Idea of the Week: Are Chinese Property Bonds Disappointing? What Types of Bonds We are Bullish On?

The unfavourable industry sentiment resulted in a widened yield spread for semiconductor issuers, increasing their investment attractiveness. As a typical cyclical sector, the semiconductor industry is expected to bottom out in 2H2023, semiconductor companies will soon pass through the toughest moment, and industry fundamentals are awaiting recovery.

Most issuers in the semiconductor industry are assigned with the investment-grade rating, with a net cash position or low leverage level. They have enough liquidity to handle the industry downturn. Therefore, we believe that it is a great time to invest in semiconductor bonds now.

Related Article: Idea of the Week: Time to Buy on Dips? Decent Investment Choices Among These 4 Semiconductor Issuers

5. Hong Kong Real Estate Companies

In general, the gross margin of Hong Kong development projects is higher (normally 40% or above), and significantly higher than that of Chinese development projects (around 10% to 20%). Besides, the leverage levels of these Hong Kong real estate companies are generally low, with a strong interest coverage ratio and lower cost of borrowings (around 2% to 4% level). This reflects the decent credit positions of most companies.

Normally, Hong Kong real estate companies are more conservative in acquiring land or investing in new projects. With most of their assets located in Hong Kong, they have a greater advantage in refinancing by pledging valuable land and investment properties in Hong Kong to obtain loans with better terms. They also have many investment properties for rental and long-term appreciation purposes, so their credit positions are generally stronger. Therefore, we are bullish on the bond performance of large and some small and medium-sized real estate companies.

Related Article: Idea of the Week: Hong Kong Real Estate Companies—These Talents Might Be Overlooked

6. Upstream Oil & Gas (Producers / Oilfield Service Providers)

The oil price is at a higher level, which is favourable to upstream oil companies. The capital expenditures by global upstream oil producers remain at a lower level compared to the past decade. The prolonged underinvestment in the industry gradually impacts the supply side. With oil producers continuing to be self-restricted in deploying capital, we can expect the tighter supply to continue going forward. It is difficult for oil prices to fall significantly.

OPEC+ might also face the dilemma of increasing production due to years of underinvestment in the past. In addition, while OPEC+ hopes oil prices would remain high, it provides strong support for oil prices. The US released massive amounts of strategic oil reserves, leading to a nearly 40-year low in total crude oil inventories. The action of replenishing oil reserves led to difficulty in cooling down oil prices further.

We are bullish on oil prices to remain higher for much longer. Upstream oil companies would thus benefit. The industry norm is to put debt reduction into a higher priority. Their balance sheets would improve significantly as the high oil price environment persists. Massive free cash flows are available for debt reduction and debt repayment. Their credit risk should be manageable in the short to medium term.

Related Article: Idea of the Week: Unravelling the Investment Logics of Oil Bonds

7.      Insurance

Benefiting from the interest rate hike cycle across the globe, the widening margins in the insurance sector are expected to boost the earnings, net book value and embedded value of major insurance companies. In general, their asset sides are less sensitive to interest rates than the liability side (since the portfolio duration is shorter than that of insurance policies). Also, driven by an increase in interest rates, the portfolio expected return is higher.

Additionally, their capital requirements are generally reduced under the scenario stress tests due to higher discount rates, driving their capital adequacy ratios. As a result, insurance companies’ capital adequacy ratios are expected to be improved, enhancing their solvency.

At the same time, the credit ratings of issuers or their subsidiaries are mostly high investment grade, reflecting their low default risk.

The bond structure of insurance companies is generally simpler than that of bank bonds. Although a lot of bonds issued by insurance companies are subordinated, fixed-tenor bonds usually do not involve the loss absorption feature. It is suitable for investors who are looking for a stable income.

8. Korean Investment Grade

The Korean investment grade bonds usually have the government background, or are guaranteed by quangos. It is positive for the issuer to have financing and maintain a good credit quality.

Besides, the issuers mostly engage in public utility. The operating condition tends to be stable. Under the same credit rating, the yield of Korean corporate bonds is usually higher than that of bonds in other regions. It is suitable for investors who are looking for an extra yield pick-up.

Investors can refer to our analytical articles to learn more about the credit profiles of Korean companies.

Related Article: Idea of the Week: Investment Choices Among Korean Issuers

9. Japanese High Yield

In Japan, there are only three USD bond issuers with international credit ratings but high yield ratings (Rakuten Group, Nissan Motor and Softbank). We are positive on their credit performances. Their short- to medium-term default risks are under control, with the bond yield to maturity of 6% to 10%. It is worth investors’ attention.

Investors can refer to our analytical articles to learn more about the credit profiles of individual companies.

Related Articles:

Idea of the Week: Attention Nissan Fans! A Japanese Company with High Yield Pick

Idea of the Week: Softbank Group, the Top Choice among Japanese High-yield Bonds

Idea of the Week: Is Rakuten Group with a yield of 10% Attractive?  

Appendix: Selected Bond List

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in T 2.875% 31Oct2023 Govt (USD), T 2.250% 31Mar2024 Govt (USD), T 2.500% 31May2024 Govt (USD), T 3.250% 31Aug2024 Govt (USD), T 3.125% 15Aug2025 Govt (USD), UKT 0.625% 07Jun2025 Govt (GBP), UKT 4.125% 29Jan2027 Govt (GBP), CKHH 4.750% 21Apr2028 Corp (USD), META 4.600% 15May2028 Corp (USD), BAYFIM 4.257% 16May2026 Corp (USD), STANLN 4.300% 19Feb2027 Corp (USD), HSBC 6.500% 20May2024 Corp (GBP), HSBC 5.300% 14Mar2033 Corp (SGD), HSBC 4.375% 23Nov2026 Corp (USD), HYUELE 6.250% 17Jan2026 Corp (USD), VTLE 9.500% 15Jan2025 Corp (USD), FWDGHD 5.750% 09Jul2024 Corp (USD) and the analyst who produced this report hold a NIL position in the abovementioned securities.