbank liquidity resulting in a spike in Hibor, c) a rise in Hong Kong's long term government bond yields, and d) weakness in the residential property market. In this section we discuss how HK IG corporate fundamentals could be affected by these factors.

FX impact: enerally we believe HK I corporates’ FX risk is manageable. This is primarily underpinned by DB House View that the HKD/USD peg will be maintained in the foreseeable future. Our table below shows that bulk of the issuers have active FX hedging policies or natural hedges when it comes to their offshore operations (mainly RMB). Companies such as Champion REIT, CLP, Hang Lung Properties and HKT have also swapped their USD debt exposure back to HKD via cross-currency swaps. For those that do not actively hedge their USD debt exposure (e.g. Lifestyle, New World Development, Sun Hung Kai Prop, Swire and Wharf) their reasoning largely rests on the stability of the HKD/USD peg. We would also highlight that Hang Lung Properties and Wharf have around 90% plus of cash denominated in non-HKD (mainly RMB) which we thought is a reasonably high percentage.

Figure 49: FX exposure summary

Company Sector Ticker % of revenue

in non HKD

% of debt in

non HKD

% of cash in

non HKD

FX risk hedging/

management

FX risk

exposure

Champion REIT Property CPREIT 0% 21% 0% Yes Low

CK Hutchison Conglomerate HUWHY 84% 84% 64% Yes Low

CLP Holdings Utility CHINLP 54% 71% NA Yes Low

Hang Lung Properties Property HLPPY 47% 57% 96% Yes Low

HKT Trust and HKT Telecom PCCW 23% 43% ~25% Yes Low

Hongkong Land Property HKLSP 27% 59% NA Yes Low

Hysan Development Property HYSAN 0% 40% 21% Yes Low

Kerry Properties Property KERPRO 59% 50% 72% Yes Low

Li & Fung Supply Chain LIFUNG 84% 100% NA No Low

Lifestyle International Retailing LIHHK 22% 83% 37% No Med

New World Development Property NWDEVL 46% 40% 56% No Med

Sun Hung Kai Properties Property SUNHUN 17% 38% 20% No Med

Swire Pacific Property SWIRE 64% 36% NA Yes Med

Swire Properties Property SWIPRO 16% 30% NA Yes Med

Wharf (Holdings) Property WHARF 47% 62% 90% No Med Source: Deutsche Bank, company data. Note: We use FY14 revenue breakdown by currency for PCCW, HKLSP, SWIRE, SWIPRO; we use FY14 debt breakdown by currency for HKLSP, LIFUNG, and WHARF; FY14 cash breakdown by currency for HYSAN, KERPRO, LIHHK and WHARF.

Figure 48: HK Resi Property Price

index and transaction volume

0

2000

4000

6000

8000

10000

12000

14000

16000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Jan-0

6

Jul-0

6

Jan-0

7

Jul-0

7

Jan-0

8

Jul-0

8

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9

Jul-0

9

Jan-1

0

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1

Jul-1

1

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2

Jul-1

2

Jan-1

3

Jul-1

3

Jan-1

4

Jul-1

4

Jan-1

5

Jul-1

5

Jan-1

6

HK Midland Property Price 100 (HKD/sqft, lhs)

Price index average since 2006

HK Midland Secondary Resi Prop total volume (rhs)

Source: Deutsche Bank Equities Research, Bloomberg Finance LP, Midland

24 February 2016

Credit


Figure 50: FX exposure – commentary

Company Comment

Champion REIT Only FX exposure from USD term note which is hedged by CCS hence FX risk is hedged

CK HutchisonNatural hedges or for individual transactions (eg procurement) use forwards/swaps. Do not hedge overseas equity

investments

CLP HoldingsNatural hedges for local operations. Also hedges all its FX debt for full tenor and significant portion of USD fuel

purchases. Hedge committed and highly probable transactional exposure.

Hang Lung Properties USD debt exposure covered by CCS. RMB debt raised as a nautral hedge against RMB ops

HKT Trust and HKT Natural hedges for operations denominated in foreign currencies. Swaps and forwards to manage USD debt exposure.

Hongkong Land Natural hedges for operations denominated in foreign currencies. CCS to manage USD debt exposure.

Hysan Development Only FX exposure from USD term note which is hedged into HKD by appropriate instruments

Kerry Properties CCS and Forward to hedge USD debt and RMB debt

Li & FungMost cash in HKD and USD while most borrowings in USD. Revenue and payments mainly in USD. Residual exposures

hedged via forward.

Lifestyle International No comprehensive FX hedging policy as rely on HKD/USD peg effectiveness and RMB/USD has been relatively stable.

New World DevelopmentDebt mainly in RMB or HKD. Maintain appropriate level of natural hedging for RMB exposure. HKD/USD no hedging

policy but largely rely on peg.

Sun Hung Kai Properties Natural hedges for RMB operations.Minimal CCS hedging mainly relies on peg for HKD/USD stability

Swire PacificThe Group had historically hedged its significant FX funding exposures (ex USD) with forwards. Relies on peg for

HKD/USD stability

Swire PropertiesThe Group had historically hedged its significant FX funding exposures (ex USD) with CCS. Also has natural hedges.

Relies on peg for HKD/USD stability

Wharf (Holdings)Enters into forward and swaps to manage FX risk related to payments. Also hedges RMB funding exposure but relies on

the peg to maintain HKD/USD stability Source: Deutsche Bank, company data.

Rates impact 1: We think higher rates could affect HK corps via two transmission channel. All things being equal higher rates should negatively affect interest coverage ratios. In Figure 51 below we show the implied funding cost for HK corps under our coverage space and what a hypothetical 50bp, 100bp and 200bp increase in base rates could mean in terms of interest coverage. We are simplifying things a little here by assuming their credit margins remain unchanged but the main point here is to see who is most/least exposed in a rising rates environment. Our analysis suggests that Hysan would be most affected (but from a very strong base). HKT, HongKong Land, SHK Properties, and Wharf could also see their interest coverage drop by more than 1x in the event of a 50bp hike in borrowing cost.

Figure 51: If funding cost goes up – impact on interest coverage

50bp 100bp 200bp 50bp 100bp 200bp

Champion REIT CPREIT HY 30 June 2015 2.1% 5.1x 4.1x 3.4x 2.6x (1.0) (1.7) (2.5)

CLP Holdings CHINLP HY 30 June 2015 4.2% 7.4x 6.6x 6.0x 5.0x (0.8) (1.4) (2.4)

Hang Lung Properties HLPPY YE 31 Dec 2015 4.5% 4.0x 3.6x 3.3x 2.8x (0.4) (0.7) (1.2)

HKT Trust and HKT PCCW HY 30 June 2015 3.5% 9.1x 8.0x 7.1x 5.8x (1.2) (2.1) (3.4)

Hongkong Land HKLSP HY 30 June 2015 2.9% 8.0x 6.8x 5.9x 4.7x (1.2) (2.1) (3.3)

Hysan Development HYSAN HY 30 June 2015 2.8% 20.3x 17.2x 14.9x 11.8x (3.1) (5.4) (8.5)

Kerry Properties KERPRO HY 30 June 2015 3.7% 3.1x 2.8x 2.5x 2.0x (0.4) (0.7) (1.1)

Li & Fung LIFUNG HY 30 June 2015 5.7% 3.3x 3.0x 2.8x 2.5x (0.3) (0.5) (0.9)

Lifestyle International LIHHK HY 30 June 2015 3.9% 5.4x 4.8x 4.3x 3.6x (0.6) (1.1) (1.9)

New World Development NWDEVL YE 30 June 2015 4.2% 3.2x 2.9x 2.6x 2.2x (0.3) (0.6) (1.0)

Sun Hung Kai Properties SUNHUN YE 30 June 2015 3.2% 9.8x 8.5x 7.5x 6.1x (1.3) (2.3) (3.8)

Swire Pacific SWIRE HY 30 June 2015 3.6% 6.8x 5.9x 5.3x 4.4x (0.8) (1.5) (2.4)

Swire Properties SWIPRO HY 30 June 2015 4.1% 7.1x 6.4x 5.8x 4.8x (0.8) (1.4) (2.3)

Wharf (Holdings) WHARF HY 30 June 2015 2.7% 7.7x 6.5x 5.6x 4.4x (1.2) (2.0) (3.2)

TickerCompany

Impact on EBITDA interest

coverage

Pro-Forma EBITDA/Interest if

average funding cost goes up by…EBITDA/Int (x)Avg Funding

costPeriod

Source: Deutsche Bank, company data

Rates impact 2: The second derivative impact from higher rates will be on cap rates. In a cap-rate decompression scenario, gearing ratios could be

24 February 2016

Credit


negatively impacted as IP asset values shrink. In Figure 52 below we list the landlords or developers with substantial IP exposure. We show the implied cap rate and show what a 50bp, 100bp and 200bp increase in cap rate would mean for their debt/asset ratios. Note we reverse calculated these cap rates by using reported net operating income/results over their respective IP portfolio’s asset values rather than actual cap rates reported b them. The main takeaway here is to show who is most exposed and our analysis suggests that Champion REIT, HK Land, and Swire Properties would be most affected. Hysan and Hang Lung Properties would be least affected.

Figure 52: If cap rate goes up – impact on gearing ratios

50bp 100bp 200bp 50bp 100bp 200bp

Champion REIT CPREIT HY 30 June 2015 3.5% 2.8% 22.4% 26.4% 30.3% 38.1% 4.0% 7.9% 15.7%

Hang Lung PropertiesHLPPY YE 31 Dec 2015 6.1% 5.1% 17.8% 18.3% 18.8% 19.5% 0.5% 1.0% 1.7%

HongKong Land HKLSP YE 31 Dec 2014 4.1% 3.5% 12.8% 14.0% 15.1% 16.9% 1.2% 2.2% 4.1%

Hysan HYSAN HY 30 June 2015 5.2% 4.6% 7.3% 7.9% 8.5% 9.7% 0.6% 1.2% 2.4%

Sun Hung Kai SUNHUN YE 30 June 2015 5.7% 4.4% 13.8% 14.3% 14.8% 15.6% 0.5% 1.0% 1.8%

Swire Properties SWIPRO HY 30 June 2015 5.0% 3.8% 13.8% 14.9% 15.9% 17.7% 1.1% 2.1% 3.9%

Wharf WHARF HY 30 June 2015 5.6% 4.9% 17.7% 18.5% 19.2% 20.5% 0.8% 1.5% 2.8%

Debt/Asset

Pro-Forma Debt/Asset if cap rate

goes up by…Impact on Debt/Asset

Company Ticker PeriodGross rental

yieldCap rate


Impact from weaker housing market: The residential property prices have cooled off with transaction volumes now at a post-Lehman low (Figure 48). Table below shows the list of developers and their respective exposure to residential sales, leasing, and other operations. New Word Development stands out with 63% of operating income from property sales followed by Kerry Properties (28%) and SHK Properties (26%). Hysan and Champion REIT are pure landlords. Swire Properties, Hongkong Land and Hang Lung Properties have relatively high exposure to leasing income.

Figure 53: Revenue/Operating profit breakdown by segment

Total Sales Leasing Hotel/Other Total Sales Leasing Hotel/Other

Champion REIT HKD FY15 1,110 0% 100% 0% 878 0% 100% 0%

Hang Lung Properties HKD FY15 8,948 13% 87% 0% 6,548 13% 87% 0%

Hongkong Land USD 1H15 905 46% 54% 0% 487 17% 83% 0%

Hysan Development HKD 1H15 1,714 0% 100% 0% 1,527 0% 100% 0%

Kerry Properties HKD 1H15 4,204 41% 42% 17% 2,158 28% 68% 4%

New World Development HKD FY15 55,245 46% 4% 49% 10,857 63% 13% 24%

Sun Hung Kai Properties HKD FY15 66,783 26% 24% 49% 23,496 26% 53% 21%

Swire Properties HKD 1H15 9,386 36% 58% 6% 5,147 20% 81% 0%

Wharf HKD 1H15 17,638 37% 41% 22% 7,491 15% 79% 6%

Revenue Operating profitCurrency/

PeriodCompany


HK IG credit strategy: We maintain our cautious view on HK corps given fundamental headwinds and rich valuations. We are not fully convinced that HK IG corps can be fully isolated against a China slowdown. We reiterate our Sell on Swire 23, Li & Fung 20, and Kerry Properties 21.

24 February 2016

Credit


China IG metals and mining: Spotting the next downgrade candidate

As we discussed in the outlook we were expecting negative rating actions to outweigh positive ones this year on the back of a prolonged commodity down cycle and an ongoing slow down in China. We’ve seen a raft of negative rating actions lately on various China IG sectors affecting sectors such as Oil and Property. We were also fairly cautious on the metals and mining sector in the outlook and expected rating pressure for the sector to increase. We list the five metal and mining credits in China IG below, update their ratings trigger (with S&P and Moody’s) and our thoughts in terms of the likelihood of a credit rating downgrade. In summary we think the risk of a downgrade is high by Moody’s for Shenhua Energy, China National Gold Corp, and Minmetals. We think a negative rating action on Baosteel could also be high by Moody’s but should be fine with S&P for the time being. Chalco could also be a potential downgrade story in the 2H by S&P.

Figure 54: Metals & Mining – spotting the next potential downgrade candidate

Company and its

family ratings

(Moody's, S&P,

Fitch)

Downside triggers -

Moody's Downside test - per Moody's Downside triggers - S&P Downside test - per S&P Our Assessment

China Shenhua Energy

Co Ltd (Aa3/RPD, AA-

/Stable, A+/Stable)

Adjusted debt/EBITDA is

higher than 2x, and/or

retained cash flow/debt

lower than 35% for a

prolonged period.

Final rating incorporates BCA of

A3 and 3 notches of uplift based

on the high likelihood of

extraordinary support expected

from Shenhua Group. Although

we believe there is still some

buffer against key ratios (albeit

narrowing given sector

challenges), Moody's seems

worried about the weak credit

profile of parent Shenhua Group

amid the sluggish oil and coal

prices.

Adjusted gross leverage

exceeds 2x on a sustained

basis

S&P’s downgrade trigger of 2x

leverage offers some cushion

(albeit narrowing) relative to the

0.8x leverage at YE14 and

around 1.2x in June'15. SACP is

a+ now and a downgrade of

final rating requires SACP to fall

to a- (two notch cut). S&P is

also concerned about the

deteriorating credit profile of its

parent, Shenhua Group, amid

the challenging market

condition. A downgrade of

parent's credit profile may add

pressure to the listco's credit

rating.

We believe Shenhua is relatively resilient against

its stand alone credit rating buffer. Market

consensus expects positive FCF for FY16, and

EBITDA needs to essentially halve before it

reaches downgrade trigger. However, the credit

weakening of Shenhua Group (parent( driven by

slower-than-expected recovery of brent and coal

prices and significant overcapacity in China will

add downgrade pressure on Shenhua's listco. We

believe a Moody's downgrade is likely if its BCA

is lowered by a notch - in other words a 3 notch

uplift is max for now. S&P's risk is lower in our

view given SACP downside buffer still remains

although the agency highlights the weakening of

parentco credit as a potential downside trigger.

Likelihood: Moody's High, S&P Low.

Aluminum Corp of

China Ltd / Chalco

(NR, BBB-/Neg,

BBB+/Stable)

NA NA EBITDA interest coverage falls

below 1.0x for an extended

period.

S&P revised the outlook to Neg

from Stable on 11 Dec, 2015

given the agency’s view on the

aluminium sector. We estimate

Chalco's EBITDA interest

coverage at 1.5x at 1H15 (up

from 0.3x at YE14) hence a

meaningful recovery although

given the revised aluminum

price assumption to USD1,500/t

in 2016 and USD1,550/t in 2017

from USD1,650/t in 2016 and

USD1,750/t in 2017,

respectively the sector outlook

remains challenging hence

downgrade pressure remains on

the high side in the medium

term.

EBITDA/Int (of below 1x) is the key downgrade

trigger for S&P’s Negative outlook on its BBB-

rating. There is some headroom given Chalco’s

EBITDA interest coverage finishing 1H15 at

~1.5x, but we expect aluminum prices to remain

low in the near future, adding credit pressure on

the name. We think downgrade pressure remains

but probably a 2H story. Likelihood: S&P

Moderate (but rising)

China Gold

International

Resources Corp Ltd

(NR, BBB-/Neg, NR)

N.A. Moody has a rating for

its

parent (China National Gold

Group Corp, Baa3/CW

Neg). Adjusted

debt/EBITDA and/or

EBITDA interest coverage

fails to trend below 10x and

above 1.5x for an extended

period will add downgrade

pressure

Final rating incorporates BCA of

B1 and 4 notches of uplift based

on the expected government

support. Moody's expects gross

leverage and EBITDA interest

coverage standing at 15.0x and

1.4x in 2015 based on volatile

gold prices and large annual

capex related to its projects

under development.

SACP comes under pressure

when FFO-to-debt falls below

12% for an extended period.

Final rating will also be

affected if EBITDA interest

coverage of its parent, China

National Gold Group Corp

(CNGGC), falls below 2x for a

sustained period. S&P

believes gold price breakeven

for its EBITDA/Int ratio is

around US$1050/oz which is

not too far away from S&P's

2016 base case of US$1100/oz.

Per S&P the company's

FFO/debt at 7% in FY14 has

already breached its SACP

trigger. As China Gold

International Resources Corp

Ltd (CGIRC) is "Highly

strategic" to CNGGC

(BBB/Neg), its rating generally

is one notch below its parent.

CNGGC's EBITDA interest

coverage stood at 2.1x at YE14

which leaves very limited

headroom against trigger point.

S&P seems to think that the

company’s cost cutting

measures and lower capex plan

may not be sufficient to

stabilise the rating.

Gold price is a key driver for the credit in our

view. Average spot Gold in 2015 ($1160/oz) and

current spot today ($1200/oz), vs 2014 average of

$1266/oz, will bring the company closer to its

EBITDA/Interest trigger. Leverage is likely to

remain high due to large capex related to its

projects under construction and cost redution

measures may not be sufficient. We think the

rating buffer is limited for further weakening of

credit fundamentals and the final rating by S&P

could come under pressure given the limited

interest coverage headroom at the parent level.

For Moody's, parent co's metric has already

breached its downgrade trigger hence

downgrade pressure on parentco rating is high in

our view. Likelihood: S&P High; Moody's

High.

Source: Deutsche Bank, company data, S&P, Moody’s, Fitch

24 February 2016

Credit


Figure 55: Metals & Mining – spotting the next potential downgrade candidate (cont’d)

Company and its

family ratings

(Moody's, S&P,

Fitch)

Downside triggers -

Moody's Downside test - per Moody's Downside triggers - S&P Downside test - per S&P Our Assessment

China Minmetals Corp

(A3/RPD, NR,

BBB+/Stable):

Adjusted debt/capital ratio

exceeds 80%-90% and

adjusted debt/EBITDA fails

to improve to 6.0x by end

of 2017.

Moody's placed Minmetal on

review for downgrade on 22

Jan, 2016. Its final rating

incorporates BCA of Ba2 and 5-

notch uplift (limited room for

higher uplift). Adjusted gearing

ratio was 70.7% at YE14 and

leverage was 15.4x at end of

Jun'15. The merger of Minmetal

and MCC is a credit positive,

resulting in a expected LTM

leverage of 10.2x at end of

Jun'15, but Moody's is mindful

that the falling commodities

prices adds uncertainty towards

Las Bambas' EBITDA projection.

NA NA We see MCC’s merger, the integration of Las

Bambas and commodity prices (copper and

nickel) as the main drivers for the credit. We

think the merger with MCC at the minimum

reaffirms (if not elevate) Minmetal’s status as a

key central SOE. Las Bambas is expected to go

online Q1 2016 which is expected to generate

about half of Minmetal’s group EBITDA when

fully ramped up. However our back of the

envelop calculation suggests that, unless there is

a sharp rally in commodity prices, there is likely a

sizeable gap between Minmetal’s pro-forma

leverage (11-12x) (under fully ramped up Las

Bambas) versus what is needed (6x) to remain A3

with Moody’s. Likelihood: Moody's High.

Baosteel

Group(A3/RPD,

BBB+/Stable, A-

/Stable)

Adjusted debt/EBITDA rises

above 5.5x-6.0x and net

debt/EBITDA rises above

4.0x-4.5x.

Moody's placed Baosteel

Group's rating on review for

possible downgrade on 19 Feb,

2016. The review was driven by

a deteriorating credit profile

resulting from significant

overcapacity and soft steel

demand. The current rating

reflects a BCA of baa3 and a 3-

notch uplift. Moody's expects

Baosteel Group's adjusted

leverage to rise to above 6.0x in

2015, which will likely trigger a

BCA downgrade. In addition,

Moody's seems believe that a

the curremt 3-notch uplift will

not be extended.

EBITDA interest coverage falls

below 2.5x

S&P downgraded Baosteel

Group to BBB+ on 1 Feb, 2016,

due to weak industry

conditions. EBITDA/interest

ratio was 3.8x at YE14 and S&P

expects the ratio stays at 3.0x-

3.5x in 2016 and 2017.

Baoshan Iron & Steel

Co Ltd (A3/RPD,

BBB+/Stable, A-

/Stable)

A downgrade of Baosteel

Group

Moody's placed Baosteel

listco's rating on review for

possible downgrade on 19 Feb,

2016. This follows the

challenging operating

environment in China. Baosteel

reported a pre-tax profit of

RMB1.8bn in 2015, down 78%

yoy. Baosteel listco accounts for

over 60% of Baosteel Group's

revenue and a downgrade of

Baosteel Group will likely

trigger a downgrade of Baosteel

listco's rating.

Adjusted leverage remains

above 4.0x on a sustained

basis

S&P downgraded Baosteel

listco to BBB+ on 1 Feb, 2016,

due to challenging market

conditions. Under S&P's current

base case, leverage is expected

to stay above 3.0x-3.5x in 2016

and 2017.

We think Baosteel’s capex plans, the progress

around Zhanjiang’s project rampup and steel

spreads are the main drivers. We remain

concerned about excess capacity in the steel

sector and consolidation may take longer than

previously expected. Barring a significant

compression in steel spreads (not our base case),

both Baosteel Group and Baosteel listco should

still have some buffer against its downgrade

triggers with S&P post the downgrade as ratio

requirements have now eased. We will not be

surprised to see a downgrade from Moody's

given limited signs of a material recovery and the

agency's effort to recalibrate Baosteel's ratings in

its global mining portfolio. Likehood: S&P Low,

Moody's High

Source: Deutsche Bank, company data, S&P, Moody’s, Fitch

Best & Worst performers YTD China and HK IG outperformers YTD are largely dominated by short-dated bonds whereas longer-dated bonds have underperformed as investors pared back on duration. Sector wise we note that Chinese Property names and some of the cyclicals such as Huayi and Citic Ltd have also underperformed.

Figure 56: China & HK IG - Top outperformers Figure 57: China & HK IG - Top underperformers


(bp)

YTD

spd chg

Far East Horizon 5.55% 'perp 104 9.5 144 (150)

Hutchison Whampoa 7.5% '27 137 3.6 196 (69)

China Aluminium 3.63% '19 105 2.2 122 (50)

Beijing Infrastructure 3.63% '19 104 2.1 120 (49)

BoC Aviation 3.88% '19 105 2.2 130 (45)

China Overseas Land 4.88% '17 103 2.1 134 (30)

Far East Horizon 4.63% '17 102 2.9 218 (24)

Lifestyle 5.25% '17 103 2.4 164 (21)

Bao-trans Enterprises 1.63% '18 100 1.4 156 (12)

China Shipping 4.25% '19 105 2.6 166 (8)


(bp)

YTD

spd chg

Noble 3.63% '18 55 36.9 3,605 1,592

Wanda 7.25% '24 102 7.0 558 186

Sino Ocean 6% '24 100 6.0 459 138

Yuexiu Property 4.5% '23 91 6.0 473 116

CITPAC 8.63% 'perp 112 7.9 308 115

Sino Ocean 4.45% '20 99 4.6 361 113

Li & Fung 6% 'perp 103 6.2 374 100

Greenland 5.88% '24 98 6.1 472 91

Huayi 4% '19 97 5.0 398 87

China Railway Const 3.95% 'perp 103 7.2 222 67 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to


24 February 2016

Credit


Top picks: Lenovo 19s, Chalco 6.625% perps, China Railway Construction perps, Greenland Group 24s, Franshion 19s, Hang Lung Properties 22s, Noble 18s

Top pans: SWIRE 23s, Li & Fung 20s, Kerry Properties 21s, COSL 20s.

Changes in recommendation: downgrade Beijing Enterprises 20s (EUR) to Hold from Buy


24 February 2016

Credit


Banks

Market volatility puts sub-debt at centre stage

We have maintained a negative stance on the valuations of AT1s in Asia since late 2014 on the premise of their expensiveness vs. European counterparts and Asian T2 bonds alike. On hindsight we welcome the yield/spread weakness for Chinese banks’ AT1 bonds that was evidenced earlier this month. We are cautious on the recent bounce in spreads for these bonds as we maintain our view that Chinese AT1 valuations have priced themselves beyond the global context. Early in Jan-16 they yielded 50-75bp less than European equivalents and about flat vs. US peers. The differentials at present stand at over 200bp. An unabating streak of negative headlines relating to China’s macro dynamics, a continuous trend of worsening asset quality, rising tolerance for defaults amongst China’s political circles, latest headlines on the potential revision down of regulatory norms for bad loan provisioning and a reversal of RRR cutting cycle at least for the mid-and-small-sized banks do not seem to be supportive of the rich bond valuations.

The relative richness of Asian banks’ AT1s has been recently highlighted by a

severe correction in DM AT1 instruments. We believe that the trigger for a sell-off in DM’s sub-debt space was mainly hinged on the re-emergence of fears of a repeated economic recession in Europe and the US coupled with the lack of ammunition by the regulators to stimulate growth and maintain liquidity in the domestic banking systems leading to the banks’ losses and inability to service the coupons on AT1 securities. The European banks’ AT1s were the

eye of the storm that hit the market in early Feb and sucked in Asian peers

with it. Our European strategists have recently released a report where they concluded that the widening in spreads/spike in yield for European AT1 bonds is more of a buying opportunity rather than a reflection of a “near default” scenario for the banks. Despite many Asian economies being in the deceleration mode, we believe that fundamentally, most of Asian banks are, similarly to their North European and Swiss peers, have substantial capital, liquidity and loan loss reserves to withstand a prolonged period of credit stress and are definitely not in a situation when investors should question their ability to service AT1 coupons.

Figure 58: lobal banks’ sub vs. senior index evolution Figure 59: Asia banks’ AT1, T2 and Snr yield evolution *

60

70

80

90

100

110

120

130

140

150

160

50

100

150

200

250

300

350

Sub Senior Differential

100

150

200

250

300

350

400

450

500

550

600

01/01/16 16/01/16 31/01/16 15/02/16

zsp, bps

B3AT1 index

B3T2 index

Senior index

Source: Deutsche Bank, Markit Source: Deutsche Bank, * average YTW for most liquid Asian bonds in respective capital structures

24 February 2016

Credit


In Asia, lack of HY supply, especially in the China property space, has historically kept Chinese AT1 bonds in demand by the PB community. We remain wary of new AT1 supply from China in light of the recently announced TLAC rules and believe that the extension risk for the current paper is quite real. We recommend investors selling Chinese AT1 bonds as we believe they should be yielding at least ~50bp from the current levels to be more reflective of their underlying fundamentals. We highlight the following ideas as alternative re-investment/diversification options:

Bank of East Asia 5.5% AT1 call-20 – based in HK, it is the most attractively priced AT1 bond in Asia currently quoted at 92 price/7.5% YTC. The bank has superior capital ratios to many larger Chinese peers and has been taking proactive steps to clean-up its China-related loan book.

Woori Bank 5% 45c20 AT1 – the only AT1 bond issue by a Korean bank. It is rated a notch higher than some of Chinese AT1s, has lower supply risks and, most importantly, is issued out of jurisdiction with the most investor-friendly PONV language. The latter, in our view, calls for a 25-30bp premium (i.e. Woori trading at lower yield vs. Chinese peers) which has not been the case thus far.

China AMCs (Cinda, Huarong, China Orient) in the long end which provide an attractive yield-enhancement opportunities while remaining senior in the capital structure.

Select Chinese corporate perps with high likelihood for a call – e.g. Chalco 6.625% Perps ($105, 4.6% YTC), which is a senior perpetual structure with a strong 500bp step-up in coupon if not called on its first date (Oct-18).

Figure 60: Asian benchmark AT1s comparison Figure 61: Global benchmark B3T2 bonds comparison

250

300

350

400

450

500

550

600

650

700

01/01/16 16/01/16 31/01/16 15/02/16

zsp, bps BNKEA Perp c20 WOORIB 45 c20

BCHINA Perp c19 BOCOM Perp c20

CCB Perp c20 ICBCAS Perp c19

150

200

250

300

350

400

450

500

01/01/16 16/01/16 31/01/16 15/02/16

zsp, bpsBCHINA 24 WOORIB 24

ICBCAS 25 OCBC24

BAC 25 HSBC 25

UBS 24

Source: Deutsche Bank Source: Deutsche Bank

When it comes to B3T2 bonds issued by Asian banks, we note their material outperformance YTD vs. DM T2 bonds and their own AT1 instruments, which is understandable given the recent sell off in that asset class. At the same time, as the infamous “local bid” in China keeps supporting the senior banks bonds spreads in Asia, the most recent widening of T2 bond spreads presents a buying opportunity, in our view. This view is also supported by a pronounced bounce in European T2 instruments (chart above) vs. their AT1 equivalents. However, a more careful credit selection is required given the differences in

the Basel III, statutory bail-in and capital buffers amongst the countries. We expect new supply this year to come mostly from higher-rated Asian countries – Singapore, S. Korea and China, driven by D-SIB/G-SIB & TLAC requirements, while Hong Kong and Thai issuers would be more opportunistic in nature.

24 February 2016

Credit


Indian banks could be an outlier depending on the state of their asset-quality deterioration and capital infusion by the government. We estimate ~USD13.5bn worth of sub-debt (T2+AT1) to be issued by Asian banks in 2016.

Amongst the higher-rated jurisdictions in Asia, we note quite contrasting trends. Korean banks paper – especially B3T2 – has visibly underperformed

its peers in Singapore. If we extend the comparison to include Europe, Japan and Australia, we also note quite visible outperformance of Singapore credits on both a spread multiple and absolute spread basis. This, to an extent, is a reflection of the higher credit quality of Singaporean banks, lower probability of new sub-debt supply and scarcity of sub-debt in USD generally.

In South Korea, where last year banks demonstrated their ability to withstand fundamental headwinds (mostly driven by a worsening external environment), T2 bonds have materially lagged the yield compression of the senior peers and have been more resilient to the market volatility vs. AT1 bonds YTD. The richness of Singapore banks’ T2 bonds is also evident from the fact that they are the rare sub-debt paper in Asia that has fully recovered losses since the tights in Apr-15. For now we refrain though from recommending investors

sell Singapore banks’ sub-debt as we believe it is at FV and is benefitting

from a flight to quality in current market conditions. We would watch closely their spread performance and should European equivalents, even such equally-rated bonds as HSBC, fail to compress vs. Singapore banks (e.g. OCBC 24s) where YTM differential at present is ~95bp vs. ~25bp at the start of this year, there may be a case to switch out of the latter into the former.

Figure 62: Spread of CCB bonds across capital structure Figure 63: Spread of Woori bonds across cap structure

125

175

225

275

325

375

425

01/01/16 16/01/16 31/01/16 15/02/16

zsp, bps CCB 25 c20 (B3T2) CCB Perp c20 (B3AT1)

CCB 20 HRAM 25

HRAM 20

75

125

175

225

275

325

375

425

475

01/01/16 16/01/16 31/01/16 15/02/16

zsp, bps WOORIB 24 (B3T2) WOORIB 20

WOORIB 45c20 (B3AT1) WOORIB 37c17 (B2T1)

KEBHNB 24

Source: Deutsche Bank Source: Deutsche Bank

We do remain of the opinion that Asian banks’ B3T2 bonds remain the most value accretive as an asset class and would highlight the following samples as our preferred way of expressing such a view:

Woori Bank 4.75% 24s – the bonds remain attractive to us in terms of absolute spread and also as a multiple vs. senior. It currently trades about ~20bp lower yield-wise vs. European peers, but about ~45bp wider vs. Singapore banks’ T2s in similar duration (vs. historic differential of ~20bp). As we mentioned above, we consider S. Korea to have the most creditor-friendly PONV regulation when it comes to sub-debt, and the country is unlikely to follow a full-blown statutory bail-regime as we had seen in Europe.

24 February 2016

Credit


CCB 3.875% 25c20 – this bank was the latest one to issue a AT1 bond in 2015 (Dec), which perhaps is the main reason for relative underperformance of this T2 paper YTD. Despite its callable structure, it trades flat to BoChina’s 10Y T2 bond spread-wise and has also widened ~20bp vs. similarly dated callable bond of a weaker and smaller Bank of Communications. CCB has the lowest new supply risk amongst the big for banks in China in our view given its more conservative risk-taking approach and greater reliance on the local currency funding.

BNKEA 4.25% B3T2 24c19 - as they have visibly underperformed HK and Chinese peers since mid-Oct and more so YTD. Yield-wise the paper had first fully converged and now is ~20bp wider v.s. 10Y bullet B3T2 bonds of BCHINA (used to trade ~60bp tighter six months ago). We note that BEA already fully meets HKMA’s capital requirements prescribed to D-SIBs which should limit the future supply risk.

Figure 64: Top outperformers (spread change) Figure 65: Top underperformers (spread change)


(bp)

YTD spd

chg

China Citic Bank 6% '24 109 4.7 217 (85)

ICICI Bank 7.25% 'perp 103 3.8 161 (64)

Bank of Ceylon 6.88% '17 102 5.3 460 (50)

Kookmin Bank 3.63% '17 102 1.3 59 (33)

Industrial Bank of Korea 2.38%

'17

101 1.3 55 (25)

Bank Negara Indonesia 4.13%

'17

102 2.4 166 (22)

Bank of Communications 2.13%

'17

100 1.6 87 (21)

Bank of China 2.13% '17 100 1.6 87 (20)

DBS Bank 2.35% '17 101 1.0 31 (19)

Shinhan Bank 4.38% '17 104 1.5 74 (19)


(bp)

YTD spd

chg

Bank of East Asia 5.5% 'perp 93 5.6 609 200

National Savings Bank 5.15%

'19

90 8.5 751 188

Ind & Comm Bank of China 6%

'perp103 5.5 425 168

National Savings Bank 8.88%

'18

102 8.2 735 137

Woori Bank 5% '45 98 4.8 447 137

Bank of Communications 5%

'perp

100 4.7 392 118

ICICI Bank 7% '20 114 3.8 266 108

China Construction Bank 4.65%

'perp

99 4.4 377 102

Bank of East Asia 8.5% 'perp 114 7.1 337 95

Bank of Ceylon 5.33% '18 97 7.0 616 88

Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank

We note that Basel III-compliant AT1s have also underperformed the entire bank bond space in Asia, as above tables tell us. We continue to believe that valuations are still generally too rich for the AT1 space in Asia with the exception of Bank of East Asia bonds. Interestingly, China CITIC Int’l T2 bond spread compression has gone too far. The rest of the dynamics remain somewhat unexciting, in our view, with clients continuing to chase short-dated senior paper with limited appetite to deploy cash.

Sub debt top picks: Basel III T2 bonds in China, Korea and Hong Kong; Bank of East Asia 5.5% AT1.

Sub debt top pans: China Taiping Perp, China banks AT1s.

Changes in recommendation: upgrade OCBC 4.25% T2 bonds, CCB Asia 4.25% 24c19 and Bank of China 5% 24s to Buy from Hold. Upgrade CITIC Bank Int’l 6% 24s to Hold from Sell.


24 February 2016

Credit


HY Corporates

Assessing refinancing risks

2018/19 is a peak maturity year for HY not only in Asia but across EM. At the same time, the current off-shore debt market is not accessible for a large portion of existing Asian HY issuers except solid China property companies. Unsurprisingly, HY supply so far has been underwhelming and we expect it to remain so in 2016, limiting chances of prefunding the maturities. We also got lot of questions on potential refinancing options for upcoming HY maturities during our recent meetings. Thus, we look at bonds maturing in 2017 and 2018 in Asia HY and discuss our views on funding gap and potential refinancing options if USD bond market remains inaccessible.

Looking at Other HY (excl China property), there are two bonds (Maoye 17 and China Hongqiao 17) totalling USD700 million maturing in 2017 and nine bonds with total notional of USD3.4 billion maturing in 2018. We have looked at potential funding gap based on some simplistic assumptions for annual FCF run rate and last available cash balance. We have estimated period end cash balance (2016 for Maoye and 2017 for others) and compared it with offshore loan/bond maturities to estimate the funding gap. Based on our analysis, 10 out of 13 corporates have more than USD100 million funding gap as of end 2017 (Figure 70). This is clearly an extreme scenario where we have assumed that off shore loans /bond market remains completely shut. We do not expect offshore loan market to remain shut especially for more asset heavy companies though bond market may remain inaccessible for some. Apart from bank loans, other alternatives that companies with high funding gap can tap include onshore bond and asset sales. We have ignored equity injection for our analysis.

China property is still the segment that has good access to various funding channels both onshore and offshore. Onshore funding includes public and private corporate bonds, asset-backed securities (e.g., Shimao and Country Garden have tapped this market), and Panda Bonds (e.g., Country Garden and now pending ones including Agile). On the syndicated loans side, we have seen a few developers like Yuzhou and Central China paying off the offshore syndicated loans (these two have zero syndicated loans currently) while a few developers including Aoyuan has tapped syndicated loans recently. Having said this, evidence from some non-SOE backed China property companies suggests that transferring money from on-shore to off-shore may have become more difficult so far in 2016, as compared to in 2H15, when it was easy. We are also stress-testing the China property HY developers that have off-shore USD/SGD/HKD/CNH bonds that are due in 2H16-2018 under the same scenario as other Asia Credit HY issuers – what would their cash flows look like if they cannot tap the off-shore debt market? This is a stress-test and is not our base case scenario, as we expect the property issuers to be able to access on-shore and off-shore funding and receive policy support this year. Our analysis is based on DB forecasts for the company’s net operating cashflows (only Future Land and KW ’s 2016 cash inflow from contract sales and major cash outflow items are guided given they have announced FY15 results already). Even under such a scenario, we see minimal risks of non-repayment from these China HY developers. Agile, reentown, Logan, and Powerlong are “low” cash levels in the future, per our estimates in this scenario; but, for instance, Agile has applied for RMB15bn of Panda Bonds (private) and reentown’s largest share holder is SOE CCCG, which mitigate some of the refinancing risks. Those that show very high cash levels even assuming no tapping of additional new debt are Cifi and Yanlord, per our estimates (Figures 71 & 72).

24 February 2016

Credit


Top & Bottom performers YTD Some of the top underperformers were driven by negative headlines such as Future Land and Hsin Chong. Country Garden also saw some news headlines around its pending investment in Forest City and potential acquisition of Dah Sing Insurance (per newspapers). Evergrande was downgraded by one of the rating agencies in January. In the case of outperformers, some of them announced calling of bonds or early redemption of bonds (e.g., Hopson, China SCE for its 2017s).

Figure 66: China Property Top Outperformers Figure 67: China Property Top Underperformers

Bond PriceYTD

price chgYTM (%)

Z-spd

(bp)

China SCE 10% '20 108 2.6 7.7 665

Oceanwide 11.75% '19 110 1.0 8.4 759

Yuzhou Property 8.63% '19 105 0.9 6.8 591

Tuspak 5.38% '18 101 0.8 5.1 420

Powerlong 7.63% '18 100 0.5 7.7 684

Modern Land 12.75% '19 104 0.5 11.5 1,050

Road King 9.88% '17 105 - 6.5 449

Poly Property 4.75% '18 102 - 4.0 321

Hopson 9.88% '18 103 - 33.7 3,573

SOHO China 7.13% '22 106 (0.1) 6.0 456

Bond PriceYTD

price chgYTM (%)

Z-spd

(bp)

Hsin Chong 8.75% '18 87 (16.5) 15.9 1,504

Future Land 10.25% '19 105 (4.3) 8.7 775

Central China 8.75% '21 95 (3.8) 10.0 889

Evergrande 8.75% '18 99 (3.3) 9.1 819

Fantasia 10.75% '20 97 (2.8) 11.7 1,073

Beijing Capital Land 8.38% 'perp 105 (2.6) 12.0 501

Country Garden 7.5% '20 105 (2.6) 6.2 521

Greentown 5.88% '20 102 (1.5) 5.3 423

Shui On 10.13% 'perp 105 (1.5) 12.4 651

Longfor 6.75% '23 103 (1.5) 6.3 504 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to


In Other HY space, top underperformers are mostly commodity players (Vedanta long end, Yanzhou, and Yingde) or event driven names (Rolta, Shanshui, etc.). Pactera, Stats Chippac and Hengdeli have also traded weak on potential earnings disappointment. On the other hand Vedanta’16 is the top performer given better clarity on redemption, followed by Indo credits. Indo HY in general has benefited from improved macro sentiments as well as attractive valuation at the beginning of the year. Longer-dated Tata Steel has also done well given recent policy support for steel players as well as relatively steeper curve at the beginning of the year.

Figure 68: HY (ex China Prop) Top Outperformers - Figure 69: HY (ex China Prop) Top Underperformers

Bond PriceYTD

price chgYTM (%)

Z-spd

(bp)

Vedanta 6.75% '16 99 8.6 10.2 967

Modernland 9.75% '19 99 6.9 10.0 906

Japfa Comfeed 6% '18 86 4.5 13.9 1,308

Alam Sutera 6.95% '20 90 4.1 10.0 896

Indiabulls 10.25% '19 96 4.1 11.7 1,070

MPM 6.75% '19 98 3.4 7.5 655

Star Energy 6.13% '20 99 3.1 6.4 544

Tata Steel 5.95% '24 87 3.0 8.1 668

China Oriental 7% '17 99 3.0 7.6 684

Delhi Intl Airport 6.13% '22 102 2.5 5.7 445

Bond PriceYTD

price chgYTM (%)

Z-spd

(bp)

Rolta 8.88% '19 31 (26.0) 56.5 5,562

Yingde Gases 7.25% '20 68 (10.8) 19.1 1,812

Pactera 8% '21 72 (8.8) 16.1 1,501

Shanshui 7.5% '20 81 (6.5) 13.7 1,267

Vedanta 9.5% '18 71 (5.8) 26.4 2,556

Yanzhou Coal 5.73% '22 86 (4.5) 8.7 744

Stats Chippac 8.5% '20 92 (4.5) 10.6 953

Hengdeli 6.25% '18 96 (4.4) 8.3 752

China Oil & Gas 5% '20 88 (3.6) 8.4 733

Vista Land 7.38% '22 102 (3.0) 7.0 573 Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to avoid repetition, we have not included perps or bonds maturing in 2016 in the tables. Source: Bloomberg Finance LP, Deutsche Bank. Note: We have considered only one bond per issuer to


Top picks for short dated bonds: China il & as’18, Parkson’18, Yingde’18, Multipolar’18, MNC Investama’18, Rolta’18, Aoyuan’18, reentown’18,

Top pans for short dated bonds: China Hongqiao’17.

Please refer to the Top Picks

and Pans section at the end of

this report for the full list of

trade recommendations, risks

and rationale.

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Figure 70: Other High Yield - Funding Gap

Current

CashLT Debt ST Debt EBITDA

Net

InterestCapex

Tax &

Dividend

s

FCF

China Oi l & Gas 1H15 HKD mln 3,013 4,985 1,155 1,100 (258) (800) (250) (208) 2,492 240 - (460) (71)

Parkson FY15 RMB mln 3,353 3,373 644 500 (99) (250) (300) (149) 3,056 510 - (704) (108)

Hengdel i 1H15 RMB mln 1,604 3,104 727 1,000 (210) (150) (350) 290 2,329 450 (78) (474) (73)

Yingde** 1H15 RMB mln 1,084 7,087 2,899 2,500 (596) (1,000) (600) 304 1,844 240 (1,133) (174)

Maoye* 1H15 RMB mln 1,030 4,602 6,728 1,200 (579) (600) (500) (479) 311 311 (1,271) (3,221) (496)

China Hongqiao** 1H15 RMB mln 7,184 26,114 20,403 12,000 (2,182) (10,000) (2,500) (2,682) 479 1,200 (4,401) (9,672) (1,488)

Tower Bersama** 9M15 IDR Bln 363 19,038 193 3,000 (1,427) (1,350) (1,000) (777) (1,385) 300 - (5,735) (425)

Japfa 9M15 IDR Bln 780 5,041 2,164 1,800 (611) (420) (350) 419 1,722 750 (209) (1,938) (144)

Gajah Tunggal 9M15 IDR Bln 916 7,259 543 1,600 (559) (945) (250) (154) 569 390 - (6,571) (487)

Multipolar*** 9M15 IDR Bln 1,300 3,346 290 297 (300) - (150) (153) 955 300 - (2,450) (181)

MNC Investama*** 9M15 IDR Bln 250 4,928 - 250 (284) - (100) (134) (53) 100 - (5,080) (376)

Vedanta*** Q3FY16 USD mln 400 8,053 - 159 (422) - - (263) (126) 20 345 (550) (550)

Rolta Q3FY16 INR mln 2,640 49,500 6,600 12,683 (4,630) (6,508) (1,030) 515 3,671 2,740 - (7,745) (113)

Company with

funding gap of $100

mln or more

Asset

sale

Access to

local bond

market

Access to

bank

funding

Refi risk

Parkson Yes Low

Yingde Yes High

Maoye Yes High

China Hongqiao Yes Yes High

Tower Bersama Yes Yes High

Japfa Yes Yes Low

Gajah Tunggal High

Multipolar Yes Yes Low

MNC Investama Yes High

Vedanta Yes Yes Yes Low

Rolta Yes High

Min cash

Funding gap

(reported

currency)

Other capital

market trans.

in 2016/17

Funding gap

(USD

equivalent)

Last reported Last

reported

period

Reported

currencyCompany

End

cash*

Annual FCF run rate

Source: Company data, Deutsche Bank Estimate

* For Maoye estimated end cash as at 2016 end as the only USD bonds mature in 1H17. For others estimated end cash as at 2017 end **PF numbers post recent bonds/syndicated loan (for Tower Bersama and Yingde) and rights issue (China Hongqiao) ***For Vedanta, MNC and Multipolar we have just assumed Holdco cashflows. EBITDA is primarily dividend from key opcos. Other assumptions:: 2% return on cash balance being set off against interest cost ST loans/onshore bonds gets refinanced/rolled over 2016 and 2017 FCF = EBITDA-Capex-Interest-Tax & Dividends Min cash assumed as 3% of sales or as per management Annual EBITDA and Tax & Dividends run rate is similar to 1H15/2014 Vedanta - Assuming entire USD2.2 billion intercompany loan (as of Dec-15) from Vedanta Ltd is repaid in 2016. Also assumed USD1 billion bank loan in 2018 is refinanced Rolta - Assumed 1) USD35 mln working capital outflows each year for the next 2 years (added to capex). 2) Bank loans of INR9.4bn maturing in 2016/17 and INR1.6bn in 2018 get refinanced.

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Figure 71: DB estimates for 2016F, 2017F, 1H2018F cashflow of HY China property names under coverage with off-shore USD/SGD/HKD/CNH bonds

maturing in 2H16-2018 under our stressed scenario

RMB bn Estimated cash inflow Estimated cash outflow Net operating cashflow

Est Cash

inflow

Construction

cost

SG&A Interests Taxes Est Cash

outflow

2016 Agile 41.8 1.8 43.6 -4.5 -18.0 -3.3 -3.6 -8.0 -4.5 -41.9 1.7

2017 Agile 41.8 1.8 43.6 -3.0 -18.0 -3.3 -3.6 -8.0 -4.5 -40.4 3.2

2016 Aoyuan 14.8 0.3 15.1 -5.3 -6.0 -1.0 -1.3 -1.6 -2 -17.2 -2.1

2017 Aoyuan 14.8 0.5 15.3 -2.0 -6.0 -1.1 -1.4 -1.6 -2.5 -14.6 0.7

1H2018 Aoyuan 8.0 0.3 8.3 -0.8 -3.0 -0.5 -0.7 -0.9 -1.3 -7.2 1.1

2016 Central China 15.6 0.3 15.9 -3.5 -6.5 -1.3 -1.0 -2.4 -3.0 -17.7 -1.8

2017 Central China 15.6 0.4 16.0 -2.0 -5.0 -1.4 -1.2 -2.5 -3.2 -15.3 0.7

1H2018 Central China 7.8 0.2 8.0 -1.0 -2.5 -0.7 -0.6 -1.3 -1.6 -7.65 0.4

2016 CIFI 30.6 0.6 31.2 -10.0 -8.5 -1.4 -1.5 -3.0 -1.5 -25.9 5.3

2017 CIFI 30.6 0.8 31.4 -9.0 -9.0 -1.7 -2.0 -3.7 -2.0 -27.4 4.0

1H2018 CIFI 13.8 0.4 14.2 -4 -4.5 -1.0 -1.2 -1.7 -0.3 -12.7 1.47

2016 Evergrande 200.5 2.5 203.0 -60.0 -68.0 -18.0 -23.0 -16.0 -18.0 -203.0 0.0

2017 Evergrande 200.5 2.9 203.4 -45.0 -74.8 -21.6 -27.6 -18.4 -20.7 -208.1 -4.7

1H2018 Evergrande 90.2 1.4 91.7 -18.0 -35.0 -10.8 -13.8 -9.2 -10.4 -97.2 -5.5

2016 Future Land 38.0 0.6 38.6 -15 -16 -2.0 -1.3 -3.5 -0.3 -38.1 0.5

2017 Future Land 38.0 0.6 38.6 -13 -16 -2.5 -1.5 -4.2 -0.5 -37.7 0.9

2016 Greentown 30.0 1.2 31.2 -8 -14 -3.0 -2.4 -4.8 -1.0 -33.2 -2.0

2017 Greentown 30.0 1.5 31.5 -5 -14 -3.3 -2.6 -5.5 -1.0 -31.4 0.1

2016 KWG 19.9 0.7 20.6 -5 -8.2 -1.65 -1.6 -2.4 -0.9 -19.7 0.9

2017 KWG 19.9 0.8 20.7 -4 -9 -1.75 -1.6 -2.6 -1.1 -20.1 0.7

2016 Logan 22.2 0.4 22.6 -10.0 -8.5 -1.4 -1.5 -2.5 -1.6 -25.5 -2.9

2017 Logan 22.2 0.6 22.8 -7.0 -9.5 -1.6 -1.7 -3.2 -2.0 -25.0 -2.2

2016 Longfor 52.2 2.0 54.2 -18.0 -24.0 -3.6 -3.4 -8.0 -1.8 -58.8 -4.6

2017 Longfor 52.2 2.7 54.9 -10.0 -22.0 -3.6 -3.5 -8.5 -1.8 -49.5 5.4

2016 Powerlong 13.0 2.0 15.0 -2.5 -7 -2.0 -2.0 -2.0 -0.3 -15.8 -0.8

2017 Powerlong 13.0 2.7 15.7 -1.0 -7.5 -2.5 -2.4 -2.7 -0.4 -16.5 -0.8

1H2018 Powerlong 5.9 1.7 7.6 -0.5 -3.5 -1.2 -1.1 -1.5 -0.2 -8.0 -0.4

2016 Sunac 32.0 0.4 32.4 -10.0 -11.0 -2.5 -3.0 -6.0 -1.7 -34.2 -1.8

2017 Sunac 32.0 0.5 32.5 -6.5 -12.0 -2.7 -3.2 -6.6 -1.9 -32.9 -0.4

1H2018 Sunac 14.4 0.2 14.6 -3.0 -6.0 -1.4 -1.6 -3.3 -1.0 -16.2 -1.6

2016 Yanlord 26.2 0.8 27.0 -7 -8.5 -1.1 -1.5 -2.5 -0.3 -20.9 6.1

2017 Yanlord 26.2 0.8 27.0 -5 -9 -1.5 -2.0 -3.5 -0.4 -21.4 5.6

2016 Yuzhou 14.3 0.5 14.8 -7.0 -5.7 -5.1 -17.8 -3.0

2017 Yuzhou 14.3 0.6 14.9 -3.0 -6.0 -5.5 -14.5 0.4

1H2018 Yuzhou 6.4 0.3 6.7 -1.5 -3.0 -3.0 -7.5 -0.7

Est net operating

cashflowYear Company

Est cash

proceeds

from

contract sales

Our est.

rental income, prop

management fees,

other income, etc

Our est.

land

premium

payment

Dividends

and

others

Note: All figures are DB estimates except for Future Land and KWG's 2016 cash flow numbers (other than KWG's landbanking numbers), which are guidances from FY15 results. For 2017, we just uniformly assume flat YoY contract sales in this sensitivity analysis and for 1H18, we assume 45% of 2018's contract sales figure (assuming FY18 flat YoY). In this stressed scenario, we assume developers will buy less landbank in 2017 than in 2016; we assume companies already took care of 1H16 off-shore debt due. Source: Company, Deutsche Bank Estimates

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Figure 72: Summary of cash availability to cover offshore debt in 2H16-2018 under our stressed scenario

RMB bn Estimated

total cash

on hand as

of start-2016

Est net

operating CF

in 2016F

2H16 off-

shore syn

loans due

(converted to

RMB bn)

End-

2016F

cash

Est net

opearating

CF in

2017F

2017 off-

shore syn

loans due

(converted

to RMB bn)

2017 off-

shore

bonds

End-

2017E

cash

2018 off-

shore

bonds due

2018 off-shore

syndicated loans

(converted to

RMB)

1H18F net

operating

cashflow

Cash level after

accounting for

1H18 CF and

2018 off-shore

debt due

Forecasted

till

Enough

to cover?

Risks of high

funding gap

Agile 13.5 1.7 15.2 3.2 -2.0 -10.8 5.7 2017 Yes Low

Aoyuan 7.8 -2.1 0 5.7 0.7 0 0 6.5 -2.3 -0.7 1.1 3.5 2018 Yes Minimal

Central China 9.0 -1.8 7.2 0.7 0 0 7.9 -2.6 0 0.4 5.3 2018 Yes Minimal

CIFI 14.0 5.3 0 19.3 4.0 0 0 23.3 -3.3 -1.2 1.5 18.8 2018 Yes Minimal

Evergrande 158.0 0.0 -0.3 157.7 -4.7 0 0 153.0 -9.8 0 -5.5 143.3 2018 Yes Minimal

Future Land 7.8 0.5 8.3 0.9 0 -1.6 7.6 2017 Yes Minimal

Greentown 12.0 -2.0 -1.6 8.4 0.1 0 0 8.5 -3.6 (Feb) 2017 Yes Low

KWG 12.6 0.9 13.5 0.7 -1.7 -2.6 9.9 2017 Yes Minimal

Longfor 18.5 -4.6 -0.5 13.4 5.4 -1.5 0 17.3 -2.0 -1.8 13.5 2018 Yes Minimal

Logan 10.5 -2.9 7.6 -2.2 -0.7 -1.6 3.0 2017 Yes Low

Powerlong 6.0 -0.8 5.2 -0.8 0 -1.5 2.9 -1.3 0 -0.4 1.6 2018 Yes Low

Sunac 18.0 -1.8 16.2 -0.4 -1.5 0 14.3 -2.6 -1.9 -1.6 9.8 2018 Yes Minimal

Yanlord 15.0 6.1 21.1 5.6 -1.6 -1.9 23.2 -2.6 (Mar) 2017 Yes Minimal

Yuzhou 9.2 -3.0 6.2 0.4 0 0 6.6 -2.0 0 -0.7 4.7 2018 Yes Minimal Note: We use spot FX rates in this analysis and did not take into currency fluctuations. FX rates used are: 6.5 for USDCNY, 1.2 for CNYHKD, and 4.7 for SGDCNY. We include restricted cash in our total cash estimates. We assume companies already took care of 1H16 off-shore debt due. ** Assumptions used are: For 2017, we just uniformly assume flat YoY contract sales in this sensitivity analysis and for 1H18, we assume 45% of 2018's contract sales figure (assuming FY18 flat YoY). In this stressed scenario, we assume developers will buy less landbank in 2017 than in 2016. *Longfor's syndicated loans are our assumptions. We have total syndicated loans amounts, but no exact maturities. We only put syndication loans’ maturity, without accounting for amortization for developers. All figures are DB estimates except for Future Land and KWG's 2016 cash flow numbers (other than KWG's landbanking numbers), which are guidances from FY15 results. Source: Company, Deutsche Bank Estimates

24 February 2016

Credit


Changes in recommendations

Figure 73: Recommendation changes

Bond Issue & Size

(USD mm) From To

Entry

price/

G-spd Price

YTM

(%)

G-

spd

(bp) Rationa le & Risks

Sovereigns

Philippines 3.95%

2040 (2000)

Cred itSell Cred itHo ld 97bp 107.4 3.5 114

Philippines 5% 2037

(1500)

Cred itSell Cred itHo ld 110bp 121.9 3.5 129

Financia ls

China Orient AM 5%

2024 (400)

Cred itHo ld Cred itBuy N/A 102.4 4.7 301 China Orient AMC which used to trade ~30bps inside of Cinda AMC 24s at the beginning of the year is

now trading flat. The spread widening is mainly on the back of investor fears that the acquisition of

Dalian Bank will be negative for the capital strength of Orient AMC. However it should be noted that

Orient's equity / assets has improved to 17.1% at the end of 1H15 from 12.6% in Dec-14. Last month,

Orient AMC started the process to establish itself as a JSC and eventually IPO the company in 2017.

This may result in ORIEAS bonds being excluded from EMBIG index, which in our view could present a

buying opportunity for investors. Key risks: spike in domestic corporate default rates, worsening of

RMB liquidity, failure by the recently announced government stimulus to yield tangible results.

OCBC 4.25% 24 sub

(1000)

Cred itHo ld Cred itBuy N/A 104.6 3.6 197 OCBC's 2024 B3T2 bond is one of the most prominent underperformers in the subordinated Asian

bonds space YTD, incl vs. IG-rated peers in DM. It used to trade ~25 bps wider vs. senior Bank of China

'25 at the beginning of the year which we believe was a fair differential; however it has now widened to

~75bps. Despite having a stable business profile and low regulatory uncertainty, its yield movement has

mirrored the ~60 bps widening of BCHINA '24 B3T2 bonds which we believe is a buying opportunity.

Key risks: material deceleration of Singapore's or China's economy, sharp negative correction of

property prices, failure to improve capital ratios.

Bank of China 5.0%

2024 sub (3000)

Cred itHo ld Cred itBuy N/A 104.1 4.4 276 Bank of China 2024 bond has underperformed the most in the Chinese B3T2 space with its spread

differential relative to Huarong AMC '25 reducing from ~60 bps at the beginning of the year to ~20 bps.

Also the bond is trading at its widest level in the last one year and its spreads have widened ~85 bps

yoy even though its financial performance continues to remain stable. BCHINA 24 used to trade 50bps

inside of ICBC 25s at the beginning of the year and now trades marginally wider than it. We believe the

bond spread should compress by at least 30 bps in the near future. Risks: derailment of banking

reforms, spike in domestic corporate defaults, faster than expected NPLs growth, negative ratings

action. China Construction

Bank Asia 4.25% 2024

(750) sub

Cred itHo ld Cred itBuy N/A 101.7 3.9 275 CCB Asia's B3T2 bonds have been affected by BEA bonds underperformance and its spread has

widened ~35 bps in the past 2 weeks alone. The bond which is used to trade ~15bps inside of weaker

Dah Sing Bank now trades wider to it by ~20 bps. CCB Asia '24c19 bonds have traded flat since the

beginning of the year and their underperformance stands in contrast to Citic Int'l 24c19 bonds which

have tightened by ~60 bps in the same period. Also CCB Asia's strong backing of a large established

Mainland parent should be reflected in its spreads compared to the other weaker Hong Kong based

peers. Key risks: slower than expected GDP growth in China, material worsening in HK property prices,

continued suppression of NIM coupled with spike in loan delinquencies.

Axis Bank 3.25% '2020 Cred itSell Cred itHo ld 149bp 101.2 2.9 182 Axis Bank has better capitalization (T1 CAR of 10.8%) and lower impaired loans (Gross NPL of 1.8%,

Net NPL of 0.8%) compared to other weaker state-owned peers and even private banks such as ICICI

Bank. The main reason for this is its low exposure to stressed sectors and high exposure to retail

lending. This should help the bank report stable and growing earnings when other banks struggle to

avoid losses and maintain adequate capitalization. Hence we believe further downside in spreads of

Axis Bank bonds is limited. Key risks: materially stronger economic data from India, sovereign ratings

upgrade, sharp depreciation of INR, sizeable new issuance.

CITIC Bank Int'l 6%

2024 (300) sub

Cred itBuy Cred itHo ld 290bp 108.5 4.7 263 CINDBK yield has dropped by ~40 bps since the beginning of the year. We close the trade based on

relative valuation. We noted the underperformance of bonds of the some of the well placed Hong Kong

banks vs. CINDBK, which we do not think is warranted. Further spread compression is limited as it is

now trading in-line with Bank of East Asia '24 bond - a stronger peer in the Hong Kong banking space.

Risks: slower than expected GDP growth in China, material worsening in HK property prices, continued

suppression of NIM coupled with spike in loan delinquencies.

Investment Grade Corporates

Beijing Enterprises

1.435% 2020

(EUR500)

Cred itBuy Cred itHo ld 200bp 98.3 1.9 229 Whilst we are comfortable with the downstream gas utilities sector in China but are worried about a

potential credit rating downgrade following the proposed EUR1.4bn acquisition of European energy

from waste company. The funding plan is still uncertain but it highlights Beijing Enterprises acquisitive

appetite away from its core Chinese market. We downgrade the EUR bonds to Hold. Key downside

risks include adverse gas tariff policies, reduced indirect ownership from Beijing SASAC or a significant

debt-funded acquisition. Key upside risks: Equity raising to fund its latest acquisition.

China Property HY

Central China 8%

2020 (USD200mn)

Cred itHo ld Cred itBuy na 95.25 9.5 847 We upgrade Central China 2020C17 from CreditHold to CreditBuy as we believe valuations seem to have

factored in a potential downgrade in credit rating and valuations look attractive, even against some solid

single B names. Its 2020s provides close to 200bp pick-up against Yuzhou 2019s new in Z-spreads.

Although its 2015 EBITDA margin is likely to be weak given considerable discounts in Tier-3 and 4 cities,

we believe its EBITDA margin would improve YoY in 2016 with higher bookings in Zhengzhou.

Downside risks include: more than one credit rating downgrade, aggressive expansion and/or higher-

than-expected JCE debt and exit of CapitaLand as a shareholder.

We remain constructive on Philippines, despite its slower pace of GDP expansion and the upcoming

Presidential elections in the country. We close these two trades on valuation grounds driven by the fact

that the spread widening in PHILIP long end has already reached 12M highs and has limited further

upside potential, even despite PHILIP's curve remaining inverted. We'd rather pick-up additional spread

by staying Long 15Y area of the curve. Risks: material strengthening of UST yields, continuous

outperformance of Asia IG vs. EM, material weakness in oil price, sovereign ratings upgrade.

Source: Deutsche Bank, Note: Entry price is cash price for HY names and G-spd for IG names

24 February 2016

Credit


Top picks and pans

Figure 74: Asia sovereign credits Top trade ideas

Bond Issue & Size

(USD mm) Price

YTM

(%)

G-spd

(bp) Rationale & Risks

Buy CHINA 5Y CDS n.a. n.a. 135 China is still clearly not out of the woods in terms of its economic performance and the direction of the fiscal policy would

remain towards more easing. The pressure points remain unchanged: RMB & local bond markets valuations, local rates’

response to FED hikes, USD supply from China is relatively easier to short, should fund outflows re-occur China IG bonds

would be most vulnerable here due to their superior liquidity and still light positioning by Asian investors in such even

more vulnerable risk assets as Indo and MALAY. We believe it makes sense to hedge this risk via China 5Y CDS. Main

risks: a potential positive swift revival of the credit markets in Asia against the global rates volatility and concerns over Asia

funds outflows; visible recovery in global commodity prices.

Buy Philippines

7.75% 2031 (2069)

148.5 3.5 156

Buy PGN 5.125%

2024 (1350)

82.3 7.1 460

Buy Pertamina 4.3%

2023 (1325)

95.4 5.1 351

Buy Pertamina 6%

2042 (1250)

85.3 7.3 481

Buy Pertamina

5.625% 2043 (1625)

82.3 7.1 460

Buy PLN 5.5% 2021

(1000)

106.3 4.3 290

Buy Pelindo II 4.25%

2025 (1100)

92.5 5.3 359

Buy Indonesia 6.75%

2044 (2000)

111.3 5.9 339

Buy Indonesia

5.375% 2045 (2000)

95.5 5.4 286

Buy Indonesia 5.95%

2046 (1250)

104.4 5.6 302

Sel l Sri Lanka 5.875%

2022 (1000)

87.8 8.4 692

Sel l Sri Lanka 6.125%

2025 (650)

84.5 8.6 687

The past two months witnessed a considerable rebound in investor sentiment towards Indonesia mostly driven by light

client positioning and the preceding sell-off in wider EM. This has not, however, yet lead to a material duration extension by

investors and many quasis and the Sovereign curve itself lagged the profound flattening that has been observed for such

peers as Brazil and South Africa YTD. Despite many Indonesia’s vulnerabilities (e.g. high foreign ownership of local

government bonds, limited FX reserves, rising budget deficit), fundamentally, the country has much stronger government

in place to turn economy around and it is making steps in a right direction. The most recent rally has brought valuations of

many sovereign and quasi-sovereign bonds to the point where a further pull tighter should be driven by underlying credits’

fundamental idiosyncrasies, which in our view lack immediate strong positive catalysts. We note however that Pertamina's

and Sovereign curves remain exceptionally steep despite stabilising fundamentals for both. We think investors have been

wary of a potential new bond supply form Pertamina, which we believe the company can backload this year due to the

flexibility of its capex budget. Thus we maintain our Buy call on Pertamina's bonds intact. In the rest of Indonesia risk

complex we highlight INDON long-end and Pelindo II 10Y bonds as most attractive trades at this stage. Risks to our

recommendations: Upside – sovereign ratings upgrade, appreciation of IDR, material improvement in GDP and inflation

data, worsening geopolitics in wider EM. Downside – further drop in commodity prices, aggressive new supply by quasis,

Fed-related sentiment deterioration, abuse of energy sector’s budget for the benefit of the sovereign.

We welcome the recent weakness in SRILAN curve. At the same time we note that the 5Y-10Y slope in SRILAN still

remains too flat, which in our view makes its 7Y-10Y part look increasingly vulnerable for two main reasons: (i) the peer

bond spreads in wider EM are undergoing a material correction ; (ii) the positive catalysts for Sri Lanka seem to have all

played out and Sri Lankan economy find itself in the cycle of worsening fiscal, debt and FX metrics. Given the current

weakness of credit markets, we believe it pays to stay cautious and reduce the risk in the long-end of SRILAN curve. The

news on the potential agreement with IMF, in our view, could bring pressure on the current President and his cabinet due

to the bitter taste the similar precedent had left in the past. Key risks: revision of the budget to be less expansionary and

more realistic on the revenue streams, replacement of more costly debt, material u/p of bonds while EM peer assets rally.

We remain constructive on Philippines, despite its slower pace of GDP expansion and the upcoming Presidential elections

in the country. We recognise the fact that the spread widening in PHILIP long end has already reached 12M highs and has

lilmited further upside potential, even despite PHILIP's curve remaining inverted. We'd rather pick-up additional spread by

staying Long 15Y area of the curve. Risks: material strengthening of UST yields, continuous outperformance of Asia IG vs.

EM, material weakness in oil price, sovereign ratings upgrade.

Source: Deutsche Bank, Bloomberg Finance LP

24 February 2016

Credit


Figure 75: Asia Financials Top Buys

Bond Issue & Size

(USD mm) Price

YTW

(%)

G-spd

(bp)

Cal l

Date

Cal l

Price Rationale & Risks

Woori Bank 4.75%

2024 (1000) sub

103.2 4.3 251 N/A N/A

Woori Bank 6.208%

2037 (1000) sub

103.0 3.6 216 May-17 100.0

Bank of East Asia

5.5% perp c2020

(650) sub

91.5 7.7 645 Dec-20 100.0

Bank of East Asia

4.25% 2024 (500)

sub

98.6 4.7 365 Nov-19 100.0

Bank of Commn's

3.375% 2019 (500)

102.4 2.6 153 N/A N/A

Bank of Commn's

3.75% 2023 (500)

102.3 3.4 174 N/A N/A

BCHINA 5% 2024

(3000) sub

103.4 4.5 276 N/A N/A

Bank of Commn's

4.5% 2024 (1200) sub

102.2 3.8 267 Oct-19 100.0

China Construction

Bank 3.875% 2025

(2000) sub

99.5 4.0 280 May-20 100.0

CITIC Bank Int'l

3.785% 2022 (300)

sub

99.4 4.2 336 Sep-17 100.0

China Construction

Bank Asia 4.25%

2024 (750) sub

101.3 3.8 274 Aug-19 100.0 CCB Asia's B3T2 bonds have been affected by BEA bonds underperformance and its spread has widened

~35 bps in the past 2 weeks alone. The bond which is used to trade ~15bps inside of weaker Dah Sing

Bank now trades wider to it by ~20 bps. CCB Asia '24c19 bonds have traded flat since the beginning of the

year and their underperformance stands in contrast to Citic Int'l 24c19 bonds which have tightened by ~60

bps in the same period. Key risks: slower than expected GDP growth in China, material worsening in HK

property prices, continued suppression of NIM coupled with spike in loan delinquencies.

OCBC 4.25% 2024

sub (1000)

103.5 3.8 197 N/A N/A This bond is one of the most prominent underperformers in the subordinated Asian bonds space YTD, incl

vs. IG-rated peers in DM. It used to trade ~25 bps wider vs. senior Bank of China '25 at the beginning of the

year which we believe was a fair differential; however it has now widened to ~75bps. Despite having a

stable business profile and low regulatory uncertainty, its yield movement has mirrored the ~60 bps

widening of BCHINA '24 B3T2 bonds which we believe is a buying opportunity. Key risks: material

deceleration of Singapore's or China's economy, sharp negative correction of property prices, failure to

improve capital ratios. China Orient AM 5%

2024 (400)

101.7 4.8 301 N/A N/A

Huarong AM 4.5%

2020 (1200)

103.8 3.4 228 N/A N/A

Huarong AM 5.5%

2025 (1400)

105.5 4.7 296 N/A N/A

Cinda AM 5.625%

2024 (500)

105.8 4.8 304 N/A N/A

Cinda AM 4.25%

2025 (1700)

96.6 4.7 294 N/A N/A

Sell EximBank of India

5Y CDS

186 N/A N/A Eximbank’s entire curve displayed a considerable weakness ever since the new EXIMBK 21s was

announced in early Jan. In the India-only context, Eximbank’s bond spreads do look optically attractive given

the post-new issue weakness mentioned above (see charts below). However, considering our negative

view on 5-10Y part of Indian banks’ curves we believe that the upside for Eximbank’s paper is limited. CDS

displays greater degree of resilience and being the closest proxy to India sovereign, has u/p such high-beta

peers and Indonesia YTD. Risks: lack of political and economic reforms, spike in corporate defaults, material

primary supply, risk aversion by EM investors towards India.

Bank of East Asia's B3T2 '24 bond spread has underperformed similar B3T2 paper in HK by ~25 bps since

the beginning of Oct-15. It's AT1 Perp has also materially underperformed since its issuance in Dec-15 and

stands out as one of the cheapest AT1 in the Asian space. Although BNKEA has the largest exposure of

loans to Mainland compared to other HK banks, the risk is mitigated by its strong retail presence in HK and a

superior business profile. BNKEA has the strongest capital ratios amongst Asian peers and they improved

further following the AT1 issue. HKMA's decision to include BNKEA to the list of HK's D-SIBs underlines its

systemic importance vs. subsidiaries of Chinese banks such as ICBC, CCB and CITIC. Risks: slower than

expected GDP growth in China, material worsening in HK property prices, continued suppression of NIM

coupled with spike in loan delinquencies.

China CITIC International Bank has demonstrated a successful turnaround story over the past couple of

years. Although it relies on Mainland China in loan growth and overall revenue generation, its connection to

CNCB Bank in China provides additional cross selling and risk mitigating opportunities. We consider Basel-II

T2 notes issued by CINDBK amongst most attractive. We think that the bank is likely to follow BNKEA

example and exchange these into a longer-dated BIII instrument in 2016. Downside risks: slower than

expected GDP growth in China, material worsening in HK property prices, continued suppression of NIM

coupled with spike in NPLs.

Basel III T2 bonds issued by Chinese banks are featuring amongst the worst performing in Asia credit space

vs. the senior and even AT1 paper (lasts couple of weeks) . We believe that given the resilience in capital

ratios over the past two quarters and the expectation of slower loan growth this year vs. 2015 the banks

would be in a relatively lesser need vs. its peers in Asia to raise hybrid capital. Recently adopted TLAC rules

may force some banks to raise sub-debt in 2016, but BOCOM is not a part of that regulation and CCB has the

smallest shortfall of capital to cover. Bank of China 2024 bond has underperformed the most in the Chinese

B3T2 space with its sread differential relative to Huarong AMC '25 reducing from ~60 bps at the beginning

of the year to ~20 bps. BIII-to-BII and -to senior spread multiples look considerably more attractive vs. peers

in APAC too. Downside risks: derailment of banking reforms, spike in domestic corporate defaults, faster

than expected NPLs growth, failure or deposit run of a mid-sized bank, negative ratings action.

Despite visible spread widening of late, WOORIB’s sub debt continues to be attractive vs. peers from

Japan and Singapore. Woori's fundamental improvement is lagging behind other commercial banks in

Korea, but is on track and is yet to be priced in (e.g. recognition of legacy loans as NPLs and conservative

provisioning) and we expect the benefits of the recent reverse takeover of its holding company to bear fruit

too. AT1 bonds recently issued by the bank boost the recovery prospects of both existing T2 bonds. Key

risks: double-dip in corporate sector restructuring, Woori's privatisation failure, further slump in consumer

demand.

We believe that the recent u/p of these bonds vs. China IG peers is more down to investors chasing paper

shorter than 5Y in duration, thus creating crowded positions. The policy easing in China cannot be

underestimated, which would ultimately provide better liquidity conditions and availability of credit on the

domestic market, indirectly mitigating pressure on asset quality. BOCOM ranks very close to its larger

domestic peers in credit ratios, but supersedes those in NIM, liquid assets and T1 CAR. BOCOM also has

one of the smallest exposures to construction, real estate and mortgages segments. Downside risks:

derailment of banking reforms, spike in domestic corporate defaults, faster than expected NPLs growth,

negative ratings action, inability to raise equity or hybrid capital in mid-term.

We believe that the value still remains in the longer dated bonds of AMCs and that they still trade at a

meaningful distance (50-60bp) from the LTM tights yield-wise. AMCs are the net beneficiaries of Chinese

policy easing and the process of the balance sheets clean up by banks. China AMC’s display overall stable

credit profiles (government ownership, solid capitalization, sufficient liquidity and ongoing business

diversification). China Orient AMC which used to trade ~30bps inside of Cinda AMC 24s at the beginning of

the year is now trading flat. The spread widening is mainly on the back of investor fears that the acquisition

of Dalian Bank will be negative for the capital strength of Orient AMC. However it should be noted that

Orient's equity / assets has improved to 17.1% at the end of 1H15 from 12.6% in Dec-14. We believe that

the bonds of AMCs would recover faster within the context of China's financial paper across the curve. Key

risks: spike in domestic corporate default rates, worsening of RMB liquidity, failure by the recently

announced government stimulus to yield tangible results.


24 February 2016

Credit


Figure 76: Asia Financials Top Sells

Bond Issue Price

YTW

(%)

G-spd

(bp)

Cal l

Date

Cal l


China Taiping 5.45%

perp ‘c19

103.0 4.5 352 Sep-19 100.0 We are cautious on China Lifers because of their direct (albeit limited) reliance on the domestic equity

market investments in generating a part of their operating profit. We consider China Taiping’s perp to be

more susceptible to the market’s volatility and the company’s credit metrics (e.g. higher financial leverage)

to have lesser cushion should the underlying profitability indeed suffer. The bonds mid-YTC vs. CHLIIN

‘75c20 have corrected and is now flat although the latter bond is priced ~6 points lower and rated two

notches higher. We see more downside risk for CTIH bonds in the near term. Upside risks: Considerable

rebound in China equity markets, material improvement in China’s macro indicators, weaker than expected

market share erosion.Bank of India 3.125%

'2020

110.4 3.9 269 N/A N/A

Bank of Baroda

4.875% '19

105.7 3.1 212 N/A N/A

ICICI 4.8% '2019 105.6 3.0 203 N/A N/A

ICICI 5.75% '20 111.0 3.2 201 N/A N/A

ICICI 3.125% '20 99.8 3.2 202 N/A N/A

State Bank of India

3.622% '19

102.3 2.8 190 N/A N/A

State Bank of India

4.875% '24

107.1 3.9 224 N/A N/A

Syndicate Bank

3.875% '19

101.5 3.5 241 N/A N/A

Union Bank of India

4.5% '19

104.6 3.2 213 N/A N/A

Bank of China

3.125% 2019 (500)

102.8 2.1 123 N/A N/A

ICBC 3.231% 2019

(1000)

103.0 2.4 135 N/A N/A

Bank of China 6.75%

Perp (6400) pref share

104.7 5.3 271 Oct-19 100.0

ICBC 6% Perp (2940)

pref share

101.0 5.7 456 Dec-19 100.0

CITIC Securities 3.5%

'2019 (650)

100.4 3.4 232 N/A N/A

Haitong Securities

3.5% 2020 (670)

100.2 3.4 233 N/A N/A

We remain negative on the outlook for the drivers for these bonds' valuations. We also maintain our

cautious outlook on their fundamental trends which is mainly based on: increased policy risks for the sector,

very aggressive growth targets, highly fragmented nature of the sector which diminishes the probability of

the implied government support vs. that for AMCs and commercial banks. Despite trading wider in absolute

spread, Chinese broker bonds have outperformed those of banks, AMCs and also some comparable BBB-

rated corporates in China (e.g. Baosteel). Key risks: lack of supply from the sector, material improvement in

China’s macro data, more aggressive monetary policy easing in China.

BCHINA '19 and ICBCAS '19 spreads have outperformed the most in the similar dated senior banking peers

like BOCOM '19 and AMCs and within their own curves too. We believe their spreads could move ~25bps

wider from here to be closer to its FV. Also we believe both the banks are amongst the most strategic

players in the Chinese financial system and Government support should be forthcoming in an event of a

crisis. Also the PRC Government will be careful to pass on the impact of moderating economic growth to

the banking system and avoid any sudden and large surge in delinquencies. Upside Risks: China posting a

stronger economic growth than the expected moderating trend, China banks report stronger asset quality

and capitalization trends, PRC Government making large cash infusion in banks to shore up banks'

capitalisation.

We welcome the correction in the entire Indian banking bond cluster which was long overdue. We

continue to believe though that the spreads of even the fundamentally weaker entities in India are still

trading too tight vs. better rated entities in EM and Asia alike and the chances for a sovereign upgrade this

year for India sovereign are slim. We expect Indian banks' fundamentals to continue diverging from the

macro positivity in the country in the near term. Many PSU banks “de-facto” run negative equity as the

combined level of net NPLs and restructured loans is larger than their CET1 capital – a reality that investors

are becoming increasingly complacent with. Indian banks lack positive catalysts to drive spreads tighter vs.

peers, which was also manifested through the recent round of quite weak results. The strong technicals

underpinned by Middle East investors are also under increasing pressure due to the sell-off of the regional

bons in MENA. Upside risks: materially stronger economic data from India, sovereign ratings upgrade, sharp

appreciation of INR, sizeable capital injection by the state, prolonged absence of new issuance.

These two perpetual instruments have had a very good performance since the time of issue and have been

particularly resilient during the market weakness. In our view, the current valuations have put them outside

of the fundamental context as both perps are trading too rich even to their better rated IG European

counterparts (e.g. HSBC and Nordea). Although we remain constructive on China banks, we see only few

remaining value accredit opportunities in their senior bond space and those of T2 format. We believe that

both notes should be yielding 50bp more on average. Key risks: materially better than expected macro

performance in China, visible improvement in property prices, rally in European CoCo risk assets.


24 February 2016

Credit


Figure 77: Asia Investment Grade Top Buys

Bond Issue & Size (USD

mm) Price YTM (%)

G-spd


Lenovo 4.7% 2019 (1500) 104.1 3.3 239 Management delivered on its cost out strategy in Q316 and we are starting to see some tangible improvements

in credit. Key ratios saw sequential improvement in Q3 despite significant macro/sector headwinds. We

appreciate concerns on a structurally declining PC market but Lenovo remains a market leader in the space and

we think is well positioned from a credit perspective. Mobile achieved operational break-even for the first time in

Q3 although helped by a better cost structure. Its Enterprise segment is promising although we are mindful of

potential competitive pressures in this area. Overall we continue to like the credit from a turnaround angle,

management’s execution track record, low near term refinancing, and its market position in key segments. The

ongoing focus on cost will remain a key driver for credit. We believe Lenovo offers credit investors a relatively

defensive exposure in a non-commodity related sector in Asia. We think bond valuations look attractive for one

that has around 3 years left to go before maturity. Key downside risks: Unexpected large scale M&A, delays in

turnaround, margin compression as competition intensifies.

China Railway Construction

3.95% 2049 (800)

100.5 3.8 283 We expect leverage improvement in FY15 but also a slight decline in backlog as less available projects in the

market due to slowdown of FAI growth. We think the outlook is stable in the near term due to 1) Central SASAC's

61% ownership, policy support (railway spend budget), 2) established record of good operating performance, 3)

prudent strategy in carrying out overseas projects and 4) longer term benefits from China's OBOR strategy. Our

view on the perpetuals also reflect our preference for stronger structured perps issued by a strong underlying

credit. China Railway Construction perps are senior ranked securities which offer a 500bp step up on its first call

date in April 2019. We think the perps offer better value than the senior 2023 bonds for a carry play. Downside

risks: reduced government support.

Chalco 6.625% 2049 (350) 105.0 4.6 375 We like the perps for mostly its strong structural features as well as valuation for a shorter-dated perps. The perps

offer investors a senior ranking security with a punitive 500bp step-up upon extension. Given the declining

onshore funding costs, we expect the perps to be called at its first call date Oct 2018. The perps offer investors a

good short-dated carry, in our view. Fundamentally, Chalco's credit metrics are under pressure given the

challenging sector outlook but we think downgrade risk is still manageable given S&P's downgrade trigger is

interest coverage based and onshore funding costs are declining which should offset some EBITDA pressure.

Key downside risks: Downward pressure in commodity prices resulting in margin pressure, signs of reduced

state support, large debt-funded M&A.

Greenland Group 5.875%

24 (600)

98.4 6.1 449 We were of the view that the company has bought themselves some time with rating agencies following a) its

proposed A-share placement, and b) its plan to reduce exposure to its loss-making Energy businesses (eg

deconsolidating Yunfung). This view is broadly unchanged but we also feel the weakness/volatility in China’s

equity markets in January raises some uncertainties around the proposed share placement. Downgrade risk is

perhaps higher today versus a month back. We maintain our Buy on GRNLGR’24 (96.97, 6.26%, G+443bp) as we

believe investors are adequately compensated. The bonds are trading at fairly similar yields to strong BB rated

names so a downgrade is partially priced in. Given the superior bond structure (the only cross-border guarantee

bond in the China IG property space), SOE background/linkage with the Shanghai government, we believe

Greenland should trade tighter than Wanda Commercial Properties. Key downside risks: Less support from

Shanghai SASAC, weaker than expected sales performance and aggressive expansion.

Franshion 5.75% 2019 (500) 105.0 4.0 308 We expect Franshion to report a stronger 2H FY15 result given the skew in delivery/settlement schedule in 1H vs

2H. 2H should account for about 70% of FY revenue. Franshion is a quality operator with high exposure in T1/2

cities, a relatively high degree of recurring income stream, and below (sector) average gearing. FRANSH’19

valuations still look attractive at these levels against similarly rated China IG comps. The recent news regarding its

Chairrman investigation has no immediate impact on the company's credit. We think China property sector

fundamentals will remain well supported by favourable government policies even though the outlook for 2H will

probably be more challenging than 1H. Downside risks: Sharp sector downturn in 2H15, signs of weaker support

from Sinochem, or aggressive debt funded expansion strategy.

Noble 3.625% 2018 (400) 54.0 37.5 3,673 Our view was largely underpinned by the improved liquidity buffer post the announced Agri sale back in

December last year. The bonds have underperformed in very thin markets along with the global sell-off in

commodity credits but we believe the idiosyncratic story is gradually improving (positive cash flows, debt

reduction,. conservative/timely mark-to-market, focus on liquidity and balance sheet). We expect the April/May

loan refinancing to go through albeit perhaps at a smaller size but would pay close attention to the key terms

(secured v unsecured). We have prefer NOBLSP'18 ($50, 40% YTM) 2018s over the 2020s ($47, 30% YTM,

CreditHold) given the inverted curve. Downside risk: a further leg down in commodity markets, material

structural subordination. Upside risk: Further asset sales/strategic investor, a successful bank refinancing in

April/May.


24 February 2016

Credit


Figure 78: Asia Investment Grade Top Buys (Cont’d)


mm) Price YTM (%)

G-spd


Hang Lung Properties

4.75% 2022 (500)

105.9 3.7 227 We still find Hang Lung Properties as one of the more attractive names within the HK property space.

Performance of its leasing portfolio in 2015 is mixed; Shanghai assets continued to delivere good results with

stable margin, positive rental reversion of its shopping malls and high occupancy rate (~97%), which is partly

offset by the soft result of Forum 66 in Shenyang and Center 66 in Wuxi. Property sales and operating profit were

down 88% yoy and 89% yoy respectively mainly due to their small inventory and effort to maximize the return.

Hang Lung Properties is better positioned in a rising cap rate environment based on our calculation. The 2022

bonds are unrated but valuations are currently implying a weak BBB rating. We see Hang Lung Properties as a

solid BBB/weak single A credit. We like the company’s concservative management style, substantial recurring

income, a strong balance sheet (nearly net cash), a good mix of commercial property ownership, and a broadly

balanced geographic exposure between Hong Kong and China. Risks: a significant downturn in China and HK

retail, a more aggressive expansion strategy in China resulting in a weaker balance sheet

Oil & Natural Gas Corp of

India 2.75% 2021 (EUR525)

100.8 2.6 291 Despite the tumbling oil price, ONGC (along with Reliance) remains amongst the strongest credits in India on a

standalone basis. ONGC's standalone rating without government support is low single A / high BBB, albiet with

negative watch by Moody's. Even if oil goes to USD20 a barrel, ONGC's final rating should stay IG. Key downside

risks are M&A as the company looks to acquire assets abroad (though we expect this to be in the form of stake

acquisitions in large oil and gas fields) and possible bond supply to fund the same.

Reliance Industries 4.125%

2025 (1000)

100.0 4.1 247 RIL's fundamental strength is almost unquestionable. It should only improve further as the capex program draws

to a close and contribution from new projects start kicking in. We do acknowledge that valuations are not

particularly attractive, it's trading 20bps tighter than ONGC. However, this is not a year we want to be too greedy,

instead prefer sticking to quality. Separately, RIL 25s vs 20s curve is one of the steepest in the Asia IG space at

~60bp. Also, we treat this as a liquid way of playing our relatively positive view on India macro. Key downside

risks include decline in GRMs, lack of success with RJIO, new issues, etc

Bharti Airtel 5.125% 2023

(1500)

105.4 4.2 272 Although Reliance Industries has underperformed and Bharti 23s are now trading 25-30bps wider, we maintain

our Buy. End of the day, Bharti is a solid BBB telco for us with a commitment to deleveraging and maintaining its

IG rating, and has amongst the best disclosures in our universe with SingTel and Qatar's minority ownership. Key

downside risks are weak technicals, participation in spectrum auctions and possible sector disruption from

RJIO's entry. Source: Deutsche Bank, Bloomberg Finance LP

Figure 79: Asia Investment Grade Top Sells


mm) Price YTM (%)

G-spd


Swire 4.5% 2023 (700) 108.2 3.3 169 Our view is primarily underpinned by valuations and macro concerns around HK retail and residential property

trends. Credit fundamentals for Swire remain stable where bulk of its income is derived from quality recurring

rental streams from Hong Kong. Technicals have been supportive of HK Corps for quite some time but we think

valuations are tight versus other single-A rated HK corps. Retail trends are weakening in Hong Kong not helped by

a high HKD and secondary residential property market is also cooling off. Unlike one of its peers in Hong Kong,

Swire also has a high degree of asset concentration in the region and also has less diversified income streams.

Upside risk to recommendation: a sharp recovery in HK retail, a beta rally in Asia IG credit.

Li & Fung 5.25% 2020 (750) 109.3 2.9 179 We see Li & Fung as a potential candidate for negative rating action. Our view is underpinned by potential margin

pressure resulting from the challenging outlook for global trade/retail. Earnings visibility do not appear to be strong

to us in the near term. Li & Fung has promised slower acquisition activities which should support FCF generation,

but we think shareholders will be the prime beneficiary of this strategy as opposed to creditors. We believe Li &

Fung’s BBB+/Baa1 rating will be under pressure if the global retail outlook fails to recover meaningfully in the near

term. We think valuations still look rich versus other HK corps. Upside risks: A material turnaround in global trade

outlook, a recovery in US retail market.

Kerry Properties 5.875%

2021 (300)

110.3 3.7 239 Kerry Properties is a well established real estate developer/operator based in Hong Kong. The company has

development exposure in both China and HK and as such we expect cash flows to remain lumpy for some time

(even though we understand company is trying to build up its recurring income base). The 2021 bonds looks

expensive to us comparing to other China BBB names such as Franshion’19. Both are weak BBB credits but

Franshion'19 has Central SOE background and a shorter duration. The trade is consistent with our cautious view

on HK property market and our preference for large quality China IG credits. Upside risks: A sharp improvement in

HK property market sentiment, creditor-friendly activity (eg equity raise, asset sales).

China Oilfield Services Ltd

3.5% 2020 (500)

101.6 3.1 195 China Oilfield Services Ltd (COSL) is 50.5% owned by CNOOC Group with a high customer customer

concentration risk (CNOOC Ltd contributes ~64% of revenues in 1H15). We believe COSL's fundamentals will

remain under pressure as long as low crude oil prices pressure E&P firms to reduce capex. Moody's recently

downgrade to Baa1 is a reflection of that. Whilst COSL'25 has widened out a fair bit, we believe the G-spread gap

between COSL'20 and CNOOC'20 at ~15bp is too tight given the current brent level and outlook. Difficult to find a

direct comp for COSL but Baosteel'20 bond valuations appear to offer better downside cushion for a Baa1 peer

operating in a challenging cyclical sector. Key upside risk: a sharp rally in Brent, a capital raising shoring up

COSL's balance sheet.


24 February 2016

Credit


Figure 80: Asia High Yield Top-Buys (ex-China property)

Bond Issue & Size

(USD mm)

Offer

Price

YTM

(%)

Z-spd

(bp)

Cal l

Date

Cal l


China Oil & Gas 5.25%

2018 (350)

97.8 6.4 556 Apr-16 102.6 We like relatively stable downstream piped city gas distribution business which is well supported by long

concession agreements and increased support of clean energy. Recent city-gas price decrease will help to

offset pending pass-through in Qingdao, which has been drag on company’s performance. Canadian

upstream business could remain weak in current oil price environment but do not expect any support from

China business at this stage. Bonds underperformed earlier in the year on the back of oil price volatility as

well as 2H15 profit warning. However, we expect financial profile to improve in 2016 and maintain our Buy

on 2018s. Key downside risks include any large upstream M&A, potential support to Canadian operation

and sharp RMB depreciation.

Parkson 4.5% 2018

(500)

89.1 10.2 934 NA NA We note that fundamental profile may not improve in the near term given overall sector challenges.

However, it is essentially a 2yr bond and trades much wider than longer dated Golden Eagle 23s as well as

Maoye 17s. Capex may remain high on transformation to lifestyle concept but Qingdao mall completion will

provide much needed relief. We also take comfort from Parkson’s stronger balance sheet and cash buffer

and do believe that company has the ability to refinance even if USD bond market remains closed. Key

downside risks include sharp decline is SSSG or margin, large acquisition/investment, aggressive equity

buyback or any other share holder friendly action and negative rating actions.

Yingde 8.125% 2018

(424)

76.9 22.2 2,135 Apr-16 104.1 Yingde’s 1H15 performances was better than expected with improved cash flow generation from better

working capital management and capex discipline. Recent fund raising has also helped in alleviating liquidity

concerns. We also take comfort from positive resolution to SOE customer dispute though recovery may be

staggered. Overall, we think Yingde with MTOP contracts and diversified customer base seems better way

to play steel sector recovery, in our view. We maintain our Buy on 2018s. Key downside risks include

further steel sector deterioration, worsening of receivable profile, aggressive capex and negative rating

actions.Stats ChipPAC 8.5%

2020

92.6 10.5 942 Nov-18 104.3 Capex intensive cyclical industry and potential weak results remain key concerns but conversion of

shareholder’s loan from the IC Fund into equity stake does provide some comfort. Company has also

managed to make some progress in procuring new business in China which should augur well for realizing

potential synergies. There are no perfect comps but bond look attractive compared to other HY SOE names

with much weaker business profile such as Zoomlion and Yanzhou. We also like the secured nature of the

bonds and thus maintain Buy. Key downside risks include loss of any contract leading to lower utilization,

exit by any key shareholders and potential rating downgrade.

Star Energy 6.125%

2020 (350)

99.0 6.4 552 Mar-17 103.1 Star Energy bonds have outperformed Indo HY space and we expect the bonds to maintain its

outperformance driven by credit profile improvement. With operations back in full swing, focus now shifts

to potential tariff revision for Unit 1&2 which should be substantially credit positive. Unit 3 capex also seems

manageable especially given that company will go ahead with the plan only with increased tariff. Thus we

maintain our Buy. Key downside risks include any other technical issues with resource availability and larger

than expected capex for Unit-3.

Multipolar 9.75% 2018

(230)

98.6 10.4 956 Jul-16 104.9 Multipolar’s recent performance has been impacted by losses from media business (Big TV) as well as

closure of hypermarket business in China. At the same time, Indo retail business, which drives majority of

company’s revenue, has been relatively stable. Fundamental credit profile may remain weak in the near term

but we take comfort from adequate holdco liquidity and relatively stronger bond structure. MLPL 18s is

among the wider trading Indo industrial names and looks cheap to us. Thus we maintain Buy. Key downside

risks include further large losses from media and china retail business, aggressive capex in non retail

business, and lower than expected dividends from MDS and MPPA.

MNC Investama

5.88% 2018 (365)

50.8 42.0 4,122 May-16 102.9 MNC Investama 18 has lagged other distress Indo HY bonds driven by upcoming refinancing concerns as

well as equity buybacks. However, we understand from the management that such buyback will continue to

be limited and at entities which has surplus cash. As regards MSKY refinancing, discussion with banks in

ongoing and the company is also looking to do an equity offering of Sky Vision Network with target

completion by 1H16. We continue to like the bonds with MSKY refinancing being the next positive trigger

and thus we maintain our Buy. Key downside risks include delay in refinancing of MSKY loan, sharp IDR

depreciation, big ticket equity buyback, large debt-funded capex/investments and further rating downgrade.

Modernland 9.75%

2019

(190)

99.1 10.1 911 Aug-17 104.9 Modernland 19s is the best performer Indo HY bond YTD and we continue to like the bond from a risk

reward perspective for a cyclical sector exposure versus other tighter trading names. We remain

comfortable with Modernland’s flagship Jakarta Garden City project and expect the project to do well in near

future especially if macro situation continue to turn around for Indonesia. Key downside risks include

material slowdown in Indo property market and further sharp depreciation in IDR.

Rolta India 10.75%

2018 (127)

37.0 70.9 7,006 May-16 105.4 We maintain our Buy on the 2018s. The bonds have dropped almost 20 points in the last 10 days due to

technical factors and are now trading in the mid to high 30s. On the fundamental side, despite a set of weak

Q3 results and continued working capital outflows, we still expect Rolta to keep paying coupons. It's debt

maturity profile is quite well spread out and the next capital market maturity is only in May'18. Separately, we

see opportunities in India opening up the defense sector to FDI (contributed ~30% of revenues). Key

downside risks include further deterioration in working capital, negative rating actions, etc.

Source: Deutsche Bank, Bloomberg Finance LP.

24 February 2016

Credit


Figure 81: Asia High Yield Top-Buys (ex-China property)

Bond Issue & Size

(USD mm)

Offer

Price

YTM

(%)

Z-spd

(bp)

Cal l

Date

Cal l


Greenko 8% 2019

(550)

106.4 5.9 497 Aug-17 104.0 We maintain our Buy on the 2019s as a good quality carry play in the Indian HY space. Greenko operates in

the right sector (clean energy) and is majority owned by GIC. We also don’t rule out the bond being called in

2017. It looks quite cheap to comps such as Olam (owned by Temasek) that has its 2020 trading at

~4.8%ytm. Unlike Olam, Greenko is rated and bonds are indirectly secured. Key downside risks are

aggressive growth plans and possible deterioration in transparency post delisting.

SMC Global Power

7.5% perp (300)

100.9 7.2 624 Nov-19 100.0 Our base case is still that SMC Power and PSALM will come to a negotiated settlement. Currently,

operations at all of their plants are normal and 2 new plants are on track to commence in 2016. Hence we

think that the 7.5% perps will be called on the first call date and we maintain our Buy recommendation. We

prefer these over the newer 6.75% perps (96 offer, 7.7% ytc) due to the higher coupon and shorter duration

to call. Key downside risks include worsening of the dispute with PSALM, aggressive capex plans and any

significant debt funded acquisitions.

Source: Deutsche Bank, Bloomberg Finance LP.

Figure 82: Asia High Yield Top-Sells (ex-China property)

Bond Issue & Size

(USD mm)

Bid

Price

YTM

(%)

Z-spd

(bp)

Cal l

Date

Cal l


Tata Steel 4.85% 2020

(500)

95.8 6.1 507 NA NA We downgraded the 2020s to Sell again this year as they look expensive at just 6% ytm, not just within Asia,

but globally in the steel sector. This is especially given Tata’s consolidated leverage is one of the highest

amongst steel peers. Even on its own bond curve, the 2020s are more than 200bp tighter than the 2024s,

making it one of the steepest spread curves in Asia HY. They are also trading more than 650bp tighter than

the JSW Steel 2019s. Key upside risks include asset sales for deleveraging, promoter brand premium, etc.

Lippo Karawaci

6.125% 2020 (403)

95.8 7.2 611 Nov-16 103.1 Lippo bonds have had a volatile year so far though bonds have bounced back from lows this year. Recent

asset sale to REITS is somewhat comforting and also expects property sector to benefit from macro

improvements in general. However, we continue to see better value in other higher yielding property

players for a cyclical sector exposure. Separately, we find Lippo bonds a bit expensive relative to MLPL18s

(10-11%), a company owned by the same family. Thus maintain Sell. Key upside risks include improving

property markets and higher than expected monetization of assets through REIT.

Texhong 6.5% 2019

(200)

101.9 5.8 489 Jan-17 103.3 Texhong announced FY15 profit alert on the back of solid 1H15 performance but we remain concerned on

US-China cotton price compression, aggressive expansion, and potential impact from RMB depreciation.

Redemption of USD 2016 bonds should be positive for technicals but 2019s at ~5.5% ytm looks expensive

relative to other China Industrials. Key upside risks include moderation in capex plans, and international

cotton prices declining more than domestic prices.

China Hongqiao

7.625% 2017 (400)

100.0 7.6 808 NA NA Hongqiao’s capex plan looks aggressive to us in light of noise around over supply and recent production cuts

in China. Company also has significant ST maturities of RMB20.4 billion as of 1H15. Local liquidity should

remain supportive of maturities but we don’t see any upside on bonds trading close to par. We see potential

downside on the back of volatile commodity markets and potential RMB depreciation, thus maintain sell on

2017s. Key upside risks include recovery in aluminium price, lower than expected capex and further equity

raising. Source: Deutsche Bank, Bloomberg Finance LP.

24 February 2016

Credit


Figure 83: China property High Yield Top-Buys

Bond Issue & Size

(USD mm)

Price YTW

(%)

Z-spd

(bp)

Call

Date

Call

Price

Rationa le & Risks

Aoyuan 10.875% 2018

(USD250mn)

106.2 7.8 699 N/A N/A

Aoyuan 11.25% 2019

(USD300mn)

107.5 8.3 740 Jan-17 105.6

Central China 8% 2020

(USD200mn)

95.25 9.5 847 Jan-17 104.0 We upgrade Central China 2020C17 from CreditHold to CreditBuy as we believe valuations seem to

have factored in a potential downgrade in credit rating and valuations look attractive, even against

some solid single B names. Its 2020s provides close to 200bp pick-up against Yuzhou 2019s new in Z-

spreads. Although its 2015 EBITDA margin is likely to be weak given considerable discounts in Tier-3

and 4 cities, we believe its EBITDA margin would improve YoY in 2016 with higher bookings in

Zhengzhou. Downside risks include: more than one credit rating downgrade, aggressive expansion

and/or higher-than-expected JCE debt and exit of CapitaLand as a shareholder.

Evergrande 8.75%

2018 (USD1,500mn)

98.8 9.3 841 Oct-16 104.4 We maintain CreditBuy on Evergrande’s 18C16 on attractive YTM. Moody’s previously downgraded

Evergrande’s corporate family rating to B2 from B1 and its senior unsecured debt rating to B3 from B2

in January. It also has a negative outlook on Evergrande but we believe the more aggressive-than-

expected 2H15 landbanking has been largely priced in. With the on-shore bond market remaining open

and our expectation that policy would remain largely supportive, we believe Evergrande’s refinancing

would not face difficulties this year. Downside risks include more aggressive expansion, severe RMB

depreciation and unexpected macro changes.

Oceanwide 9.625%

2020 (USD400mn)

103.4 8.7 764 Aug-18 104.8 We maintain our CreditBuy on Oceanwide's 20C18 as we believe its yield is still attractive and the

company should fetch above-sector contract sales growth in 2016. We believe the weak credit profile

has been priced in; the company's debt maturity profile and cost of borrowing have been improving.

Downside risks include more-than-expected acquisitions and weaker execution in non-property

businesses.

Greentown 5.625%

2016 (RMB2,500mn)

99.6 7.4 169 N/A N/A

Greentown 8.5% 2018

(USD700mn)

104.5 5.1 460 Mar-16 104.3

GZ R&F 8.5% 2019

(USD1,000mn)

104.4 6.8 590 Jan-17 104.3 We maintain CreditBuy on GZ R&F's 19C17 and CreditHold on its 20C17 and 16s. The company guided

for a possibility of A-share listing in 2016. With 2H15's policy changes of re-opening of the A-share

listing market, we believe there the developer may be able to list and if so, would be a positive

development for GZ R&F. We also expect GZ R&F to see some credit improvement by YE15 vs. 1H15

given its conservative landbanking in FY15. Upside risks include faster A-share listing and more-than-

expected policy support. Downside risks include aggressive landbanking, unexpected macro or

political changes.

Powerlong 10.75%

2017 (RMB1,500mn)

98.4 11.9 608 N/A N/A We maintain CreditBuy on Powerlong's 2017 CNH bond. We like Powerlong's improvement in

execution. We also like its gradual increase in exposure to Tier-1 cities. Powerlong’s credit metrics

were largely stable in 1H15. Downside risks include aggressive landbanking, sharp decline in retail unit

rents, and unexpected macro developments.

Maintain CreditBuy on Greentown's 16s and 18s. Greentown has established a strong brand name in

the high-end segment, particularly in Hangzhou and Zhejiang. Its interim 2015 results were weak but

adjusted gearing ratio (assuming perps as 50% debt and 50% equity) dropped 13ppt HoH to 85.7% as

of June. Downside risks include weaker-than-expected support from CCCG and severe RMB

depreciation.

We maintain CreditBuy on Aoyuan's 18s and 19C17. We continue to like China Aoyuan as it is growing

as a developer and we believe its debt composition and costs of borrowing should improve at end-

2015 vs. end-June. Furthermore, we estimate its foreign debt exposure as a precentage of total debt to

drop from June-2015's 50% to below 40% as of end-FY15. Downside risks to our call include: more

aggressive land acquisitions than expected, severe RMB depreciation, and unexpected macro changes.


Figure 84: China property High Yield Top-Sell

Bond Issue & Size

(USD mm)

Price YTW

(%)

Z-spd

(bp)

Call

Date

Call

Price

Rationale & Risks

Agile 8.375% 2019

(USD500mn)

102.1 7.6 666 Feb-17 104.2 We maintain our CreditSell on Agile's 19C17. Overall, we view Agile's landbank as weak in

quality though pending on-shore bonds issuance should alleviate refinancing pressure.

Upside risks include better-than-expected improvement in execution and re-financing. We

believe its geographical exposures could limit sharp upside in pricing, unlike some peers

that have more Tier-1 and key Tier-2 cities exposure.


24 February 2016

Credit


Figure 85: List of trades closed YTD

Trade Entry dateEntry

price/spreadExi t date

Exi t

price/spread

Sovereigns

Sell PHILIP 3.95% 2040 (2000) 7-Jan-16 97bp 23-Feb-16 118bp

Sell PHILIP 5% 2037 (1500) 7-Jan-16 110bp 23-Feb-16 136bp

Financials

Sell ORIEAS 5% 2024 (400) 12-Jan-16 255bp 5-Feb-16 304bp

Buy CINDBK 6% '24c19 (300) 7-Jan-16 290bp 23-Feb-16 263bp

Sell AXSBIN 3.25% 2020 (750) 7-Jan-16 149bp 23-Feb-16 181bp

IG Corporates

Buy ADSEZ 3.5% 2020 (650) 28-Jul-15 205bp 7-Jan-16 201bp

Buy BEIENT 1.435% 2020 (EUR500) 7-Jan-16 200bp 23-Feb-16 229bp

Sell Itraxx Asia 10-Feb-16 170bp 11-Feb-16 180bp

HY Corporates (excl. China property)

Sell TATAIN 4.85% 2020 (500) 8-Jan-16 95.0 14-Jan-16 91.5

Buy MPMXIJ 6.75% 2019 (200) 8-Jan-16 96.3 15-Feb-16 95.0

Sell SRITEX 9% 2019 (270) 8-Jan-16 98.0 15-Feb-16 96.5 Source: Deutsche Bank, Bloomberg Finance LP. Entry/Exit price is cash price for HY names and G-spd for IG names

The authors of this report wish to acknowledge the contribution made by Kalvin Fernandes, an employee of Deutsche CIB Centre Private Limited and also by Xiang Gao, Mary Mou and Yuvaraj Bhole, employees of CRISIL, a third-party provider to Deutsche Bank of offshore research support services.

24 February 2016

Credit

24 February 2016

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist

Institution Disclosure

Central China Real Estate

CENCHI 8.75% notes due 2021 1,7,14

CENTRAL CHINA REAL ESTAT 8 20200128 1,7,14 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Harsh Agarwal/Viacheslav Shilin/Colin Tan/Karen Kwan/Vikash Agarwalla

24 February 2016

Credit


Deutsche Bank debt rating key

CreditBuy (“C-B”): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.

CreditHold (“C-H”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.

CreditSell (“C-S”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months.

CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating.

Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst.

DB Credit Opinion Definition : The DB Credit Opinion follows the same scale as S & P's credit ratings ranging from AAA for the Highest credit quality to C for the Weakest credit quality. It reflects our opinion on the creditworthiness of a company. We derive our Credit Opinion from fundamental credit analysis of the company, comparable analysis, benchmarking against rating agencies and qualitative judgement.

(a) Regulatory Disclosures

(b) 1.Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

(c) 2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

24 February 2016

Credit

24 February 2016



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24 February 2016

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multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to

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24 February 2016

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not disclosed according to the Financial Instruments and Exchange Law of Japan.

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Copyright © 2016 Deutsche Bank AG

David Folkerts-Landau Chief Economist and Global Head of Research

Raj Hindocha Global Chief Operating Officer

Research

Marcel Cassard Global Head

FICC Research & Global Macro Economics

Steve Pollard Global Head

Equity Research

Michael Spencer Regional Head

Asia Pacific Research

Ralf Hoffmann Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer Regional Head

Equity Research, Germany

International Locations

Deutsche Bank AG

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Deutsche Bank AG

Große Gallusstraße 10-14

60272 Frankfurt am Main

Germany

Tel: (49) 69 910 00

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

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