cnh market primer food for thought

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EMERGING MARKETS RESEARCH November 2011

CNH MARKET PRIMERFOOD FOR THOUGHT

Barclays Capital | CNH Market Primer

8 November 2011 1

FOREWORD

The evolution and expansion of the CNH (dim sum) bond market has been one of the key developments in Asian capital markets in 2011. We have analysed the rapid growth of this segment through our research publications.

The growth of the market has been fuelled by the increase in RMB trade settlement, which grew by CNY600bn in Q2 alone. As at September 2011, renminbi deposits make up more than 10% of deposits in Hong Kong’s banking system and the total value of CNH bonds outstanding exceeds USD30bn. While investors attracted by the potential for currency appreciation remain the core of this market, there is an increasing presence of investors viewing CNH instruments as a means to diversify their currency exposure. A cross-section of institutional investors – including central banks, insurance companies, asset managers – are evaluating the opportunity or have allocated funds for investment in the CNH market, a dynamic we expect to gather momentum in coming months.

At the same time, the focus of Chinese policymakers to internationalise use of the renminbi has encouraged a more diverse issuer base. CNH bond issuers encompasses Chinese, Asian and global corporations and financial institutions. Bond structures and covenants also continue to evolve, with recent issues including stricter covenants. We expect more onshore borrowers to utilise this market in coming months.

Overall, we have a constructive view on the CNH market and expect it to continue to expand rapidly in coming years. In this publication, our economics, rates, FX teams provide an overview of the CNH market, development milestones, technical drivers and key participants. Our credit research team builds upon these insights to profile a number of issuers in the CNH market, some of which may not be familiar to clients.

We appreciate your feedback and hope you find this publication provides useful input for your investment decisions.

Jon Scoffin Head of Research, Asia-Pacific and Head of Global Credit Research


8 November 2011 2

TABLE OF CONTENTS

CNH MARKET PRIMER Hong Kong: CNH market primer............................................................................................................. 4

Further support from Beijing ............................................................................................................. 4 Key developments since Q4 10......................................................................................................... 6 Sources and uses of RMB................................................................................................................... 9 Generic RMB instruments in Hong Kong......................................................................................11 Trading different RMB FX markets.................................................................................................14

CNH CORPORATE BONDS Food for thought ......................................................................................................................................20

Regulatory changes continue to spur market development....................................................20 Demand dynamics still supportive.................................................................................................20 Expect CNH corporate bond issuance to remain high...............................................................21 Assessing relative value ....................................................................................................................22 Reduced appetite for issuers with weak fundamentals ............................................................22

ISSUER OVERVIEW ...........................................................................................................................23

ISSUER COMPARISON TABLE ........................................................................................................24

ISSUER PROFILES Beijing Capital Land Ltd.....................................................................................................................30 BYD (HK) Co Ltd .................................................................................................................................32 China Eastern Airlines........................................................................................................................34 China Resources Power.....................................................................................................................36 China Shanshui Cement Group Ltd ................................................................................................38 China Windpower...............................................................................................................................40 Galaxy Entertainment Group Ltd ....................................................................................................42 Global Logistic properties .................................................................................................................44 Guangzhou R&F Properties ..............................................................................................................46 Melco Crown Entertainment Ltd.....................................................................................................48 PCD Stores (Group) Ltd ....................................................................................................................50 Road King Infrastructure Ltd............................................................................................................52 Singamas container holdings ..........................................................................................................54 Sinochem Hong Kong (Group) Co. Ltd..........................................................................................56 Zhongsheng group holdings ltd......................................................................................................58

This report contains updated versions of two previously published separate reports, Hong Kong: CNH market primer II, 16 August 2011, and CNH Corporate Bonds - Differentiating the issues and issuers, 19 August 2011.

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8 November 2011 3

CNH MARKET PRIMER


8 November 2011 4

Hong Kong: CNH market primer The CNH market1 continues to thrive, helped by medium-term RMB appreciation

expectations. We expect further liberalisation of China’s capital account to accelerate development of the offshore market.

Regulation changes since mid-2010 have largely reflected regulators’ preference for a “firm but measured” pace of RMB internationalisation.

However, the story may start to change as the pace of RMB internationalisation accelerates, as suggested by Premier Li’s recent six measures to support offshore RMB.

“Dim sum” bonds remain the dominant RMB-denominated asset class in Hong Kong. Issuance of these bonds has picked up significantly since 2010, but is still well short of the rapid rise in offshore RMB deposits. Lengthy and strict regulations related to the issuance of these bonds and the remittance of the proceeds are the main bottlenecks. But we expect the latest announcement of rules related to RMB FDI and the encouragement of mainland enterprises to issue “dim sum” bonds to help to accelerate the issuance pace.

The CNH FX market has also seen a significant improvement in liquidity and a broadening in key instruments. The gap between CNH and CNY spot rates reflects different fixing dynamics in these two markets, as well as expectations of RMB appreciation. The recent widening in the CNH-CNY spot spread is a result of position unwinding and weak external sentiment, but it also calls for more institutional stabilisers for the offshore CNY FX market. The divergence between CNY onshore, CNY NDFs and CNH forwards continues to reflect differences in market structure, appreciation and funding conditions. But the difference is likely to shrink as China gradually lifts controls on the capital account.

Further support from Beijing The CNH markets continue to expand, with some new development emerging since the summer. The momentum of renminbi (RMB) deposit accumulation has slowed from the rapid growth seen in the previous 12 months. Cross-border RMB trade settlement has become more balanced, with more exports now being settled in RMB. Moreover, the central government has endorsed several initiatives to facilitate two-way RMB circulation between Hong Kong and the mainland – a bottleneck to sustaining momentum in the offshore RMB market that we have discussed previously.

Market attention has been drawn to the slower increase in offshore RMB deposits since June, when new RMB deposits were CNY4.8bn (July: CNY18.6bn), versus a monthly average of CNY45.5bn in Q1. The monthly accumulation remained modest in September, at CNY13.2bn. This moderation should not come as a surprise, given more balanced two-way RMB flows between onshore and offshore markets, especially after the expansion of the RMB trade settlement (discussed below) and the increased number of CNH bond issuers remitting funds. We expect this trend to continue, but also believe sufficient liquidity will be in place for a further expansion of the CNH markets. In Hong Kong, the share of RMB deposits continued to rise, reaching 10.4% of total deposits in September.

RMB trade settlement has continued to expand rapidly. It has also become more balanced, with exports settled in RMB accounting for a growing share. According to the PBoC,

1 Renminbi, or RMB, refers to China’s currency. USD/CNY or CNY refers to the spot market for deliverable RMB in China. USD/CNH, or CNH, refers to the spot market for deliverable RMB in Hong Kong.

Ju Wang +65 6308 2801

[email protected]

Kumar Rachapudi +65 6308 3383

[email protected]

Jian Chang +852 2903 2654

[email protected]


8 November 2011 5

Chinese trade settled in RMB totalled CNY597bn in Q2 (Q1: CNY360bn), exceeding the CNY506bn seen in full-year 2010. Export settlement (which reduces offshore RMB liquidity) accounted for 25%, up from 11% in Q1, while import settlement (which supplies RMB liquidity) remains dominant at 75%. Among them, more than 80% of the settlements was channelled through the Hong Kong banking system in H1 (73% in 2010), which recorded a CNY149bn increase in July (June: CNY205bn).

The development of Hong Kong’s offshore RMB market received a further boost since August when the central government endorsed several policies to further liberalise its capital account and expand two-way RMB flows.2 Until recently, given the capital account restrictions, the main channels for RMB inflows were through QFII, trade settlement and CNH bond remittance. Also, RMB trade settlement has now expanded nationwide.

The long-awaited RMB QFII (RQFII, or mini-QFII), which allows investments in mainland securities markets, was approved with an initial size of CNY20bn. This will allow offshore RMB investors to achieve a more diversified portfolio with potentially higher returns. RQFII funds are expected to be allocated more towards fixed income versus equity products initially.

The rules on RMB FDI (RFDI) have been formalised. In August, Hong Kong enterprises were encouraged to use RMB to settle direct investments in the mainland. With more than half of China’s inward FDI coming from Hong Kong, this should help to facilitate two-way RMB flows. In October, detailed guidelines on RFDI (initially started in March) were announced, qualified foreign investors can apply directly for RFDI, and deals of CNY300mn or more are subject to approval. Allowing more channels for RMB inflows to China will increase investor interest in CNH fund-raising/bond issues.

Moreover, the central government has committed to expand the size and depth of the CNH bond market. It now allows mainland enterprises to issue CNH bonds, and it will expand mainland entities’ total CNH bond issuance size to CNY50bn in 2011. It also committed to regularly issue CNH sovereign bonds with a greater size. Following a successful August auction of CNY20bn, the tenors have now been expanded to include 2y, 3y, 5y, 7y and 10y.

Figure 1: RMB cross-border trade settlement (CNY bn)

Figure 2: Hong Kong RMB deposits continue to increase

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Q2 2011Q1 2011Q4 2010Q3 2010Q2 2010Q1 2010

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Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11

Deposit in other foreign currenciesRMB depositUSD depositHKD deposit

HKD trn

Source: CEIC, Barclays Capital Source: CEIC, Barclays Capital

2 New initiatives also include allowing mainland investors to buy exchange-traded funds linked to Hong Kong stocks.


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Key developments since Q4 10 Regulation changes since mid-2010, when we published our first CNH primer (see Hong Kong: CNH market primer, 2 December 2010), largely reflect the authorities’ preference for a “firm but measured” pace of RMB internationalisation. We highlight the key regulation changes below.

October 2010, December 2010: RMB clearance quota

In October 2010, the Bank of China Hong Kong (BoCHK) announced that its annual clearing quota of CNY8bn for trade purposes had been filled, sparking market concerns that the availability of RMB in Hong Kong would become severely constrained. However, the Hong Kong Monetary Authority (HKMA) announced soon after that it had agreed a CNY200bn swap line with the PBoC to support market liquidity. This eased concerns about the RMB business hitting a bottleneck. In December, the HKMA announced that the PBoC had approved a CNY4bn quota for Q1 2011 and future quotas would be approved on a quarterly basis. PBoC later approved another CNY4bn quota for Q2 11.

December 2010, July 2011: HKMA regulations on CNH net open positions (NOPs)

In December 2010, to ensure appropriate risk management, the HKMA limited Authorised Institution’s (AIs) RMB net open positions (whether net long or net short) to 10% of their RMB asset or liabilities, whichever is higher. In July 2011, the HKMA refined the rules governing AI’s RMB NOPs at the clearing bank and allowed excess NOPs to be offset against any net RMB deliverable forward positions in the opposite direction. This relaxation has seemingly encouraged banks to use CNH forwards as a funding curve and caused forward points to move higher.

January 2011: PBoC announces pilot scheme to allow RMB settlement of outward direct investment by non-financial enterprises

This move was designed to: a) further internationalisation of the RMB; and b) increase potential ODI and lower CNY appreciation pressures. However, the initial market impact was limited.

April 2011: PBoC cut interest rates on offshore CNH deposits in Hong Kong to 0.72% from 0.99%

This move was intended to: a) smooth the pace of offshore RMB accumulation; and b) encourage more CNH investment instead of CNH deposits. CNH bonds rallied in reaction to the announcement. As 0.72% was the interest rate the PBoC paid on excess reserves for onshore banks, this move also brought offshore rates in line. Note that BoCHK will only pass on 62.9bp to AIs after deducting its charges.

November 2010 and March 2011: SAFE regulations on onshore FX forward positions and ‘hot’ money

In a bid to combat ‘hot’ money inflows, SAFE tightened capital controls by setting a limit on mainland banks’ RMB outstanding cash basis positions in November 2010. In March 2011, these limits were lowered along with new curbs on USD borrowing. These measures resulted in onshore FX swaps moving sharply lower and led to the development of an outright forward market, separate from the FX swaps market.

March 2011 and May 2011: HKMA Fiduciary Account

To mitigate participating AI’s counterparty credit risk with the clearing bank, BoCHK, the HKMA launched an RMB Fiduciary Account service in March 2011. In May, the HKMA further clarified that participating AI’s exposure to the Fiduciary Account meant that they were taking counterparty risk with the PBoC (and not with BoCHK) and hence were exempt




8 November 2011 7

from the “large exposures” limits. While in theory this should have moved CNH forward points higher, as the move was well telegraphed it had a limited market impact.

More offshore RMB centres

In April 2011, it was reported that Singapore was in discussions with the Chinese government to make the Lion City the second offshore RMB trading centre. Taiwan and London were also reported to be looking to become an RMB centre. But uncertainties remain high in this area, especially the issue of how regulators can overcome jurisdictional differences. We would not expect the emergence of new offshore RMB centres to have much impact on Hong Kong, as the market there is already relatively mature following the rapid development of recent years.

August 17: Supporting RMB markets in Hong Kong

Premier Li Keqiang announced key guidelines to support the development of the offshore RMB market in Hong Kong and its drive towards becoming an offshore RMB centre.

Key measures to support the offshore RMB market development in Hong Kong can be separated into two parts:

1. Expand more channels for RMB circulation between Hong Kong and the mainland:

1.1. To allow the RMB QFII (mini QFII) to invest in the mainland securities market with an initial size of CNY20bn.

1.1.1. Allowing offshore RMB to access the onshore bond market will drain RMB liquidity from Hong Kong into the mainland and push up RMB yields in Hong Kong. This will likely result in USD/CNH forward points moving higher. However, we expect no impact on USD/CNH spot from this measure. But the initial size of CNY20bn is not big enough to have a material impact on either spot USD/CNY or USD/CNH markets.

1.2. To further expand RMB trade settlement to the whole nation (from 20 provinces previously).

1.2.1. This measure will encourage trade settlement in RMB and will result in more RMB liquidity moving to Hong Kong.

1.3. To support Hong Kong enterprises in making RMB DI (direct investment) on the mainland.

1.3.1. Similar to allowing offshore RMB to access the onshore bond market, this measure will help offshore RMB flow back to China. It will likely drive RMB interest rates higher in Hong Kong and push USD/CNH forward points higher.

2. To expand the CNH bond market in Hong Kong:

2.1. To allow more mainland financial institutions and allow mainland enterprises to issue RMB bonds.

2.1.1. Repatriation of RMB to the mainland will shrink the offshore RMB pool, which is likely to cause interest rates in CNH market to rise.

2.1.2. However, this will result increase the availability of RMB assets in Hong Kong, which is likely to offer more incentive for RMB to stay in Hong Kong. Therefore, we believe the overall impact on CNH liquidity is likely to be limited.


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2.2. To expand issuance size – mainland institutions are to raise a total of CNY50bn in the CNH market in 2011

2.2.1. Same as above.

2.3. Set RMB treasury bond issuance as a long-term institutional arrangement and gradually increase the size.

2.3.1. Same as above.

Some of the guidelines, such as RMB FDI, have been officially announced and more are likely to be formalised in the next few months.

Premier Li also announced plans to support Hong Kong as an International Financial Sector. Measures include launching exchange-traded funds (ETFs) on the mainland that are linked to Hong Kong stocks, further opening up the mainland market to Hong Kong banks and insurance companies, and encouraging more mainland-based enterprises to be listed in Hong Kong.

Figure 3: Milestones

Year Month Key milestones

2004 Jan Licensed banks can conduct personal RMB business (deposit, exchange, remittances, card business).

2005 December Personal business is expanded: local residents can make payments in Guangdong by cheque.

2007 June The mainland’s financial institutions are allowed to issue RMB bonds in Hong Kong upon approval.

2009 July Launch of RMB trade settlement and related services between Hong Kong and five mainland cities.

2009 September First RMB sovereign bond issued by the Ministry of Finance in Hong Kong.

2010 June The RMB trade settlement programme is expanded to 20 mainland provinces from five cities previously, and to all foreign trade partners versus Hong Kong, Macau and ASEAN countries previously.

2010 July Major deregulation measures: 1) banks can offer RMB accounts and RMB-denominated investment products to corporates and individuals, and can provide RMB credit to corporates. 2) Corporates may freely convert currency and transfer funds between accounts. 3) No restrictions on issuer, investor or amount of RMB bond issuance.

2010 July Hopewell Highway Infrastructure is the first HK corporate to issue RMB bonds in Hong Kong.

2010 August PBoC allows eligible overseas institutions to invest in mainland China’s interbank bond market.

2010 August McDonald’s is the first foreign corporate to issue RMB bonds in Hong Kong.

2010 September The FT reports that Malaysian central bank bought RMB-denominated bonds for its reserves.

2010 October Issuance of CNH–denominated bonds in Hong Kong by the Asian Development Bank (ADB) and the International Finance Corporation (IFC).

2010 November First tendering of sovereign bonds (RMB–denominated) through Central Moneymarkets Unit (CMU)

2010 November SAFE tightens capital controls by setting limits on mainland banks’ RMB outstanding cash basis positions.

2010 December HKMA limits AIs’ RMB net open positions (whether net long or net short) to 10% of their RMB assets or liabilities.

2011 January PBoC announces trial scheme for RMB settlement of enterprises’ offshore investment, allowing eligible enterprises to use their RMB holdings for overseas direct investment without the need to convert into a foreign currency.

2011 January The first CNY synthetic (straight) bond was issued in Hong Kong.

2011 January PBoC announces pilot scheme to allow RMB settlement of outward direct investment, by non-financial enterprises.

2011 January Bank of China’s New York branch is reported to be offering RMB trading to its US customers. Customers with a BOC account can exchange the equivalent of up to USD4,000 of renminbi daily, or USD20,000 annually (customers without a BOC account can only exchange the equivalent of up to USD2,000 of renminbi daily, or USD10,000 annually.

2011 January YFY Cayman Co., Ltd is the first Taiwan corporation to issue an RMB-denominated IPO, and HKEx to hold the introductory meeting in March

2011 February Bank of China (HK) to launch securities sales and repurchase facilities to RMB participating banks

2011 March China allows eight foreign banks to invest in China’s interbank bond market

2011 March SAFE further tightens domestic banks’ onshore FX positions and USD borrowing limits, ordering banks with net open positions of USD2bn or more to reduce these by 60% and others to reduce them by half by 30 September 2011.


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Year Month Key milestones

2011 March HKMA introduces a Fiduciary Account Service that allows HK banks to pass CNH credit risk to the PBoC. The PBoC also reported to have lowered its offshore RMB clearing interest rate from 0.99% to 0.72%, BoCHK cut its interest rate for CNY deposits in Hong Kong to 0.629% from 0.865%.

2011 April China and Singapore in talks to develop Singapore as a second offshore RMB trading centre.

2011 April Hui Xian REIT becomes the first IPO denominated in RMB in Hong Kong.

2011 April PBoC cuts interest rates on offshore CNH deposits held in Hong Kong from 0.99% to 0.72%

2011 June The Hong Kong Treasury Market Association launched a CNH fixing to provide a reference rate for the pricing of renminbi products in the offshore market. 15 banks active in the offshore renminbi market have been designated. The fixing is calculated by averaging the middle quotes after excluding the two highest quotes and the two lowest quotes from the rates provided by the contributing banks The calculated spot USD/CNY (HK) fixing will be published on both Reuters Instrument Code <CNHFIX=> and Reuters page CNHFIX at 11:15 a.m. Hong Kong time

2011 July HKMA refines rules on net CNH open positions and position squaring with clearing banks. The RMB net open position limit remains 10% of the RMB balance sheet. But excess amounts above this can now be offset against net RMB deliverable forward positions in the opposite direction.

2011 August To support offshore RMB market in Hong Kong, Vice Premier Li announced six measures that seek to expand the circulation between the onshore and offshore RMB bond markets, and encourage the use of RMB in trade and FDI.

2011 October PBoC and Ministry of Commerce announced Administrative Rules on Settlement Business of Foreign Direct Investment Denominated in RMB, which are designed to support RMB-denominated FDI and allow banks to provide settlement services related to these flows.

Source: Government web sites, Barclays Capital

Sources and uses of RMB

We believe that it is important to understand the drivers of RMB flows between mainland China and Hong Kong. In this section we discuss the sources and uses of RMB.

The supply of RMB into Hong Kong is coming from the following sources:

1. Clearing bank, the Bank of China (HK): The clearing bank brings RMB from mainland China into Hong Kong as participating AIs are allowed to hedge their trade-related flows with the clearing bank. So, if a corporate wants to hedge its exports denominated in USD or imports denominated in CNY, it will sell USD/CNY (at the onshore USD/CNY spot rate) to a participating AI bank. The participating AI will, in turn, sell USD/CNY to the clearing bank, ie Bank of China (HK). The clearing bank hedges its risk through its branch in the mainland, thus bringing in RMB liquidity from the mainland into Hong Kong.

The PBoC established a settlement quota for BoC (HK), initially set at CNY8bn per annum in 2010. This was later changed to CNY4bn for each of the first three quarters of 2011 and then set at CNY8bn for Q4 2011 in response to increased market demand.

2. HKMA: The HKMA has a CNY200bn currency swap line with the PBoC valid until December 2011. If the trade settlement flows require more RMB than the clearing bank’s quota, the HKMA will use its RMB swap lines with the PBoC, allowing participating AIs to hedge their open positions with it. Thus, HKMA acts as a source of RMB liquidity in Hong Kong if trade settlement flows exceed the clearing bank’s quota.

3. Mainland importers: Onshore Chinese importers can obtain approvals to remit RMB out of China into Hong Kong to buy USD for their import needs. Given the demand for RMB liquidity in Hong Kong, these importers have an incentive not to use their trade documents to buy USD via the onshore curve. These importers end up buying USD/CNH in Hong Kong and become suppliers of RMB to the CNH market as they try to capture the differential between the onshore CNY and CNH markets, providing RMB liquidity in Hong Kong in addition to that provided by the clearing bank. However, note that if USD/CNY spot trades lower than USD/CNH spot (as is currently the case), these


8 November 2011 10

importers are unlikely to bring RMB into Hong Kong to buy USD. Instead, they most likely would convert their RMB into USD on the mainland by buying USD/CNY spot.

4. Individuals: a) Hong Kong citizens who have accumulated RMB deposit those funds with Hong Kong banks, providing the market with RMB liquidity. b) Both investors and tourists from mainland China bringing in cash RMB are also a significant source of the currency in Hong Kong

RMB liquidity is absorbed from the Hong Kong market by the following sources:

1. Hong Kong-domiciled importers (from mainland China) who settle trade in RMB will absorb RMB out of Hong Kong and remit it to mainland China.

2. Bond issuers: RMB-denominated bond issuance most likely will be repatriated to mainland China for investment purposes, draining RMB from Hong Kong. RMB bond issuance has expanded rapidly since 2009, and as at July 2011, CNY150bn of this paper was outstanding. Although this is a significant source of RMB demand, it is still well short of the rapid growth of RMB deposits in Hong Kong.

3. CNH interbank participants: More than 10 foreign banks (including foreign central banks) now have access to the onshore interbank bond market. While the details have not been confirmed by the Chinese authorities, we believe the quotas have been kept small to limit the near-term impact on the CNH market. Over time, the greater access to the onshore market should promote to the convergence of onshore and offshore rates, and FX levels.

4. CNH equity issuers: Similar to bond issues, equity issuance proceeds that are transferred to mainland China drain RMB liquidity from Hong Kong. If the proceeds are not remitted to the mainland, the impact on liquidity is temporary as the funds are “locked up” in the issue. Hui Xian REIT became Hong Kong’s first IPO denominated in RMB when it raised USD1.6bn (CNY10.48bn) at a yield of 4.33%, which was at the lower end of the expected range.

Figure 4: Impact of various market participants on USD/CNH and RMB liquidity in Hong Kong

Market participant Impact on RMB liquidity in HK Impact on USD/CNH spot rate Impact on USD/CNH forward rates

Clearing Bank (BoC- HK) Increase Neutral - applicable rate is USD/CNY rate

HKMA Increase Neutral - applicable rate is USD/CNY rate

Mainland importers Increase Higher Lower USD/CNH forward points due to increasing RMB liquidity

Foreign domiciled importers

Decrease Lower Higher USD/CNH forward points due to tighter liquidity

Individuals Increase Neutral - applicable rate is USD/CNY rate Lower USD/CNH forward points due to increasing RMB liquidity

Bond issuers Decrease Neutral for spot - applicable rate is USD/CNY rate;

Higher USD/CNH forward points due to tighter liquidity

Equity issuers Decrease Neutral - applicable rate is USD/CNY rate Higher USD/CNH forward points due to tighter RMB liquidity

Non-mainland bond investors

Neutral Lower Higher USD/CNH forward points due to tighter RMB liquidity

Non-mainland RMB depositors

Neutral Lower Lower USDCNH forward points due to increasing RMB liquidity

Source: Barclays Capital


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Generic RMB instruments in Hong Kong We discuss the latest available RMB assets in Hong Kong in this section. It is interesting to note the increasing divergence in yields between onshore RMB assets and offshore RMB assets. Fundamentally, this is driven by the strict segregation of the two markets. At the moment, the onshore yield curve is elevated and flat, dominated by the mainland’s tight monetary policy stance. In contrast, the offshore yield has been driven by FX appreciation expectations, which tend to have a much lower and steeper curve in a bullish CNY environment. During the recent market sell-off, offshore yield curves have bear flattened. Within different offshore assets, the existence of arbitrage activities has caused in general a higher correlation between different yield curves. Currently, the correlation between onshore and offshore curves is very small, but expanding the circulation between the onshore and offshore markets should lead to greater convergence.

RMB deposits: Any corporate or individual customers, including offshore investors bringing dollars into the country, can open an RMB deposit account with any participating AI in Hong Kong. While there are no limits on RMB deposit amounts for either corporates or individuals, it is important to note the following: a) individual investors are limited to converting the foreign currency equivalent of CNY20,000 per day; and b) as mentioned earlier, only corporates with trade settlement requirements can buy RMB at the USD/CNY rate – customers without underlying requirements need to pay a premium. Owing to the restricted movement of RMB between mainland China and Hong Kong, Hong Kong RMB deposit rates are lower than mainland RMB deposit rates.

Previously, banks did not encourage RMB deposits because of a lack of RMB assets to match their RMB liabilities. The growth of the RMB business in Hong Kong, particularly dim sum bond issuance, has encouraged the increase in the RMB deposit market as banks now have access to RMB-denominated assets against their deposit liabilities. In fact, RMB deposits in Hong Kong have risen quickly since August 2010 and now total CNY609bn, accounting for 9.4% of the total deposit base in Hong Kong. In April this year, the PBoC cut the interest rate on offshore CNH held in Hong Kong from 0.99% to 0.72% in an attempt to slow the pace of deposit accumulation.

RMB loans: At present, participating AIs can extend RMB loans to corporate customers, and there is no restriction on the type of corporation or the type of loan. However, RMB loans

Figure 5: Current RMB yield curves – onshore vs offshore

Figure 6: July 2011 RMB yield curves – onshore and offshore

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CNH MOF bond yields Onshore MOF bond yieldsCNY NDF yields CNH deposit rateCNH FX Implied yields

Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital


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cannot be extended to personal customers. While RMB loans for customers for use on the mainland are not prohibited, the customer needs to obtain the required approval from the relevant mainland authority to remit the associated RMB funds to and from the mainland.

Certificates of deposit: Participating AIs are allowed to issue certificates of deposit (CD) under the HKMA’s supervision. This practice is encouraged as it not only provides an alternative source of RMB funding, but it also reduces the risk of over-reliance on a single source of wholesale funding for participating banks.

USD/CNH FX market: The CNH market is similar to the onshore CNY market in that the RMB is deliverable in Hong Kong. There are no requirements of underlying trade for accessing RMB via this market. However, if the RMB is to be repatriated to mainland China, documentation supporting the trade or approved capital account item is required.

CNH options: USD/CNH FX options: While the CNH FX option market is still nascent, it is developing rapidly with the increase in RMB liquidity in Hong Kong. USD/CNH option implied vols are lower than onshore USD/CNY vols, as CNH forward points are constrained by money market rates and hence are less volatile compared with CNY NDFs. Since 26 July, the Hong Kong Treasury Market Association has started publishing a daily USD/CNH fix. However, the current market convention for settling USD/CNH options is to use the Tokyo 3pm USD/CNH rate published by Reuters as the option settlement fixing.

The CNH FX market is developing rapidly, and interbank daily liquidity is estimated at USD1.2bn. The average interbank deal size is about USD10mn. Investors can also access deliverable FX forwards and FX swaps. Liquidity has improved significantly since initiation, with tradable tenors now extending to 3y and the typical size now reaching USD20mn.

CNH swap markets: The CNH cross currency swap (CCS) market is more liquid compared with IRS, but its liquidity is still limited. The main participants are corporate issuers and CNH loan takers. The CCS is a CNH fixed versus USD floating rate, with the floating leg 3m USD Libor. It is liquid up to 1y, though an illiquid market exists up to 2y. The IRS market has not been fully developed due to the lack of a liquid money market, a shortage of recognised fixing rates, and a lack of hedging demand given that most CNH bond buyers are buy-and-hold investors.

Figure 7: Liquidity, daily turnover and interbank market

CNH products Liquidity Daily turnover Interbank market

CNH Deliverable spot Liquid. Bid/ask spread 10 pips for USD20mn

USD1.2bn Typical interbank deal size is USD10mn

CNH Deliverable forward Liquidity now extends to 3y. 1y bid/ask 30 pips for USD20mn

USD2bn for whole curve Liquidity has improved significantly; typical size is USD20mn

CNH CCS Not liquid. The most active traded tenor is 1y. Bid/ask spread about 10bp for to 1y CCS

Low No active interbank market

CNH IRS Not developed yet Very low No active interbank market


CNH bonds: RMB-denominated bonds issued in Hong Kong are referred as CNH bonds or ‘dim sum’ bonds. Since 2010, the market started growing rapidly, with CNY29.27bn worth of issuance as of end November 2010. Total trading volume is about USD100mn per day.

The CNH bond market was launched in 2007, and the spectrum of issuers and bond type is increasing following deregulation. In June 2007, mainland financial institutions were allowed to issue RMB bonds in Hong Kong upon approval. In December 2008, the State Council


8 November 2011 13

stated in Guo Ban Fa [2008] No. 126 that Hong Kong enterprises and financial institutions that have substantial business operations in mainland China would be permitted to issue RMB bonds in Hong Kong. The market started to take-off from July 2010 when the restrictions on offshore RMB business were mostly lifted. Since then, multinational corporations, international financial institutions and international organisations have tapped the CNH market.

For issuers, the dim sum bond market offers a unique low-cost funding source. Restrictions on the access to the mainland bond market for offshore investors with QFII licences have increased demand for CNH-denominated assets where there are no such restrictions. As a result, CNH bonds generally trade 100-300bp below comparable onshore bonds, which gives issuers (particularly mainland issuers) an incentive to sell bonds in the CNH market instead of in mainland China.

On 17 August, the Ministry of Finance issued RMB20bn CNH bonds. The 3y bond led the performance, but overall cut-off yields were low, reflecting the demand for RMB-denominated assets in Hong Kong. In Figure 8 and Figure 9, we list the results of the 17 August 2011 and 30 November 2010 auctions (for further details of the 17 August auction see CNH bonds: Craving for ‘dim sum’ undiminished, 17 August 2011).

Figure 8: Result of tenders of RMB sovereign bonds on 17 August 2011

Tenor Application amount (bn)

Issued amount (bn) Average rate Highest Lowest Bid-to-cover

3y 38 6 0.48% 0.60% 0.10% 6.29

5y 17 5 1.15% 1.40% 0.10% 3.43

7y 9 3 1.65% 1.94% 0.10% 3.11

10y 5 1 1.92% 2.36% 0.10% 5.25

Source: HKMA, Bloomberg, Barclays Capital

Figure 9: Result of the tenders of RMB sovereign bonds on 30 November 2010

Tenor

Issuance amount

(RMB bn) Bid-to-

cover ratio

Latest onshore bid-to-

cover ratio

Avg accepted

yield Comparable

onshore yield Current yield (Indicative)

3y 2.0 14.83 1.23 0.89% 3.30% 0.82-0.65%

5y 2.0 7.06 1.53 1.61% 3.68% 1.38-1.26%

10y 1.0 5.48 1.92 2.27% 3.92% 2.44-2.30%

Source: HKMA, Bloomberg, Barclays Capital

Despite fast growth, the supply of dim sum bonds has fallen short of the growth in the deposit pool. This is due to the lengthy and strict regulation process for such bonds. According to the HKMA, there are no specific restrictions on offshore entities related to the issuance of CNH bonds, and the process is in general shorter than for conventional USD bonds in Hong Kong, given that most CNH bonds are not rated. The main obstacle comes from mainland authorities. Currently, Hong Kong enterprises and financial institutions that have substantial business operations in mainland China are permitted to issue RMB bonds in Hong Kong. There are no other PRC laws or regulations regarding CNH bond issuance by mainland incorporated companies, but it can be challenging to receive approval for issuance from authorities, particularly for sensitive sectors such real estate. Foreign companies that want to remit RMB issuance proceeds back to the mainland are allowed to do so via shareholder loans or capital contributions upon the approval from the PRC



8 November 2011 14

authorities. But all remittances of CNH proceeds require approval on a case-by-case basis, which can take several months to complete.

But things are now starting to change. In October, the PBoC and Ministry of Commerce announced “Administrative Rules on Settlement Business of Foreign Direct Investment Denominated in RMB”, measures designed to support RMB-denominated FDI, a move that provided official support for CNH bond proceeds to flow back to China, thereby simplifying the process.

Demand for dim sum bonds has been concentrated in short-tenor issues, as most investors seem to be investing on an FX appreciation theme. This has resulted in a skewed issuance of dim sum bonds by tenor (see Figure 10).

Figure 10: Monthly CNH bond issuance (CNY bn)

Figure 11: Issued CNH bonds by tenor

41

59

3

15

2227

10

34

18

9

0

5

10

15

20

25

30

35

40

45

2010 Ja

n

Feb

Mar

Apr

May Jun Jul

Aug Se

p

Oct

2011

y

8%

1-3y38%

3-5y40%

2%

5-10y12%

Source: CMU, Barclays Capital Source: CMU, Barclays Capital

Trading different RMB FX markets The renminbi, wherever it trades, is still one currency. However, owing to regulatory design and various supply/demand dynamics, the RMB spot rates trade differently in different markets. Similarly, RMB and USD interbank deposit rates are different in different markets – leading to different FX deliverable forward (DF) rates. In addition, the nondeliverable forwards (NDFs) are purely a representation of future CNY appreciation expectations rather than interest rate differentials between USD and CNY. Given the interconnection between NDF and DF markets, CNY appreciation expectations are transmitted into deliverable forward curves as well.

We explain below the various forms RMB spot and RMB forwards take in the different markets and the interplay between them.

Onshore RMB deliverable spot and forward market The deliverable RMB spot rate against the USD quoted in mainland China is referred to as the USD/CNY spot rate. The PBoC provides a daily fixing for USD/CNY spot, and spot is allowed to trade within a +/-0.5% band from the fix each day. Within this band, limitations on capital account convertibility mean that the spot USD/CNY rate is primarily driven by trade flows.


8 November 2011 15

Given that the RMB is deliverable for trade flows onshore, one would expect the FX forwards to reflect the interest rate differentials between onshore RMB and USD interbank deposit rates. However due to the reasons below, this covered interest rate parity is not maintained:

Due to limits on capital account convertibility, interbank market participants find it difficult to arbitrage between money market rates and FX implied interest rates through USD/CNY forward transactions. Hence, the implied CNY rate via FX forwards will be lower than the onshore interbank CNY deposit rate.

The fact that USD funding costs for various banks in China are different and also different from international USD funding markets complicates things (indicative average costs – Libor + 300bp).

Additionally, some market participants can access both onshore and offshore markets. These participants do onshore/offshore arbitrage trades, which arise as result of RMB appreciation being priced into the NDF forward curve. For instance, when RMB appreciation pushes USD/CNY NDF points lower, these participants can buy USD/CNY forwards in the NDF market, while selling USD/CNY forwards in the onshore market. This means that whenever there is increased RMB appreciation expectations being priced into the NDF forward market curve, these participants help translate some of that pricing into onshore forward markets.

In sum, onshore USD/CNY forward points are a function of: 1) interbank RMB and USD deposit rates; 2) severe restrictions on RMB capital account convertibility; and 3) RMB appreciation expectations in the NDF market and the resulting arbitrage opportunities, albeit limited.

Offshore RMB nondeliverable forward markets Before the recent development of a deliverable offshore RMB market, the offshore, nondeliverable forward market was the traditional market for investors to hedge RMB exposure. The daily spot fixing rate for nondeliverable forwards is the same as the onshore PBoC fixing. The USD/CNY forwards are nondeliverable and USD-settled against this fixing rate. These nondeliverable forwards are driven purely by supply and demand, which in turn is driven by RMB appreciation expectations – and are decoupled from the interest rate differential between RMB and USD. Thus, the NDF points can be said to be purely a function of RMB appreciation expectations.

Offshore RMB spot and deliverable forward markets The deliverable RMB spot rate against the USD quoted in offshore market (for all practical purposes, Hong Kong) is referred to as USD/CNH spot rate.

The CNH market is similar to the onshore CNY market that the RMB is deliverable in Hong Kong. However, the CNH is quoted differently, ie, a basis exists between USD/CNY and USD/CNH. This is because the current regulatory design results in RMB appreciation expectations being priced into spot USD/CNH. This is unlike USD/CNY spot, where only a limited amount of future appreciation expectations can be priced into the current spot rate. We explain the phenomenon below.

Expectations of RMB appreciation lead to a higher demand for RMB and RMB-denominated assets in Hong Kong. However, given the restrictions on the movement of RMB between China and Hong Kong, the physical supply of RMB available for delivery is much lower than the demand for RMB in Hong Kong. Given that there is no regulatory restriction on how much USD/CNH can move on a given day, this mismatch between supply and demand results in offshore RMB trading at a premium to RMB in mainland China.


8 November 2011 16

But over past two to three months, we have seen the opposite development in the spot CNH-CNY spread, caused by strong demand for USD in the Hong Kong market amid weak risk appetite, a stop out of heavy positions in long CNH versus CNY forward positions, as well as news that settlement banks filled the clearance quota with BoC (HK). We expect the spread to narrow back, helped by stronger CNY fixing by the PBoC, improving risk appetite as well as an increase in the clearance quota from CNY4bn per quarter to CNY8bn in Q4. (See CNH: Downside in CNY fixing trend intact; concern over depreciation overblown, 27 September 2011.)

In short, expectations of RMB appreciation as well as demand/supply conditions are reflected in the CNH versus CNY basis. Improving circulation between the onshore and offshore RMB markets, as well as providing more clarity on the regulatory environment, should help to keep the basis contained over longer term.

Given that USD/CNH is deliverable, one would expect the FX forward points in USD/CNH to be determined by the interest rate differential between the offshore RMB and USD funding rates. However, in practice this is not the case. Currently banks offer relatively high rates for CNH deposits (1y at around 1.5% for instance) to ensure enough RMB liquidity to be able to offer higher-margin RMB loans to offshore corporates. The positive and upward sloping CNH deposit curve, together with relatively low offshore USD funding rates, should translate into positive CNH forward points. However, actual CNH forward points closely track CNY NDF forward points and are influenced by sentiment about the NDF curves. RMB appreciation pressures, as well as the existence of offshore arbitrage activities, tend to translate into a more downward sloping curve. For instance, corporates can take advantage of the relatively high USD/CNH forward to hedge their USD exposure by selling USD/CNH forwards, particularly as the spot CNY and CNH basis now trade very close to each other.

Meanwhile, we do not expect convergence of CNH and onshore CNY forward points as long as China’s capital account remains largely closed.

In sum, the CNH forward curve is a function of: 1) interest rate differentials between offshore RMB and USD interbank deposits; and 2) RMB appreciation expectations.

Figure 12: The three RMB curves (current)

Figure 13: The three RMB curves (three months ago)

6.25

6.27

6.29

6.31

6.33

6.35

6.37

6.39

6.41

0 0.3 0.6 0.9 1.2 1.5

Onshore CNY Deliverable ForwardCNH Deliverable ForwardOffshore CNY NDF

6.25

6.30

6.35

6.40

6.45

6.50

0 0.3 0.6 0.9 1.2 1.5

Onshore CNY Deliverable ForwardCNH Deliverable ForwardOffshore CNY NDF

Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital




8 November 2011 17

Figure 14: Factors influencing various forward markets

Market Factors influencing the forward points

USD/CNY onshore forwards

1. Interbank RMB and USD deposit rates 2. Severity of RMB capital account convertibility restrictions 3. RMB appreciation pressures 4. Onshore/CNH arbitrage flows

USD/CNY NDF 1. RMB appreciation expectations 2. Onshore/offshore arbitrage flows 3. NDF/CNH arbitrage flows

USD/CNH forwards 1. Offshore interbank RMB and USD deposit rates 2. RMB appreciation pressures via CNH premium over CNY 3. Hedging interest in longer-dated forwards by CNH investors



8 November 2011 18

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8 November 2011 19

CNH CORPORATE BONDS


8 November 2011 20

Food for thought The CNH market continues to thrive, driven by renminbi (RMB) appreciation expectations and investors seeking to diversify currency exposure. We expect continued liberalisation of China’s capital account to accelerate development of this market. Demand technicals remain strong. We look for this market to continue to grow and mature rapidly. We provide updates of our profiles for selected Asian CNH bonds to reflect recent developments in the issuers’ operating and financial profiles. We expect investor appetite for issuers with weak fundamentals to remain subdued.

Regulatory changes continue to spur market development “Dim sum” bonds, which are RMB-denominated bonds issued in Hong Kong, remain the dominant RMB asset class in Hong Kong. Issuance of these bonds has risen significantly since 2010, but remains well short of growth in offshore RMB deposits. Strict regulations related to bond issuance and remittance of proceeds are the main bottlenecks. That said, policymakers have shown an intention to liberalise access to this market for onshore borrowers, albeit gradually. Measures that permit Hong Kong entities to make direct RMB investments into China are also spurring dim sum bond issuance.

Growth in the sector has been rapid – we estimate new issuance of CNY152bn (USD24bn) in the year to November, compared with a total market size of CNY197bn as at the end of October 2011. This rapid growth is likely to continue, in our view, driven by expectations of RMB appreciation and the lack of attractive alternative offshore RMB investments. CNH bonds have also become an attractive asset for investors looking to diversify their currency risk.

In August 2011, the Vice Premier Li Keqiang announced measures regarding RMB market developments in Hong Kong. The main points as reported in the media were:

1. RMB Qualified Foreign Institutional Investors (RQFIIs) will be allowed to invest in mainland securities markets with an initial size of CNY20bn.

2. Allow mainland companies to issue RMB bonds in Hong Kong.

3. Mainland Chinese investors will be able to buy ETFs linked to Hong Kong stocks.

4. Expand the RMB trade settlement program to cover the whole of China from 20 provinces previously.

5. Allow Hong Kong enterprises to use offshore RMB for FDI in China.

6. Start to allow foreign banks to raise RMB as equity on a trial basis.

7. Simplify approval procedures and implement favourable policies for Hong Kong under the Closer Economic Partnership Arrangement (CEPA), to realise full liberalisation of trade in services between the two sides by the end of the 12th Five-Year Plan.

Demand dynamics still supportive

Late last year and early this year, potential appreciation of China’s currency seemed to be the main motivation for buying CNH bonds. In recent months, a desire for currency and geographical diversification has also emerged.

The investor base for CNH bonds includes banks (which are not able to make RMB loans using their retail RMB deposits), CNH dedicated bond funds, money managers allocating to CNH assets and private banks. Hong Kong banks have shown a strong preference for highly

Krishna Hegde, CFA +65 6308 2979

[email protected]

Erly Witoyo +65 6308 3011

[email protected]

Avanti Save +65 6308 3116

[email protected]


8 November 2011 21

rated issuers, while private bank investors appear to have an appetite for the higher yields offered by lower-rated/unrated issuers. In response to the demand for CNH products, a number of CNH funds have also been formed. At least 24 CNH bond funds have been created this year and more are expected to launch. By the end of 2010, there were just six such funds. At the same time, RMB deposits in Hong Kong have risen from USD47.7bn at end 2010 to USD97.85bn as of end September 2011.

An additional investor base has opened up in Taiwan where the Financial Supervisory Commission has permitted insurance firms to invest up to 10% of their overall overseas funds into RMB-denominated securities in Hong Kong (ie, CNH). The limit implies more than USD13bn of potential demand, based on June 2011 investment portfolios.

As is typical for bond markets in their initial stages of development, demand for dim sum bonds remains concentrated in short-tenor issues.

The CNH bond issuer base is diverse in terms of issuer profile and tenor (Figure 15 and Figure 16). The corporate and financial institutions that have issued bonds span the range of Chinese, Asian and global corporates. Furthermore, the bond structures/covenants continue to evolve, with recent issues including stricter covenants.

Expect CNH corporate bond issuance to remain high

We expect CNH corporate bond issuance to remain robust for the following reasons.

1. Chinese policymakers’ desire to continue the internationalisation of the RMB. We expect policy to continue to encourage onshore borrowers to use the CNH market as a means of diversifying funding sources and deepening the market.

2. Credit conditions are likely to remain tight in China.

3. The dim sum bond market offers a unique low-cost funding source. Restrictions on access to the mainland bond market for offshore investors with QFII licences have increased demand for CNH-denominated assets on which there are no such restrictions. As a result, CNH bonds generally trade 100-300bp below comparable onshore bonds, which is an incentive (particularly for mainland issuers) to sell bonds in the CNH market.

Figure 15: CNH Issuance – issuer profile

Figure 16: CNH Issuance – tenors

Financials48%

Sovereign/Quasi16%

Corporates35%

Supranationals1%

<1y8%

1-3y38%

3-5y39%

>10y3%

5-10y12%

Source: CMU, Barclays Capital Source: CMU, Barclays Capital


8 November 2011 22

4. As the investor base expands, bond indentures and structures are likely to continue to evolve and include stricter covenants.

A key risk to this market would come from a reversal in expectations of RMB appreciation, most likely stemming from any sharper-than-expected slowdown in growth in China. So, a period in which the RMB did not appreciate against the USD, such as witnessed in mid-2008 to mid-2010, would create a headwind for the market.

Assessing relative value

An increasing number of issuers have bonds outstanding in CNH and USD. While liquidity in the CNH bond market is usually lower than that in the USD market, demand technicals for CNH bonds are very strong – especially for highly rated bonds.

Assuming there are two bonds from the same issuer, that are pari passu in seniority, for an investor who purchased a 3y CNH-denominated bond, the USD equivalent yield can be generated using the following steps (Bloomberg tickers where applicable):

a. Receive yield on CNH bond from the issuer

b. Enter into a CNH USD cross currency swap where the investor pays CNH CCS. (CGUSSW3 Curncy)

c. Enter into a USD fixed floating interest rate swap where the investor receives fixed (USSW3 Curncy)

As a result of these transactions, the USD equivalent yield by buying a CNH bond is:

CNH bond yield - CNH CCS coupon + USD IRS coupon

Reduced appetite for issuers with weak fundamentals We provide an update on our credit view for selected Asian CNH bonds to reflect recent developments in the issuers’ operating and financial profiles. At the same time, we have revised our views on the bonds’ relative value owing to the price changes – some of which were severe – seen in the past three months. We have added a profile of China Eastern Airlines, which issued CNY2.5bn of bonds in August, to this report.

Although Asian corporate CNH bonds remain largely driven by technicals, we believe recent price movements indicate an increased effort by investors to differentiate among the bonds based on fundamentals. Yields on CNH corporate bonds are trading in a wider range compared with a few months ago, when most yields were in the 5-7% range. We think this reflects investors’ increased familiarity with the issuers and, perhaps, improved liquidity in the CNH market, even if the overall widening in yields was due mainly to recent market weakness. We expect the CNH market to be less technically driven over time, owing to increased supply and broader investor participation in the sector.

Among the issues covered in this report, we see value in the Guangzhou R&F ’14s, Melco Crown ’13s, Sinochem ’14s and Zhongsheng ‘14s. We see the least value in the BYD ’14s, China Eastern Airline ’14s, China Wind Power ’14s and the Galaxy ’13s.


8 November 2011 23

ISSUER OVERVIEW

Figure 18: Asian industrial CNH bonds – bond details

Bond Coupon Principal (CNY mn) Indicative Price Mid YTW Ratings*

Beijing Capital Land '14 4.75% 1,150 NA NA -

BYD HK '14 4.50% 1,000 75/81 15.51% -

China Eastern Airline '14 4.00% 2,500 99.5/100.5 4.00% -

China Resources Power '13 2.90% 1,000 100.25/101.25 2.52% Baa3/BBB-/--

China Resources Power '15 3.75% 1,000 101/102 3.35% Baa3/BBB-/--

China Shanshui Cement '14 6.50% 1,500 91.5/93.5 9.70% --/BB-/BB-

China Wind Power '14 6.375% 750 79/84 15.89% -

Galaxy Entertainment '13 4.625% 1,380 97.5/98.5 5.64% -

Global Logistics Properties '16 3.375% 2,650 97.25/98.25 3.92% Baa2/--/BBB+

Guangzhou R&F '14 7.00% 2,612 73.5/76.5 20.35% -

Melco Crown '13 3.75% 2,300 94.5/96.5 6.93% Ba3/BB-

PCD Stores '14 5.25% 750 NA NA -

Road King Infrastructure '14 6.00% 1,300 80/85 15.29% --/BB-/--

Singamas Container '14 4.75% 1,380 87/91 9.95% -

Sinochem '14 1.80% 3,500 95.75/96.75 3.58% Baa1/BBB/BBB+

Zhongsheng '14 4.75% 1,250 83/89 11.46% -

Note: * Issue ratings for unsecured debt assigned by Moody’s/S&P/Fitch. Source: Barclays Capital, as of 3 November 2011.

Figure 17: Asian industrial CNH bonds compared

ZHOSHK '14

BYDCOL '14

CEAIRL '14RESOUR '13

RESOUR '15

SHASHU '14

CHIWIN '14

GALENT '13GLPSP '16

GZRFPR '14

MPEL '13

ROADKG '14

SINCON '14

SINOCH '14

1%3%5%

7%9%

11%13%15%

17%19%21%

1.5 2 2.5 3 3.5 4 4.5 5

Average Life (years)

YTW



8 November 2011 24

ISSUER COMPARISON TABLE

Figure 19: Issuer comparison table – Beijing Capital, BYD HK and China Eastern Airline

Beijing Capital BYD HK China Eastern Airline

Equity ticker 2868 HK Not listed 670 HK

Years of listing record 8 N/A 15

- IPO date 19 Jun 2003 - 5 Feb 1997

- Market cap (USD mn), as at 1 Nov 11

533 - 7,298

Largest equity holders Beijing Capital Group, a state-owned enterprise under Beijing Municipal Government - 46%

BYD Co. (which is in turn owned by founders Wang Chuan-fu and Lu Xiang-yang) – 100%

China Eastern Air Holdings (which is in turn owned by China’s State-owned Assets Supervision and Administration Commission) – 55%

Other key shareholders GIC (8.1'%) Shareholders of BYD Co. (parent): MidAmerican Energy (28.4%), CITIC Cap China (10.8%)

JP Morgan (5.8%), China National Aviation Holdings (4.7%)

Auditors PricewaterhouseCoopers Ernst & Young PricewaterhouseCoopers

Sector Real estate IT - handset component manufacturer and assembler; LFP batteries and automobile parts

Airline

Branding Middle- to high-end residential developer, increasing focus on large-scale integrated residential/commercial complexes

Integrated handset provider. Differentiates itself through innovation and one-stop shop service. Insufficient information on market position due to fragmented industry

No.2 Chinese carrier in terms of passengers carried in 2010

Corporate History Established in 1995, listed in 2003 Parent BYD Co. was founded in 1995 as Shenzhen BYD Battery Co. Ltd. Listed in July 2002.

Established in 1995 following China's decentralisation of its airline industry

Business model Increasing focus on large-scale integrated residential/commercial complexes. Highly concentrated in Beijing and Tianjin and other Tier 1 and 2 cities. Not a very big developer, but has a strong presence in Beijing, as it is ultimately controlled by the Beijing municipal government.

Handset components and assembly services accounted for 42% and 55%, respectively, of 2010 revenue, while rechargeable batteries and automobile parts contributed the remaining 3%. Master framework supply agreements with OEM customers, but they are not binding. Vertical integration allows the company to reduce costs through economies of scale. The industry is highly fragmented and cost competitive. The rechargeable battery and auto parts segments also support the parent BYD Co‘s automobile business. LFP battery business could contribute a greater portion of revenue in the future.

China Eastern Airline is based in Shanghai to take advantage of the largest number of cargo freight and passengers. The airline positions itself as a premium brand in China and is a member of SkyTeam, a strategic alliance that includes flight sharing and a frequent flyer programme with well-known global airlines

Key risks Incorporated in China, so capital raising must be approved by CSRC. Austerity measures in the residential property market. Also, as is typical in the sector, BCL provides guarantees to banks for mortgages granted to its property buyers - CNY3.0bn at end-Dec 10

Fast-evolving industry trends, fragmented and competitive industry, customer concentration, lack of public disclosure

Exposure to fuel prices and a slowdown in global economy, competition from China’s expanding rail network, and regulatory risks (eg, route allocation, pricing of domestic airfares, etc). The airline partially hedges its FX and fuel cost exposure

Significant related-party transactions?

Sales of properties to subsidiaries of associate Yang Guang is CNY692mn (10.7% of 2010 consolidated revenue)

Purchases of inventories from holdco and subsidiaries are substantial (>10%), sales of inventories to subsidiaries ~5%

Purchase of products and services from affiliates (<5% of 2010 consolidated revenue)

Management team (average years in industry)

- Chairman Liu Xiaoguang, chairman since 2002; Vice chairman of BCG since 1995; Prior to 1995, 13 years of working experience in various departments of the Beijing Municipal government

Wang Chuanfu. 16 years in the position. A co-founder of BYD Co. and previously a researcher in Beijing Non-Ferrous Research Institute

Liu Shaoyong. Appointed general manager of CEA Holdings in Dec 2008 and chairman in Feb 2009. Prior to joining CEA Holdings, he served as general manager and chairman of other Chinese airlines. He has been in the aviation industry since 1978.

- CEO Tang Jun. Joined BCL since 2002. 17 years of experience in the real estate sector

Li Ke. Eight years in the position. Worked at Asia Resources, and joined BYD Co. in 1996 in marketing and sales

Same as above

- CFO Luo Jun. Joined BCL in 2003, CFO since 2007 Information not available Wu Yongliang. Joined China Eastern Airlines in 1993 and has served as CFO since March 2009.

Source: Company data, Bloomberg, Barclays Capital


8 November 2011 25

Figure 20: Issuer comparison table – China Resources Power, China Shanshui Cement and China Wind Power

China Resources Power China Shanshui Cement China Wind Power

Equity ticker 836 HK 691 HK 182 HK

Years of listing record 8 3 20

- IPO date 12 Nov 2003 4 Jul 2008 27 Nov 1991


8,543 2,138 338

Largest equity holders China Resources Holdings (SOE) - 64% China Shanshui Investment - 30% Johnson Ko - 27%

Other key shareholders Commonwealth Bank (5.0%) China Construction Bank's AM unit (7%), JP Morgan (5%), Prudential (4.6%), Capital Group (4.6%)

Four other executive directors hold 27.38%

Auditors Deloitte Touche Tohmatsu KPMG PricewaterhouseCoopers

Sector Power producer, mainly operating coal-fired plants

Cement products manufacturing Wind power development, consultancy; engineering and equipment manufacturing

Branding One of the larger power producers in China (2% market share), with assets mainly located in the more affluent eastern, southern and northeastern China

China's largest producer of cement and clinker, with a strong presence in Shandong and Liaoning provinces

No significant market power (c2.2% share of market in 2009), but ties up with leading wind power players

Corporate History Incorporated in 2001; listed in November 2003

Incorporated in 2006; listed in 2008. Previously a listed pharmaceutical company, bought the wind power business in 2007 and sold the pharma business in 2009

Business model The company is an independent power producer. Its business segments include sales of electricity (86% of revenue, primarily coal-fired), sales of coal (11%) and heat supply. The company is increasingly diversifying upstream into coal mining in order to secure long-term supplies. It is also seeking to venture into clean energy projects, such as wind energy, hydro energy and solar energy.

Produces and sells various grades of cement products through direct sales network or third-parties (in rural areas). Ministry of Railways is a customer, using its cement on the Beijing-Shanghai High-Speed Rail line. The company obtains limestone from both third-party suppliers and its own mines (approximately 50:50). It has long-term relationships with coal suppliers, but no purchase contracts are in place. Raw materials, coal and electricity represent 77.6% of COGS in 2010.

Holding company; involved in services along the entire wind power value chain. Majority of company's revenue is contributed by tower tube manufacturing (48%) and engineering and construction (42%), which are one-off transactions. A substantial portion of wind power services and manufacturing revenue comes from wind farms in which CWP has a minority/joint-controlling interest. Recurring revenue comes from share of profit from JVs, which are off balance sheet; a company is set up to manage each wind farm project, with CWP taking a (mostly 49%) equity interest in each project company. The company announced in June 2011 that it was in the process of spinning off the tube manufacturing business

Key risks Regulatory environment (ie, pass-through mechanism, tariffs, etc); volatility in coal prices; high leverage; subordination, given that more than 86% of debt is at the subsidiary level

Exposure to construction industry and fuel prices

Poor infrastructure, especially in Inner Mongolia; regulatory uncertainty; probable large capex in the next few years to develop wind resources, short operating track record – change of business in 2007


Two transactions involving acquisitions of interests from related parties at consideration of c.HKD2.2bn (~ 6% of revenue) in 2009

<1% of revenue Sale of goods and services to associates and JCEs accounted for c.43.5% in both 9M 2009 and 2010. Key management compensation was 2-3% of operating revenue in 9m2009 and 2010.


- Chairman Wang Shuai Ting. At least 17 years in leadership positions in CRH and subsidiaries

Caikui Zhang. 42 years of experience in cement business

Liu Shunxing. Eight years at China Energy Conservation Investment Corporation; worked in NDRC before that

- CEO Wang Yu Jun. Over 20 years experience in power plant operation; 11 years working in various companies in CRH

Bin Zhang. 32 year-old son of the chairman. Joined March 2006. He had two years work experience prior to that.

Same as above

- CFO Wang Xiao Bin. Five years audit experience; previous corporate finance experience in investment banking; eight years working in CRP

Yongkui Zhao. Joined in November 2005. 29 years of experience in accounting and has been in the cement industry since 1984.

Hu Mingyang. Was director of Finance Office and General Office; years of experience not disclosed



8 November 2011 26

Figure 21: Issuer comparison table – Galaxy Entertainment, Global Logistic Properties and Guangzhou R&F

Galaxy Entertainment Global Logistic Properties Guangzhou R&F

Equity ticker 27 HK GLP SP 2777 HK


- IPO date 07 Oct 1991 18 Oct 2010 13 Jul 2005


8,327 6,365 2,849

Largest equity holders Lui Che Woo and family - 76% GIC/Ministry of Finance Singapore - 51% Li Sze Lim - 33.3%; Zhang Li - 31.9%

Other key shareholders Lone Pine Capital. 7.2% Morgan Stanley (12.4%), JP Morgan (7.0%)

Auditors PricewaterhouseCoopers KPMG PricewaterhouseCoopers

Sector Casino (gaming), construction Logistics, in particular, customizable, modern logistic facilities

Real estate

Branding Both VIP and mass market, no particular niche

Market leader in China and Japan modern logistics industry; 34.5% of total GFA located in China

Well established in Guangzhou, Beijing and Tianjin. Joint projects with SHK and other large Chinese developers. Top 10 Chinese property developer in 2010 by contracted sales.

Corporate History Incorporated in 1987; listed in October 1991 Incorporated in 2007; listed in October 2010 Established in 1994, listed in 2005

Business model Primarily develops and operates casinos and entertainment resorts; casino operations currently contribute 92% of total revenue. Serves the VIP market primarily through junket operators, and through direct promotion. The new Galaxy Macau, which opened in May 2011, appeals to mass-market gamers, which offer better margins but lower revenue than the VIP market. Entertainment resorts, although drawing the majority of revenue from casino winnings, will also rely on hotels, retail and entertainment service revenues.

Provides vertically integrated logistic services, including site selection, property development, leasing and management. Customizes facilities to suit the needs of the customers. Locates properties within key logistic hubs; extensive network reduces costs and helps the company meet customers' expansion needs in multiple locations. Currently, it is the largest provider of modern logistical facilities in both China and Japan. Lease profile is 5.9y in Japan, which locks in stable revenue, and 2.6y in China to capture growing demand.

Middle to upper-middle developer. High concentration in Tier 1 and 2 cities, such as Guangzhou, Beijing and Tianjin.

Key risks Market concentration, volatility from VIP segment, China visa restrictions, no significant market power or differentiation

Concentration risk, subordination to TMK, regulatory risk in China, weak credit metrics

1) Incorporated in China, capital raising must be approved by CSRC. Austerity measures in the residential property market. 2) as is typical in the sector, GZ R&F provides guarantees to banks for mortgages granted to its property buyers - CNY12.3bn at end Dec 10


Key management expenses of chairman, deputy chairman, and executive directors amounted to HKD48mn in 2010

~USD33mn (7-8%) of revenue Provision of guarantees for bank loans to jointly controlled entities and associates of CNY1.4bn (1.8% of total assets).


- Chairman Lui Che Woo. Director since 1991. Over 50 years of experience in quarrying, construction materials and property development.

Ang Kong Hua. 28 years as CEO of NSL (formerly Natsteel); other appointments include stints at DBS and HDB; currently also serving as chairman of Sembcorp Industries

Li Sze Lim (chairman). Zhang Li (co-chairman). Co-founders of GZ R&F in 1994. Both started in real estate in 1993

- CEO Same as above Ming Z. Mei. Former CEO of Prologis in China and Asian Emerging Markets; was at Prologis for at least 8 years

Zhang Li (same as above)

- CFO Former VP - Finance for Western Division of Harrah's Entertainment, length of experience not disclosed

Fang Xie. 15 years experience at GE and Prologis prior to joining GLP in 2009; previously CFO of GE Toshiba Silicones and Prologis (Momentive Performance Materials Shanghai)

Zhu Ling, CFO since 2001



8 November 2011 27

Figure 22: Issuer comparison table – Melco Crown, PCD Stores and Road King

Melco Crown PCD Stores Road King

Equity ticker MPEL US 331 HK 1098 HK


- IPO date 19 Dec 2006 15 Dec 2009 01 Jul 1996


6,111 625 413

Largest equity holders Melco and Crown (each 33.36%) Alfred Chan and Edward Tan - 40% (aggregate)

Wai Kee Holdings (HK-listed toll roads and property developer) - 39%

Other key shareholders Blackrock (4.2%) FIL (6%), Schroder (5.4%), Morgan Stanley (4.9%) and JP Morgan (4.7%)

Shenzhen Investment & subsidiaries (27%), property developer partly owned by the Shenzhen government

Auditors Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu

Sector Casinos (gaming) Retail industry (department stores) Real estate and toll roads

Branding Both VIP and mass market, no particular niche

High-end department stores; expanding network and entering outlet mall business.

Long toll road operating history. Track record in property development relatively short

Corporate History Incorporated in 2004; listed in December 2006

Previously known as Tiger Power Investments, which was incorporated in January 2007

Established in 1994, started as a toll road operator before entering property development in 2004

Business model Develops and operates casinos and entertainment resorts. MCE serves the VIP market primarily through junket operators, while the new City of Dreams resort serves the mass market. Its new project (Macau Studio City) will focus on the mass market.

Owns/manages 17 department stores in and an outlet mall in Beijing. Revenue is earned primarily through concessionaire sales. Cosmetics are sold through direct sales as per industry practice.

Toll road business and property development. Property focus is primarily on residential projects within reasonable travel to city centres.

Key risks Market concentration, volatility from VIP segment, China visa restrictions, no significant market power or differentiation

Expansion, revenue concentration, cyclicality

Regulatory risks: 1) toll road businesses are formed with JV partners under the control of local highway bureaus and/or provincial governments. Regulatory regimes lack transparency and are hard to predict; 2) austerity measures in the residential property market. Also, as is typical in the sector, Road King provides guarantees to banks for mortgages granted to its property buyers - HKD4.5bn at end Dec 10


PPE payments to affiliates ~ 5% in 2009 Key management expenses (all directors and senior officers) of US11.26mn ~5.6% of administration expenses

CNY551mn acquisition of Goal Gain from controlling shareholders Alfred Chan and Edward Tan in 2010 (12% of total assets). Existing options granted by PCD's controlling shareholders to PCD to acquire the controlling shareholders' interest in certain projects.

No


- Chairman Lawrence Ho (10 years) and James Packer (19 years)

Alfred Chan, chairman since 2007 and with PCD since it began operations in 2004. More than 20 years experience managing department stores in North America and Asia.

Zen Wei Pao, chairman of Road King since its establishment in 1994

- CEO Lawrence Ho, aged 34 and the son of Stanley Ho, has served as group managing director since November 2001, and as chairman and CEO of Melco since March 2006. He has also been co-chairman and CEO of Melco Crown since December 2004

Same as above Ko Yuk Bing. Joined Road King in 1995; 21 years of experience in business development and operations in China

- CFO 15 years experience in gaming and as gaming industry research analyst

Same as above Fong Shiu Leung. Joined Road King in 2000; 25 years of experience in auditing, accounting and business advisory



8 November 2011 28

Figure 23: Issuer comparison table – Singamas, Sinochem and Zhongsheng

Singamas Sinochem Zhongsheng

Equity ticker 716 HK 600500 CH 881 HK


- IPO date 08 Jul 1993 1 Mar 2000 26 Mar 2010


541 1,778 3,429

Largest equity holders Pacific International Lines (Private) Ltd. (controlled by Chang Yun Chung) - 39%

SASAC through Sinochem Corp - 100% Huang Yi and Li Guoqiang - 65%

Other key shareholders Fidelity (5.0%), Value Partners (5.0%) - Gen Atlantic (6.1%), Value Partners (5.0%)

Auditors Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu Ernst & Young

Sector Container manufacturing Oil trading, E&P, fertilizer, property Passenger car dealership

Branding Second-largest manufacturer globally, with 23% market share; provides customized services as a differentiation

Leading oil import/export company, largest fertilizer enterprise and importer of potash, leading high-end property developer and hotel operator

Fragmented market, with 1.0% market share; ranked 7th among passenger car dealerships in China

Corporate History Incorporated in 1989; listed in 1993 Sinochem Group was founded in 1950. The first state-owned import and export company in China. Sinochem HK commenced operations in HK in 1994

Founded in June 2008; wholly owned subsidiary Zhongsheng (Dalian) Holdings, was founded by Mr Li in 1998. Zhongsheng listed in March 2010.

Business model Provides wide range of container-related products, including dry freight containers (78%) and specialised containers. Competitive advantage by maintaining flexible and relationship-focused business model, allowing customer to vary quantity, specification, and delivery time and location after order is placed. Highly cyclical industry, which saw Singamas suffer an 85% drop in revenue in 2009.

The company's primary business is the import/export of oil, which contributed 84% of revenue in 1H10. Margins are extremely low (~1%); hence, the low contribution to EBITDA (25%). Oil trading can be volatile. The company has been diversifying upstream into E&P. Through its Sinofert subsidiary, Sinochem buys fertilizer from global producers and sells it to farmers through its extensive distribution network. Sinochem is vulnerable to high volatility due to the lack of a clear pass-through mechanism for fertilizer costs, which can fluctuate widely. The property business, carried out through Franshion Properties, provides the highest profit margin, but is exposed to increasing property curbs as the government seeks to arrest rising prices.

Operates 4S dealership agreements (sales, spare parts, service and survey), with both luxury and high-end auto brands. Comprehensive “one-stop automobile shop” business model. Mid- to high-end brands contribute 60%-plus of new auto sales revenue. Gross profit margin of luxury brand autos was 5.5% in 2008, 6.5% in 2009 and 8.2% in 2010; gross margin on mid- to high-end autos was 4.0% in 2008, 4.5% in 2009 and 4.4% in 2010. Extensive network concentrated in affluent cities in the northeastern, northern, eastern and southern regions of China.

Key risks Operates in a cyclical industry, weak financial profile, concentration risk (for product and customers)

Volatile commodity costs, high debt, low-margin oil trading business, lack of clear pass-through mechanism for fertilizer costs

Reliance on short-term debt, expansionary phase, low-margin business


Insignificant ~1% of revenue Substantial related-party transactions pertaining to sale of goods and acquisitions

Insignificant ~ <1% of revenue


- Chairman Chang Yun Chung (aka. Teo Woon Thiong) More than 60 years of experience in the shipping industry; founder of PIL

Liu Deshu. More than20 years of experience in international trade and machinery and petrochemical; sectors; president of Sinochem Group since 1998 and chairman of Sinochem HK since 1999

Huang Yi. Held position since company began 13 years ago; has more than 23 years experience in Chinese auto industry

- CEO Teo Siong Seng. More than 32 years in the shipping industry; appointed CEO in 1997

Li Xuehua, more than 20 years of experience in corporate finance; before joining, held senior financial management positions in national import/export corporations and was CEO of Franshion Dec 05-Sep 09

Same as above

- CFO Tham Shuk Ping. More than 23 years in multiple industries; company secretary since 1997; prior to joining, was CFO of HK-based construction company

Tang Zhijun. Held various positions within Sinochem Group over the past 20 years, including positions in finance

Du Qingshan; more than 24 years experience in accounting and finance; appointed by Dalian city government as CFO of Dalian DHI.DCW, a large Chinese corporation



8 November 2011 29

ISSUER PROFILES


8 November 2011 30

BEIJING CAPITAL LAND LTD Christina Chiow

BarCap view Company overview

While not rated by any of the ratings agencies, based oninternational rating scales, we estimate Beijing Capital Land(BCL) could be viewed as a BB credit for its establishedoperating track record, and strong parentage and liquidity. Ithas good positions in Beijing and Tianjin, its 2 largest markets.It also benefits from co-operations with Beijing Capital Group(BCG) under the Beijing Municipal Government. However,business diversification is limited, and credit metrics such asdebt/LTM EBITDA of 7.0x, LTM EBITDA/interest cover of 2.8xand debt/capital of 62% are closer to B rated peers. Theseshould recover as BCL books more property completions in2H11. Its CNH bonds have limited covenants (one for negativepledge), but do not include a CoC clause. Similar to GuangzhouR&F, its bonds are guaranteed by an onshore entity.

Since inception in 1995, BCL has expanded beyond Beijing to become a more geographically diversified developer. Traditionally focused on the development and sale of medium-to high-end residential projects, BCL is increasingly looking to develop large-scale integrated residential-commercial complexes. As at June 2011, the total GFA of the company’s land bank was 9.03mn sqm (attributable 4.99mn sqm) across 12 cities and 29 projects. Foshan, Tianjin, Xi-an and Beijing are BCL’s largest exposure, accounting for 57% of its land bank. Beijing Capital Group (BCG) is the largest shareholder with a 45.58% stake, followed by GIC at 8.14%. Listed in 2003 on the Hong Kong Stock Exchange, Beijing Capital Land had a market capitalisation of HKD4.1bn as at 31 October 11.

Strengths Risks

Strong shareholders: BCL is 45.6% owned by BCG, whichis under the direct supervision of the Beijing MunicipalGovernment. Singapore’s GIC owns another 8.14% and hasbeen a strategic investor since 2003. Several of BCL’s boardmembers have worked for Beijing Municipal Government,related entities or BCG prior to joining BCL. It also benefitsfrom co-operations with BCG’s other businesses. Forexample, BCG built the Beijing-Tianjin tollway, along whichBCL obtained 2.9mn sqm of primary land developmentrights (Tianjin Wuqing section).

Beijing presence: One of the leading developers in Beijing,BCL’s strong brand allows it to command a premium forquality. In 1H11, BCL’s average contracted selling price inBeijing was CNY25,175/sqm, a modest 4.1% y/y decline. Over the past five years, Beijing accounted for 52-97% of BCL’s contracted sales and will remain a significant contributor,although Beijing’s share declined to 35% in 1H11.

Adequate liquidity: At Jun 11, BCL has cash of CNY8.5bnagainst short-term debt of CNY3.5bn. Land premiumspayable in 2H11 were slightly less than CNY1bn.

Financial flexibility: BCL has access to various fundingchannels, including onshore banking facilities, and the CNYand CNH bond markets. This ensures sustainable capitalsufficiency while it focuses on large-scale integratedresidential-commercial complexes. Revenue from officeand commercial properties tends to be generated closer tocompletion of the development, with a longer assetturnover cycle and upfront capital costs.

Increasing leverage: Standalone credit metrics weakened further in 1H11 on lower property completions and higher debt. Debt/LTM EBITDA rose to 7.0x (2010: 5.2x) and debt/capital was 62% (2010: 56%). These should recover in 2H11 as BCL targets GFA completion of 1.1mn sqm in 2H11, compared with 305,800sqm in 1H 11.

High concentration in Tier 1 and Tier 2 cities: Over 90% of BCL’s projects are in cities with purchase restrictions, which helps to explain its low contracted sales in 9M 11 –CNY7.8bn, or 52% of its annual target. Although BCL has a back-loaded launch schedule and maintained its full-year sales target of CNY15bn, YTD underperformance raises a risk it may miss its sales target.

Subordination risk: BCL’s bank borrowings and trust loans are secured. Secured debt accounted for c.27% of total assets at June 11. Further, c.50% of consolidated debt was at the subsidiary level at end-December 2010, implying subordination risk for offshore bondholders. This is despite the bond having an onshore guarantee from BCL.

Trust loans re-financing: At Jun 11, BCL has trust loans of CNY3bn (24% of total debt), of which CNY2.1bn is due by Jun 12 and another CNY825mn by Aug 12. Given the government’s curb on property trust products, BCL may have to re-finance through alternatives or use internal resources to pay down the loans.

Corporate governance: Given BCL’s long operating and listing record, we do not see material corporate governance issues. However, we note CNY692mn property sales (10.7% of 2010 consolidated revenue) to related companies.

Bonds outstanding

Issuer Coupon Principal

(CNY mn) Maturity Senior unsecured

issue rating

BECL Investment Holding Ltd 4.75% 1,150 21 Feb 2014 –


8 November 2011 31

BEIJING CAPITAL LAND LTD (BCL)

Financial summary, year end December (CNY mn)

FY 08 FY 09 FY 10 1H11

Profit and loss

Operating revenue 5,167 5,393 6,493 1,658

Gross profit 1,660 1,728 2,235 635

EBITDA 1,471 1,504 1,904 474

EBIT 1,379 1,467 1,863 452

Gross interest expense (512) (441) (449) (379)

Net income 383 538 918 308

Cash flow

FFO 602 842 960 NA

Changes in working capital (1,830) 3,366 231 NA

Operating cash flow (1,227) 4,208 1,191 NA

Capex/Acquisitions (863) (905) (834) NA

Dividends paid (168) (179) (242) NA

Free cash flow (2,258) 3,124 115 NA

Balance sheet

Cash 2,147 4,879 8,429 8,480

Total assets 19,068 22,422 30,553 35,462

Short-Term Debt 1,223 1,096 2,382 3,498

Long-Term Debt 5,662 5,510 7,468 8,766

Total debt 6,885 6,606 9,851 12,264

Net debt 4,738 1,726 1,421 3,785

Total shareholders' equity 6,159 6,677 7,670 7,497

Credit ratios

Gross profit margin 32% 32% 34% 38%

EBITDA margin 29% 28% 29% 29%

EBITDA/Gross interest 2.9x 3.4x 4.2x 1.3x

Total Debt/EBITDA* 4.7x 4.4x 5.2x 7.0x

Total debt/Total capital 53% 50% 56% 62%

Source: Company data, Barclays Capital

Land bank by city, June 2011 Debt maturity profile, June 2011

Beijing12%

Tianjin13%

Qingdao2%

Chengdu9%Xi'an

12%

Zhenjiang2%

Foshan20%

Wanning4%

Shenyang9%

Huzhou7%

Chongqing8%

Wuxi2%

2.1

1.0

3.5

0.91.4 1.1

0.8 0.1

0.1

1.1

0

1

2

3

4

5

6

7

< 1 yr 1 - 2 yrs 2 - 5 yrs > 5 yrs

CNH 5Y 2014 bond

CNY 5Y 2014 bondOther loans

Trust loansBank borrowings

Debt: CNY12.3bn

Source: Company data, Barclays Capital Source: Company data, Barclays Capital


8 November 2011 32

BYD (HK) CO LTD Erly Witoyo


Despite the high yield, the BYD HK ’14s look fairly rich relative toits CNH peers. The company’s robust credit metrics are offset bya relatively weak business profile characterised by highcustomer concentration and its position in a competitive sectorwith rapidly evolving industry trends. We think its credit profile isalso hurt by the linkage to parent BYD Co. Ltd, which we see as aweaker credit. Similarly, we do not believe the parent letter ofsupport on the CNH bonds provides any credit uplift. The BYDHK CNH bond covenants are among the weakest for CNHbonds. There are no limitations on additional indebtedness orrestricted payments; the only restrictive covenant seems to be alimitation on the negative pledge of assets. While not rated byany of the ratings agencies, based on international rating scales,we estimate that BYD HK’s rating could be viewed as a mid B.

BYD HK through its subsidiaries is involved in handset component (casing, keypad, charger and others) and assembly services. Its key customers included Nokia, Motorola and Samsung. The company also produces lithium ferrous phosphate batteries and automobile parts, which are mainly sold to parent BYD Co. BYD HK is a wholly owned subsidiary of BYD Co, a conglomerate whose main business is automobiles, and handset components and assembly. BYD Co. Ltd is listed on the Hong Kong Stock Exchange with a market cap of USD8.3bn as at 2 November 2011. BYD Co. is 43% owned by founders Mr. Wang Chuan-fu and Mr. Lu Xiang-yang.

Strengths Risks

Integrated business: BYD HK is involved in the design,manufacturing and assembly of mobile handsets. Itsintegrated operation is one of its key competitiveadvantages, in our view. Aside from benefiting from costcompetitiveness, the integrated model provides customersa one-stop shop in outsourcing their handset production.This operating advantage has enabled the company tobuild strong relationships with major OEM customersincluding Nokia, Huawei, Motorola and Samsung.

Sound financial profile: BYD HK has been in a net cashposition since at least 2008. Pro forma for the CNH bondissue, its credit metrics look robust, with 2010debt/EBITDA of 0.8x and debt/capital of 12%. Given thecompany’s large cash balance, however, we question whythe company needs to raise additional funds from the CNHbond market.

Strong R&D capabilities: BYD HK’s R&D capabilities help todifferentiate it from its competitors. As at 31 December2010, BYD HK had 144 patents and 152 pending patentapplications, as well as 19 trademarks and 164 patents that were licensed by the parent company. The BYD group wasnamed among the top 10 Electronics and InformationTechnology Companies of 2010 in China by the Ministry ofIndustry and Information Technology.

Customer concentration: BYD HK’s five largest customers contributed at least 92% of its revenue from 2008-10. Any loss or fall in sales to any of these customers could have a significant impact on cash flow. We are concerned that key customers Nokia and Motorola are facing a declining trend in market share. BYD HK’s customers have not provided, nor are they obligated to provide, long-term purchase orders or commitments under existing supply agreements.

IT trends: BYD HK faces significant challenges from fast-moving industry trends. A change in the market share of its key customers or reversal in outsourcing by handset manufacturing could hurt operations. There is also a trend of smartphones replacing mobile phones, although BYD has so far been able to keep up with this change.

Competitive industry: Handset component and assembly is a highly fragmented and competitive industry. A deterioration in the company’s competitive advantage (eg, integration, cost competitiveness, R&D capability) could have an adverse effect on its operations and financial position.

Weak parent: Parent BYD Co faced significant refinancing risk at end-Sep 11, with short-term debt of CNY9.8bn versus cash of CNY3.6bn. Also, BYD Co has said FY11 net income will fall 35-65% on lower sales at its automobile and solar-energy businesses. Given BYD HK’s strong liquidity, it mayface requests to support its parent if BYD Co faces financial difficulties. Its CNH bonds do not limit restricted payments.

Corporate governance: We think the key risk for BYD is its lack of disclosure, given its private status. It also has material related-party transactions: around 16% of operating costs in 2010 comprise products and services purchased from the holdco and other subsidiaries.

Bonds outstanding



issue rating

BYD (H.K.) Co. Ltd 4.50% 1,000 28 Apr 2014 –


8 November 2011 33

BYD HK LTD


FY 08 FY 09 FY 10 Pro forma FY 10*

Profit and loss

Operating revenue 8,561 11,297 17,216

Gross profit 1,709 1,577 2,124

EBITDA 1,052 1,233 1,813 1,813

EBIT 679 663 1,127


Net income 443 783 1,083

Cash flow

FFO 1,072 1,590 2,184

Changes in working capital (887) 517 (283)

Operating cash flow 186 2,107 1,901

Capex/Acquisitions (2,786) (2,123) (1,816)

Dividends paid (119) 0 (52)

Free cash flow (2,719) (17) 34

Balance sheet

Cash 1,201 1,283 1,584 2,584

Total assets 10,749 13,531 16,039

Short-Term Debt 14 0 476

Long-Term Debt 0 0 0

Total debt 14 0 476 1,476

Net debt (cash) (1,186) (1,283) (1,108)


Credit ratios

Gross profit margin 20.0% 14.0% 12.3%

EBITDA margin 12.3% 10.9% 10.5%


Total debt/EBITDA 0.0x 0.0x 0.3x 0.8x

Total debt/Total capital 0.2% 0.0% 4.3% 12.4%

Note: * Includes CNH bonds issued on April 2011. Source: Company data, Barclays Capital

Revenue by business segment, December 2010 Debt maturity profile, December 2010*

Mobile handset

component42%

Assembly service income

55%

Battery and others

3%

Source: Company data, Barclays Capital Note: *Pro forma for CNY1bn of CNH bonds issued in April 2011. Source: Company data, Barclays Capital

CNY476mn + Pro forma for CNY1bn of CNH bonds

476

1,000

0

200

400

600

800

1000

1200

2011 2012 2013 2014

Bank loans CNH bonds


8 November 2011 34

CHINA EASTERN AIRLINES Jit Ming Tan


We have a cautious view of CEA due to concerns that amoderation in China’s economic growth will hurt trafficvolumes, earnings and credit quality in 2H11 and 2012. CEA’splans to increase its fleet 42% through 2015 will also weigh onits load factor and credit metrics, in our view. Its liquidityprofile is weak, although its SOE status should provide accessto domestic funding. Bond covenants are weak, with anegative pledge and change-of-control put, but no restrictionson additional indebtedness or payments. While not rated by any of the rating agencies, based on international rating scalesand subordination by secured debt, we estimate that theCEAIRL ’14s would be viewed as a mid-B credit. Therefore, webelieve its 3-4% yield is rich compared with other CNH bonds.

China Eastern Airlines (CEA) is one of the three largest airlines in China. It served 182 domestic and international cities with 355 aircraft at end-2010. It is a full-service airline and operates primarily from Shanghai’s Hongqiao (52% of the airport’s 2010 flight traffic) and Pudong (38%) airports. In 1H11, it carried 33.2mn passengers and reported revenue tonne-kilometres (RTK) of 6.3bn and revenue passenger-kilometres (RPK) of 48.6bn. The company was listed in Shanghai, Hong Kong and New York in 1997, and has a market capitalisation of c.HKD53bn. An SOE, China Eastern Airlines is 59.9% indirectly owned by China’s State Council through SASAC.

Strengths Risks

China growth: CEA likely will benefit from the expectedgrowth in China’s aviation market, which is driven by the country’s growing affluence and critical role in the globaleconomy. Boeing projects a CAGR for China’s domesticrevenue passenger-kilometres (RPK) of 7.9% during 2009-29, and a CAGR of 5.7-7.3% for its international RPK. Tomeet demand, China plans to build 55 or more airports by2015; construction of 33 had been completed by end-2010. Problems with China’s high-speed rail network havealso supported demand for air travel.

Shanghai hub: CEA’s main hub in Shanghai allows theairline to tap the high demand for travel to/from China’sleading financial centre. Shanghai’s Hongqiao and Pudongairports are the largest in China, in terms of cargo, mail andpassenger traffic. We believe CEA is able to capture a widercustomer base as a result of its geographical location.Industry association IATA reported that CEA was thesecond-largest airline in China and the ninth-largest globally by passenger volume in 2010.

SOE status: As a state-owned enterprise, CEA may benefitfrom favourable policies and regulation. More importantly,we think its SOE status will provide the airline good accessto domestic funding, despite China’s continued liquiditytightening.

Industry cyclicality: Airline traffic is highly correlated to economic growth, and we expect the current economic uncertainty to weigh on demand for air transport. China will not be immune to the ongoing uncertainty. CEA’s 3Q11 passenger volume rose only 1.5% y/y, and in Oct 11, the China’s Civil Aviation Administration cut its forecast of full-year passenger volume growth to 8% from 13%, and its cargo growth forecast to 0 from 12%. This comes as CEA seeks to add 150 new planes through 2015, raising the prospect of a significant decline in its load factor.

Fuel exposure: Fuel costs rose 34% y/y and accounted for 37% of operating expenses in 1H11, despite RTK rising only 5.3% y/y, as the average aviation fuel price rose 20%. CEA can enter into fuel hedging contracts with prior government approval. The company hedged 28% of its annual fuel consumption in 2010, and reported in Jun 11 that all existing hedges expire at end-2011. We believe a higher proportion of fuel hedges would bring more stability to CEA’s financial profile.

Weak liquidity: We estimate CEA had pro forma Jun 11 cash of CNY6.8bn, and it generated CNY5.5bn of operating cash flow in 1H11 compared with short-term debt of CNY22.0bn. Given industry’s historical cyclicality, we believe CEA should hold a higher cash balance relative to maturing debt. That said, we acknowledge that as an SOE, it likely will have access to domestic funding, even during periods of economic uncertainty.

Corporate governance: We do not see material corporate governance issues, owing to its long operating and listing record, as well as its government ownership.

Bonds outstanding



issue rating

Eastern Air Overseas (Hong Kong) Corp Ltd 4.00% 2,500 8 Aug 2014 --


8 November 2011 35

CHINA EASTERN AIRLINES

Financial summary, year end December (HKD mn)

FY 08 FY 09 FY 10 1H11 Pro forma 1H11*

Profit and loss


EBITDA^ (1,699) 4,678 14,257 7,194 7,194

EBIT^ (8,513) (2,528) 5,003 2,221

Gross interest expense^ (3,512) (2,691) (2,456) (1,256) (1,306)

Net income (15,269) 169 4,958 2,279

Cash flow

FFO^ (565) 3,125 14,432 NA

Changes in working capital 2,831 310 (2,845) NA

Operating cash flow 234 1,432 9,091 NA

Capex/Acquisitions (1,727) (5,685) (6,523) NA


Free cash flow (1,545) (4,298) 2,526 NA

Balance sheet

Cash 3,451 1,735 3,078 4,286 6,786

Total assets 73,052 71,851 103,334 108,955

Short-Term Debt 26,513 12,330 15,211 19,783

Long-Term Debt 8,588 13,005 23,355 20,059

Total debt^ 47,794 37,206 60,667 62,248 64,748

Net debt (cash)^ 44,343 35,471 57,589 57,962 57,962

Total shareholders' equity (12,640) 1,676 16,562 19,739 19,689

Credit ratios (lease-adjusted)

EBITDA margin NM 12.0% 19.3% 18.9%

EBITDA/Gross interest NM 1.7x 5.8x 5.7x 5.5x

Total debt/EBITDA NM 8.0x 4.3x 4.2x 4.3x

Total debt/Total capital 136.0% 95.7% 78.6% 75.9% 76.7%

Note: * Includes the CNH bonds issued on August 2011. ^ Adjusted for operating leases. Source: Company data, Barclays Capital

Revenue by business segment, June 2011 Debt maturity profile, December 2010

Cargo and mail9%

Others7%

Passenger revenues

84%

15.2

8.2 8.76.5

2.5

0

2

4

6

8

10

12

14

16

< 1 yr 1 - 2 yrs 2 - 5 yrs > 5 yrs

Bank borrowings CNH bonds

Source: Company data, Barclays Capital Note: Pro forma for CNY2.5bn of CNH bonds issued in August 2011. Source: Company data, Barclays Capital


8 November 2011 36

CHINA RESOURCES POWER Timothy Tay


Among the Chinese independent power producers, ChinaResource Power has one of the strongest credit profiles, withthe highest operating margins and lowest leverage. Thebiggest risk to the company’s credit profile is escalating coalprices and its ability to pass through higher fuel costs. This issomewhat mitigated by high operating margins and the highutilisation rate of its generation fleet, which provides a bufferagainst increases in fuel cost. The recent average on-grid tariff hike of 1.2% in April, though lower than expected, should helpalleviate some of the rising cost pressures. We view the CNHbonds as fairly valued relative to the 2015 maturity USD bonds.

China Resources Power is one of the fastest growing independent power producers in China in terms of installed capacity, revenue and net profit growth. The company manages coal-fired power plants, renewable energy projects and coal mine projects in 13 provinces, municipalities and autonomous regions. As at Jun 11, the company operated 53 power plants with total attributable generation capacity of 21,059MW. Of this capacity, 94.8% was coal-fired and the rest ‘clean energy’ projects. The company was listed in 2003 and has a market capitalisation of c.HKD72bn. China Resources Holdings, an SOE, has a 64.1% stake in the company.

Strengths Risks

Favourable service areas: As at Jun 11, 70.9% of thecompany’s operational generation capacity was located inthe affluent regions of eastern, southern and north easternChina. The on-grid tariffs in eastern and southern China,are generally higher than the national average, CNY414.4per MWh versus CNY340 per MWh (both inclusive of VAT).

Strong operating track record: The company’s ability toconsistently achieve high profit margins and utilisationhours underscores its cost competitiveness. It activelyimplements measures to control fuel costs by sourcingthrough annual contracts, entering strategic cooperationagreements and expanding its coal mining business. Thecompany enjoyed average gross margins of 39% from2008 to 2010. Utilisation hours exceeded the nationalaverage by 16.6%, 18.8%, and 19.3% in 2008, 2009 and2010 respectively.

Upstream expansion and business diversification: China Resources Power seeks opportunities to expand upstreaminto coal mining in order to secure long-term coal supplyand stabilise coal costs. Coal production in the first sixmonths of 2011 increased 63.2% y/y, rising to 7.743mntonnes from 4.746mn tonne. Self-produced coal accountsfor 25% of the company’s consumption. The company has also actively diversified into clean energy projects such aswind, which accounts for 646MW of attributable capacity,as well as hydro-electric energy.

Evolving regulatory environment: The regulatory environment, while managed by the National Development and Reform Commission, is ultimately shaped by the central government’s policy objectives. Regulatory changes can be unpredictable and inefficient, as seen by the authorities’ delay in implementing a coal tariff pass-through mechanism during 2007 and 2008.

Exposure to commodity risk: As fuel costs averaged 72.5% of operating expenses from 2008-10, and a substantial portion of its coal requirements are purchased from spot markets (48.6% in 2009), China Resources Power is materially exposed to rising coal prices. Fixed on-grid tariffs set by the central government also limit the company’s ability to pass on coal price increases and add further pressure on gross margins. This risk is mitigated by China Resources Power’s growing portfolio of coal mines, which should provide a secure long-term supply of coal and help to stabilise its cost base.

Weak credit metrics: China Resources Power has a relatively high debt/total capitalisation ratio of c.60% and debt/EBITDA of 6.5x. However, short-term liquidity is adequate, with HKD7.3bn cash on hand. Further, the company has established stable long-term relationships with domestic banks and possesses the flexibility to roll over most of its short-term debt.

Bonds outstanding



issue rating

China Resources Power Holding Co. Ltd 2.90% 1,000 12 Nov 2013 Baa3/BBB-/--

China Resources Power Holding Co. Ltd 3.75% 1,000 12 Nov 2015 Baa3/BBB-/--


8 November 2011 37

CHINA RESOURCES POWER Financial summary, year end December (HKD mn)

FY 08 FY 09 FY 10 1H11

Profit and loss


Gross profit 9,289 14,161 18,908 11,685

EBITDA 5,737 10,284 11,398 6,213

EBIT 2,923 7,040 7,123 3,773

Gross interest expense (1,846) (2,311) (3,041) (1,444)

Net income 1,936 6,038 5,762 3,227

Cash flow

FFO 4,854 8,341 9,955 NA

Changes in working capital (88) (674) (555) NA

Operating cash flow 4,766 7,667 9,400 1,515

Capex/Acquisitions (15,846) (22,654) (20,881) (4,824)

Dividends paid (1,044) (620) (1,771) (1,268)

Free cash flow (12,124) (15,607) (13,252) (4,577)

Balance sheet

Cash 5,467 6,262 6,802 7,305

Total assets 79,650 118,926 143,011 160,527

Short-Term Debt 9,485 23,494 20,668 19,618

Long-Term Debt 28,187 32,990 54,243 57,932

Total debt 37,671 56,484 74,911 77,550

Net debt (cash) 32,204 50,223 68,109 70,245


Credit ratios

Gross profit margin 34.7% 42.6% 38.9% 40.2%

EBITDA margin 21.4% 31.0% 23.5% 21.4%





Revenue by business segment, December 2010 Debt maturity profile, June 2011

Sales of electricity

86%

Sales of coal11%

Heat supply3%

19,618

12,94514,959

19,154

3,891

4,5752,408

0

5,000

10,000

15,000

20,000

25,000

< 1 yr 1 - 2 yrs 2 - 5 yrs > 5 yrs

Bank & other loans USD bondsCNY bonds CNH bonds



8 November 2011 38

CHINA SHANSHUI CEMENT GROUP LTD Jit Ming Tan


China Shanshui looks set to remain free cash flow negative inthe near- to medium-term due to its aggressive expansion plans. Fitch estimates its capex will total CNY11bn over thenext two to three years. This raises the possibility that thecompany may need to raise additional funds. Notwithstandingthis, we think the SHASHU ’14s look reasonably cheap at alow- to mid-9% YTW – other CNH bonds yield 4-8% and the USD-denominated SHASHU ’16s yield 9-10%. Bond covenantsare similar to those for its USD bond and include subsidiaryguarantees, change of control put, restricted payments andindebtedness subject to fixed charge coverage ratio of 3.5x.

Listed in 2008 with a market capitalisation of HKD18bn, China Shanshui Cement was the sixth largest producer of clinker and cement in China by volume in 2010. The company is one of the leading players in the Shandong and Liaoning provinces with 22.0% and 12.8% market shares respectively. The company is also seeking to expand into the construction and infrastructure sectors within Shanxi province and Inner Mongolia through organic growth and acquisitions. Its products are sold under the “Shanshui Dongyue” brand name, which was awarded “Famous Trademark of Shandong Province” in 2008. The two largest shareholders in the company are Zhang trust (19.7% effective interest) and Hillhouse Capital Management (8.62%).

Strengths Risks

Strategically located assets minimise costs: Due to the low value-to-weight ratio, transportation is a largecomponent of the cost of sales for cement producers.China Shanshui says it selects the locations of itsproduction facilities to be close to both limestone and coalmines, as well as end-users. It also operates a “hub andspoke” facility layout to maximise cost savings.

Government support: Shandong Shanshui, the primaryonshore holding company of China Shanshui Cement, isone of 12 national cement producers entitled togovernment support in the form of priority with respect toproject approvals, land use right grants and creditapprovals when undertaking mergers, acquisitions andproject investments. With the government pushing forindustry consolidation and more efficient use of resourcesand energy, we would expect favourable policies, such asaccess to liquidity, VAT refunds and enterprise income taxexemptions to continue. Indeed, in October 2011,Shandong Shanshui secured credit lines totalling CNY3bn from Bank of China.

High barriers to entry: Industry regulations create highbarriers to entry by imposing strict requirements onproduction capacity and resource holdings of newlyestablished cement and clinker production plants. Inaddition, of the total cement capacity in Shandong at end2010, 18.9% is considered ‘outdated’ and likely to bephased out, while new capacity yet to commenceoperation is only 2.5%, which implies further consolidation.As a leading cement producer in China, we think China Shanshui Cement looks well positioned to benefit fromindustry consolidation and strengthen its market power.

Vulnerability to cyclicality and cost fluctuations: Demand for cement and clinker is largely determined by expectations of economic growth and fixed asset investment. In addition, coal, raw materials and electricity costs represented 77.6% of total cost of sales in 2010. As the company does not lock in long term contracts, volatility in demand and raw material costs is likely to materially affect profitability.

Financing for large capex: China Shanshui Cement has stated its intention to increase cement production capacity to 80mn tons by the end of 2011 (1H11: 69.94mn tons), and to double production capacity within the next three years, which Fitch estimates will require CNY11bn of capex. Given a relatively low cash buffer and consistently negative free cash flow, funding would likely be in the form of additional debt, in our view.

Geographical concentration risk: 80% of 1H11 revenue was generated in Shandong province, and the remainder from northeastern China. This concentration reflects high transportation costs for cement and the resultant regionalised nature of the business. China Shanshui seeks to spreads its risk by expanding into other provinces and establishing a diversified client base, with its five and 10 largest customers accounting for just 4.9% and 7.0% of total revenue in 2010, respectively.

Corporate governance: Key concerns relate primarily to its aggressive growth and shareholding structure. The company’s revenues grew at 42% CAGR over the past three years. Its largest shareholder, China Shanshui Investment, which owns 30% of the company, is in turn owned by current and former employees of the company.

Bonds outstanding



issue rating

China Shanshui Cement Group 6.50% 1,500 22 July 2014 --/BB-/BB-


8 November 2011 39

CHINA SHANSHUI CEMENT GROUP LTD Financial summary, year end December (CNY mn)

FY 08 FY 09 FY 10 1H11 Pro forma 1H11*

Profit and loss

Revenue 7,501 8,728 11,854 7,832

Gross profit 1,586 1,780 2,550 2,470

EBITDA 1,397 1,763 2,454 2,396 2,396

EBIT 858 1,115 1,646 1,972

Gross interest expense (407) (346) (403) (250) (274)

Net income 539 702 979 1,237

Cash flow

FFO 1,633 1,902 2,658 NA

Working capital -147 -315 -194 NA

Operating cash flow 1,485 1,587 2,464 2,208

Capex/Acquisitions -2,395 -2,155 -2,901 NA

Dividends paid -206 -170 -238 NA

Free cash flow -2,600 -2,325 -3,139 NA

Balance sheet

Cash 1,248 886 1,145 4,614 5,374

Total assets 12,773 14,609 18,950 23,869

Short term Debt 2,768 2,207 1,792 2,327

Long term Debt 2,008 3,556 5,614 8,242

Total debt 4,776 5,763 7,405 10,568 11,328

Net debt (cash) 3,527 4,877 6,261 5,954 5,954

Total shareholders' equity 4,606 5,229 6,149 7,487 7,462

Credit ratios



EBITDA/Gross interest 3.4x 5.0x 6.0x 9.6x 8.7x

Total Debt/EBITDA** 3.5x 3.3x 3.1x 2.8x 3.0x

Total debt/Total capital 52% 53% 55% 59% 60%

Note: * Includes the CNH bonds issued in July 2011. Source: Company data, Barclays Capital

Revenue breakdown, June 2011 Debt maturity profile, June 2011

Northeast China19.8%

Shandong province79.8%

Shanxi province

0.4%

1,9002,5862,222

2,785

630

1,500 45

0

500

1000

1500

2000

2500

3000

3500

4000

4500

< 1 yr 1 - 2 yrs 2 - 5 yrs > 5 yrs

Bank loansCNH bondsUSD bondsCNY bonds

Source: Company data, Barclays Capital Note: Pro forma for CNY1.5bn of CNH bonds issued in July 2011. Source: Company data, Barclays Capital


8 November 2011 40

CHINA WINDPOWER Timothy Tay


The company expanded its operating capacity to 1,063MW ina relatively short three years despite a fairly limited track record and unproven business model. As generation capacitygrows, so should the company’s share of the stable cash flowavailable from wind farms selling electricity at guaranteedrates to the grid. High debt leverage (5.4x) and its aggressiveexpansion pose key risks. With a total wind generation pipelineof 14GW and plans to add almost 1.6GW over the next twoyears, a key challenge for the company will be to manage itsexternal funding needs and to grow its share of stable cashflow from wind farms. While not rated by any of the ratingsagencies, based on international rating scales, we estimatethat China WindPower’s rating could be viewed as a single Bcredit. The valuations of its CNH bonds look rich relative to therisk profile of the company and other CNH bonds.

China WindPower Group Limited is an integrated wind power company in China providing services which range from wind farm development and investment to wind power services. As at Dec 2010, the company had plans for a total portfolio of14GW in wind generation capacity, of which 1,063MW was operational. This constitutes a 2.4% share of the total wind power capacity in China. The company has been listed on the Hong Kong Stock Exchange since 1991, and has a market capitalisation of approximately HKD3.7bn. Its wind power business commenced in 2007. Vice Chairman Johnson Ko holds 27.06% of outstanding shares, while another 27.34% is held by four executive directors.

Strengths Risks

Integrated business model: China WindPower achievessignificant operational efficiencies from the synergy that itsbusiness segments provide. This is reflected in highEBITDA margins and rapid growth in operational capacity(170.3MW in Dec 08 to 1,064.3MW in Dec 10), as well asthe ability to recover a substantial portion of the initialequity investment within 6-12 months through tower tubesale proceeds and service fees.

Strong JV partners: JVs with state-owned powercompanies such as Liaoning Energy and China PowerInvestment Corporation provide financing and priority connection to the electrical grid. China WindPower gets toenjoy increased scale of operations at reduced operatingcosts and upfront capital expenditures.

Cash flow from wind farms: The stable and recurrent cash flows from investments in existing and new wind farmdevelopments enable the company to fund part of itsexpansion capital needs.

Supportive regulatory policies: The PRC government haspromulgated a series of laws and regulations whichprovide preferential measures for the renewable energy industry. Measures such as mandatory grid connection, theguaranteed purchase of all electricity generated from windfarms, subsidized on-grid tariffs and other tax-related incentives are supportive of the company’s credit profile.

Regulatory uncertainties: There is no certainty that thegovernment will maintain its supportive policy stance on renewable energy development. Furthermore, as the regulatory framework for renewable energy is relatively new and evolving, the interpretations and implementation of such rules and laws may differ from region to region.

Aggressive capex: The company is planning to increase its wind farm operating capacity to 1,800MW in 2011 and to 2,600MW in 2012. Total available wind resource was 14GW at the end of 2010. We expect the company to require incremental financing to fund its expansion and credit metrics could deteriorate over the expansion phase.

Unpredictability of wind: The electricity generated by windfarms is dependant on local wind conditions. The highly unpredictable nature of wind means it may not conform to historical operating conditions in a given area. Any shortfall in wind could lead to a decline in revenues.

Corporate governance: Key concerns over the corporate structure as 46.0% of profits in 2010 were derived from the company’s share of profits from its controlling interest in several wind farms. We view the structure of these businesses as less transparent compared with the fully consolidated earnings from subsidiaries. The company also has a relatively short history in the wind industry. Prior to 2008, the company was known as Hong Kong Pharmaceutical Holdings Limited. The wind power business was started in 2007 and the pharmaceutical business subsequently divested in 2009.

Bonds outstanding

Issuer Coupon Principal (CNY mn) Maturity

Senior unsecuredissue rating

China WindPower Group Limited 6.375% 750 4 April 2014 –


8 November 2011 41

CHINA WINDPOWER Financial summary, year end December (HKD mn)

FY 09* FY 09** FY 10 1H11

Profit and loss

Operating revenue 379 563 1,236 258

Gross profit 132 235 513 128

EBITDA 73 144 357 27

EBIT 69 139 347 21


Net income 117 181 427 237

Cash flow

FFO 87 142 331 NA

Changes in working capital 359 99 (51) NA

Operating cash flow 446 241 281 NA

Capex/acquisitions (88) (123) (1,589) NA

Dividends paid 0 0 0 NA

Free cash flow 358 118 (1,308) NA

Balance sheet

Cash 745 1,110 733 1,418

Total assets 2,645 3,506 5,425 6,185

Short-term debt 0 34 247 172

Long-term debt 23 0 802 1,342

Total debt 23 34 1,049 1,514

Net debt (cash) (722) (1,075) 317 96


Credit ratios


EBITDA margin 19.2% 25.6% 28.9% 10.6%

EBITDA/gross interest 13.3x 83.4x 25.7x 1.2x



Note: * Year-end March 09. ** 9 months ending Dec 09. ^ Includes CNH bonds issued on April 2011. Source: Company data, Barclays Capital

Revenue by business segment, June 2011 Debt maturity profile, December 2010***

Tower tube equipment

manufacturing

58%Engineering and

construction

16%

Consultancy and design

6%

Wind power plant

operation & maintenance

20%

Tower tube equipment

manufacturing

58%Engineering and

construction

16%

Consultancy and design

6%

Wind power plant

operation & maintenance

20%

HKD1bn + Proforma CNY750mn (HKD885mn)

CNH bonds

247102

295 405

885

0

200

400

600

800

1000

1200

1400

2011 2012 2013-15 2016 &beyond

CNH bonds

Bank loans

Source: Company data, Barclays Capital Note: ***Pro forma for HKD885mn of CNH bonds issued in April 2011. Source: Company data, Barclays Capital


8 November 2011 42

GALAXY ENTERTAINMENT GROUP LTD Jit Ming Tan


Lower capex and an earnings contribution from Galaxy Macau,which opened in May 2011, are likely to support credit metrics.After an initial ramp-up period, we expect EBITDA from GalaxyMacau, given its greater size than existing facilities, tocontribute significantly to the company’s earnings from 2H11onwards. Longer-term, the issue of funding for development ofits Cotai land bank could weigh on credit metrics. While notrated by any of the ratings agencies, based on internationalrating scales and subordination by opco debt, we estimate thatGALENT could be viewed as a mid-B credit, which implies thatthe 5.5-6.5% yield is rich compared with other CNH bonds.Bond covenants include a negative pledge on assets and revenues, change of control put, cross default clause and amaximum leverage ratio of 1.75x, defined as gross debt lesssubordinated debt over tangible net worth.

Incorporated in Hong Kong in 1987 and listed in 1991, Galaxy Entertainment Group is primarily a gaming and entertainment company. It also has a construction materials business. Its subsidiary, Galaxy Casino, S.A. (GCSA), is a leading developer, owner and operator of premier casino, hotel and entertainment complexes in Macau. The gaming properties held under GCSA include StarWorld, a VIP-focused luxury five-star hotel and casino; four City Club casinos; and the recently completed Galaxy Macau, an integrated leisure and entertainment resort catering to the mass market segment. Galaxy has a land bank with approved buildable area of approximately 47 hectares in Cotai for future developments. The company has a market capitalisation of HKD75bn. Lui Che Woo and his family own 75.76% of the group.

Strengths Risks

Exposure to world’s largest gaming market: Galaxy holds one of only six concessions/sub-concessions to operategaming facilities in Macau. Macau’s gaming revenue –USD23.5bn in 2010 – achieved a 32.5% CAGR during2006-10 to become the world’s largest gaming market.Macau’s robust growth is expected to continue – YTD September 2011 casino revenue grew 46% y/y –supported by China’s strong economic expansion andsteadily increasing disposable incomes.

Strong track record and diversification: With the launchof the Galaxy Macau, Galaxy is diversifying away from thevolatile VIP-focused business towards a balanced portfoliothat also targets the higher-margin mass-market segment.The Galaxy Macau is an integrated leisure resort that isdesigned to enable the company to capture a larger market share in the entertainment industry.

Strategically located properties: StarWorld and GalaxyMacau, its primary casinos, are centrally located in theMacau peninsula and Cotai, respectively, and benefit fromthe large number of tourists and improved transport infrastructure.

Increased earnings and reduced capital expenditures:Debt/EBITDA of 6.4x is slightly high, but we expect it toimprove in 2H11, on an increased earnings contributionfrom and reduced capital expenditures for Galaxy Macau.Galaxy reported 3Q11 EBITDA rose 191% y/y toHKD1.8bn, with Galaxy Macau contributing HKD973mn inits first full quarter of operation.

China’s policy on gaming visits: As Macau draws a large portion of its customers from China, the Chinese government’s policy on gaming will affect the industry’s performance. China’s decision to impose restrictions (subsequently removed) on mainland residents’ gaming visits to Macau was one factor behind the depressed gaming revenues in 2009. This risk remains, as China does not have a firm, long-standing stance and a transparent policy mechanism.

Market concentration: All of Galaxy’s gaming operations are based in Macau. Due to the relatively short post-liberalisation history (since 2002), Macau has not established a track record as a stable regulatory environment. Galaxy also faces increasing competition not only from other Macau gaming operators, but also from regional gaming hotspots such as Australia, Malaysia and Singapore.

Volatility from VIP segment: 90% of StarWorld’s 2010 revenue is generated from the VIP segment, so the company retains substantial exposure to the high turnover associated with VIP gaming, which could lead to volatility in earnings and cash flow.

Corporate governance: Key concerns relate to its growth, earnings quality and shareholder concentration. In the past three years, Galaxy’s revenue more than doubled while free cash flow was consistently negative. Working capital metrics were volatile during this period. Lastly, 76% of the company’s shares are held by the Lui family.

Bonds outstanding



issue rating

Galaxy Entertainment Group Limited 4.625% 1,380 16 Dec 2013 –


8 November 2011 43

GALAXY ENTERTAINMENT GROUP LTD


FY 08 FY 09 FY 10 1H11

Profit and loss


Gross profit 3,028 3,003 4,100 3,258

EBITDA 84 888 1,782 862

EBIT (1,060) 347 1,271 513


Net income (11,390) 1,149 898 378

Cash flow

FFO (88) 664 1,687 NA

Changes in working capital (618) 962 514 NA

Operating cash flow (706) 1,626 2,201 NA

Capex/acquisitions (1,744) (2,510) (4,592) NA


Free cash flow (2,452) (884) (2,400) NA

Balance sheet

Cash 6,042 3,516 4,428 5,050

Total assets 18,652 18,963 25,186 31,902

Short-term debt 436 1,383 2,283 747

Long-term debt 6,276 4,460 7,144 10,959

Total debt 6,712 5,843 9,426 11,706

Net debt (cash) 670 2,327 4,998 6,656


Credit ratios


EBITDA margin 0.8% 7.3% 9.2% 6.3%





Revenue by business segment, June 2011 Debt maturity profile, December 2010

Gaming operations

93%

Hotel operations

2%Sales of construction materials

5%

HKD7.9bn + CNY1.38bn (HKD1.6bn) CNH bonds

451 451 451

698

2,0942,252

1,181

1,574

415

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2011 2012 2013-15 2016 &beyond

CNH bondUSD convertible notesBank loansFinance lease payments

HKD7.9bn + CNY1.38bn (HKD1.6bn) CNH bonds

451 451 451

698

2,0942,252

1,181

1,574

415

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2011 2012 2013-15 2016 &beyond

CNH bondUSD convertible notesBank loansFinance lease payments



8 November 2011 44

GLOBAL LOGISTIC PROPERTIES Timothy Tay


The key strength of GLP is its large and stable cash flow fromits well established and profitable logistics business in Japan.The gross leverage ratio of 11.8x and net leverage of 6.3x,while elevated, are mitigated by strong liquidity and the qualityof the recurring cash flow. The contributions from its Chinabusiness should increase over time as GLP expands itsfootprint from first- to second-tier cities. While risks may behigher during this build-out process, once established, wethink the business will be relatively stable.

GLP is a leading modern logistics facilities operator in China and Japan, two of the largest logistics markets in Asia. As of 31 December 2010, the company develops, owns, manages and leases out 296 completed properties with a GFA of 6.2mn sq m, and has a development pipeline of 7.9mn sq m. GLP was listed on the Singapore Stock Exchange in 2010 and had a market capitalisation of SGD7.8bn as of 2 November 2011. Singapore’s Government Investment Corporation is the majority equity shareholder with a 51.6% stake in GLP.

Strengths Risks

Leading operator in the logistics sector: GLP is the largestprovider of modern warehouses in both Japan and China.An extensive network of strategically located propertiesenables economies of scale and provides a competitiveedge in attracting customers pursuing an expansionstrategy. Furthermore, the strength of the companythroughout the entire logistics value chain enables it toprovide comprehensive logistics solutions to clients, whichdifferentiates it from competitors.

Stable income base from Japan: The logistics industry inJapan is well established, with occupancy rates for GLP’sJapan portfolio averaging 99% since 2002. EBITDAcontribution from the Japanese portfolio amounted toUSD346mn in FY2011, almost 90% of total EBITDA.Income from the Japanese portfolio is underpinned bystaggered lease expirations and a weighted average leaseterm of 5.9 years.

Short construction cycle: The company is able to flexiblyscale back logistics projects as demand changes due to thelow investment costs, and short planning anddevelopmental time frames (12 months) for logisticsproperties versus other property types. GLP also worksclosely with customers, which allows the company toaccurately assess demand before committing to newprojects.

Weak credit metrics: Due to aggressive expansion plans in China, total debt/LTM EBITDA of 11.8x and net debt/LTM EBITDA of 6.3x at end-June are not expected to improve substantially in the near term. However, the company has a balanced approach to raising capital, as seen by the IPO in 2010, and GIC’s conversion of USD1.1bn of shareholder loans into equity.

Concentration risk: The top 10 customers in Japan make up 60% of sales in that country, implying considerable tenant concentration risk. This is mitigated by the generally strong credit profiles of the customers, which include Panasonic Logistics, Hitachi Transport System and Nippon Express.

Parent debt structurally subordinated to locally issueddebt: GLP has issued bonds that are secured against its Japanese assets, which were valued at USD5bn as of 31 December 2010. These assets are structured as Tokutei Mokuteki Kaisha (TMK) vehicles, which are ring-fenced against the risk of bankruptcy or liquidation of the TMK.

Evolving and uncertain regulatory environment in China: The ability to develop and construct logistics facilities in China is highly dependant on the company’s ability to obtain the necessary approvals and regulatory licenses from the relevant authorities. Government regulations, including changes in zoning, and usage and tax laws, may affect the company’s ability to conduct and expand its business in China.

Bonds outstanding



issue rating

Global Logistics Properties Limited 3.375% 2,650 11 May 2016 Baa2/--/BBB+

Global Logistics Properties Limited 4.00% 350 11 May 2018 Baa2/--/BBB+


8 November 2011 45

GLOBAL LOGISTIC PROPERTIES

Financial summary, year end March (USD mn)

FY 09 FY 10 FY 11 1Q FY 12

Profit and loss

Operating revenue 51 413 474 129

Gross profit 36 293 341 93

EBITDA 38 297 349 94

EBIT 36 293 341 93


Net income 32 (177) 706 97

Cash flow

FFO 56 243 278 70

Changes in working capital 14 (48) 5 (29)

Operating cash flow 71 195 283 41

Capex/Acquisitions (932) (189) (409) (119)

Dividends paid (67) (17) (135) (2)

Free cash flow (929) (12) (261) (80)

Balance sheet

Cash 311 412 1,560 1,964

Total assets 7,200 7,397 11,700 12,431


Long-term debt 2,667 2,665 2,755 3,294

Total debt 3,132 3,381 3,692 4,241

Net debt (cash) 2,820 2,969 2,132 2,277


Credit ratios


EBITDA margin 73.7% 71.9% 73.7% 72.7%




Note: * Includes CNH bonds issued on May 2011. Source: Company data, Barclays Capital

Revenue by geographical market, June 2011 Debt maturity profile, March 2011*

China25%

Japan75%

USD3.7bn + Proforma CNY3bn (USD458mn) bonds

203521

141458

734

2,062

31

0

500

1000

1500

2000

2500

3000

2012 2013-2016 2017 & beyond

TMK BondsCNH BondsBank loans

Source: Barclays Capital, company data Note: *Pro forma for USD 458mn CNH bonds issued in May 2011. Source: Barclays Capital, company data


8 November 2011 46

GUANGZHOU R&F PROPERTIES Christina Chiow


We believe the company has a slightly better credit profilethan Shimao (B1/BB-), given Shimao pursued moreaggressive expansion in the past. While not rated by any ofthe ratings agencies, based on international rating scales, weestimate Guangzhou R&F could be viewed as a weak BB-/strong single-B credit. The company has a good marketposition and moderate growth appetite. Contracted salesunder-performed the company’s target and was revised toCNY36bn in September 2011 (from CNY40bn). High gearingis a negative and is likely to remain so, and helps to restrainaggressive growth. Unlike most other CNH bonds, GuangzhouR&F’s bonds have an onshore guarantee and interest reserveaccount. CNH bond covenants are the same as for its USDbonds, with limitations on indebtedness, restricted payments, CoC, make-whole and a fixed charge incurrence covenant.With the widest yields in the CNH market, the bonds lookattractive, but fair value compared with the USD bonds.

Established in 1994 and headquartered in Guangzhou, Guangzhou R&F Properties was the No.10 property developer in China by contracted sales in 2010. The company’s H shares were listed on the Hong Kong Stock Exchange in July 2005, and at 15 August 2011 the company had attributable GFA of 25.4 mn sqm across close to 60 projects in 12 cities. The company targets middle- to upper-middle-income residents. It also owns two shopping malls, two office buildings and four hotels managed by Hyatt Hotels in Guangzhou and Beijing. Guangzhou R&F is controlled by Li Sze Lim, who owns 33.12% of the company’s shares, and Zhang Li, who owns 31.91%. As of 31 October 2011, the company had a market capitalisation of HKD24.8 bn.

Strengths Risks

Good track record: Guangzhou R&F has a well-established presence, particularly in Guangzhou, Beijing and Tianjin. In the past five years, it completed 27 projects in Guangzhou,eight in Beijing and four in Tianjin. On the basis of 2010contracted sales, the company ranked No.1 in Guangzhou,No.3 in Tianjin and No.10 in Beijing.

Joint ventures to mitigate risk: Guangzhou R&F has jointventures with other developers, including KWG and SunHung Kai Properties for the Lie De project (Guangzhou),and Agile, Country Garden, Shimao and CITIC Real Estatefor the Asian Games City project (Guangzhou). Morerecently, it announced the Fumao Venice Bay project(Huizhou) with Shimao Group. Besides sharing risks, webelieve this also reflects its quality and brand recognition.

Prudent growth: Since 1994, the company has expandedinto 12 cities in different regions in China. Typically, Guangzhou R&F expands into a city only if it expects todevelop at least three projects, a strategy that allows it tomanage its resources to achieve economies of scale. In9M11, it achieved sales of CNY21.5bn, an achievement rateof 67% of the revised annual target.

Adequate liquidity buffer: Despite the contracted salesunderperformance, Guangzhou R&F’s liquidity is adequate.At Jun 11, it has unrestricted cash and restricted cash forconstruction of CNY9.6bn against short-term debt ofCNY6.4bn. We expect a large part of this to be rolled over.Land premiums payable in 2H 11 are c.CNY4.5bn.

High leverage: Debt/LTM EBITDA at 2.8x and LTM EBITDA/gross interest cover at 6.3x are similar to BB or BB split-rated peers. But its debt capital ratio of 60% and net gearing (net debt/equity) of 102% are higher, and historically have been elevated. This is likely to remain the case, in our view, owing to the difficulty China-incorporated companies face in raising new capital, which requires approval from the China Securities Regulatory Commission.

Uncertain revenue stream: In 2010, contracted sales fromGuangzhou, Beijing and Tianjin accounted for 71% of total. In 2011, available-for-sale GFA in these cities is c.51% of its total and could make up c.58% of contracted sales. We believe the exposure to these cities and some delays in getting sales permits resulted in the lower than expected sales in 9M 11. However, with a back-loaded launch schedule, quarterly sales have started to pick up in 3Q.

Regulatory uncertainties: About 40 Chinese cities haveimplemented purchase restrictions, and it seems the central government will continue to implement tight property measures for the rest of the year.

Corporate governance: With a long operating and listing record, we do not see material corporate governance issues.

Bonds outstanding



issue rating

Guangzhou R&F Properties Co. Limited 7% 2,612 29 April 2014 –


8 November 2011 47

GUANGZHOU R&F PROPERTIES


FY 08 FY 09 FY 10 1H11

Profit and loss


Gross profit 5,158 5,750 9,293 5,259

EBITDA 4,162 4,466 7,971 4,531

EBIT 3,883 4,152 7,711 4,409

Gross interest expense (1,579) (1,416) (1,607) (880)

Net income 3,119 2,900 4,351 2,006

Cash flow

FFO 1,101 1,530 3,864 NA

Changes in working capital 243 3,043 (1,872) NA

Operating cash flow 1,344 4,573 1,991 399

Capex/Acquisitions (875) (332) (1,351) (176)

Dividends paid (803) (924) (1,482) (406)

Free cash flow (334) 3,317 (842) (182)

Balance sheet

Cash 1,450 6,642 5,654 9,646

Total assets 55,047 66,344 77,417 84,902

Short-Term Debt 9,488 6,867 7,185 6,420

Long-Term Debt 10,983 17,523 20,669 24,323

Total debt 20,471 24,390 27,854 30,743

Net debt (cash) 19,021 17,748 22,200 21,097


Credit ratios







Land bank by city, June 2011 Debt maturity profile, June 2011

Tianjin11%

Shenyang0.4%

Taiyuan12%

Shanghai3%

Harbin3%

Xi'an2%

Haikou4%

Chengdu5%

Huizhou11%

Beijing7%

Nanjing2.1%

Guangzhou15%

Chongqing25%

Jun 11: 26.7mn sqm(attributable)

0

3

6

9

12

< 1 yr 1 - 2 yrs 2 - 5 yrs > 5 yrs

Debt : CNY30.7bn



8 November 2011 48

MELCO CROWN ENTERTAINMENT LTD Jit Ming Tan


The credit profile looks set to improve on expected strongearnings, supported by growth at City of Dreams, althoughmetrics may deteriorate from 2012 as construction of MacauStudio City starts. MCE is rated Ba3/BB-; taking into accountsubordination by project debt closer to the opco level, we thinkthe CNH bond could be viewed as a high B credit. But theMPEL ’13s look cheap compared with other CNH bonds,especially given the short tenor of under two years. The yieldspread over USD-denominated MPEL ‘18c14s (priced to 2016call) of c.1.80% is less than our CNY appreciation expectations,also suggesting the CNH bond is cheap. Bond covenantsinclude a negative pledge on assets and revenues, change ofcontrol put, cross default clause and a maximum leverage ratioof 2.5x, defined as gross debt over tangible net worth.

Melco Crown Entertainment (MCE) is a developer, owner, and, through its subsidiary Melco Crown Gaming (MCG), operator of casino gaming and entertainment resort facilities in Macau. MCG is one of only six companies granted concessions or sub-concessions to operate casinos in Macau. As at Dec 10, the major properties MCE include Altira Macau, an award-winning luxury casino hotel, which targets the VIP gaming market, City of Dreams, an integrated entertainment resort and eight Mocha Clubs, which are cafes providing 1,600 gaming machines. Listed in 2006 on the NASDAQ, the company has a market capitalisation of USD6.4bn. Australian-based gaming company Crown Ltd and Hong Kong listed Melco International Development Ltd each hold a 33.36% stake in MCE.

Strengths Risks

Exposure to world’s largest gaming market: MCE holds one of only six concessions/sub-concessions to operategaming facilities in Macau. Macau’s gaming revenue –USD23.5bn in 2010 – expanded at a CAGR of 32.5% during2006-10 to become the world’s largest gaming market.Macau’s robust growth is expected to continue – YTD September 2011 casino revenue grew 46% y/y –supported by China’s continued strong economicexpansion and steadily increasing disposable incomes.

Support from Crown: Crown, an established operator oftwo large casinos in Australia, has an extensive network ofsales offices in Asia. MCE can tap both Crown’s network toattract high-end customers, as well as its experience incasino operations.

Diversified portfolio of properties: MCE seeks to diversifyits revenue streams by developing properties that targetdifferent segments. The Altira Macau focuses on the VIPmarket, while the City of Dreams is positioned to appeal tothe mass market with an assortment of entertainment andgaming facilities. The company is also looking to develop athird leisure resort, the Macau Studio City, targeting thelower end of the mass market. Such diversification, in ourview, could position the company to capture a largermarket share of the entertainment industry.

Policy on gaming visits: As a lot of customers come from China, Beijing’s policy on gaming will affect the industry’s performance. China’s decision to impose restrictions (since removed) on mainland residents’ visits to Macau was one factor behind the slowdown in gaming revenues in 2009. This risk remains, as China does not have a firm, long-standing stance or transparent policy mechanism.

Market concentration: All of MCE’s gaming operations are in Macau. Due to the relatively short post-liberalisation history (since 2002), Macau has not established a track record as a stable regulatory environment. MCE also faces increasing competition not only from other Macau gaming operators, but also from new regional gaming locations such as Australia, Malaysia and Singapore.

Short operating history: MCE remains in the early phase of its operations with its main properties, the Altira Macau and City of Dreams, having commenced operations in 2007 and 2009 respectively. With such a brief history, the company has not yet built a credible track record.

Capex requirements may weaken credit metrics: Post-issuance, MCE has comfortable EBITDA/gross interest cover of 4.9x though debt/EBITDA is slightly high at 4.2x. We also expect substantial capex through 2015 to weigh on credit metrics as the company develops the USD2.5bn Macau Studio City, in which it has a 60% interest.

Aggressive growth: MCE’s revenue grew at 92% CAGR over the past three years, especially after City of Dreams opened in mid-2009. The rapid growth raises concerns whether the company is well-equipped to manage the transition into a significantly larger business.

Bonds outstanding



issue rating

Melco Crown Entertainment Limited 3.75% 2,300 9 May 2013 Ba3/BB-/--


8 November 2011 49

MELCO CROWN ENTERTAINMENT LTD

Financial summary, year end December (USD mn)

FY 08 FY 09 FY 10 1H11

Profit and loss


Gross profit 241 175 624 438

EBITDA 128 (55) 406 330

EBIT 1 (272) 93 164


Net income (2) (308) (11) 74

Cash flow

FFO 137 (53) 359 NA

Changes in working capital (148) (59) 43 NA

Operating cash flow (11) (112) 402 NA

Capex/acquisitions (1,147) (992) (260) NA


Free cash flow (1,158) (1,104) 142 NA

Balance sheet

Cash 815 213 442 1,027

Total assets 4,498 4,863 4,884 5,555


Long-term debt 1,528 1,754 1,637 2,432

Total debt 1,529 1,799 1,840 2,432

Net debt (cash) 714 1,586 1,398 1,406


Credit ratios


EBITDA margin 9.0% NM 15.4% 18.7%

EBITDA/gross interest 2.6x NM 3.9x 4.9x

Total debt/EBITDA 11.9x NM 4.5x 4.2x


Note: * Includes CNH bonds issued on April 2011. Source: Company data, Barclays Capital

Revenue by business segment, June 2011 Debt maturity profile, December 2010*

Casino93%

F&B2%

Rooms3%

Entertainment, retail & others

2%

Source: Company data, Barclays Capital Note: *Pro forma for USD348mn CNH bonds issued in May 2011. Source: Company data, Barclays Capital

USD1.7bn + Pro forma USD348mn (CNY2.3bn) CNH bonds

203 294 290 345

600

348

0

100

200

300

400

500

600

700

2011 2012 2013 2014 2015 & beyond

CNH bonds USD bonds Bank loans


8 November 2011 50

PCD STORES (GROUP) LTD Christina Chiow


While not rated by any of the ratings agencies, based oninternational rating scales, we estimate that PCD’s rating couldbe viewed as a mid BB credit. Its concessionaire business modeland favourable industry prospects mitigate the negatives of ahighly cyclical industry and its expansion plans. PCD does notbear inventory risks and earns a relatively stable commissionrate from concessionaire sales. Credit metrics and liquidity arerelatively strong, driven by its cash generative model. It was in anet cash position (before operating leases) at June 2011. PCD isexpanding, with plans to increase GFA to 800k sqm by 2013.Bond covenants include a subsidiary guarantor group but notsecurity pledges (as for USD high yield bonds), certain financialcovenants, change of control and negative pledge but notlimitations on indebtedness, restricted payments.

Incorporated in 2007 and headquartered in Xiamen, China, PCD Stores is an expanding premium department store group in China that targets high-income earners. It has a network of 17 stores and one outlet mall across eight provinces, of which 11 are owned, while the other six and outlet mall are managed by the company. All of these are located in major cities including Beijing, Changchun, Guiyang, Qingdao, Taiyuan, Xi’an and Xiamen. From Jan 06 to Dec 10, the total GFA of self-owned stores increased from 66,485 sqm to 201,490 sqm. As at Dec 10, the company offered more than 1,600 brands, including luxury names such as Armani Collezioni, Burberry and Cartier. On ownership, 39.57% of the company is jointly held by brothers Alfred Chan and Edward Tan. Listed in Hong Kong in 2009, the company has a market capitalisation of HKD4.9bn as at 31 October 2011.

Strengths Risks

Stable and strong profitability: PCD derives the majority of its revenue from commissions from concessionaire sales(at least 60% of revenue in each of the last 3 years and57% in 1H 11). Although the agreements are for 1-2 years, commission rates have been stable at c.20% ofconcessionaire sales. Such revenue carries limitedinventory and working capital risks, thereby supporting thegroup’s high gross profit margins (in excess of 65%).

Favourable industry prospects: According to a WorldLuxury Association report in June, China's luxury marketwas worth USD10.7bn (+13.8% y/y) in 2010, and Chinawill surpass Japan as the largest luxury goods-market in 2012 with sales of CNY14.6bn. A cut in luxury goods taxesin China, which is under discussion, could further fuelgrowth (on cosmetics, current taxes are 17% VAT, consumption tax of 30% and import tariffs of 6.5-18%).

Strong credit metrics: PCD’s lease-adjusted LTMEBITDA/gross interest cover was 6.5x at June-2011, and above 4x in each of the past three years. Leverageincreased though, with operating lease adjusted debt/LTMEBITDA of 4.7x due to a CNY750 CNH bond issued inFebruary 2011 and higher operating lease commitments.Given PCD’s business profile, we believe these metrics lookreasonable for what could be viewed as a BB credit.

Strong liquidity: At June 11, PCD had cash of CNY2.1bnagainst short-term debt of CNY890mn. It was also in a netcash position. We believe PCD is building up its financialresources for potential investment opportunities.

Cyclical industry: The luxury retail business is highly cyclical, largely discretionary and tied to the economic cycle. The industry is also very competitive and fragmented in China.

Revenue concentration: Revenue from Scitech Plaza inBeijing accounted for more than half of total revenue in each of the past three years. Mitigating this is the fact that Scitech Plaza is not subject to any rental review until the end of the lease term in 2019. The lessor is a company majority owned by the co-founders of PCD. In 2010, PCDpaid CNY44mn in operating lease charges for Scitech Plaza.

Expansionary ambition: PCD is looking at acquisitions and greenfield opportunities, such as new sites in Tier 1 and 2 cities for its outlet malls. GFA under operation and management is expected to increase by 400K sqm to 800K sqm by 2013, according to the company. In 4Q 11, PCD will open one new department store in Guiyang and one outlet mall in Qingdao, adding 80,000 sqm of GFA to PCD’s self operated stores network.

Corporate governance: Related-party transactions, eg, the acquisition of Coal Gain (a company with interests in three department stores in Guiyang) from PCD’s controlling shareholders for CNY551mn (>40% discount to fair market value) could raise concerns. Listed in 2009, PCD has only five directors; three are independent non-executive directors. The two executive directors are co-founders. Prior to May 2011, PCD had another executive director, Mr Lau Lim Yip, who resigned for personal reasons.

Bonds outstanding



issue rating

PCD Stores (Group) Limited 5.25% 750 1 February 2014 –


8 November 2011 51

PCD STORES (GROUP) LTD

Financial summary, year-end December (CNY mn)

FY 08 FY 09 FY 10 1H11

Profit and loss

Operating revenue 718 927 1,084 582

Gross profit 494 637 750 403

EBITDA 288 390 486 273

EBIT 258 342 435 248


Net income 174 253 335 181

Cash flow

FFO 214 296 458 NA

Changes in working capital 132 42 172 NA

Operating cash flow 346 338 630 (92)

Capex/acquisitions (208) (188) (1,799) (38)

Dividends paid 0 0 0 0

Free cash flow 138 150 (1,170) (130)

Balance sheet

Cash 110 2,120 1,402 2,129

Total assets 1,667 3,971 4,623 5,321


Long-term debt 301 300 257 976

Total debt 695 682 1,096 1,956

Net debt (cash) 585 (1,438) (306) (173)

Total shareholders' equity 154 2,089 2,366 2,461

Credit ratios (lease-adjusted)


EBITDA margin 50.2% 50.4% 52.7% 55%




Note: Revenue includes commission income from concessionaire sales, not gross revenue from concessionaire sales. Source: Company data, Barclays Capital

Revenue by business segment, June 2011 Debt maturity profile, June 2011

Sales of goods28%

Sales commission

57%

Consultancy service 11%Rental

income4%

563

48187

417

742

0

200

400

600

800

1,000

< 1yr 1-2 yrs 2-5 yrs

CNH bonds

Bank loans with repayment on demand clause

Bank loans

Debt: CNY1.96bn



8 November 2011 52

ROAD KING INFRASTRUCTURE LTD Christina Chiow


Road King’s credit profile benefits from its stable toll roadbusiness, which contributes cash of at least HKD500mn pa. Itsproperty unit has become more important, after improving itsperformance in 2010. We think Road King’s balance sheet liquidityis weak, although we believe the company can meet its short-term obligations, with re-financing of short-term debt underway.It achieved sales of CNY3.8bn in 9M 11, resulting in a downwardrevision of its annual target to CNY6bn (from CNY8bn). CNH bondcovenants are the same as its USD bonds, with limits on indebtedness, restricted payments, CoC, make-whole, equity claw-backs and a fixed charge incurrence covenant. The CNHbonds are among the highest yielding in the CNH market.Compared to its USD ’14 bonds (Underweight), the CNH bondsare broadly fair, factoring in slightly more yield for the p.a. CNYdepreciation implied by the 2.5y NDF curve.

Established in 1994 and listed in 1996, Road King is engaged in the operation and management of toll roads and expressways in China. In 2004, it entered property development and in 2007 it broadened its portfolio by acquiring Sunco Property. The company operates 15 toll road projects spanning 760km in seven provinces. Its investments in toll roads are conducted through joint ventures with entities linked to the relevant local highway bureau and/or municipal or provincial government. At June 2011, Road King had an attributable land bank of 4.9mn sqm, across 26 projects in 13 cities including Suzhou, Changzhou and Tianjin. Road King is 39% owned by Wai Kee Holdings and 27% owned by Shenzhen Investment, a property developer partly owned by the Shenzhen government.

Strengths Risks

Stable toll road business: We expect the cash contributionfrom the toll road business to remain relatively stable atc.HKD600mn pa over the next few years. This factors in thedisposal of Jihe Expressway and a reduction in cashentitlements for the roads over 2009-13. A newly acquiredShanxi expressway purchased in April 2011 is not expectedto contribute materially to cash flows in the next few years.We estimate toll roads cover c.1x interest expenses.

Property business spin-off: We note the potential for RoadKing to spin-off its property business while maintainingcontrol in the medium term. We would view such anaction, while unlikely near-term due to market volatility, aspositive for its credit profile (stronger liquidity, improvedfocus on the more stable toll road business).

Adequate liquidity: While weak, we think Road King hassufficient liquidity to meet its short-term obligations. At June 2011, cash had declined to HKD3.5bn (Dec-10: HKD5.2bn) after it paid outstanding land premiums. At thesame time, short-term debt (including its USD200mn July2011 bonds and USD150mn May 2011 FRNs) increased toHKD4.2bn (Jun-10: HKD3bn). Adjusting for the USD200mnbond redemption in July 2011 (post balance sheet date),we estimate the company has cash of HKD1.9bn versusshort-term debt of HKD2.6bn. Mitigating this is the fact thecompany has no land premiums outstanding and is lookingat small bilateral loans to repay the bonds. We expect thecompany to break even on a cash flow basis in 2H 11, inthe absence of further land acquisitions and investments.

Limited track record in property: Road King entered the property business in 2004 and acquired Sunco Property in 2007. Before 2009, its property performance was dismal, due to problems integrating the acquired business and a market downturn. Gross profit margin (property) was low, at 11-12% in 2008-2009. It recovered to 31% in 2010, but weakened to 23% in 1H 11. We expect it to stabilise at c.30% in 2011 (low compared to peers), on higher-price deliveries in 2H 11.

External financing likely needed for material investments:Road King spent CNY4.7bn in 2010 to acquire land with a GFA of 670,803sqm. We expect it to continue to grow its property business over the medium term. It has also been pursuing new road opportunities and secured an expressway project in Shanxi in April 2011 for CNY400mn. As it has USD150mn of FRNs due in 2012, we expect it to conserve liquidity and re-finance with new debt.

Short-dated debt profile: Road King’s debt has an average life of c.3-4 years. Furthermore, it has limited access to onshore bank loans. However, the company has access to the offshore loan market. In July, it entered a three-year HKD390mn term loan facility agreement with HSBC.

Corporate governance: Given Road King’s long operating and listing record, we do not see material corporate governance issues. But, it cannot unilaterally control decision-making at its toll road business (JV basis). In July 2007, Road King was unable to exert management control over two property subsidiaries in Tianjin which it acquired from Sunco (the issue has since been resolved).

Bonds outstanding



issue rating

Road King Infrastructure Ltd 6.00% 1,300 25 February 2014 Ba3/BB-/BB-


8 November 2011 53

ROAD KING INFRASTRUCTURE LTD


FY 08 FY 09 FY 10 1H11

Profit and loss

Operating revenue* 6,329 5,683 5,745 3,324

Gross profit 521 539 1,544 652

EBITDA* 1,132 837 1,674 631

EBIT* 909 623 1,468 524


Net income* 656 728 625 363

Cash flow

FFO 684 196 1,268 NA

Changes in working capital (1,756) 2,494 (620) NA

Operating cash flow (1,072) 2,691 648 (3,064)

Capex/acquisitions (111) (110) (593) (321)

Dividends paid (248) (296) (370) (171)

Free cash flow (1,432) 2,285 (315) (3,556)

Balance sheet

Cash 796 2,887 5,230 3,456

Total assets 20,909 22,223 27,686 30,404

Short-term debt 1,425 1,201 3,003 4,185

Long-term debt 5,738 5,200 5,687 5,991

Total debt 7,163 6,401 8,690 10,175

Net debt (cash) 6,367 3,514 3,460 6,719


Credit ratios


EBITDA margin* 18% 15% 29% 19%

EBITDA/gross interest* 2.4x 2.1x 3.8x 1.8x

Total debt/EBITDA* 6.3x 7.6x 5.2x 6.7x


Note: * Includes results from toll road joint ventures. Source: Company data, Barclays capital

EBITDA by business segment, 1H 11 Debt maturity profile, June 11

Toll road48%

Property development

52%

1.8

1.3

1.2

1.5

1.5

2.7

0

1

2

3

4

5

< 1 yr 1 - 2 yrs 2 - 3 yrs 3 - 4 yrs 4 - 5 yrs

Bank loans USD July 11 USD May 12

CNH Feb 14 USD May 14 USD Sep 15

Debt: HKD9.9bn

Source: Source: Company data, Barclays Capital Source: Source: Company data, Barclays Capital


8 November 2011 54

SINGAMAS CONTAINER HOLDINGS Erly Witoyo


We view the Singamas ‘14s as fairly valued relative to otherAsian corporate CNH bonds. While not rated by the ratingsagencies, based on international rating scales, we estimateSingamas could be viewed as a high B credit. Singamas operates in a highly cyclical industry. It posted record earnings in 1H11,but we think the operating environment will be significantlymore challenging in 2H on slowing global growth. The companyalso is subject to some business and customer concentrationrisk. Partly offsetting these are its strong market position (23%share of the global container manufacturing market), its robustliquidity position and the high barriers to entry into the industry.We view the strength of the 2014 bond covenants as averagerelative to other CNH issues. The covenants include a negativepledge on assets and revenues, a change-of-control put, a crossdefault of USD10mn and maximum net debt/tangible net worthof 1.5x, but no limits on restricted payments.

Founded in 1989, Singamas is the second largest container manufacturer in the world. It operates 11 container production factories in China, and 11 container depots and terminals in China, Hong Kong and Thailand. Singamas produces a wide range of container-related products, although dry freight containers contributed 78% of its revenue in 2010. The company is 39.27% owned by Pacific International Lines (Private) Limited, one of the largest ship owners in Asia. Singamas has been listed on the Hong Kong Stock Exchange since 1993 and has a market capitalisation of c.USD550mn as at 2 November 2011.

Strengths Risks

Economies of scale: As the second-largest containermanufacturer globally with a 23% market share, Singamasbenefits from economies of scale that smaller competitorsmay not have. Its strategically located facilities andextensive production network across the coastal regions ofChina improve its cost profile given the proximity to ports.

High barriers of entry: We believe the threat of newentrants is low, especially in China where foreigninvestment in the container industry is restricted.Furthermore, the high investment costs, low margins andhighly cyclical industry conditions give incumbents theedge and serve to deter potential new entrants. Currently,the two largest container manufacturers hold about three-quarters of the global market share.

Cost protection: The selling price of Singamas’ containerboxes is structured to reduce the impact of renminbiappreciation and increases in raw material costs. Its salesare based on a cost-plus pricing model that takes intoaccount fixed and variable costs, supply and demanddynamics and a 2% percent appreciation in the renminbiduring the working capital cycle (normally 4-5 months). Given the oligopolistic nature of the industry, we think thecompany should be able to maintain this pricing structure.

Cyclical industry: Demand for containers is correlated with global GDP growth. This risk is exacerbated by a short order book of around one month, which can result in a rapid deterioration in cash flow during a downturn. In 2009, its container output fell by 85% resulting in an 80% drop in total revenue.

Singamas’ credit metrics are decent for a company in a cyclical industry, although we think they could significantly deteriorate in the near term on weaker earnings. Management has guided for a 30-40% sequential decline in 2H sales volume given the slowing global economic condition. The company’s strong liquidity position, however, should provide some buffer against a temporary market downturn. It had cash of USD445mn at end-1H compared with short-term debt of USD170mn.

Concentration risk: The company faces concentration risk on various fronts. It only sells container boxes, although it tries to differentiate itself by producing some specialized boxes (see Revenue breakdown chart on next page). It derives 41.4% of its revenue from its top five customers, with its largest customer representing 18.7%. Additionally, the company generates around 60% of its sales from customers based in the US and Europe.

Corporate governance: The company’s long listing and operating record reduce corporate governance concerns, in our view. It breached the covenants of a USD100mn term loan during the recent economic downturn although it managed to get a waiver from lenders.

Bonds outstanding



issue rating

Singamas Container Holdings Ltd. 4.75% 1,380 14 Apr 2014 –


8 November 2011 55

SINGAMAS CONTAINER HOLDINGS

Financial summary, year-end December (USD mn)

FY 08 FY 09 FY 10 1H11

Profit and loss

Revenue 1,385 275 1,373 1,024

Gross profit 250 65 344 288

EBITDA 80 (20) 140 157

EBIT 63 (36) 122 148


Net income 5 (52) 93 102

Cash flow

FFO 25 (18) 124 NA

Working capital 89 52 (80) NA

Operating cash flow 114 34 44 NA

Capex/Acquisitions (25) (26) (31) (45)

Dividends paid (9) (4) (2) 0

Free cash flow 80 4 12 NA

Balance sheet

Cash 154 93 229 445

Total assets 907 737 1,251 1,644

Short term Debt 347 178 298 170

Long term Debt 25 4 4 359

Total debt 372 182 302 528

Net debt (cash) 218 89 72 83

Total shareholders' equity 365 404 509 593

Credit ratios


EBITDA margin 5.7% -7.2% 10.2% 15.4%

EBITDA/Gross interest 2.8x -2.0x 12.2x 16.2x

Total debt/EBITDA* 4.7x -9.2x 2.1x 2.0x


Note: * LTM for 1H11. Source: Company data, Barclays Capital

Revenue breakdown Debt maturity profile

Dry freight containers

78%

Other specialised containers/

parts7%

Refrigerated containers

8%

Tank containers

4%

Logistic services

3%

Note: As at Dec. 31, 2010. Source: Company data, Barclays Capital Note: As at Dec. 31, 2010. Source: Company data, Barclays Capital

USD302mn + Pro forma CNY1.38bn (USD209mn) CNH bonds

209

298

1

2

0

50

100

150

200

250

300

350

2011 2012 2013-2015

CNH Bonds Bank loans


8 November 2011 56

SINOCHEM HONG KONG (GROUP) CO. LTD Timothy Tay


Sinochem HK is rated Baa1/BBB/BBB+ by the rating agencies.On a standalone basis, the company is rated in the BB range.The uplift in ratings reflects the strategic importance ofSinochem’s fertilizer business to the state. The company’scredit metrics are likely to be constrained in the medium termby its large capex programme. However, short-term liquidity isstrong due to the high cash balance on its balance sheet.Financial flexibility is also enhanced by its stable relationshipswith onshore lenders. We view the valuation of the CNH bondsas tight relative to the existing 2020 and 2040 USD bonds.

Sinochem HK is the overseas holding subsidiary of Sinochem Group and the overseas platform for executing the parent’s business strategy. Sinochem Group is a PRC state-owned enterprise (SOE), which is supervised by SASAC. Sinochem HK operates its business under four main segments: Oil & Gas, Fertilizer, Real Estate and Others. It owns a vertically-integrated fertiliser business conducted through 52.7%-owned Sinofert Holdings Ltd, as well as a real estate development and hotel operations business, which is managed by 62.9%-owned Franshion Properties (China) Ltd. Both subsidiaries are listed on the Hong Kong Stock Exchange.

Strengths Risks

Strategic importance to China: Sinochem HK’s subsidiary,Sinofert, is the largest integrated fertiliser company and themost dominant importer of potash in China and isstrategically important to the country’s agriculturalproduction and food security. China is highly reliant onimported potash fertilisers as natural potassium depositsare scarce and potash is crucial for improving crop yields.90% of China’s imported fertilisers are potash. SinochemHK is also of moderate importance to the oil & gas industry.

Well-diversified portfolio of businesses: Sinochem HK is aleading player in the oil & gas, fertiliser and propertysectors. Although these businesses are cyclical by nature,each has contributed on average 20-30% of gross profitover the past three years. As Sinochem looks to increasevertical integration in the oil & gas business by venturinginto exploration and production, we think this shouldimprove its business mix by reducing volatility.

Strong financial flexibility: As a state-owned entity,Sinochem HK has stable relationships with domestic banks,which gives it greater flexibility to roll over debt, and accessto ample (unused) banking facilities of CNY66bn. It alsohas the ability to tap domestic and foreign bankingfacilities and capital markets.

Recurring income: Franshion’s commercial propertiesbusiness generated rental income of c.HKD780-870mn in each of the past three years. Its commercial properties arein prime areas with high occupancy rates.

Low margin core business: The core businesses of oil trading and fertiliser import and distribution have low operating margins in the range of 1-2%. This leaves little room for deterioration in its operating environment.

Cyclical core business: Both the fertilizer and the oil and gas businesses are cyclical and the earnings for both are highly correlated to the business cycle and commodity prices.

External debt financing likely needed to fund expansion: Sinochem HK’s strategy is to actively expand its global oil & gas and fertiliser businesses through up- and down-stream acquisitions. The company is likely to require additional financing to support the substantial planned capital expenditures. Based on the company’s track record and expansion plans, free cash flow looks likely to remain negative in the near term, which could put pressure on its already weak credit metrics.

Corporate governance: Key concerns over the availability of information. Sinochem HK is not a listed company, and does not publish regular reports on its financial position. Although investors can obtain information on its fertiliser and real estate businesses through its listed subsidiaries, information on its oil & gas business, which contributed 79% of total revenue in 2009, is not freely available.

Bonds outstanding



issue rating

Sinochem Hong Kong (Group) Co. Ltd 1.8% 3,500 18 January 2014 Baa1/BBB/BBB+


8 November 2011 57

SINOCHEM HONG KONG (GROUP) CO. LTD


FY 08 FY 09 FY 10 Pro forma FY10*

Profit and loss

Revenue 283,225 217,593 293,686

Gross profit 7,786 3,704 6,774

EBITDA 6,388 2,268 5,566 5,566

EBIT 5,232 885 3,628

Gross interest expense (1,329) (1,333) (1582) (1,668)

Net income 3,579 2,929 5,224

Cash flow

FFO 5,772 2,180 5,334

Working capital (10,662) (7,610) 6,849

Operating cash flow (4,890) (5,430) 12,184

Capex/acquisitions (6,455) (8,808) (1,793)

Dividends paid (899) (404) (89)

Pre-financing cash flow (12,244) (14,642) 6,658

Balance sheet

Cash 10,877 5,710 17,220

Total assets 109,236 119,441 154,742

Short term debt 16,722 22,016 12,179

Long term debt 15,022 11,191 30,691

Total debt 31,744 33,207 42,870 47,109

Net debt (cash) 20,867 27,497 25,650


Key ratios

Gross profit margin 2.7% 1.7% 1.9%

EBITDA margin 2.3% 1.0% 1.2%




Note: * Includes the CNH bonds issued on January 2011. Source: Company data, Barclays Capital

Revenue by segment, December 2010 Debt maturity profile, Dec 2010*

Oil and gas83%

Fertilizer14%

Real estate2%

Others4%

HKD33.2bn + Proforma CNY3.5bn (HKD4bn) CNH bonds

29

7 5

15

4

1

0

5

10

15

20

25

30

35

2011 2012-15 2016 & beyond

CNH bondsUSD bondsConvertible loan notesBank loans

Source: Company data, Barclays Capital Note: *Pro forma for HKD4bn CNH bonds issued in January 2011. Source: Company data, Barclays Capital


8 November 2011 58

ZHONGSHENG GROUP HOLDINGS LTD Erly Witoyo


The Zhongsheng ’14 CNH bonds look attractive relative to otherCNH bonds, in our view. They are one of the highest yieldingCNH bonds. While not rated by any of the ratings agencies,based on international rating scales, we estimate thatZhongsheng’s could be viewed as a low BB credit. Ourassessment of Zhongsheng reflects its strong operating trackrecord, diversified product portfolio, and a positive long-term outlook for the Chinese automobile sector. Offsetting these is itsexposure to industry cyclicality and relatively weak financialprofile. The covenants on the Zhongsheng ‘14s look robust incomparison to most other CNH bonds. They include limitationson restricted payments, asset sales, and indebtedness (subjectto FCCR of 2x), negative pledge on assets and revenues, andcross default clause.

Zhongsheng is a leading automobile dealership group operating in China’s affluent northeastern, eastern and southern regions, as well as Sichuan and Yunnan. According to independent research firm ACMR, Zhongsheng accounted for 1% of Chinese passenger car market revenue in 2009, ranking it 7th among passenger car dealerships. Currently, the company holds 4S (sales, spare parts, service and survey) dealership agreements for a diversified portfolio of luxury brands such as Mercedes-Benz, Lexus, Porsche and Lamborghini, as well as mid-to-high end brands such as Toyota, Nissan and Honda. The company was founded in 1998 by Huang Yi and Li Guoqiang, who currently own 65.29% of the company. Zhongsheng was listed in early-2010 and its market cap is currently around USD3.3bn.

Strengths Risks

Diversified portfolio of brands: Zhongsheng’s diversifiedautomobile portfolio reduces the company’s reliance onany one brand or market segment. The company servicesthe middle class market through partnerships with Toyota,Honda and Nissan, which were ranked among the top 10passenger car manufacturers in 2008 and 2009 by salesvolume. It targets the luxury market though partnershipsMercedes-Benz, Lexus and Audi, which were rated highly in terms of service satisfaction in a 2009 JD Power survey.

Strong performance: The company’s strong operatingtrack record has enabled it to rapidly expand its businesswith steadily improving profit margins. It has been able tobuild partnerships with well-known car brands due to itsstrong dealership performance and customer satisfaction.For example, in China, it is the leading dealer for Toyotaand Lexus by sales volume. It has also won severalcustomer satisfaction awards including a Best Customer Satisfaction Dealer Store Award (North Region) fromMercedes-Benz.

Positive outlook for vehicle sales: We are positive on thelong-term outlook for auto sales in China. We believeincreasing urbanisation and rising income levels in Chinashould continue to support demand growth for passengervehicles. The pace of growth in the industry, nonetheless,could fall in the near term as the government has imposedtightening measures to slow down economic growth. So far, the impact on Zhongsheng’s business has been limited. Itssales of vehicle in 3Q11 rose 60% y/y, while revenue fromthe after-sales business increased 70%. 9M11 sales fromboth businesses exceeded the full-year record in 2010.

Industry risk: Auto sales are somewhat correlated to economic growth. We have seen a slowdown in auto sales in China in 1H11 largely due to tighter monetary conditions and weakening consumer confidence. Moreover, the profit margin for the car dealership business is low, leaving little buffer for a deterioration in the operating environment. Zongsheng’s EBITDA margin in the past three years averaged 5.6%, but it has been gradually improving (4.4%, 5.9% and 6.5% in 2008, 2009 and 2010 respectively).

Weak financial profile: Zhongsheng’s debt/EBITDA of 3.7x in LTM 1H11 is high for a company operating in a cyclical industry, in our view. The company’s reliance on short-term debt could pose some concern, although we understand this mainly comprises working capital facilities that are secured on the company’s car inventories. On average, these facilities are repaid within 40 days, according to management.

Expansionary: Zhongsheng has announced plans to expand its dealership network by 40 outlets (from 98 at end-2010) to capture growth in the luxury car market. About half of this number will be added through acquisitions, which the company estimates at CNY1.3bn. The impending capital expenditures and acquisition costs are likely to keep free cash flow negative in 2011. The planned expansion also brings execution and event risks given the increased uncertainty over China’s economic prospects in the near to medium term.

Corporate governance: We see the short listing trackrecord (around 1.5 years) as a key corporate governance risk for Zhongsheng. Additionally, the company’s rapid growth is slightly concerning. The increase in dealership numbers by more than 200% in the past two years could stretch management’s oversight of the business.

Bonds outstanding



issue rating

Zhongsheng Group Holdings Limited 4.75% 1,250 21 April 2014 –


8 November 2011 59

ZHONGSHENG GROUP HOLDINGS LTD

Financial summary, year-end December (CNY mn)

FY 08 FY 09 FY 10 1H11

Profit and loss


Gross profit 777 1,179 2,293 1,706

EBITDA 465 809 1,566 1,220

EBIT 405 721 1,413 1,006

Gross interest expense (104) (81) (238) -232

Net income 219 471 1,031 511

Cash flow

FFO 284 624 1,214 NA

Changes in working capital (52) (505) (2,284) NA

Operating cash flow 232 119 (1,070) NA

Capex/acquisitions (401) (590) (2,075) NA


Free cash flow (169) (472) (3,145) NA

Balance sheet

Cash 964 1,031 2,990 4,370

Total assets 4,171 5,504 16,200 19,648

Short-term debt 1,158 1,797 4,924 6,147

Long-term debt 0 0 0 1,261

Total debt 1,158 1,797 4,924 7,408

Net debt (cash) 193 766 1,935 3,039


Credit ratios


EBITDA margin 4.4% 5.9% 6.5% 7.4%


Total debt/EBITDA* 2.5x 2.2x 3.1x 3.5x


Note: * LTM for 1H11. Source: Barclays Capital

Revenue by region in China, December 2010 Debt maturity profile, June 2011

North7%

Selected inland areas

18%

Northeast39%

South19%

East17%

1250

6147

210

1,000

2,000

3,000

4,000

5,000

6,000

7,000

< 1 yr 1 - 2 yrs 2 - 5 yrs > 5 yrs

Bank and other loans CNH bonds



8 November 2011 60

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8 November 2011 61

KEY ASIA CONTACTS Jon Scoffin Head of Research, Asia-Pacific and Head of Global Credit Research +65 6308 3217 [email protected]

Credit

Krishna Hegde, CFA Asia Credit Strategist and Senior Financial Institutions +65 6308 2979 [email protected]

Avanti Save Credit Strategy +65 6308 3116 [email protected]

Christina Chiow, CFA Chinese Real Estate +65 6308 3214 [email protected]

Lyris Koh Financial Institutions +65 6308 3595 [email protected]

Jit Ming Tan, CFA N. Asia High Yield Industrials and Resources +65 6308 3210 [email protected]

Timothy Tay, CFA High Grade Diversified Industrials; Oil & Gas and Utilities +65 6308 2192 [email protected]

Erly Witoyo S.E. Asia High Yield Industrials and Resources +65 6308 3011 [email protected]

Nicholas Yap Associate +65 6308 3180 [email protected]

Rampharaj Yudhanahas Associate +65 6308 3804 [email protected]

Emerging Asia Economics Rahul Bajoria Regional Economist – India, Malaysia, Thailand +65 6308 3511 [email protected]

Jian Chang Regional Economist – China, Hong Kong +852 2903 2654 [email protected]

Joey Chew Regional Economist – Singapore +65 6308 3211 [email protected]

Yiping Huang Chief Economist, Emerging Asia +852 2903 3291 [email protected]

Wai Ho Leong Senior Regional Economist – Korea, Malaysia, Singapore, Taiwan +65 6308 3292 [email protected]

Siddhartha Sanyal Chief Economist, India +91 22 6719 6177 [email protected]

Prakriti Sofat Regional Economist – Indonesia, Philippines, Sri Lanka, Vietnam +65 6308 3201 [email protected]

Lingxiu (Steven) Yang Regional Economist – China, Hong Kong +852 2903 2653 [email protected]

FX Strategy Olivier Desbarres Head of FX Strategy, Asia-Pacific ex-Japan +65 6308 2220 [email protected]

Hamish Pepper FX Strategist, Asia-Pacific ex-Japan +65 6308 2220 [email protected]

Nick Verdi FX Strategist, Asia-Pacific ex-Japan +65 6308 3093 [email protected]

FI Strategy Rohit Arora FI Strategist, Emerging Asia +65 6308 2092 [email protected]

Kumar Rachapudi FI Strategist, Emerging Asia +65 6308 3383 [email protected]

Ju Wang FI Strategist, Emerging Asia +65 6308 2801 [email protected]

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Analyst Certification(s) We, Jian Chang, Christina Chiow, CFA, Krishna Hegde, CFA, Kumar Rachapudi, Avanti Save, Jit Ming Tan, CFA, Timothy Tay, CFA, Ju Wang, Erly Witoyo andRampharaj Yudhanahas, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this research report. Important Disclosures For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital ResearchCompliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi-bin/all/disclosuresSearch.pl or call 212-526-1072. Barclays Capital does and seeks to do business with companies covered in its research reports. 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Not Rated (NR): An issuer which has not been assigned a formal rating. For Australia issuers, the ratings are relative to the Barclays Capital U.S. Credit Index or Pan-European Credit Index, as applicable. Explanation of the High Yield Sector Weighting System Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays Capital U.S. High Yield 2% IssuerCapped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate CreditIndex, as applicable. Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays Capital U.S. High Yield 2% Issuer Capped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate CreditIndex, as applicable. Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays Capital U.S. High Yield 2% IssuerCapped Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable. Explanation of the High Yield Research Rating System The High Yield Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to either someor all of the company's debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertain the application of therating system to that company. Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total return of the

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Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EMAsia USD High Yield Corporate Credit Index, as applicable. Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, orthe EM Asia USD High Yield Corporate Credit Index, as applicable. Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, or the EMAsia USD High Yield Corporate Credit Index, as applicable. Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with applicableregulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger or strategic transaction involving the company. Coverage Suspended (CS): Coverage of this issuer has been temporarily suspended. Not Rated (NR): An issuer which has not been assigned a formal rating.

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