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US-China Trade Fallout Infects Overly-Complacent Financial Markets

Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Credit

Huawei Investment and Holding Co. Ltd. (“Huawei”), a parent of <a href="https://www.smartkarma.com/entities/8231" target="_blank" data-smartkarma-citation="entities:8231:1">Huawei Technology (40978Z CH)</a> , has been in the news on the Sino-US trade war from the arrest of the group’s chairman’s daughter in Canada to the accusation of Huawei on spying and dealing with Iran. The recent ban on Google’s future business with Huawei is unfortunate, and we see Huawei as a tool used by the Trump Administration to muster over China on the trade war.
We believe the trade war reflects a lack of trust between the US and China which, for sure, did not originate from Mr. Trump, but has been brewing for a long time. We expect the trade war to last a while at least until the next Presidential election in 2020. Huawei as a major competitor to Apple, and one of the forefront leaders in the 5G technology, will inevitably be in the eye of the storm. We advise bond investors to take a deep breath and look beyond this tit-for-tat war of rhetoric between the US and China, and focus on the long-term to determine Huawei's ability to repay its bonds.
In a series of reports, we start by looking into the events that have led to the current situation, how the Huawei corporate body is structured, and how important Huawei is to China. Next, we look into how Huawei bonds have been trading versus peers, and how financial metrics determine Huawei’s debt repayment capability. Last, we conclude with our fair value of HUAWEI bonds. We expect declining profit margins in the near term but we believe the key to bondholders is the Chinese government support of the group.
The HUAWEI complex (HUAWEI 22s, 25s, 26s, and 27s), all guaranteed by Huawei, has dropped 2-3 points across the board to the mid 90 cents on a dollar since 17-May when the first news of Google’s ban broke. We expect more negative news on Huawei this year and expect asymmetric downside risk on the bonds. The fact that Google issued a statement on 20-May to continue its business with Huawei leads us to believe the dust has not settled. That said, we put our recommendation on all HUAWEI complex under “EVOLVING”. Any further sell-off on HUAWEI bonds will lead us to reconsider our recommendation.

Huawei Investment and Holding Co. Ltd. (“Huawei”), a parent of Huawei Technology (40978Z CH) , has been in the news on the Sino-US trade war from the arrest of the group’s chairman’s daughter in Canada to the accusation of Huawei on spying and dealing with Iran. The recent ban on Google’s future business with Huawei is unfortunate, and we see Huawei as a tool used by the Trump Administration to muster over China on the trade war.
We believe the trade war reflects a lack of trust between the US and China which, for sure, did not originate from Mr. Trump, but has been brewing for a long time. We expect the trade war to last a while at least until the next Presidential election in 2020. Huawei as a major competitor to Apple, and one of the forefront leaders in the 5G technology, will inevitably be in the eye of the storm. We advise bond investors to take a deep breath and look beyond this tit-for-tat war of rhetoric between the US and China, and focus on the long-term to determine Huawei's ability to repay its bonds.
In a series of reports, we start by looking into the events that have led to the current situation, how the Huawei corporate body is structured, and how important Huawei is to China. Next, we look into how Huawei bonds have been trading versus peers, and how financial metrics determine Huawei’s debt repayment capability. Last, we conclude with our fair value of HUAWEI bonds. We expect declining profit margins in the near term but we believe the key to bondholders is the Chinese government support of the group.
The HUAWEI complex (HUAWEI 22s, 25s, 26s, and 27s), all guaranteed by Huawei, has dropped 2-3 points across the board to the mid 90 cents on a dollar since 17-May when the first news of Google’s ban broke. We expect more negative news on Huawei this year and expect asymmetric downside risk on the bonds. The fact that Google issued a statement on 20-May to continue its business with Huawei leads us to believe the dust has not settled. That said, we put our recommendation on all HUAWEI complex under “EVOLVING”. Any further sell-off on HUAWEI bonds will lead us to reconsider our recommendation.

Huawei Investment & Holding– In the Eye of the Storm (Part I)