Charles MacGregor, head of Asia at Lucror Analytics, and a Smartkarma Insight Provider, gives us an update on new bond issues in China, discussion of recent defaults and a perspective on investor appetite for bonds.
IPOs expected this week:
- Australian Stock Exchange: Control Bionic; Dalrymple Bay Infrastructure; Desert Metals; Live Verdure; You Foodz; Rincon Resources; Akora Resources; Errawara Resources; Cluey; Top Shelf International Holdings.
- Hong Kong Stock Exchange: Yue Kan Holdings; JD Health; Jiayuan Services; China Resources Mixc Lifestyle Services; HBM Holdings; Leading Holdings; Datang Group Holdings; Pop Mart International Group; Lion-OCBC Securities Hang Seng TECH ETF.
- Disclaimer: Primary Markets TV is a news update and intended for informational purposes only. Primary Markets TV does not provide investment advice or recommend investment products. Please consult a professional investment advisor when making investment decisions.
Dan Barnes Welcome to Primary Markets TV Asia Pacific – your updates on newly issued securities in the region and upcoming IPOs. I’m Dan Barnes. This week is seeing 10 IPOs launched on the Australian Stock Exchange. These include Control Bionic, which produces technology to support people who are suffering from paralysis, loss of speech, and also listings from several firms in the mining exploration and commodity business. That is Desert Metals, Rincon Resources, Akora Resources and Errawara Resources. Cluey, the online tutoring platform is also listing. Of course, over the COVID-19 period, a lot of people have been working from home and home schooling dramatically. We’ve seen investor interest moving into funds which are focused on commodities, notably gold and silver this year, as well as health care. And that’s reflected in some of the IPOs in Asia Pacific. Hong Kong has a busy week for IPOs ahead, but possibly its most notable is going to be JD Health coming out on the 8th, which is expected to raise around 3.5 billion US dollars. JD Health, of course, fits into that wider interest from investors in health care and pharmaceutical assets resulting from the COVID-19 pandemic. There’s also interest in being part of JD.com. According to Bloomberg reports, the firm has plans to list its fintech units, JD digits and IFR, and said it also expects to list its distribution business, JD Logistics, which was spun off from the main firm three years ago. JD.com, of course, is an e-commerce giant in the region. In other news, the Board of China developments is reported to acquire a majority stake in China Life, by acquiring an additional 21% in China Life’s outstanding shares. Well, now we’re going to be one the fixed income markets, and joining me is Charles MacGregor, head of Asia at Lucror Analytics, an independent research firm and also a Smartkarma Insight Provider. Charles, welcome back to the show.
Charles MacGregor Thank you, Dan. Good to be back.
Dan Barnes So tell us, which new bond issuances caught your attention over the recent weeks?
Charles MacGregor Just a bit of a backdrop; the last sort of 5-6 weeks have been relatively quiet. There was only 11 billion issuance in November compared to 38 billion in October. Year to date that takes us to about 311 billion, so that’s still ahead of last year by about 6% year-over-year. So it’s been relatively quiet the last couple of weeks. What we did see this week was a rush to perpetuals. We had issuers seemingly looking to issue what they perceived to be cheap capital, and seemingly insatiable, yield-hungry investors that are chasing these perpetuals. I’ll mention two, briefly, one was China Hua Main, which is a state-owned entity, power generator. It issued a billion dollars in two tranches, a non-call 3 and a non-call 5, and they were priced around about 3.0%. So this is a perpetual that has been priced at about 3%, so people are obviously taking a lot of comfort out of the state-owned entity status. What was interesting there was, that it was 7 times oversubscribed, so they had an order book of about 7 billion for that 1 billion dollar offer. The second issue that caught my eyes was new world developments at a Hong Kong-based property company, and it issued 750 million in a non-call 3. And in that case, the order book was about 3.8 billion, so about 5.5 times oversubscribed. So there’s definitely a lot of demand for these these types of issues from investors that are just getting yield-hungry. They’re getting squeezed in other markets like the US, where overnight high yield spreads came down to the lowest level since June 2014.
Dan Barnes That’s really interesting thank you. Of course, talking of state-owned enterprises, we have seen a number of defaults. And some of the Morgan Stanley analysts, as we mentioned last week, noticed that the net new issuance for AA and AAA in China in one week of the 20th had dropped off. Do you have any thoughts on the defaults and the impact that might be having? And of course, we have had some government meetings and announcements since then.
Charles MacGregor I mean, there’s been a lot of press for the last couple of weeks. I was reading two articles today highlighting the surge in defaults. To put it in perspective; there were quite a few defaults in 2018, 2019. There were very few, if any, in the early part of the year, and these are state-owned entities that we’re talking about. As policymakers, we’re keen to sort of reduce the impact of COVID-19, but what we’re seeing now is that Beijing is trying to adopt a policy whereby, it’s going to have more of a market-led approach to risk management. And hopefully this will result in some of these are failing. Now, in the short term, obviously, people will see that as being a concern. But in my perspective, it potentially means that in the long term, it brings a bit more certainty to capital markets. It allows investors to better price risk. Since November 18, a couple of other things have happened. Foreign investors piled into the onshore market, because they’re attracted by the yields, and I think they’re more than happy to take some of those state-owned entity companies that are very high profile, and so that was one thing. And the second thing I noted yesterday is that the spreads on Chinese AAA paper were at the lowest level for 8 months. So the market, I think, is actually starting to calm down.
Dan Barnes Do you have any perspective on the year ahead, nearing the end of the year now? You mentioned the levels are slightly up on last year. Do you expect that to continue through December, potentially?
Charles MacGregor It’s really hard to tell. In the high yield space, I wouldn’t see a lot of new issuance, because Chinese property companies have now been restricted by the three-red-lines policy, which sticks if they have certain financial parameters that are outside limits that have been set by the government. So in the high yield area, I don’t see a lot. But in the IG area I would expect what we’ve seen in the last month to continue there.
Dan Barnes That’s great. Charles, thank you very much.
Charles MacGregor It’s a pleasure, Dan. Thank you.
