cnh market primer

EMERGING MARKETS RESEARCHNovember 2011

CNH MARKET PRIMERFOOD FOR THOUGHT

PLEASE REFER TO THE LAST PAGE FOR ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES

Barclays Capital | CNH Market Primer

FOREWORDThe 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 Kongs 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

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TABLE OF CONTENTSCNH 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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CNH MARKET PRIMER

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Hong Kong: CNH market primerJu Wang +65 6308 2801 [email protected] Kumar Rachapudi +65 6308 3383 [email protected] Jian Chang +852 2903 2654 [email protected]

The CNH market 1 continues to thrive, helped by medium-term RMB appreciation expectations. We expect further liberalisation of Chinas 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 Lis 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 BeijingThe 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 Chinas 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.

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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 Kongs 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 Chinas 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)700 600 500 400 300 200 100 0 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011Source: CEIC, Barclays Capital

Figure 2: Hong Kong RMB deposits continue to increaseHKD trn 8 7 6 5 4 3 2 1 0 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Deposit in other foreign currencies RMB deposit USD deposit HKD deposit

Source: CEIC, Barclays Capital

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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 10Regulation 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 quotaIn 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 Institutions (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 AIs 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 enterprisesThis 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 moneyIn 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 AccountTo mitigate participating AIs 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 AIs exposure to the Fiduciary Account meant that they were taking counterparty risk with the PBoC (and not with BoCHK) and hence were exempt8 November 2011 6


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 centresIn 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 KongPremier 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: MilestonesYear 2004 2005 2007 2009 2009 2010 2010 Month Jan December June July June July Key milestones Licensed banks can conduct personal RMB business (deposit, exchange, remittances, card business). Personal business is expanded: local residents can make payments in Guangdong by cheque. The mainlands financial institutions are allowed to issue RMB bonds in Hong Kong upon approval. Launch of RMB trade settlement and related services between Hong Kong and five mainland cities. 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. 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. Hopewell Highway Infrastructure is the first HK corporate to issue RMB bonds in Hong Kong. PBoC allows eligible overseas institutions to invest in mainland Chinas interbank bond market. McDonalds is the first foreign corporate to issue RMB bonds in Hong Kong. Issuance of CNHdenominated bonds in Hong Kong by the Asian Development Bank (ADB) and the International Finance Corporation (IFC). First tendering of sovereign bonds (RMBdenominated) through Central Moneymarkets Unit (CMU) SAFE tightens capital controls by setting limits on mainland banks RMB outstanding cash basis positions. HKMA limits AIs RMB net open positions (whether net long or net short) to 10% of their RMB assets or liabilities. 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. The first CNY synthetic (straight) bond was issued in Hong Kong. PBoC announces pilot scheme to allow RMB settlement of outward direct investment, by non-financial enterprises. Bank of Chinas 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. YFY Cayman Co., Ltd is the first Taiwan corporation to issue an RMB-denominated IPO, and HKEx to hold the introductory meeting in March Bank of China (HK) to launch securities sales and repurchase facilities to RMB participating banks China allows eight foreign banks to invest in Chinas interbank bond market 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. 8

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

2010 2010 2010 2010 2010 2010 2010 2010 2011 2011 2011 2011

July August August October November November December January January January January

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

2011 2011 2011 2011

January February March March

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Year 2011

Month March

Key milestones 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%. China and Singapore in talks to develop Singapore as a second offshore RMB trading centre. Hui Xian REIT becomes the first IPO denominated in RMB in Hong Kong. PBoC cuts interest rates on offshore CNH deposits held in Hong Kong from 0.99% to 0.72% 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 and Reuters page CNHFIX at 11:15 a.m. Hong Kong time 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. 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. 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.

2011 2011 2011 2011

April April April June

2011

July

2011 2011

August October

Source: Government web sites, Barclays Capital

Sources and uses of RMBWe 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 banks 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 banks quota. 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), these9

3.

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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. 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. 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. 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 Kongs 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.

2.

3.

4.

Figure 4: Impact of various market participants on USD/CNH and RMB liquidity in Hong KongMarket participant Impact on RMB liquidity in HK Impact on USD/CNH spot rate Neutral - applicable rate is USD/CNY rate Neutral - applicable rate is USD/CNY rate Higher Lower Neutral - applicable rate is USD/CNY rate Neutral for spot - applicable rate is USD/CNY rate; Neutral - applicable rate is USD/CNY rate Lower Lower Lower USD/CNH forward points due to increasing RMB liquidity Higher USD/CNH forward points due to tighter liquidity Lower USD/CNH forward points due to increasing RMB liquidity Higher USD/CNH forward points due to tighter liquidity Higher USD/CNH forward points due to tighter RMB liquidity Higher USD/CNH forward points due to tighter RMB liquidity Lower USDCNH forward points due to increasing RMB liquidity Impact on USD/CNH forward rates

Clearing Bank (BoC- HK) Increase HKMA Mainland importers Foreign domiciled importers Individuals Bond issuers Equity issuers Non-mainland bond investors Non-mainland RMB depositorsSource: Barclays Capital

Increase Increase Decrease Increase Decrease Decrease Neutral Neutral

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Generic RMB instruments in Hong KongWe 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 mainlands 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 offshore5.0 4.0 3.0 2.0 1.0 0.0 0 2 4 6 8 10 CNH MOF bond yields CNY NDF yields CNH FX Implied yieldsSource: Bloomberg, Barclays Capital

Figure 6: July 2011 RMB yield curves onshore and offshore5.0 4.0 3.0 2.0 1.0 0.0 -1.0 0 2 4 6 8 10

Onshore MOF bond yields CNH deposit rate

CNH MOF bond yields CNY NDF yields CNH FX Implied yieldsSource: Bloomberg, Barclays Capital

Onshore MOF bond yields CNH deposit rate

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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 HKMAs 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 marketCNH products CNH Deliverable spot CNH Deliverable forward CNH CCS Liquidity Liquid. Bid/ask spread 10 pips for USD20mn Liquidity now extends to 3y. 1y bid/ask 30 pips for USD20mn Not liquid. The most active traded tenor is 1y. Bid/ask spread about 10bp for to 1y CCS Not developed yet Daily turnover USD1.2bn USD2bn for whole curve Low Interbank market Typical interbank deal size is USD10mn Liquidity has improved significantly; typical size is USD20mn No active interbank market

CNH IRSSource: Barclays Capital

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 Council8 November 2011 12


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 RMBdenominated 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 2011Tenor 3y 5y 7y 10y Application Issued amount (bn) amount (bn) Average rate 38 17 9 5 6 5 3 1 0.48% 1.15% 1.65% 1.92% Highest 0.60% 1.40% 1.94% 2.36% Lowest 0.10% 0.10% 0.10% 0.10% Bid-to-cover 6.29 3.43 3.11 5.25

Source: HKMA, Bloomberg, Barclays Capital

Figure 9: Result of the tenders of RMB sovereign bonds on 30 November 2010Issuance amount (RMB bn) 2.0 2.0 1.0 Latest onshore Bid-tobid-tocover ratio cover ratio 14.83 7.06 5.48 1.23 1.53 1.92 Avg accepted yield 0.89% 1.61% 2.27%

Tenor 3y 5y 10y

Comparable onshore yield 3.30% 3.68% 3.92%

Current yield (Indicative) 0.82-0.65% 1.38-1.26% 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 PRC8 November 2011 13


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)45 40 35 30 25 20 15 10 5 0 5 9 3 15 10 22 18 91-3y 38% 3-5y 40%

Figure 11: Issued CNH bonds by tenor2% y 8%

41 34 275-10y 12%

May

Jan

Jun

2010

Mar

Aug

Sep

Feb

Apr

2011Source: CMU, Barclays Capital Source: CMU, Barclays Capital

Trading different RMB FX marketsThe 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 marketThe 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.

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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 marketsBefore 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 marketsThe 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 15


But over past two to three months, we have seen the opposite development in the spot CNHCNY 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 Chinas 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)6.41 6.39 6.37 6.35 6.33 6.31 6.29 6.27 6.25 0 0.3 0.6 0.9 1.2 1.5 Onshore CNY Deliverable Forward CNH Deliverable Forward Offshore CNY NDF

Figure 13: The three RMB curves (three months ago)6.50 6.45 6.40 6.35 6.30 6.25 0 0.3 0.6 0.9 1.2 1.5 Onshore CNY Deliverable Forward CNH Deliverable Forward Offshore CNY NDF

Source: Bloomberg, Barclays Capital

Source: Bloomberg, Barclays Capital

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Figure 14: Factors influencing various forward marketsMarket Factors influencing the forward points 1. 2. 3. 4. 1. 2. 3. 1. 2. 3. Interbank RMB and USD deposit rates Severity of RMB capital account convertibility restrictions RMB appreciation pressures Onshore/CNH arbitrage flows RMB appreciation expectations Onshore/offshore arbitrage flows NDF/CNH arbitrage flows Offshore interbank RMB and USD deposit rates RMB appreciation pressures via CNH premium over CNY Hedging interest in longer-dated forwards by CNH investors

USD/CNY onshore forwards

USD/CNY NDF

USD/CNH forwardsSource: Barclays Capital

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CNH CORPORATE BONDS

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Food for thoughtKrishna Hegde, CFA +65 6308 2979 [email protected] Erly Witoyo +65 6308 3011 [email protected] Avanti Save +65 6308 3116 [email protected]

The CNH market continues to thrive, driven by renminbi (RMB) appreciation expectations and investors seeking to diversify currency exposure. We expect continued liberalisation of Chinas 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 developmentDim 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 supportiveLate last year and early this year, potential appreciation of Chinas 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 highly8 November 2011 20


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 highWe 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. Credit conditions are likely to remain tight in China. 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 16: CNH Issuance tenors>10y 3% 5-10y 12%Financials 48%

2. 3.

Figure 15: CNH Issuance issuer profileSupranation als 1% Corporates 35%

10%), sales of affiliates ( 5 yrs 8.2 8.7 6.5 15.2 2.5 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

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CHINA RESOURCES POWERBarCap view Among the Chinese independent power producers, China Resource Power has one of the strongest credit profiles, with the highest operating margins and lowest leverage. The biggest risk to the companys credit profile is escalating coal prices and its ability to pass through higher fuel costs. This is somewhat mitigated by high operating margins and the high utilisation rate of its generation fleet, which provides a buffer against increases in fuel cost. The recent average on-grid tariff hike of 1.2% in April, though lower than expected, should help alleviate some of the rising cost pressures. We view the CNH bonds as fairly valued relative to the 2015 maturity USD bonds. Strengths Favourable service areas: As at Jun 11, 70.9% of the companys operational generation capacity was located in the affluent regions of eastern, southern and north eastern China. The on-grid tariffs in eastern and southern China, are generally higher than the national average, CNY414.4 per MWh versus CNY340 per MWh (both inclusive of VAT). Strong operating track record: The companys ability to consistently achieve high profit margins and utilisation hours underscores its cost competitiveness. It actively implements measures to control fuel costs by sourcing through annual contracts, entering strategic cooperation agreements and expanding its coal mining business. The company enjoyed average gross margins of 39% from 2008 to 2010. Utilisation hours exceeded the national average by 16.6%, 18.8%, and 19.3% in 2008, 2009 and 2010 respectively. Upstream expansion and business diversification: China Resources Power seeks opportunities to expand upstream into coal mining in order to secure long-term coal supply and stabilise coal costs. Coal production in the first six months of 2011 increased 63.2% y/y, rising to 7.743mn tonnes from 4.746mn tonne. Self-produced coal accounts for 25% of the companys consumption. The company has also actively diversified into clean energy projects such as wind, which accounts for 646MW of attributable capacity, as well as hydro-electric energy. Bonds outstandingIssuer China Resources Power Holding Co. Ltd China Resources Power Holding Co. Ltd Coupon 2.90% 3.75% Principal (CNY mn) 1,000 1,000 Maturity 12 Nov 2013 12 Nov 2015

Timothy TayCompany overview 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. Risks Evolving regulatory environment: The regulatory environment, while managed by the National Development and Reform Commission, is ultimately shaped by the central governments policy objectives. Regulatory changes can be unpredictable and inefficient, as seen by the authorities delay in implementing a coal tariff passthrough 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 ongrid tariffs set by the central government also limit the companys ability to pass on coal price increases and add further pressure on gross margins. This risk is mitigated by China Resources Powers 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.

Senior unsecured issue rating Baa3/BBB-/-Baa3/BBB-/--

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CHINA RESOURCES POWERFinancial summary, year end December (HKD mn)FY 08 Profit and loss Operating revenue Gross profit EBITDA EBIT Gross interest expense Net income Cash flow FFO Changes in working capital Operating cash flow Capex/Acquisitions Dividends paid Free cash flow Balance sheet Cash Total assets Short-Term Debt Long-Term Debt Total debt Net debt (cash) Total shareholders' equity Credit ratios Gross profit margin EBITDA margin EBITDA/Gross interest Total debt/EBITDA Total debt/Total capitalSource: Company data, Barclays Capital

FY 09 33,214 14,161 10,284 7,040 (2,311) 6,038 8,341 (674) 7,667 (22,654) (620) (15,607) 6,262 118,926 23,494 32,990 56,484 50,223 45,155 42.6% 31.0% 4.5x 5.5x 55.6%

FY 10 48,578 18,908 11,398 7,123 (3,041) 5,762 9,955 (555) 9,400 (20,881) (1,771) (13,252) 6,802 143,011 20,668 54,243 74,911 68,109 50,260 38.9% 23.5% 3.7x 6.6x 59.8%

1H11 29,033 11,685 6,213 3,773 (1,444) 3,227 NA NA 1,515 (4,824) (1,268) (4,577) 7,305 160,527 19,618 57,932 77,550 70,245 59,185 40.2% 21.4% 4.3x 6.5x 56.7%

26,772 9,289 5,737 2,923 (1,846) 1,936 4,854 (88) 4,766 (15,846) (1,044) (12,124) 5,467 79,650 9,485 28,187 37,671 32,204 30,161 34.7% 21.4% 3.1x 6.6x 55.5%

Revenue by business segment, December 2010

Debt maturity profile, June 201125,000 Bank & other loans CNY bonds USD bonds CNH bonds 2,408 3,891 15,000

Sales of coal 11% Heat supply 3% Sales of electricity 86%

4,575

20,000

10,000 5,000 0

19,618 12,945 14,959

19,154

< 1 yrSource: Company data, Barclays Capital

1 - 2 yrs

2 - 5 yrs

> 5 yrs


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CHINA SHANSHUI CEMENT GROUP LTDBarCap view China Shanshui looks set to remain free cash flow negative in the near- to medium-term due to its aggressive expansion plans. Fitch estimates its capex will total CNY11bn over the next two to three years. This raises the possibility that the company may need to raise additional funds. Notwithstanding this, we think the SHASHU 14s look reasonably cheap at a low- to mid-9% YTW other CNH bonds yield 4-8% and the USD-denominated SHASHU 16s yield 9-10%. Bond covenants are similar to those for its USD bond and include subsidiary guarantees, change of control put, restricted payments and indebtedness subject to fixed charge coverage ratio of 3.5x. Company overview

Jit Ming TanListed 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%). Risks 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 companys 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.

Strengths Strategically located assets minimise costs: Due to the low value-to-weight ratio, transportation is a large component of the cost of sales for cement producers. China Shanshui says it selects the locations of its production facilities to be close to both limestone and coal mines, as well as end-users. It also operates a hub and spoke facility layout to maximise cost savings. Government support: Shandong Shanshui, the primary onshore holding company of China Shanshui Cement, is one of 12 national cement producers entitled to government support in the form of priority with respect to project approvals, land use right grants and credit approvals when undertaking mergers, acquisitions and project investments. With the government pushing for industry consolidation and more efficient use of resources and energy, we would expect favourable policies, such as access to liquidity, VAT refunds and enterprise income tax exemptions to continue. Indeed, in October 2011, Shandong Shanshui secured credit lines totalling CNY3bn from Bank of China. High barriers to entry: Industry regulations create high barriers to entry by imposing strict requirements on production capacity and resource holdings of newly established cement and clinker production plants. In addition, of the total cement capacity in Shandong at end 2010, 18.9% is considered outdated and likely to be phased out, while new capacity yet to commence operation 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 from industry consolidation and strengthen its market power. Bonds outstandingIssuer China Shanshui Cement Group Coupon 6.50%

Principal (CNY mn) 1,500

Maturity 22 July 2014

Senior unsecured issue rating --/BB-/BB-

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CHINA SHANSHUI CEMENT GROUP LTDFinancial summary, year end December (CNY mn) FY 08 Profit and loss Revenue Gross profit EBITDA EBIT Gross interest expense Net income Cash flow FFO Working capital Operating cash flow Capex/Acquisitions Dividends paid Free cash flow Balance sheet Cash Total assets Short term Debt Long term Debt Total debt Net debt (cash) Total shareholders' equity Credit ratios Gross profit margin EBITDA margin EBITDA/Gross interest Total Debt/EBITDA** Total debt/Total capital 21% 19% 3.4x 3.5x 52% 20% 20% 5.0x 3.3x 53% 22% 21% 6.0x 3.1x 55% 32% 31% 9.6x 2.8x 59% 8.7x 3.0x 60% 1,248 12,773 2,768 2,008 4,776 3,527 4,606 886 14,609 2,207 3,556 5,763 4,877 5,229 1,145 18,950 1,792 5,614 7,405 6,261 6,149 4,614 23,869 2,327 8,242 10,568 5,954 7,487 11,328 5,954 7,462 5,374 1,633 -147 1,485 -2,395 -206 -2,600 1,902 -315 1,587 -2,155 -170 -2,325 2,658 -194 2,464 -2,901 -238 -3,139 NA NA 2,208 NA NA NA 7,501 1,586 1,397 858 (407) 539 8,728 1,780 1,763 1,115 (346) 702 11,854 2,550 2,454 1,646 (403) 979 7,832 2,470 2,396 1,972 (250) 1,237 (274) 2,396 FY 09 FY 10 1H11 Pro forma 1H11*

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

Revenue breakdown, June 2011Northeast China 19.8% Shanxi province 0.4%

Debt maturity profile, June 20114500 4000 3500 3000 2500 2000 1500 1000 500Shandong province 79.8%

Bank loans CNH bonds USD bonds CNY bonds

630 45

1,500

2,222

2,785 1,900

2,586

0 < 1 yr 1 - 2 yrs 2 - 5 yrs > 5 yrs


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

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CHINA WINDPOWERBarCap view The company expanded its operating capacity to 1,063MW in a relatively short three years despite a fairly limited track record and unproven business model. As generation capacity grows, so should the companys share of the stable cash flow available from wind farms selling electricity at guaranteed rates to the grid. High debt leverage (5.4x) and its aggressive expansion pose key risks. With a total wind generation pipeline of 14GW and plans to add almost 1.6GW over the next two years, a key challenge for the company will be to manage its external funding needs and to grow its share of stable cash flow from wind farms. While not rated by any of the ratings agencies, based on international rating scales, we estimate that China WindPowers rating could be viewed as a single B credit. The valuations of its CNH bonds look rich relative to the risk profile of the company and other CNH bonds. Strengths Integrated business model: China WindPower achieves significant operational efficiencies from the synergy that its business segments provide. This is reflected in high EBITDA margins and rapid growth in operational capacity (170.3MW in Dec 08 to 1,064.3MW in Dec 10), as well as the ability to recover a substantial portion of the initial equity investment within 6-12 months through tower tube sale proceeds and service fees. Strong JV partners: JVs with state-owned power companies such as Liaoning Energy and China Power Investment Corporation provide financing and priority connection to the electrical grid. China WindPower gets to enjoy increased scale of operations at reduced operating costs and upfront capital expenditures. Cash flow from wind farms: The stable and recurrent cash flows from investments in existing and new wind farm developments enable the company to fund part of its expansion capital needs. Supportive regulatory policies: The PRC government has promulgated a series of laws and regulations which provide preferential measures for the renewable energy industry. Measures such as mandatory grid connection, the guaranteed purchase of all electricity generated from wind farms, subsidized on-grid tariffs and other tax-related incentives are supportive of the companys credit profile. Company overview

Timothy TayChina 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 of 14GW 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.

Risks Regulatory uncertainties: There is no certainty that the government 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 wind farms 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 companys 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 outstandingIssuer China WindPower Group Limited Coupon 6.375% Principal (CNY mn) 750 Maturity 4 April 2014 Senior unsecured issue rating

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CHINA WINDPOWERFinancial summary, year end December (HKD mn)FY 09* Profit and loss Operating revenue Gross profit EBITDA EBIT Gross interest expense Net income Cash flow FFO Changes in working capital Operating cash flow Capex/acquisitions Dividends paid Free cash flow Balance sheet Cash Total assets Short-term debt Long-term debt Total debt Net debt (cash) Total shareholders' equity Credit ratios Gross profit margin EBITDA margin EBITDA/gross interest Total debt/EBITDA Total debt/Total capital 34.8% 19.2% 13.3x 0.3x 0.9% 41.8% 25.6% 83.4x 0.2x 1.0% 41.5% 28.9% 25.7x 2.9x 21.1% 49.6% 10.6% 1.2x 5.0x 26.3% 745 2,645 0 23 23 (722) 2,485 1,110 3,506 34 0 34 (1,075) 3,268 733 5,425 247 802 1,049 317 3,913 1,418 6,185 172 1,342 1,514 96 4,251 87 359 446 (88) 0 358 142 99 241 (123) 0 118 331 (51) 281 (1,589) 0 (1,308) NA NA NA NA NA NA 379 132 73 69 (6) 117 563 235 144 139 (2) 181 1,236 513 357 347 (14) 427 258 128 27 21 (23) 237 FY 09** FY 10 1H11

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 2011Wind power plant operation & maintenance 20% Tower tube equipment manufacturing 58%

Debt maturity profile, December 2010***1400 1200 1000 800 600 400 200 0 2011 247 102 2012 295 2013-15 405 HKD1bn + Proforma CNY750mn (HKD885mn) CNH bonds CNH bonds Bank loans 885

Consultancy and design 6% Engineering and construction 16%Source: Company data, Barclays Capital

2016 & beyond

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

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GALAXY ENTERTAINMENT GROUP LTDBarCap view 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 Galaxy Macau, given its greater size than existing facilities, to contribute significantly to the companys earnings from 2H11 onwards. Longer-term, the issue of funding for development of its Cotai land bank could weigh on credit metrics. While not rated by any of the ratings agencies, based on international rating scales and subordination by opco debt, we estimate that GALENT could be viewed as a mid-B credit, which implies that the 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 a maximum leverage ratio of 1.75x, defined as gross debt less subordinated debt over tangible net worth. Strengths Exposure to worlds largest gaming market: Galaxy holds one of only six concessions/sub-concessions to operate gaming facilities in Macau. Macaus gaming revenue USD23.5bn in 2010 achieved a 32.5% CAGR during 2006-10 to become the worlds largest gaming market. Macaus robust growth is expected to continue YTD September 2011 casino revenue grew 46% y/y supported by Chinas strong economic expansion and steadily increasing disposable incomes. Strong track record and diversification: With the launch of the Galaxy Macau, Galaxy is diversifying away from the volatile VIP-focused business towards a balanced portfolio that also targets the higher-margin mass-market segment. The Galaxy Macau is an integrated leisure resort that is designed to enable the company to capture a larger market share in the entertainment industry. Strategically located properties: StarWorld and Galaxy Macau, its primary casinos, are centrally located in the Macau peninsula and Cotai, respectively, and benefit from the 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 to improve in 2H11, on an increased earnings contribution from and reduced capital expenditures for Galaxy Macau. Galaxy reported 3Q11 EBITDA rose 191% y/y to HKD1.8bn, with Galaxy Macau contributing HKD973mn in its first full quarter of operation. Bonds outstandingIssuer Galaxy Entertainment Group Limited Coupon 4.625% Principal (CNY mn) 1,380 Maturity 16 Dec 2013

Jit Ming TanCompany overview 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 fivestar 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.

Risks Chinas policy on gaming visits: As Macau draws a large portion of its customers from China, the Chinese governments policy on gaming will affect the industrys performance. Chinas 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 Galaxys 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 StarWorlds 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, Galaxys revenue more than doubled while free cash flow was consistently negative. Working capital metrics were volatile during this period. Lastly, 76% of the companys shares are held by the Lui family.

Senior unsecured issue rating

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GALAXY ENTERTAINMENT GROUP LTDFinancial summary, year end December (HKD mn)FY 08 Profit and loss Operating revenue Gross profit EBITDA EBIT Gross interest expense Net income Cash flow FFO Changes in working capital Operating cash flow Capex/acquisitions Dividends paid Free cash flow Balance sheet Cash Total assets Short-term debt Long-term debt Total debt Net debt (cash) Total shareholders' equity Credit ratios Gross profit margin EBITDA margin EBITDA/gross interest Total debt/EBITDA Total debt/Total capitalSource: Company data, Barclays Capital

FY 09

FY 10

1H11

10,520 3,028 84 (1,060) (577) (11,390)

12,233 3,003 888 347 (418) 1,149

19,262 4,100 1,782 1,271 (381) 898

13,666 3,258 862 513 (277) 378

(88) (618) (706) (1,744) (2) (2,452)

664 962 1,626 (2,510) (0) (884)

1,687 514 2,201 (4,592) (9) (2,400)

NA NA NA NA NA NA

6,042 18,652 436 6,276 6,712 670 7,274

3,516 18,963 1,383 4,460 5,843 2,327 8,435

4,428 25,186 2,283 7,144 9,426 4,998 9,575

5,050 31,902 747 10,959 11,706 6,656 11,804

28.8% 0.8% 0.1x 79.9x 48.0%

24.5% 7.3% 2.1x 6.6x 40.9%

21.3% 9.2% 4.7x 5.3x 49.6%

23.8% 6.3% 3.1x 6.4x 49.8%

Revenue by business segment, June 2011

Debt maturity profile, December 2010

Hotel operations 2% Sales of constructio n materials 5%

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0

HKD7.9bn + CNY1.38bn (HKD1.6bn) CNH bonds CNH bond USD convertible notes Bank loans Finance lease payments 1,181 698 451 2011

1,574

2,094 2,252 415 451 2012 451 2013-15 2016 & beyond

Gaming operations 93%Source: Company data, Barclays Capital


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GLOBAL LOGISTIC PROPERTIESBarCap view The key strength of GLP is its large and stable cash flow from its 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 quality of the recurring cash flow. The contributions from its China business should increase over time as GLP expands its footprint from first- to second-tier cities. While risks may be higher during this build-out process, once established, we think the business will be relatively stable. Strengths Leading operator in the logistics sector: GLP is the largest provider of modern warehouses in both Japan and China. An extensive network of strategically located properties enables economies of scale and provides a competitive edge in attracting customers pursuing an expansion strategy. Furthermore, the strength of the company throughout the entire logistics value chain enables it to provide comprehensive logistics solutions to clients, which differentiates it from competitors. Stable income base from Japan: The logistics industry in Japan is well established, with occupancy rates for GLPs Japan portfolio averaging 99% since 2002. EBITDA contribution from the Japanese portfolio amounted to USD346mn in FY2011, almost 90% of total EBITDA. Income from the Japanese portfolio is underpinned by staggered lease expirations and a weighted average lease term of 5.9 years. Short construction cycle: The company is able to flexibly scale back logistics projects as demand changes due to the low investment costs, and short planning and developmental time frames (12 months) for logistics properties versus other property types. GLP also works closely with customers, which allows the company to accurately assess demand before committing to new projects. Company overview

Timothy TayGLP 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. Singapores Government Investment Corporation is the majority equity shareholder with a 51.6% stake in GLP. Risks 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 GICs 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 issued debt: 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 companys 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 companys ability to conduct and expand its business in China.

Bonds outstandingIssuer Global Logistics Properties Limited Global Logistics Properties Limited Coupon 3.375% 4.00% Principal (CNY mn) 2,650 350 Maturity 11 May 2016 11 May 2018 Senior unsecured issue rating Baa2/--/BBB+ Baa2/--/BBB+

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GLOBAL LOGISTIC PROPERTIESFinancial summary, year end March (USD mn)FY 09 Profit and loss Operating revenue Gross profit EBITDA EBIT Gross interest expense Net income Cash flow FFO Changes in working capital Operating cash flow Capex/Acquisitions Dividends paid Free cash flow Balance sheet Cash Total assets Short-term debt Long-term debt Total debt Net debt (cash) Total shareholders' equity Credit ratios Gross profit margin EBITDA margin EBITDA/gross interest Total debt/EBITDA Total debt/Total capital 71% 73.7% 3.9x 82.9x 55.7% 71% 71.9% 4.8x 11.4x 59.1% 72% 73.7% 6.2x 10.6x 34.6% 72% 72.7% 3.6x 11.8x 37.2% 311 7,200 465 2,667 3,132 2,820 2,492 412 7,397 716 2,665 3,381 2,969 2,342 1,560 11,700 937 2,755 3,692 2,132 6,984 1,964 12,431 947 3,294 4,241 2,277 7,173 56 14 71 (932) (67) (929) 243 (48) 195 (189) (17) (12) 278 5 283 (409) (135) (261) 70 (29) 41 (119) (2) (80) 51 36 38 36 (10) 32 413 293 297 293 (62) (177) 474 341 349 341 (56) 706 129 93 94 93 (26) 97 FY 10 FY 11 1Q FY 12

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

Revenue by geographical market, June 2011

Debt maturity profile, March 2011*3000 2500 2000 TMK Bonds CNH Bonds Bank loans 2,062 USD3.7bn + Proforma CNY3bn (USD458mn) bonds

China 25%

Japan 75%

1500 1000 500 0 734 203 2012

31 521 2013-2016 458 141 2017 & beyond

Source: Barclays Capital, company data

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

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GUANGZHOU R&F PROPERTIESBarCap view We believe the company has a slightly better credit profile than Shimao (B1/BB-), given Shimao pursued more aggressive expansion in the past. While not rated by any of the ratings agencies, based on international rating scales, we estimate Guangzhou R&F could be viewed as a weak BB/strong single-B credit. The company has a good market position and moderate growth appetite. Contracted sales under-performed the companys target and was revised to CNY36bn in September 2011 (from CNY40bn). High gearing is a negative and is likely to remain so, and helps to restrain aggressive growth. Unlike most other CNH bonds, Guangzhou R&Fs bonds have an onshore guarantee and interest reserve account. CNH bond covenants are the same as for its USD bonds, 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 look attractive, but fair value compared with the USD bonds. Strengths 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 T

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