China Hongqiao (01378.HK) Profits Surge, New Offshore Bond Issuance Expected
In 2023, China's aluminum industry has witnessed significant growth, fueled by the gradual recovery of the real estate sector and the rapid expansion of the renewable energy industry. Data from the National Bureau of Statistics showed that aluminum production reached 63.034 million tons, marking a 5.7% year-on-year increase; electrolytic aluminum production reached 41.594 million tons, reflecting a year-on-year increase of 3.7%.
The widening gap between supply and demand for electrolytic aluminum led to a rise in aluminum prices, subsequently boosting profits and profitability for China Hongqiao Group Limited(referred to as "China Hongqiao"). As of the first nine months of 2023, its core operating entity, Shandong Hongqiao, reported impressive financials, achieving a cumulative revenue of RMB 97.866 billion and a net profit of RMB 6.525 billion. Notably, Shandong Hongqiao's net profit surged by 226.2% year-on-year in the third quarter, with a remarkable quarterly increase of 167.9%, indicating sustained robust growth for China Hongqiao. Analysts hereby summarize the previous offshore bond, and focus on discussing the HONGQI 6.25 06/08/24.
The price of China Hongqiao's USD bonds has remained stable. Analysts attribute this stability to the company's solid fundamentals, enduring presence and great performance in offshore capital markets and the close ties with investment institutions.
China Hongqiao's offshore market track record showcases a history of successful bond issuances. The company issued its first convertible offshore bond in 2012 and has since issued a total of 9 offshore bonds (6 senior bonds and 3 convertible bonds), amounting to a total issuance scale of USD 2.92 billion. Well-known asset management companies such as UBS, E Fund and Schroders all possess long-term investments in China Hongqiao.
As shown in the chart below, despite the market volatility caused by the Fed's interest rate hikes, China Hongqiao's offshore bond pricing has remained stable overall, ranging between 5% and 7.7%. The company's most recent issue, HONGQI 6.25 06/08/24, priced in June 2021 at USD 500 million with a coupon rate of 6.25%, was widely recognized among investors, with its order book reaching up to seven times of its issue size.
China Hongqiao's investors have been growing continuously due to three main reasons:
Firstly, the company's promising fundamentals support its consistent growth. As the world's second-largest primary aluminum producer, it has substantial production capacities in bauxite, alumina, electrolytic aluminum, and fabricated aluminum processing.
Secondly, it maintains high competitiveness within the industry. The company has been rated "BB" by the major credit rating agencies. Although the rating is slightly lower than that of Alcoa Corporation, China Hongqiao benefits from the scale and efficiency of its core business, achieving a higher EBITDA margin comparatively.
Thirdly, similar high-yield dollar bond investments are relatively scarce. Challenges faced by developers in issuance markets, amid the domestic real estate industry downturn, have limited options for high-quality, high-yield dollar bond investments. Since 2023, the only high-yield bond in the industrial sector was issued by Wynn Resorts.
Moreover, many foreign institutional investors have become more prudent in investment following the real estate down cycle. They tend to favor issuers with a solid record of bond issuance, higher ratings, and stable cash flows. Therefore, to fulfill investors' demand for high-quality Chinese offshore assets, investment institutions are actively seeking ongoing issuance of offshore debt by China Hongqiao.
Currently, China Hongqiao has only two outstanding USD bonds: namely HONGQI 6.25 06/08/24 (senior bond) and HONGQI 5.25 01/25/26 (convertible bond). With the maturity of HONGQI 6.25 06/08/24, market uncertainties arise regarding whether China Hongqiao will issue offshore bonds again. If the company chooses to have repayment over new issuance, it will be a significant loss for the investors.
With China Hongqiao's strong liquidity on its balance sheet, its subsidiary Shandong Hongqiao has successfully issued one short-term note and one medium-term note of 1 billion respectively in January. However, as the high exchange rate between RMB and USD as well as the tightening trend in offshore bond issuance still persist. The company may face new challenges in the future if it chooses to repay HONGQI 6.25 06/08/24. New burdens may result from the high exchange rate, the tightening trend in offshore bond issuance or even the potential reversal in the inverted yield curve.
There are many experienced offshore bond issuers in the market who maintain a stable issuance frequency throughout the year. This regular issuance not only helps uphold the issuer's market position and reputation but also helps improve the yield curve and facilitates ongoing communication with institutions. Taking Shandong Commercial Group Co. Ltd. as an example, it has been issuing at least one offshore bond annually since 2020, showcasing a consistent financing strategy.
In conclusion, benefiting from the surge in demand for electrolytic aluminum and its robust fundamentals, China Hongqiao's position in the offshore capital market has become increasingly solid. However, given the prevailing market environment and policy changes, the market concerns whether China Hongqiao will issue offshore bonds again. Investors are recommended to stay updated on the company’s news as well as the market trend, so as to seize the potential investment opportunities.
