Asia Fixed Income Analyst

Derek Silva

Credit

Rising aluminum prices, a fresh equity top-up fundraising, a strong position as one of the world’s biggest aluminium producers, and still yielding over 10% for short-dated paper. What’s not to love about China Hongqiao’s bonds?
What’s not so lovely about Hongqiao (bond ticker: HONGQI) is the bumpy ride that bond investors have suffered from several significant 5-10 point drops over the years. That’s not unusual for equity investors, but it is for bonds, particularly when they’re short-dated and issued by a global industrial powerhouse. The issuer has endured negative headlines from regulators, environmental controversies and short-selling research firms.
The closest direct peer is Chalco but it is IG-rated and lower yielding due to State ownership. Another industrial comparable would be Yingde Gases, but its bonds are trading with a low yield-to-call and no upside left due to much stronger fundamentals. One would expect a company with Hongqiao’s scale, vertical integration and top-quartile position in the cost curve to be IG rated by now, but these factors have yet to translate to consistently strong free cash flow and deleveraging.
So, while Asia credit is gaining more positive attention now and the search for yield is stronger than ever, a 10% yield should be very tempting for both the 2022 and 2023 maturities. But when it comes to Hongqiao’s bonds, it’s always better to buy on the dip, because there’s often a dip with this issuer.

Rising aluminum prices, a fresh equity top-up fundraising, a strong position as one of the world’s biggest aluminium producers, and still yielding over 10% for short-dated paper. What’s not to love about China Hongqiao’s bonds?
What’s not so lovely about Hongqiao (bond ticker: HONGQI) is the bumpy ride that bond investors have suffered from several significant 5-10 point drops over the years. That’s not unusual for equity investors, but it is for bonds, particularly when they’re short-dated and issued by a global industrial powerhouse. The issuer has endured negative headlines from regulators, environmental controversies and short-selling research firms.
The closest direct peer is Chalco but it is IG-rated and lower yielding due to State ownership. Another industrial comparable would be Yingde Gases, but its bonds are trading with a low yield-to-call and no upside left due to much stronger fundamentals. One would expect a company with Hongqiao’s scale, vertical integration and top-quartile position in the cost curve to be IG rated by now, but these factors have yet to translate to consistently strong free cash flow and deleveraging.
So, while Asia credit is gaining more positive attention now and the search for yield is stronger than ever, a 10% yield should be very tempting for both the 2022 and 2023 maturities. But when it comes to Hongqiao’s bonds, it’s always better to buy on the dip, because there’s often a dip with this issuer.

China Hongqiao: A No-Brainer at 10% Yield? Not if You Can Wait for the Dip