Nomura Picks Builders as Morgan Stanley Retreats: China Credit
Nomura Holdings Inc. (8604) is recommending dollar-denominated bonds of five Chinese developers for 2013 as a recovery in sales boosts cash flow, contrasting with Morgan Stanley that has twice cut its outlook on the debt since August.
Japan’s largest brokerage favors notes issued by Agile Property Holdings Ltd. (3383), Shimao Property Holdings Ltd. (813), Yanlord Land Group Ltd. (YLLG), Gemdale Corp. (600383) and China SCE Property Holdings Ltd. (1966) after home sales rose last month by the most in 2012. Signs of a rebound in Asia’s biggest economy are also reassuring holders of the debt at Nikko Asset Management Ltd. and Baring Asset Management, which together oversee some $205 billion.
Chinese notes, dominated by high-yield homebuilders, are poised for their best annual gain since 2009 with a 24 percent return this year, while Indian debt rose 19 percent, according to JPMorgan Chase & Co. indexes. U.S. high-yield debt climbed 15 percent, also the most in three years. Potential upgrades in rating outlook and fund inflows into emerging markets will spur further gains, Nomura said.
“Pre-sales will still be quite strong going into 2013 and the liquidity profile of developers will improve,” said Annisa Lee, a Hong Kong-based credit analyst at Nomura. “We are positive on the China property sector” as stronger cash and debt positions will also underpin the rating outlook, she said in a Dec. 11 phone interview.
Property sales increased from a year earlier in each of the last four months and totaled 5.35 trillion yuan ($856 billion) for the January-November period, within 10 percent of the annual record in 2011, official figures show. Revenue may climb 5 percent in 2013 as growth picks up in the world’s second-largest economy, said Liu Yuan, a researcher in Shanghai at Centaline Property Agency Ltd., China’s biggest real-estate brokerage.
Reports in the past week showed industrial output and retail sales in November recorded their biggest gains since March, adding to evidence expansion is gathering pace after a seven-quarter slowdown. Gross domestic product is forecast to increase 7.7 percent this quarter, following a 7.4 percent gain in the July-September period, and quicken through the first half of 2013, based on the median estimates in Bloomberg surveys.
Nomura’s five picks are Yanlord’s bond maturing in May 2017, Shimao’s March 2018 debt, Gemdale’s November 2017 note, China SCE paper due January 2016 and November 2017, as well as Agile securities maturing in 2017. The broker predicted yields on its recommendations would decline by 50 to 80 basis points when it published the buy-list on Nov. 28, without setting a timeframe. Yields on Yanlord and Shimao more than halved this year to 7.19 percent and 7.52 percent, respectively, according to data compiled by Bloomberg.
“I’m more optimistic on China’s economic outlook than six months ago,” said Leong Wai Hoong, Singapore-based manager of the Nikko’s $589 million Asia High Yield Bond Fund. “For dedicated high-yield investors in Asia, the property sector is where you will have less worry about the fundamentals.”
Chinese developers are still preferred investments because their business model is easier to grasp, Leong said. Industrial companies such as cement makers and steel producers may benefit later from an economic recovery because they feed off a construction and building boom, he said.
Morgan Stanley, which turned bullish on Chinese high-yield bonds in December 2011, has started retreating from the market. Its recommendation was cut in September to “accumulate” from “buy,” and then downgraded to “neutral” on Dec. 4 because of concerns about a rising stock of unsold homes and a slowdown in bank lending. New yuan loans amounted to 522.9 billion yuan in November and 505.2 billion yuan in October, the lowest monthly totals since September 2011, according to data released Dec. 11.
The U.S. bank is ready to switch out of property to industrial companies when developers start ramping up spending and will turn “outright cautious” on a sharper pullback in loan growth, Hong Kong-based credit analysts led by Viktor Hjort wrote in a Dec. 4 report. Morgan Stanley doesn’t have a list of its recommendations for Chinese property bonds, Hjort said in a Dec. 12 e-mail.
The extra yield investors demand to own Chinese dollar bonds has narrowed every month since March to 386 basis points over Treasuries on Dec. 11. A 50-basis point drop in 2013, while likely to happen, will push the market into the pre-crisis low seen in January 2008, a level associated with reckless risk- taking and a credit bubble, Morgan Stanley said.
“The rally in Chinese property names has made it even harder to invest in them,” said Azhar Hussain, head of global high yield at Royal London Asset Management. His company manages about $78 billion including $1 billion in speculative-grade debt. “The consensus is for single-digit returns, which is why some people are reaching for yields in riskier jurisdictions, and which is why Chinese names are getting more focus.”
Confidence in China’s creditworthiness is rising, cutting the cost of insuring its sovereign debt against non-payment.
Credit-default swaps for five years fell to 56 basis points on Nov. 30, the least in more than two years, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The cost was 59 basis points on Dec. 11, compared with 121 at the end of June and 147 at the end of 2011.
Contracts on bonds of Zhongshan, Guangdong-based Agile cost 652 basis points on Dec. 11, down from 1,281 on May 17 that was the highest level since April 2009, CMA data show. It costs 773 basis points to insure the debt of Hong Kong-based Shimao, a drop of 596 basis points over the same period.
The yield on China’s 10-year government bonds rose three basis points this month to 3.57 percent in Shanghai as of Dec. 11, Chinabond data show. The yuan weakened 0.3 percent through yesterday to 6.2518 per dollar, according to the China Foreign Exchange Trade System.
China’s stable economic growth outlook means there’s still room for property bonds to deliver returns in 2013, according to Sean Chang, head of Asian debt in Hong Kong at Baring, which manages $45 billion of assets. Targeted curbs on bank lending and buying restrictions are designed to damp speculation in the high-end market and preserve growth in mass housing, meaning there will be winners and losers, he said.
“We are selectively bullish on the Chinese property market,” Chang said in a phone interview yesterday. “Slower but healthy growth at 7 percent a year is not too bad and we still see strong demand for housing urbanization and a higher quality of life.”
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