As stocks and bonds typically do not move in the same direction, investing in both protects your portfolio against volatility.
Bonds diversify your portfolio and provide a steady stream of income. We suggest that you diversify your bond holdings to mitigate the risk of a single bond.
This publication is a distillation of the top bond recommendations from our research team.
Emerging Markets Fixed Income has been at the forefront of our investment offering and the fixed income research group is at the cornerstone of this effort.
The fixed income research group covers roughly 200 credits globally from its base in Singapore. The focus is on bottom-up fundamental analysis, meeting with management teams at company headquarters and conferences around the world.
The team of seven analysts has an average of more than ten years of research experience, ranging from 3 years to 25 years individually.
We hope you will find this publication useful and glean some useful insights from it.
U.S. Dollar Bond
China Jinmao, formerly known as Franshion Properties, is a leading developer and operator of large-scale and high-end properties, both in the commercial and residential markets. Since listing in 2007, the group has grown to a total asset size of RMB188.7 billion. Cash flow from operating activities is negative as the company is in an investment phase, building contracted sales scale leading to the increase in borrowings and leverage. Gross cash flow from operation (before working capital) is positive at RMB 5.15 billion (up 86 per cent YoY) for 1H2017, but when working capital is included, to reflect capital expenditure for future cash flow and contracted sales, it results in a negative cash flow of -RMB11.62 billion, or -RMB4.56 billion YoY. We expect gross margins to be maintained in a range of 30- 35 per cent but leverage could deteriorate slightly with gearing ratio rising to 55 per cent from continued land acquisition. Mitigating the slightly higher financial leverage is its good liquidity position and financial flexibility. China Jinmao has healthy access to external funding channels to support to its long-term expansion strategies. The group’s shareholder structure can be regarded as a credit strength too. China Jinmao is backed by Sinochem Hong Kong (with a 54 per cent stake), GIC Pte Ltd (with 5.91 per cent stake) and Warburg Pincus (with a 4.3 per cent stake). Additionally, its strategy to work with other property partners in major developments should help to alleviate execution risks and related capital requirements. While an increasing proportion of joint venture projects could reduce China Jinmao’s financial transparency, exposure to such projects has remained relatively low, totalling RMB29.2 billion, which is approximately 15.4 per cent of total assets.
China Jinmao Holdings Group Limited invests in and develops real estate projects in China.
Key downside risks: significant slowdown in the Chinese property market in 2H2017, and significant debt funded expansion leading to rating agencies downgrade.
Source: Bank of Singapore
Source: Bank of Singapore
Singapore Dollar Bond
For 2Q2017, Lippo Malls Indonesia Retail Trust (LMRT) revenue and net property income (NPI) increased 6.6 per cent year on year (YoY) and 8.6 per cent YoY to S$49.9m and S$46.8m respectively, mainly due to the acquisition of a retail mall in Kuta and positive rental reversions. LMRT has retained its high portfolio occupancy rate, as strong rental renewals were seen in the Indonesian retail real estate scene (up 13 per cent in 2Q2017). The positive growth in the retail sector has resulted in mall occupancy inching up quarter on quarter to 94.3 per cent (1Q2017: 93.8 per cent). LMRT has acquired S$1.24b of assets since 2011 and is likely to continue its acquisition pace. Its sponsor -- Lippo Karawaci -- has plans to develop 40 new retail malls, which may join LMRT’s pipeline for acquisition in the future. On the back of strong reversions and outlook, we think that LMRT will manage the 18 per cent of leases that will expire in 2017. Aggregate leverage improved to 30.6 per cent (1Q2017: 32.2 per cent) mainly due to the issuance of a S$120m perpetual bond. However, if we were to regard the perpetual bond as half debt, half equity, then aggregate leverage would increase to 36.7 per cent (1Q2017: 35.7 per cent). With strong performance and a positive retail outlook, we continue to hold LMRT at a Neutral issuer profile.
Listed on the SGX on 2007, Lippo Malls Indonesia Retail Trust (LMRT) is a retail REIT with a portfolio of 20 retail malls and 7 retail spaces in Indonesia. The malls are mostly located within Greater Jakarta, Bundung, Medan and Palembang, targeted at the middle to upper-middle class domestic consumers. LMRT is the largest retail S-REIT by floor space, with an NLA of 851,850 sqm. LMRT is 29.85 per cent owned by its sponsor, Lippo Karawaci.
Key downside risks: LMRT is exposed to significant FX risks as it borrows in SGD while its assets are in Indonesia. FX risks are not hedged directly, but we think it is mitigated by the gearing limit of 45 per cent.
Source: OCBC Treasury Research & Strategy
Source: OCBC Treasury Research & Strategy
U.S. Dollar Bond
A national property developer, Longfor Properties Co Ltd (Longfor) has a strong presence in Western China, the Pan Bohai Rim and the Yantze River Delta and southern China. It is geographically diversified, its latest foray being Hong Kong in May 2017, although positive impact to the operation will lag a few years. In 2016, Longfor enjoyed contracted sales of RMB88.14 billion, with total revenue of RMB51.44 billion, supported by a geographically diversified project base. During FY2016, about 20 per cent of the company’s revenue from property development was from its home base of Chongqing, supplemented by rental income, primarily from an operating 1.94m sq m land bank. The company has a good operating track record and enjoys stable and moderate credit metrics. As a medium to large sized developer, the company has maintained a moderate growth strategy with revenue CAGR of 32 per cent over the past four years, approximately 10.7 per cent per annum. Contracted sales in Jan-May 2017 were steady, achieving RMB75.75 billion. Recurring income is expected to improve over time to sufficiently cover interest costs over the medium term. At end-Dec 2016, the developer has total attributable land bank of 32.94 million sqm, with an average cost of RMB 4,039/sqm. Despite expectations of higher leverage from its expansion into Hong Kong in May 2017, leverage is expected to be maintained at a level commensurate with its current stable credit profile. Operational risk is low as the company has a good track record of delivering property projects in China since 1994.
Longfor Properties Co. Ltd. operates in the property development, property investment and property management businesses in China.
Key downside risks: sharp downturn in China’s property market, potential governance issue, which is generally high in the Chinese property sector, and change in strategy to grow aggressively.
Source: Bank of Singapore, as at 31 December
Source: Bank of Singapore
Singapore Dollar Bond
Wing Tai Properties Limited (WTP) reported decent FY2016 results, with revenue rising 9.3 per cent year on year (YoY) to HK$1.1b. This was driven mainly by property investment; its flagship property, Landmark East, recorded a strong 30 per cent upward rental reversion. WTP had also disposed of properties for gains; all in, net profit increased 4.6 per cent YoY to HK$1.1b. Investment properties will continue to be the main driver of WTP’s credit profile, even with the looming supply of office space, as its management has guided for positive rental growth even after the strong rental reversions in 2016. WTP expects rental income and capital value to increase after the completion of the Shui Hing revitalisation project in Hong Kong (conversion from industrial building to office use) and Cavendish Square’s modernisation in London in 2018. WTP is in the process of expanding its hospitality portfolio and residential development which may see a boost in revenue. It renewed its management contract for Lanson Place Jinlin Tiandi Serviced Residences for another seven years in July 2016 and has other projects lined up till 2022. Net debt over equity has increased to 0.14 times (2015: 0.07 times) largely due to settlement for HK$981.6m land purchase for a plot at Castle Peak Road. If the residential projects (Le Cap and La Vetta) sell well, the healthy level of net gearing may inch down going forward. WTP maintains good access to liquidity, with HK$1.7b cash on hand and HK$2.2b unutilized revolving loan facilities.
Wing Tai Properties Ltd. (WTP) invests in and manages real estate. Its premium serviced residences are located in China and Southeast Asia under the brand names of Wing Tai Asia and Lanson Place. Listed in 1991 on the Hong Kong Stock Exchange, it has developed an aggregate GFA of over 5mn sq ft in the luxury residential property projects. WTP is 34.4 per cent owned by Wing Tai Holdings Ltd and 13.7 per cent-owned by Sun Hung Kai Properties Ltd.
Key downside risks: (1) Downturn in the Hong Kong property market, (2) Potential to privatise WTP. We will not rule this out as Wing Tai Holdings has privatised 66.13%-owned Wing Tai Malaysia, while WINGTA holds sufficient cash (S$1.0bn) and WTP trades at 0.3 times Price to Book.
Source: OCBC Treasury Research & Strategy
Source: OCBC Treasury Research & Strategy
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