海通证券股份有限公司 海通证券研究所
Weekly topic: How will financing platforms go in the future? 1. Financing platforms are now at the crossroadsof transformation. ―Local government bonds + Project Revenue Bonds‖ will likely become a prevalent model of localgovernment financing, and local government financing platforms are now at the crossroads of transformation with theirfinancing function being removed. 2. Guideline of “classified” transformation. Since the beginning of this year,several provinces/municipalities including Jiangxi, Guangdong, Sichuan and Chongqing have issued documents toguide the transformation of local government financing platforms. In terms of content, the principle of classifiedtreatment is adopted: empty-shell local government financing platforms (i.e., those with the financing function only) willbe removed. Companies integrating government financing and public welfare project construction & operation functionswill be converted into State-owned social enterprises after being stripped of their financing function. And commercialplatforms with certain market competitiveness will be transformed into general enterprises. On this basis, Chongqingmunicipality also restricted the number of social enterprises, requiring that the number of public welfare projectconstruction units established by each district/county may not exceed three. 3. Exploration on transformationmodels of local government financing platforms: First, resource integration based restructuring, such asrestructuring of Jiangdong Holding Group and Jianan Investment Holding Group. Second, transformation into industrialenterprises, or development in the direction of resource integration – industrial investment – financial service andsuccessful transformation built upon urban public utilities and infrastructure construction projects, such as TEDAInvestment Holding Co., Ltd. and Beijing Capital Group. Third, transformation into higher-level ―city operators‖, e.g.,Shanghai Municipal Investment (Group) Corporation. 4. Impact on quasi-municipal bonds. Government credit will befurther separated from quasi-municipal bonds, and investors should notice quality and profitability of platform assets.
During reorganization and institutional shift, local government financing platforms under prioritized development plan oflocal governments are preferred on resource allocation and government support, and their credit qualifications will beenhanced. In contrast, non-major local government financing platforms may possibly face the risk of loss of assets andtheir creditability will be weakened.
Weekly market review: Supply increased substantially, and yields differentiated depending on specificdurations. Net supply of credit bonds on primary market was RMB42.2bn, which increased substantially as comparedwith the net supply of -RMB17.6bn in the previous week. There were 6 quasi-municipal bonds among 93 credit bondsof major types issued. Trading in secondary market increased, and yields went down on the whole. To be specific, for1Y bonds, the yields of AA and AA- bonds declined the largest with a loss of 19BP, the yield of AA+ bonds lost 14BP,and the yields of AAA and AAA- bonds lost 9BP. For 3Y bonds, the yield of AA bonds lost 25BP, the yield of AA- bondslost 21BP, the yield of AA+ bonds lost 20BP, the yield of AAA- bonds lost 15BP, and the yield of AAA bonds lost 10BP.
For 5Y bonds, the yields of both AA and AA- bonds lost 13BP, and the yields of all other grades lost 15BP. For 7Ybonds, the yields of all grades lost 9BP.
Weekly rating adjustment review: Rating adjustments were generally upgrades. This week, there were a total of11 corporate rating upgrades of credit bonds (including 1 outlook upgrade), including two issuers of quasi-municipalbonds. And there was no corporate rating downgrade. The rating upgrade of Zhuzhou State-owned Asset ManagementCo., Ltd. was mainly attributed to steady performance growth of its controlled subsidiaries, adequate reserves oftransferrable land and controllable short-term debt repayment pressure. The rating upgrade of China Elion ResourcesGroup was mainly attributed to considerable growth in revenue and profit of the issuer’s clean energy business, certainmonopolistic advantage within the park where relevant projects are operated, and relatively stable sources of revenue.
Investment strategy: The turning point has not yet come, so defense is the best policy. Last week, credit bondsrose with the rise of interest rate bonds. The average yields of AAA enterprise bonds lost 10BP, the average yields ofAA enterprise bonds lost 17BP, and the average yields of quasi-municipal bonds lost 15BP. How will credit bonds go inthe next step? We suggest investors notice the following points:1) CSRC pushes the standardization of local government financing. Recently, local offices of CSRC required thatrelevant institutions within their respective jurisdiction should conduct self-inspection on their asset management plansdating back to 2015 and check whether they had participated in local governments’ debt financing in violation of lawsand regulations. Unlike previous practices, the recent tightening of local government financing involved the regulationof both fund demand side and fund supply side (i.e., financial institutions), and supervision coordination was clearlystrengthened. Therefore, the standardization of local government financing will be an inevitable trend.
2) Supervision of overseas bond issuance is gradually tightened. Last week, NDRC issued risk warnings withrespect to overseas bond issuance by five enterprises, pointing out that they had not conducted prior filing inaccordance with relevant provisions. Since the domestic macro-control of real estate market, real estate financingchannels have been generally tightened up and the quantity of overseas bonds issued by real estate companies hasbeen skyrocketing. However, NDRC has gradually tightened up the issuance of overseas bonds since Q2, and this willintensify the liquidity pressure on real estate enterprises in the future.
3) The turning point of credit bonds has not yet come. Recently, bond market rebounded, the yields of credit bondsgenerally declined, and issuance of bonds also increased. Nevertheless, we hold that it will be some time before theturning point of credit bond market arrives. First, financial deleveraging will last a long period. With the scale of fundscontracted, adjustment time of credit bond will be longer than that of interest rate bond and adjustment space will belarger. Second, economic downturn pressure increases and financing is tightened, leading to a rising credit risk in H2.
