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1、3 December 2019Global Macro StrategyGlobalAnna HoAnalyst +852-3712 2965Bhanu Ba we j aStrategist +44-20-7568 6833Mary Xia, CFAStrategist +86-105-832 8508Matthew Mish, CFAStrategist +1-203-719 1242Stephen Caprio, CFAStrategist +44-20-7567 5788Kamil AminStrategist +44-20-7568 2225Global ResearchMacro
2、Keys: Asia Credit Strategy2020 Outlook: Bend, Not BreakLook beyond 1H20This year is closing with stellar returns for Asian $ credits (IG: 10.8%, HY: 11.7%) on a dovish US Fed and Chinas easing policy stance. With a major move in spreads and rates, we expect lower returns in 2020 (IG: 3.5%, HY: 6.2%)
3、, Asian HY still offers better returns over its global credit peers where carry cushions spreads from widening, a slow default pick-up and policy support. We expect trade tensions and a likely trough in growth in 1H20 will carry spreads wider before tightening in 2H20. Policy responses in China, tho
4、ugh milder than the previous cycle, should anchor Asian $ credit spreads. Downside risks could emerge if Fed under delivers on market expectations and trade war-led CNY volatility rises. A comprehensive trade deal would raise upside potential.Asian default risk a burning question; we do not expect a
5、 big jump in 2020 Asian HY corporate default rates stood at 1-1.5% in 2019. Poor liquidity management and contraction of shadow channels are drivers of defaults. Our bottom-up analysis suggests Chinese HY industrials defaults will add 1 % to the current level. Chinese HY developers in the $ bond uni
6、verse (leading companies) should be able to fend off default risks on better rating quality and an ability to churn assets in managing refinancing stress. For CNY bonds, defaults are bound to rise on slower growth and private enterprises structurally high debt problems. The dominance of SOE/LGFV in
7、onshore bonds and less contraction in shadow credits should limit a system-wide default. Our top-down model predicts an onshore default rate at 1.3-1.6% in 2020 (0.5% currently) assuming trade tensions escalate.Asian HY credit offers room for some compressionWe look to position a bias on Asian HY ov
8、er IG with some compression opportunities. Benchmarking the US IG spreads widening call of 40bps to 145bps at end-2020 on rising credit cycle risks and slower US growth, we think the Asian IG spread could finish at 170bps (40bps widerfrom 130bps). Asian HY spreads already decompressed to 4.3x IG (3.
9、5x in the 2015 downcycle, 4.2x at end-2018) but we do not foresee a major deterioration in Chinese developers credit profiles and acceleration in default rates, coupled with more moderate bond supply. This should not put spreads back to the highs of end-2018 on easing monetary policy and lower rates
10、 outlook. We estimate HY spreads at 640bps at end-2020 (80bps wider from 560bps), or3.8x IG.This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 80. UBS does and seeks to do business with companies covered in its research reports.
11、 As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Figure 14: Financial profiles of Chinese university complexesSourc
12、e: Company financials, UBSTsinghua UnigroupTus- HoldingsTsinghua TongfangPeking UniversityFounderKeepwell & 曰PK providerTsinghua UnigroupN/AN/APUFGGuarantorN/ATus(TFN/ABond tickerTSINGHTHSCPATSIGTFFOUIHK, HKJHCCBond o/s (USD m)2,4501,3006003,1501) If Tsinghua Uni ceases to own COCputTsinghua Uni cea
13、ses to own 50% in TH50%inTH (whenTH owns 45% or moreinT us), 2) ifTH ceases to own 17%inTus(whenTHceasestoTsinghua Uniceasesto own 50% inTFPeking Uniceasesto own 50% inPUFGown 45% inTus)OwnershipTsinghua Hldgs (TH) 51%Tsinghua Hldgs (TH)45%Tsinghua Hldgs (TH)25%Peking Uni 70%BeijingJiankun lnv.49%Ch
14、ina Private Venture 30%BeijingZhaorun IM 30%Shanghai Xiexin Jinhan lnv.20%(Rmb m)1H199M199M199M19Revenue33,16113,59014,36191,769Gross profit7,2333,8153,04010,435Net profit(3,694)52743(2,469)EBITDA(718)761(312)1,504Short-term debt61,75723,02711,84196,130Long-term debt101,53939,87314,867103,034Gross d
15、ebt163,29662,90026,708199,164Total cash44,85717,1255,98545,459Net debt118,43945,77520,722153,705Assets274,088139,40562,750365,712Equity72,13536,42720,57962,760Gross profit margin22%28%21%11%EBITDA interest coverage(0.2)0.3(0.3)0.2Net debt/equity164%126%101%245%ST debt/gross debt38%37%44%48%Cash/ST d
16、ebt73%74%51%47%Effective interest costs2.7%3.7%3.7%3.6%ROE-5.1%0.1%3.6%-3.9%Figure 15: CH university complexes $ bond maturitiesFigure 16: CH university complexes CNY bond maturities Tsinghua Peking UniversitySource: Bloomberg, UBSTsinghua Peking UniversitySource: Bloomberg, UBSUsing a top-down appr
17、oach, we estimate that onshore defaults could: 1) rise to 1.3-1.6% at end- 2020 if the trade war escalates, or 2) muddle through 0.5-0.8% in a trade war de-escalation scenario.Figure 17: Chinas default and debt at riskNote: DAR ratio as of Jun19. Source: Wind, UBSCNY bond defaults could grind higher
18、 on much slower growth and POEs debt burdens.: turning to CNY bonds, privately-owned enterprises (POEs) leverage and high default rates remain a concern. Their debts at risk (DAR, defined as problematic debt where EBITDA interest coverage is less than 1 x, Figure 17) are rising, highlighting the abi
19、lity to service debt is deteriorating. POEs reliance on non-standard funding channels would be more negatively affected by governments tighter grip on leverage and subdued demand for lower-rated bond issuance (Figure 26).but this is likely to be met by a policy response. POEs default rate stood at c
20、5% in 2019, and markedly exceeded total credit bonds c0.5% on SOEs and LGFV dominance (Figure 19, Figure 20). We modelled the CNY bond default rate using assumptions on Chinas GDP, DAR and credit impulse. If growth slows much faster (in a trade war escalation scenario), we estimate the default rate
21、could test 1.3-1.6% in 2020. However, we believe the government will likely step in via some relaxations on shadow banking channels to limit a system-wide default (if that also results in a rise in unemployment). Moreover, from a bond maturity perspective, c80% due in 2020-21 are from SOEs and LGFV.
22、 They should have better flexibility to handle the maturity wall, especially since the latter fits into governments push for infrastructure spending.Figure 18: Scenarios on CNY bond default rateActual/Base case Trade de-escalationOil at $30/bblTrade escalation Oil$120/bblSupply becomes demand shockN
23、ote: Blue line denotes baseline scenario.Source: Wind, UBS estimatesFigure 19: CNY credit bond defaults.6 6 6 xP Q/ Q/ Q/mainly in 8.0% enterprises, shadow channelsRMB tn1.0%0.0%LH6ONCXJH85ZLH8SCSJZHNSCXJLHZ.5CXJCH9OCXILH9oeeHgoaLHlnseNH 寸5eNote: China credit bond o/s Rmb20tn. Source: Wind, UBSSourc
24、e: Wind, UBSFigure 20: .led by POEs defaults China onshore defaults occurredprivately-ownedContraction in 7 0%and subdued 6,0%cer-rated bond issuance should4 o% lead default rates to trend higher3.0% in the POE segment.2.0%Q F-里 6 Outstanding Credit Bond (Ihs) S POE default Rate (Itm) Commercial Ban
25、k NPL RatioFigure 21: Asian $ bonds defaultSource: Bloomberg, UBSoooCNCsjCXJDefault rateoo o oNCXJ (N (NDefault count (RHS)Consumer 7%Industrial 21%Private investment 9%Energy 24%Commodity 32%PropertyTechnol 4%Figure 23: Asian HY $ bonds outstanding by ratingBB-B- and below 16%14%Figure 22: Asian $
26、default by segment Chinas credit conditions anddefault trend are becoming increasingly relevant to defaults in Asian $ bonds. Chinese issuers tap funds in both markets and cross default clauses link up their risk profiles.Source: Bloomberg, UBS,since2018BB and high B accounted for c60% of the Asian
27、HY $ bond universe. They reflect mostly Chinese developers credit profiles, and we see low rating downgrade risks on expanded scale, managed gearing and healthy liquidity positions.Source: Bloomberg, UBSFigure 24: Asian $ bond issuance and maturities IG issuance HYissuance IG maturities HY maturitie
28、sSource: Bloomberg, UBSFigure 25: CNY bond issuance and maturitySource: Wind, UBSAsian IG names (mainly Chinese SOEs, Chinese banks) form the bulk of maturities. Balancing repayment risk are their solid rating profiles and fundamentals which are not directly exposed to the trade-war. HY redemption p
29、icks up a bit more in 2020-21 as bonds were issued in a shorter tenor (c3y) in the past two years.Of the RMB20tn credit bond market, RMB6tn and RMB6.4tn will be due in 2020 and 2021, respectively. Within each year, LGFV and SOEs account for c80% of total maturities. We expect policy support and broa
30、d-based liquidity injections will keep their refinancing risks under control.Figure 26: Net onshore bond issuanceRMB tn, 12mn cumulativebLuas 6工ez 6TUC 8A s 8工Bz 8TUC Z.A s z.TAew Z.TUC 9Td s 9L金 975 gvd S 9!.金 9TUCAAA AA+ AA/AA- & belowFigure 27: Onshore put by segmentSource: Wind, UBSCNY bond issu
31、ance for high-rated names has accelerated on government initiatives to revive credit growth. Lower-rated bonds become harder to print on waning demand and ongoing default concerns. Lower put ratio in property reflects developers proactive negotiations with some upward adjustments in coupon rates. To
32、tal net issuance YTD increased 61% YoY in 2019.Source: Wind, UBSTechnical: issuance moderate with IG outpacing HYUSDbn1I7A18A19A20FGross issuance283177292362Redemptiong10378113150Coupon39444042Net issuance14155139171Change yoy-61%152%23%Net issuance (IG)111305878Net issuance (HY)30258093Figure 28: A
33、sia $ bond supplySource: Bloomberg, UBS estimatesWe expect net issuance to moderate in 2020. Both gross and net issuance for Asian $ bonds in 2019 exceeded our forecasts on the Feds dovishness and better- than-expected demand (Figure 28). HYs higher net issuance (USD80bn, up 2.2x YoY) than IGs USD58
34、bn (up 93% YoY) is in line with our direction call at year start as lower offshore yield incentivised Chinese developers to refinance their onshore bonds in 1H19 and raise incremental funds for land acquisitions. We estimate overall net issuance to increase 20-25% YoY in 2020, with IG outpacing HY.
35、Pre-refinancing may bring the supply pipeline forward on expectations of lower yields in 1H relative to 2H. Overall, a moderate supply should be supportive from a technical perspective.We expect Chinese financials, Korea, HK corporates, China A SOE and India to drive the majority of issuance in 2020
36、, taking cues from their redemption pictures. Refinancing via the offshore bond market may still be a preferred option for Asian IG to: 1) lock up longer-term funding (10 or 30 years) - an advantage over offshore syndicated loans and onshore bonds, if yields stay low for longer; and 2) maintain a di
37、versified funding channel.Issuance for Chinese SOEs in 2020 should primarily be for refinancing purposes. More moderate outbound Chinese M&A activities amid trade tensions and SOEs deleveraging campaign should keep incremental funding needs low. Given the rule above, cheaper onshore funding on margi
38、nal easing of LGFVfinancirq and more reliance on special purpose/LG bonds to fuel infrastructure growth, local land reserves and shanty-town renovations, we think issuance for LGFV should be fairly flat. SOE oils higher capex will also increase the likelihood of issuance.Out of China, we think India
39、 and Indonesia could find ways to shore up foreign reserves to stabilise currencies if needed. We expect supply in these regions to tick up slightly in 2020. However, the pace on foreign external debt expansion in these regions should be a measured one to avoid external debt vulnerability. We expect
40、 overall IG net issuance to grow at 35% in 2020.Tighter rules on cross-border financing for Chinese property and LGFV might cap the growth in net issuance for 2020.We expect HY net issuance growth to lag IG in 2020. For Chinese developer and LGFV issuance, the latest NDRC rules guided that new offsh
41、ore bonds should only be used to repay offshore debt due within one year. This will limit cross- border refinancing but has the positive effect of curbing FX risks. In the case of Chinese developers, we estimate onshore drives 75% and 65% of developers bond refinancing needs in 2019 and 2020, respec
42、tively. The deterioration in Chinese HY industrials* credit profile and lack of capex growth for Indonesian HY corporates will likely keep the issuance pipeline minimal. We expect HY net issuance to pick up 20% in 2020. Our forecast could err on the conservative side if there is any sign of relaxati
43、on in NDRC rules on offshore bond quotas.Fund flows towards EM Asia should be stable on balance, given Asian central banks* policy support on trade-war-led slower growth, little direct trade exposure for most corporate credits and manageable default risks. We do not expect Chinas bid to fade given:
44、1) the skew of bond redemption in 2020 towards Chinese issuers (60%), which attracts home bias demand; 2) Chinese banks tend to favour offshore LGFV bonds given lower onshore yield; 3) Chinese asset managers would likely retain theiryield-searching strategy via selective better quality HY credits an
45、d add leverage (helped by lower LIBOR) to improve returns; and 4) crowded one-way buying towards Chinese LGFV, AT1, and the lack of an alternative bond choice, create a tight technical market.Figure 29: Asian IG 2019 net issuance underwhelmed HYCouponcxi CXI CNRedemptionNet issuance (RHS)oocxicxiGro
46、ss issuanceFigure 30: Asian HY 2019 net issuance accelerated on low yieldGross issuanceCouponRedemptionNet issuance (RHS)We expect Asian IG net issuance to outpace HY in 2020. NDRC rules on new offshore bonds to match offshore maturity due in one year should limit growth in net issuance for Chinese
47、property and LGFV.Source: Bloomberg, UBSSource: Bloomberg, UBSUSDbnFigure 31: Monthly gross issuance by segment45403530252056 二。O 6Tda 6a4 6L,_n 6Lun 67d 67BW 67q u.6TUC 8L& d 8L&0N 8 二。O 86.8S 834 8vn 8vun 8VQ.4 8T-SLL.8TUCHY issuance accelerated in 1H19 on lower offshore yields. Constraints on cross-border financing may result in only modest issuance growth in 2020. Banks