Is It Time to Buy China Industrials High Yield Bonds?
In Jan 2013, we saw more than 20 Asia ex-Japan High Yield issuers rushing to raise over USD8.
0 bn to take advantage of the low rates before the markets close for Chinese New Year holidays.
This, added with a series of profit warnings from HY industrial names, prompted some profit taking by the money managers and almost all the bonds in the HY industrials universe were trading wider than where they were a couple of weeks ago.
Even though most of the bonds have covered some of their losses they present a good investment opportunity.
On the other hand, we saw encouraging macro economic data suggesting improvement in economic activity in FY 2013.
China's official PMI was above 50 at 50.
4 in January.
PMI's new orders sub-index and the quantity of purchases sub-index, both climbed to a nine-month high of 51.
6 and 53.
2, lending support to the belief that we might have already seen the lows in the economic cycle.
China HSBC Markit PMI was at two year high at 52.
3 in January up from 51.
5 in December 2012, signalling the third consecutive month of improvement.
This survey, in line with the official survey, reported that new orders rose for the fourth consecutive month, and at a pace that was the sharpest in two years.
This survey also indicated that new export orders increased as well, following a reduction in the previous month as the survey respondents saw strengthened demand from clients in Europe and the US.
Services PMI data published later also pointed in the same direction with reading of 54.
0 for January, a four month high.
Chinese Academy of Social Sciences (CASS) has increased its growth forecast for 2013 to 8.
4% to from 8.
2% and now expects faster expansion in 1H 2013.
Home sales data posted by the real estate developers in January has been very encouraging with sales growing both on yoy and sequential basis.
Shimao's Jan-2013 contract sales increased 353% yoy and 8% mom to CNY 4.
1bn.
At the same time, Country Garden reported Jan-2013 contract sales of CNY7.
3 bn, up 33% mom.
Most developers have reported similar strong sales numbers.
Driven by strong home sales and improving economics environment, land sales figures for China's 10 most important cities in Jan 2013 published by Shanghai E-house Real Estate Research Institute increased 263% yoy.
Real estate developer taking on more new projects will be positive for industrial credit names.
China has continuously seen an increase in urbanization and the new leadership sees it as an engine of growth.
Li Keqiang has explicitly vowed to support the efforts to urbanization.
The proportion of China's population living in cities was at 51% by the end of 2011 compared to 80% in developed economies.
To support urbanization, the government will have to provide and upgrade the necessary infrastructure.
We believe this will continue to be a strong demand driver in the economy and would provide support to the industrial credit names.
Profit warnings given out by companies for FY 2012 were a consequence of weak economic environment seen in during the previous year and were more or less on expected lines.
We expect earnings to improve this year with improvement in demand drivers as indicated by the data above.
In addition, the thrust on urbanization will benefit the industrial bond.
We recommend adding names such as China Automation, Shanshui, Liansu, West China, Yanzhou to the portfolio.
0 bn to take advantage of the low rates before the markets close for Chinese New Year holidays.
This, added with a series of profit warnings from HY industrial names, prompted some profit taking by the money managers and almost all the bonds in the HY industrials universe were trading wider than where they were a couple of weeks ago.
Even though most of the bonds have covered some of their losses they present a good investment opportunity.
On the other hand, we saw encouraging macro economic data suggesting improvement in economic activity in FY 2013.
China's official PMI was above 50 at 50.
4 in January.
PMI's new orders sub-index and the quantity of purchases sub-index, both climbed to a nine-month high of 51.
6 and 53.
2, lending support to the belief that we might have already seen the lows in the economic cycle.
China HSBC Markit PMI was at two year high at 52.
3 in January up from 51.
5 in December 2012, signalling the third consecutive month of improvement.
This survey, in line with the official survey, reported that new orders rose for the fourth consecutive month, and at a pace that was the sharpest in two years.
This survey also indicated that new export orders increased as well, following a reduction in the previous month as the survey respondents saw strengthened demand from clients in Europe and the US.
Services PMI data published later also pointed in the same direction with reading of 54.
0 for January, a four month high.
Chinese Academy of Social Sciences (CASS) has increased its growth forecast for 2013 to 8.
4% to from 8.
2% and now expects faster expansion in 1H 2013.
Home sales data posted by the real estate developers in January has been very encouraging with sales growing both on yoy and sequential basis.
Shimao's Jan-2013 contract sales increased 353% yoy and 8% mom to CNY 4.
1bn.
At the same time, Country Garden reported Jan-2013 contract sales of CNY7.
3 bn, up 33% mom.
Most developers have reported similar strong sales numbers.
Driven by strong home sales and improving economics environment, land sales figures for China's 10 most important cities in Jan 2013 published by Shanghai E-house Real Estate Research Institute increased 263% yoy.
Real estate developer taking on more new projects will be positive for industrial credit names.
China has continuously seen an increase in urbanization and the new leadership sees it as an engine of growth.
Li Keqiang has explicitly vowed to support the efforts to urbanization.
The proportion of China's population living in cities was at 51% by the end of 2011 compared to 80% in developed economies.
To support urbanization, the government will have to provide and upgrade the necessary infrastructure.
We believe this will continue to be a strong demand driver in the economy and would provide support to the industrial credit names.
Profit warnings given out by companies for FY 2012 were a consequence of weak economic environment seen in during the previous year and were more or less on expected lines.
We expect earnings to improve this year with improvement in demand drivers as indicated by the data above.
In addition, the thrust on urbanization will benefit the industrial bond.
We recommend adding names such as China Automation, Shanshui, Liansu, West China, Yanzhou to the portfolio.
Source...