Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

China Huarong Asset Management / Equity Bottom-Up

The irony.
<a href="https://www.smartkarma.com/entities/china-huarong-asset-management" target="_blank" data-smartkarma-citation="entities:968:1" rel="noopener">China Huarong Asset Management (2799 HK)</a> was originally set up in 1999 by Beijing, in response to the Asian financial crisis,  to bail out a State-owned bank - ICBC - before listing. Rumours abound the State may resort to bailing out Huarong or risk a domino effect of losses at other (state-owned) entities which have lent to Huarong.
The bailer becomes the bailee?
Huarong's woes are not new. Its chairman, Lai Xiaomin was placed under investigation for graft in April 2018, following which he resigned for "<a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2018/0420/ltn20180420033.pdf" target="_blank" rel="noopener">personal reasons</a>". 
Shortly after, Hong Kong's SFC froze HK$10.17bn of assets in three brokers - this amount is the loss incurred by Huarong. In the SFC's words, a certain person "orchestrated fraudulent schemes by colluding with certain personnel of the management of a listed company [Huarong] or its subsidiaries in 2 suspicious transactions stemming from a loan facility indirectly granted to the Person by the listed company".
Fast forward to the 29 January this year wherein Lai Xiaomin was <a href="https://www.reuters.com/article/us-china-huarong-lai/former-china-huarong-chairman-executed-after-bribery-conviction-idUSKBN29Y1P2" target="_blank" rel="noopener">executed</a> in what Bloomberg (perhaps) sardonically concluded was an unusually harsh sentence for a bribery conviction. 
Huarong has been <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0401/2021033101720.pdf" target="_blank" rel="noopener">suspended</a> since the 1 April 2021 after failing to despatch its 2020 annual report. In Hong Kong, companies are afforded three months from year-end to do so.
Huarong is not alone - at least 50 Hong Kong-listed companies have failed to report earnings on the March 31 deadline. Last year, 384 Hong Kong companies did not publish annual results by March 31, but were able to continue trading after the exchange and markets regulator relaxed the rules due to the pandemic. This year there was no such arrangement.
But Huarong has come under pressure following a commentary from Caixin Media of a possible bankruptcy. In a commentary dated on Monday, Ling Huawei, managing editor of Caixin Media and Caixin Weekly, discussed the possibility of a China Huarong bankruptcy. “As of mid-2020, Huarong had 160 billion yuan [$20 billion] in net assets, and more than 30 billion yuan in loan-loss provisions,” she wrote “Huarong needs to be thoroughly recapitalised and have the value of its nonperforming assets correctly recalculated. It needs to take a big bath."
The yield on Huarong's US$300mn 3.375% bond due May 2022 has blown out to 23%. 
This has all the hallmarks of the <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande Real Estate Group (3333 HK)</a> situation in September last year covered by <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a> in <a href="https://skr.ma/UvXgU" target="_blank" rel="noopener">Evergrande May Be Facing a Funding Squeeze</a>.
The equity here, as might be expected, is the riskier option if the company goes bust. Yet a systematic restructuring process is a more likely outcome here.
Creditors are also often protected but this situation will test both state support of an SOE and how keepwell agreements are treated. The offshore bonds at ~70c look interesting.

The irony.
China Huarong Asset Management (2799 HK) was originally set up in 1999 by Beijing, in response to the Asian financial crisis,  to bail out a State-owned bank - ICBC - before listing. Rumours abound the State may resort to bailing out Huarong or risk a domino effect of losses at other (state-owned) entities which have lent to Huarong.
The bailer becomes the bailee?
Huarong's woes are not new. Its chairman, Lai Xiaomin was placed under investigation for graft in April 2018, following which he resigned for "personal reasons". 
Shortly after, Hong Kong's SFC froze HK$10.17bn of assets in three brokers - this amount is the loss incurred by Huarong. In the SFC's words, a certain person "orchestrated fraudulent schemes by colluding with certain personnel of the management of a listed company [Huarong] or its subsidiaries in 2 suspicious transactions stemming from a loan facility indirectly granted to the Person by the listed company".
Fast forward to the 29 January this year wherein Lai Xiaomin was executed in what Bloomberg (perhaps) sardonically concluded was an unusually harsh sentence for a bribery conviction. 
Huarong has been suspended since the 1 April 2021 after failing to despatch its 2020 annual report. In Hong Kong, companies are afforded three months from year-end to do so.
Huarong is not alone - at least 50 Hong Kong-listed companies have failed to report earnings on the March 31 deadline. Last year, 384 Hong Kong companies did not publish annual results by March 31, but were able to continue trading after the exchange and markets regulator relaxed the rules due to the pandemic. This year there was no such arrangement.
But Huarong has come under pressure following a commentary from Caixin Media of a possible bankruptcy. In a commentary dated on Monday, Ling Huawei, managing editor of Caixin Media and Caixin Weekly, discussed the possibility of a China Huarong bankruptcy. “As of mid-2020, Huarong had 160 billion yuan [$20 billion] in net assets, and more than 30 billion yuan in loan-loss provisions,” she wrote “Huarong needs to be thoroughly recapitalised and have the value of its nonperforming assets correctly recalculated. It needs to take a big bath."
The yield on Huarong's US$300mn 3.375% bond due May 2022 has blown out to 23%. 
This has all the hallmarks of the Evergrande Real Estate Group (3333 HK) situation in September last year covered by Travis Lundy in Evergrande May Be Facing a Funding Squeeze.
The equity here, as might be expected, is the riskier option if the company goes bust. Yet a systematic restructuring process is a more likely outcome here.
Creditors are also often protected but this situation will test both state support of an SOE and how keepwell agreements are treated. The offshore bonds at ~70c look interesting.

China Huarong Asset Management (2799 HK): This Is Manageable

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Real credit fundamentals have yet to catch-up with spreads in bonds which continue to outperform. True fundamentals have a considerable gap to close relative to spread compression. Global monetary accommodation is in large part responsible for recent outperformance. However, credit tourists may have booked too early.Deeply subordinated Additional Tier 1 (AT1) bonds led in terms of spread tightening during January in Asia. Increased risk tolerance and a reach for yield, possibly by credit tourists, drove results as global vaccination efforts raised economic growth expectations. As such, Hong Kong and Thai- based bank securities outperformed, albeit for differing reasons.As Asia-headquartered banks report earnings, the quality of disclosure varies considerably from bank-to-bank. Even where disclosure is adequate, asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ.  There is limited price discovery. As such, credit value should remain driven by larger market forces.In terms of economic growth, the IMF projects 11.5% and 8.1% GDP growth this year for India and China, respectively. The near-term future is South Asian, but this may not apply to all. Most India-headquartered banks already price-in considerable recovery prospects. However, significant bank recapitalized in needed for the economic forecasts to materialize and for these banks spreads to be maintained.Eventually, it will be time to deliver real fundamental performance. In the meantime, monetary accommodation should remain the main driver of credit spreads while economic growth plays catch-up. Credit tourists are fickle and may vacate if either are delayed.

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<a href="https://www.smartkarma.com/entities/changshouhua-food-co-ltd" target="_blank" data-smartkarma-citation="entities:18501:1" rel="noopener">Changshouhua Food (1006 HK)</a> is principally engaged in the corn oil business, the production and sales of refined edible sunflower seed oil, olive oil, peanut oil and rice germ oil, and the production and sales of cornmeal. Last night, Changshouhua received a privatisation offer from SanXing Trade, the controlling shareholder with a 52.14% stake. SanXing Trade is an investment holding company which is a wholly-owned subsidiary of Sanxing Grease. SanXing Trade is taking private Changshouhua by offering HK$4.19 cash per scheme share. The bid price is a 16.4% premium over the closing price of HK$3.60 per share on the last trading day (2 September).  <div class="content-highlight">The key conditions precedent is the headcount test and the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). Overall, we believe that the privatisation proposal has a good chance of success. At the last close, the gross spread to the privatisation bid is 7.2%. </div>

Changshouhua Food (1006 HK) is principally engaged in the corn oil business, the production and sales of refined edible sunflower seed oil, olive oil, peanut oil and rice germ oil, and the production and sales of cornmeal. Last night, Changshouhua received a privatisation offer from SanXing Trade, the controlling shareholder with a 52.14% stake. SanXing Trade is an investment holding company which is a wholly-owned subsidiary of Sanxing Grease. SanXing Trade is taking private Changshouhua by offering HK$4.19 cash per scheme share. The bid price is a 16.4% premium over the closing price of HK$3.60 per share on the last trading day (2 September).  The key conditions precedent is the headcount test and the scheme approved by at least 75% disinterested shareholders (&lt;10% disinterested shareholders rejection). Overall, we believe that the privatisation proposal has a good chance of success. At the last close, the gross spread to the privatisation bid is 7.2%. 

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

China Cinda Asset Management / Equity Bottom-Up

*Weak 2H19 Result: China Cinda Asset Management (1359.HK) [CINDA] reported 2H19 profit of CNY 4.0 bn – declining CNY 5.0 bn or 55.6% linked period. What could go wrong, actually did for CINDA. Driving the challenged results operating revenues declined CNY CNY 6.5 bn (33.2%); and  * Risks Well Priced For: Trading at 1/3 of book value with a 9.4% yield (not likely to hold), much of the macro-headwinds associated with COVID-19 would appear to be priced in as we note the following positives: a) declining funding costs and a rise in bank NPL formation rates are favorable to CINDA’s NPL disposal business; b) the announced sale of its loss-making subsidiary; and c) the allocation of more resources to its traditional NPL disposal business.

*Weak 2H19 Result: China Cinda Asset Management (1359.HK) [CINDA] reported 2H19 profit of CNY 4.0 bn – declining CNY 5.0 bn or 55.6% linked period. What could go wrong, actually did for CINDA. Driving the challenged results operating revenues declined CNY CNY 6.5 bn (33.2%); and  * Risks Well Priced For: Trading at 1/3 of book value with a 9.4% yield (not likely to hold), much of the macro-headwinds associated with COVID-19 would appear to be priced in as we note the following positives: a) declining funding costs and a rise in bank NPL formation rates are favorable to CINDA’s NPL disposal business; b) the announced sale of its loss-making subsidiary; and c) the allocation of more resources to its traditional NPL disposal business. 

China Cinda Asset – Negativity Priced In

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

YX Asset Recovery / Equity Capital Markets

YX Asset Recovery (YX), the biggest consumer debt restructuring specialist in China with a focus on long-date consumer delinquencies, plans to raise upto US$200m in its US ADR listing. YX represents seven of the 10 largest banks in China and some of the biggest online lenders. It has registered rapid growth in its delinquent receivables under collection, which have been nearly doubling every year. Furthermore, the company is one of the largest players in its segment and thus, is likely to continue to benefit from industry tailwinds which point towards a 25% CAGR in such assets over the next few years.However, revenue growth has been lagging portfolio growth. While gross profit and net profit growth has been lagging revenue growth. Thus, the company has been suffering from a compression in commission rates along with faster cost growth.

YX Asset Recovery (YX), the biggest consumer debt restructuring specialist in China with a focus on long-date consumer delinquencies, plans to raise upto US$200m in its US ADR listing. YX represents seven of the 10 largest banks in China and some of the biggest online lenders. It has registered rapid growth in its delinquent receivables under collection, which have been nearly doubling every year. Furthermore, the company is one of the largest players in its segment and thus, is likely to continue to benefit from industry tailwinds which point towards a 25% CAGR in such assets over the next few years.However, revenue growth has been lagging portfolio growth. While gross profit and net profit growth has been lagging revenue growth. Thus, the company has been suffering from a compression in commission rates along with faster cost growth.

YX Asset Recovery Pre-IPO - Rapid Portfolio Growth Has Not Led to Commensurate Earnings Growth

China

China Cinda Asset Management Company Ltd. provides asset management services. The Company invests, disposes, and manages non-performing assets and equity. China Cinda Asset Management also provides consulting, investment, financial, and risk management services to individuals and businesses.

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China Cinda Asset Management (1359 HK)

China Huarong Asset Management (2799 HK): This Is Manageable

With the benefit of the restructuring of Boashang, Anbang, and Evergrown Bank, China has developed a mature process to address a situation such as...

David Blennerhassett

Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up

Credit tourists may vacate if economic growth and real credit fundaments are not delivered. The gap between credit spreads and fundamentals is...

Hank Calenti, CFA

Changshouhua Food’s Privatisation Bid

$1006 hkChangshouhua Food is principally engaged in the corn oil business, the production and sales of refined edible sunflower seed oil, olive...

Arun George

China Cinda Asset – Negativity Priced In

*Weak 2H19 Result: China Cinda Asset Management (1359.HK) [CINDA] reported 2H19 profit of CNY 4.0 bn – declining CNY 5.0 bn or 55.6% linked period....

Thomas J. Monaco

YX Asset Recovery Pre-IPO - Rapid Portfolio Growth Has Not Led to Commensurate Earnings Growth

YX Asset Recovery (YX), the biggest consumer debt restructuring specialist in China with a focus on long-date consumer delinquencies, plans to...

Sumeet Singh

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