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March 2021

  • Asian USD HY Bond market once again outperformed IG as short duration of the asset class protects against steepening UST yield curve.
  • Primary markets reopened after the Chinese New Year Holidays but remained quiet providing supportive technicals to the market
  • Sri Lanka saw the strongest performance across Asia on the back of signing new bilateral swap line with China
  • China HY property and LGFV sector in contrast underperformed as volatility in some single name credits increased from idiosyncratic events and results announcements
  • Despite overall property bond price weakness, FY20 results imply improving credit fundamental for the sector in 2H20 and consequently we saw a raft of rating upgrades across market in March
  • The JKC Asia Bond 2023 fund ended November with an average yield of 8.70%while duration continued to come down (currently 1.3 years), line items stood at 170 (across 127 issuers)

In March 2021, the JKC Asia Bond 2023 fund produced a total return of -0.52%. This return was broken down by +60bps from carry, -103bps from bond price movements and -9bps from fees. Although returns were negative for the Asian HY market in March, the sector continued to outperform the wider Asian market as the short duration of the asset class limited the impact of further bond yield rises out of the US which drove the underperformance of IG. Market technicals were also supported by post Chinese New Year primary market issuance that was quieter than usual as property and LGFV bonds were less active in the market.

From a geographical perspective, the biggest gain from the HY market was out of Sri Lanka after the country announced it had agreed a bilateral swap line with China which reduced concerns on near term liquidity of the sovereign bonds. The Sri Lanka curve which accounts for 3% of the HY market gained 5-10 points in March. In contrast, Chinese credits underperformed the overall Asian HY market in March as the LGFV and property sectors, typically strong in the 1Q, saw softer demand from Chinese domestic investors. The LGFV sector in particular was weighed  down news in early March that Chongqing government owned SOE, CHQENE, had missed payments on an onshore letter of credit from a domestic bank. USD bonds issued by the company fell sharply and although the issuer subsequently paid its USD bond coupon, sentiment for the  name remained  extremely cautious. This had a knock on effect across the LGFV sector with bonds issued out of weaker provinces such as Yunnan, Xinjiang, Henan and Guangxi all trading lower.  

Away from LGFV’s sector, Chinese property bonds also saw mixed performance as several developers rebounded on the back of strong FY20 results and credit rating upgrades while certain others that did miss their FY20 results expectations were punished with negative  price action. One notably volatile name in March was BB- rated YUZHOU which saw its bond curve fall 5-10 points over the month after announcing a surprise profit warning and subsequent earnings report that showed a 97% drop in net profit. Admittedly much of the fall was non-cash and one-off in nature, related to sales booking timing during the  COVID outbreak. Nevertheless, given Yuzhou has historically been a popular name among retail investors the surprise created significant  price volatility. Towards month end the company announced a bond buy back and, after several broker upgrades on the name, the bond price began to stabilize.  This surprise move only goes to demonstrate the value of our highly diversified strategy to minimize the impact of unforeseen idiosyncratic risk.

Notwithstanding the Yuzhou results, in March we had the opportunity to observe overall trends across the Chinese property sector as most developers announced their full year numbers. Crucially this was the first major financial reporting season since China introduced the “Three Red Line” policy to reduce leverage across the sector. In summary, we saw some clear observable trends across the sector including a broad-based acceleration of liquidation of land banks, slower new land  capex and lower gross margins as accelerated cash sales came at the expense of profitability. These factors in combination are positive for credit, in our view, as they demonstrate the issuers’ willingness to prioritize strengthening of their balance sheet over short term earnings performance. Overall average balance sheet gearing of the sector improved marginally but most importantly the greatest improvement was seen in highly leveraged names such as Evergrande, Kaisa, Sunac and Guangzhou R&F. This view was corroborated by S&P in its recent report “S&P Global Ratings: Chinese Developers’ Discipline Is Policy Induced” which noted improvements across the sector in debt growth, liquidity position and ST Debt coverage. Despite this, the sector continues to trades cheap presenting an opportunity for Asian HY investors in our view.

This month also saw a host of ratings revisions on the back of full year results. Notably, we saw upgrades of Chinese property developers such as SUNAC, which was upgraded one notch to BB by S&P on enhanced financial discipline, FUTLAN (upgraded one notch to BB+), REDPRO (upgraded one notch to B) and PWRLNG (upgraded one notch to BB-) Upgrades weren’t limited to only Chinese developers as Chinese aluminum producer, HONGQI, was upgraded one notch to Ba3 by Moody’s on the back of better than expected operating results while Car rental company, CARINC, was upgraded to B- by S&P after completion of a PE takeover of the company and successful issue of new bonds. Away from China we also saw upgrades of Indian steelmaker TATAIN and Indian broker IIFOIN.

On the flip side, Chinese developer YUZHOU was downgraded one notch to B1 by Moody’s following the profit warning (mentioned previously) while Chinese furniture retailer and shopping-center developer RSMACA was downgraded one notch to BB by Fitch as its recovery in credit metrics was slower than the agency’s expectations. For RSMACA, in which the fund holds a position, it should be noted that after the downgrade, the company announced the sale of a portfolio of properties to Sino Ocean for RMB20bn which triggered a 14pts gain for the bonds over the month. Overall upgrades significantly outweighed downgrades in March which contrasts the opposite trend we saw in 2020.

For the 2023 portfolio, it was another month of buying as we continued to experience sizable inflows to the fund. Firstly, we took the opportunity to scale up our position in some of the stronger Chinese property developers such as the COGARD 23s and LOGPH 23s. In addition, we increased diversification and add more exposure to non-Chinese property names such as FAEACO 23, RECLIN 23, MGFLIN 23s and OGIMK 22s. We ended the month with an average gross yield on the portfolio of ~8.70% and an average duration of approximately 1.3 

The information and material provided herein do not in any case represent advice, offer, sollicitation or recommendation to invest in specific investments. The information contained herein is issued by JK Capital Management Limited. To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. Under no circumstances should this information or any part of it be copied, reproduced or redistributed. 

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