Asia Credit Weekly Wrap-up

* THIS IS A PRODUCT OF SALES AND TRADING DESK, NOT RESEARCH. THIS MATERIAL IS A SOLICITATION TO ENTER INTO A DERIVATIVE TRANSACTION UNDER CFTC SECTION 1.71(a)(9)(iii). FOR INSTITUTIONAL INVESTORS ONLY.

January 24, 2014

Our weekly wrap-up is a compilation of the comments we put out during the week. Below is a list of topics covered in this weeks issue.

Desk Analysts Nomura International (HK) Ltd Pradeep Mohinani, CFA +852-2536-7030 pradeep.mohinani@nomura.com Annisa Lee +852-2536-7054 annisa.lee@nomura.com William Mak, CFA +852-2536-7059 william.mak@nomura.com Agnes Wong +852-2536-7434 agnes.wong@nomura.com Anthony Leung +852-2536-6015 anthony.leung@nomura.com Abhimanyu Talwar +852-2536-7065 abhimanyu.talwar@nomura.com Nomura Singapore Limited Gourav Dhavale +65-6433-6651 gourav.dhavale@nomura.com

Strategy: Following the money trail Our views on new issues: Powerlong Views on proposed CNH 3yr, Alam Sutera - Our views on the new 2019 bonds, Hold new DAHSIN LT2 24nc19; Buy ICBCAS LT2 23nc18 vs Sell ICBCAS LT2 2020 HY Corporates: Greentown, Cifi, China South City, Gemdale, Bumi Resources, Midwest Vanadium, Gajah Tunggal, Dalian Wanda, Fufeng / West China Cement, Sound Global

Strategy
January 20, 2013

Following the money trail

In this weeks issue we focus on: The challenges for EM, which have yet to result in investors meaningfully deserting the asset class. There are likely to be some knee-jerk reactions along the way though, but for now we see value in Indonesia. Chinese banks: the trust product saga, tightened interbank liquidity, revived SBLC supply and HKMAs resolution regime; none of which help sentiment. Trade idea: Reiterate Underweight on BCHINA HK LT2 2020 and ICBCAS LT2 2020, or switch into BCHINA senior 2017 / 2019); Avoid or take profits on existing Chinese banks SBLC bonds ahead of near-term supply. Moodys methodology change in debt and equity treatment for HY perpetuals this should not have much of an impact on these bonds. Company update on selective HY issuers Trade ideas: Buy GJTLIJ 2018 for carry, Buy CFGSP 2019 with refinancing of short term debt as catalyst. Review of last weeks new issues Trade ideas: Suggest

STRICTLY PRIVATE AND CONFIDENTIAL

Copyright 2014 Nomura This publication has been issued by a Sales and Trading department of a Nomura affiliate in the Asia ex-Japan region identified on page1 herein, in order to promote investment services and is provided without compensation. It is neither investment research nor a research recommendation, and may not be relied upon as such. The information contained herein has not been prepared in accordance with regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It is likely to include views of trading desk of Nomura affiliates, some of which should be considered to be short-term in nature, which may differ from views of Nomura Groups research department. Nomura traders are likely to be active participants in the investments or strategies mentioned herein. * This is a product of sales and trading desk, not research. This material is a solicitation to enter into a derivative transaction under cftc section 1.71(a)(9)(iii). For institutional investors only.

Overweight CAPG2 019, FTHDGR 2017, FTHDGR 2019; Neutral SHIMAO 2021, WHARF 2017 and Underweight COGO 2019, YUZHOU 2019

Despite all the issuance year-to-date (US$17.8bn), Asia credit spreads have held up reasonably well, widening by 4-7bp across HG, HY corporates and sovereigns. While there appears to be increased hedging activity across the indexes, iTraxx AXJ IG still ended up only 1bp wider, and it is noteworthy that the skew on the index is 15-16bp wider (to the theoretical), which does not seem to tighten from here. Over the past week, Indian credits outperformed, tightening by 2-10bp, but we maintain our neutral stance with a downward bias in light of the upcoming elections and our view that banks will report rising NPLs crossing 5%. Indonesian sovereign bonds also outperformed, rising 1.5-2.5 points following UST movements. HY China property bonds held up relatively well despite all the new issues, although the shorter-dated ones have traded down slightly. However, Chinese financials and Thai credits underperformed with spreads widening by 5-7bp due to rising supply risk and the uncertain political situation, respectively. Besides Asian credit markets widening at the margins, Asian equity markets have started to perform a bit better this past week after a weak start. While a few weeks performance certainly does not make a longterm trend, there has been a lot of discussion in the financial media over whether EM is still the preferred asset class or whether better returns can be found in advanced economies. This thesis has perhaps been supported by the recent EPFR fund flows.

Exhibit 1. Cumulative US HG and HY versus EM bond fund flows

70 60 50 40 30 20 10 0 (10) (20) (30) Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
Source: EPFR and Nomura

USD bn

US HG

US HY

EM BONDS

Exhibit 2. Cumulative EM versus US equity fund flows

450 400 350 300 250 200 150 100 50 0 -50 -100 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
Source: EPFR and Nomura

USD bn

EM EQUITY

DM EQUITY

However, we believe there are two things to consider: 1) EPFR only captures retail flows and more importantly 2) it is only a narrow segment of the investor community and does not include the all important institutional flows. While institutional flows are not easy to track, we have instead have looked at changes in foreign ownership of local bond and equity markets which indicated that the government bond holdings seem to have stabilized as compared to the sharp decline as seen in 3Q13 while the current levels are still higher than that of the lowest level seen in 2008.

Exhibit 3. Foreign ownership of domestic government bonds

Thailand (LHS) Korea (RHS) % 19.5% 17.5% 15.5% 13.5% 11.5% 9.5% 7.5% Apr-10 Apr-11 Apr-12 Apr-13

55.0% 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0%

Malaysia (LHS)

Indonesia (LHS)

India (RHS) % 4.3% 3.8% 3.3% 2.8% 2.3% 1.8% 1.3% 0.8%

19.0% 17.0% 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 3.0%

10.0% Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

1.0% Apr-09

Source: CEIC and Nomura FX research

Exhibit 4. Foreign ownership of domestic equity markets

India (LHS) Thailand (LHS) China (RHS) Hong Kong (RHS) % 9.9% 9.7% 9.5% 9.3% 9.1% 8.9% 8.7% 8.5% 8.3% Mar-13 Jun-13 Sep-13 Dec-13

25.5% 24.5% 23.5% 22.5% 21.5% 20.5% 19.5% 18.5%

34.0% 33.5% 33.0% 32.5% 32.0% 31.5% 31.0% 30.5%

Korea (LHS) Philippines (RHS)

Taiwan (LHS) Malaysia (RHS)

Indonesia (RHS) % 18.5% 18.0% 17.5% 17.0% 16.5% 16.0% 15.5%

17.5% Dec-12

30.0% Dec-12

Mar-13

Jun-13

Sep-13

Dec-13

Source: CEIC and Nomura FX research

We would add that that the past 20 years have shown us a rising risk-free rate environment has coincided with inflows into risky asset classes, and EM has been a beneficiary. This was most apparent in 1994 and 2003, when 10-yr UST yields rose by 200bp and 100bp (from bottom to year-end), respectively. So why should it be any different this time, when credit quality for most EM sovereigns is better than it was in both of those periods. Perhaps the key difference is the relative growth trajectory for EM today. Also, EM has been coming off of a recent leverage-driven recovery since the global financial crisis. Therefore, flows into the asset will not be entirely abandoned, in our view, but instead will likely be invested at a slower pace. This is despite the scare mongering going on over the outlook for EM, with much of the debate over whether EMs growth is in a structural or cyclical decline. Either way, its growth should still outpace advanced economies, but we also expect greater differentiation in the performances for the asset class in 2014. We are also keeping an eye on possible speed bumps that could cause knee-jerk reactions to the asset class. Our scorecard is currently focused on the sovereign ratings for Turkey and Brazil and potential casualties from Chinas leverage binge, with a likelihood that default rates will creep higher and negatively impact these countries growth outlooks. From recent discussions with investors, there is a belief that Brazils sovereign ratings could be downgraded by S&P as early as 2Q this year, as it has assigned a rating on Negative outlook in June 2013. There are concerns that the rating could be downgraded but remain on Negative outlook, or worse, be downgraded by two notches (which we see as a much lower probability). In our view, a one-notch downgrade with a negative outlook could still cause a knee-jerk reaction to the countrys sovereign bonds, with a ripple effect onto EM sovereigns. Furthermore, comparing the Brazil 2023 (Z+175bp) to the Turkey 2022 (Z+288bp) and Indonesia 2024 (Z+297bp) shows both the richness and the widening potential of Brazil. Similarly, there is potential for a downgrade of Turkey from political tensions and the likely negative impact on growth, which would weigh on its sovereign bond spreads. In our view, Fitch would likely be the first to act. It is worth noting that both Brazil and Turkey account for 4.1% and 4.7% of the EMBIG index, and run the risk of index outflows that would weigh on the rest of the issues outstanding in the index.

Indonesia appears set for some near-term outperformance

Relative to the downward momentum in Thailand that we discussed last week, Indonesia appears to have has set itself on a better trajectory, benefiting from the confidence instilled by the Bank of Indonesia, combined with the recent softening of the mineral ore export ban. Therefore, our economists expect the current account deficit to narrow further this year to 2.7% from a high of 3.8% in 3Q2013, while inflation is
4

likely to stabilize within the target range of 3.5-5.5%, with both factors likely to help stabilize IDR. The only noise factor investors need to contend with is the parliamentary and presidential elections, along with any corresponding volatility to rise from March, depending on whether Joko Widodo is nominated by Megwatis PDI-P as its presidential candidate. Nonetheless, given where the Indonesia sovereign curve trades we see value of 20-30bp across the curve, with the 2024 offering the best value. Supporting our view of an underperformance of Indonesia cash spreads are 5-yr CDS which are trading at 215bp, midway between Turkey at 249bp and Brazil at 197bp. Nonetheless, we argue that the over 100bp pick up to the Philippines at 111bp still offers value in a historical context, where the two traded even as far back as in 2012, and only 30bp wider prior to May 2013.

Exhibit 5. RV z-spread chart of Indonesia versus Brazil and Turkey

INDON 5.875 2024 310 290 270 250 230 210 190 170 150 08-Jan-14
Source: Bloomberg, Nomura

TURKEY 6.25 2022

BRAZIL 2.625 2023

13-Jan-14

18-Jan-14

Relative to the sovereign, the PLN and Pertamina curves appear fair to us, with a pick-up of 120-130bp above the sovereign and given potential for both issuers to come to market, with Pertamina potentially offering USD3.5-5.0bn and PLN USD1.5bn this year. That said, the long-dated bonds with a low dollar price make the PERTIJ 2043 and PLNIJ 2042 look attractive in our opinion.

Exhibit 6. Historical z-spread for PERTIJ 2043 and PLNIJ 2042 versus INDON 2043
PERTIJ 5.625 2043 500 450 400 350 300 250 200 150 May-13 bp PLNIJ 5.25 2042 INDON 4.625 2043

Jun-13

Jul-13

Aug-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Source Bloomberg and Nomura

Moodys methodology change in debt and equity treatment for HY perpetuals

Moodys published a report in July 2013 which indicated that it will change the methodology of debt and equity treatment for hybrid securities issued by HY corporates. The key point is the all HY corporate perpetuals will be assigned 0% equity treatment (that means 100% debt treatment) from the previous 50/50 debt/equity treatment. This change in methodology will also increase the debt of these HY perp issuers from Moodys perspective, although there has not been any negative rating action based on this change. Moreover, this may trigger the exercise of the call option of the bond for early redemption on select bonds, such as Tata Power perps. Tata Power has confirmed that Moodys action triggered a Capital Event that we believe makes the USD perps callable immediately at 101 (reflected in the perps trading up to 101/102.25 post the announcement.) That said, we believe there is a low likelihood of the bonds being called in the near future for the following reasons: 1) we understand from our conversation with the company that Indian rating agencies still assign equity credit to subordinate perps (S&P assigns 50% equity credit as well) and with most of Tata Powers senior creditors being Indian banks, therefore, the Moodys announcement should not impact the companys borrowing costs, in our view; 2) The Replacement Capital Covenant (RCC) of the perps states that they can be redeemed only using proceeds from those securities which get the same or greater equity credit than those perps received at their issue date. We believe there is a low likelihood of the company raising equity at the current stock valuation (down 28% y-o-y.) Even if it did raise equity, we believe it is more likely to use the proceeds for capex/senior-debt-refinancing rather than call the perps from a senior creditors angle the former is credit positive while the latter is credit neutral (as both equity/perps are subordinate), and given the sizable debt maturities in FY15 (~USD860mn based on S&Ps estimate) we expect the company to choose the former option to comfort the senior creditors; 3) We note that the RCC is subject to certain exemptions which we do not have access to at present. Nonetheless, given the upcoming debt maturities and uncertainties to cash-flows arising from outcome

of Mundra tariff deliberations and future tariff hikes in the distribution business, we believe there is a low likelihood of the company refinancing perps through other means. At the current trading level of z+690bp (priced to April-2016 call), the TPWRIN USD perps (senior secured rating is B2 (NEG)/B+ (NEG); perps are subordinate) trade ~360bp wider to FGENPM 23s at z+327bp (after adjusting for 7 years tenor difference at 10bp/year.) Using a perp-straight premium of 240bp (based on average of HUWHY old & new and RESOPW perps), this implies a spread pickup of 120bp which we believe is inadequate given FGENs strong credit profile (leverage of ~1.0x adjusted for EDC stake versus 5.9x for Tata Power) and the senior nature of FGENPM bonds (versus the subordinate TPWRIN perps.) We would avoid the perps at current levels and await more clarity on the Mundra tariff discussions (which we note could be a key catalyst for Tata Powers credit/equity re-valuation) before a possible recommendation. We view the impact on the CITPAC and Ballarpur perps would be limited. In the CITPAC bonds, the company can early redeem the perp bonds if an Equity Credit Classification Event happens when either S&P or Moodys lowering the equity content of the bonds to below 50%. That said, the early redemption price is at a make-whole premium at 185bp for both CITPAC perps while their bonds are now trading at below par level. For Ballarpur, the early bond redemption will only be triggered if either S&P and Fitch changes the methodology while the early redemption price is at a make-whole premium of 150bp.For the property names such as SHUION, BJCAPT, SINOCE and the proposed GRNCH deal, there is no early redemption clauses in relation to a change of rating agencys classification of their perpetual bonds.

Chinese banks the trust product saga, tightened interbank liquidity, revived SBLC supply and HKMAs resolution regime: none of which help sentiment
There are a number of negative developments for Chinese banks recently: Firstly, ICBC would not bail out a troubled RMB3bn trust product that the bank distributed, according to Bloomberg news quoting a bank official. A default on the trust product, which is due on 31 January, could change investors perception on the banks implicit guarantees in the trust products, which could potentially weaken investors appetite for these trust products and lead to higher difficulties for trust companies to refinance these trust products. The outstanding amount of wealth management products (WMPs) in China is estimated to be around RMB10trn, so if this leads to the default of other trust products, then it could be problematic for the Chinese banking system given the sheer size of WMPs. Secondly, the liquidity conditions in China have tightened again, with the 7-day repo rate rising above 7% intraday last Friday (from 4.35% last Thursday) ahead of the Lunar New Year. While seasonality may play a big factor, a frequent tightening in the Chinese inter-bank liquidity (recall a similar tightening in December) will hurt the Chinese corporates refinancing their sizeable RMB onshore bond maturities this year, and will encourage them to tap the cheaper USD funding source (i.e. higher USD issuance risks for Chinese HG corporate). Thirdly, regarding Chinese banks SBLC issuance, the general understanding is that the CBRC has asked the Chinese banks not to provide any further SBLC to the Chinese corporate for USD bond issuance in the future (as per an IFR article in early December), but there are about six SBLC deals that were previously approved by the CBRC (before it issued the soft guidance to the banks) and could still be launched to the market in the near term. However, when we tried to verify this with the management of BOC (the most active provider of SBLC in the USD bond market), they denied hearing such guideline from the CBRC. Therefore, it is still uncertain whether there will be further SBLC issuance from China (beyond the six preapproved deals) over the long run. Nonetheless, the six deals in the pipeline could still keep the SBLC bonds from tightening further from here. Therefore, we suggest investors avoid or take profits on the existing Chinese banks SBLC bonds in the near term ahead of the imminent supply risks. Finally, as we pointed out in our Hong Kong banks Thoughts on resolution regime proposed by HKMA

13 January 2014, we believe that the implementation of resolution regime (including statutory bail-in power) by the HKMA on 1 January 2016 will make all the existing senior bonds and old-style LT2s issued by HK banks and Chinese banks HK branch being exposed to bail-in risks (i.e., the risk of being fully written down when the bank becomes non-viable). Most importantly, the current valuation of the large systemically important HK banks old-style LT2 2020s (e.g., BCHINA and ICBCAS) have not priced in such bail-in risks yet. Therefore, we reiterate our Underweight on BCHINA HK LT2 2020 (Z+198/192bp) and ICBCAS LT2 2020 (Z+179/169bp), or switch into BCHINA senior 2017 (Z+135/132bp) or 2019 (Z+164/161bp) for shorter duration and better risk-reward.

Company update on selective HY corporates

We obtained an update from several HY corporates such as Gajah Tunggal, China Fishery and West China Cement. We expect their credit profile to remain largely stable while their 2013 results will be in line with previous guidance. In terms of bond recommendation, we see value in CFGSP 2019 at 10.2% and view GJTLIJ 2018 as a good carry. On the other hand, we do not see much value in WESCHI 2016.

Gajah Tunggal Overall we maintain our stable credit view on Gajah. With the bonds trading about 30bp tighter over the past month, we now see the bonds (with YTM of 7.5-7.8%) at fair value with decent carry. Management still maintained full-year EBITDA guidance at about US$180-190m and capex will be lower than the guidance of US$110-120m. The company bought back equities of less than US$20m in November last year, which was a one-off event as IDX provided them with an opportunity to do so without getting prior approval in order to boost its stock market price. For 2014, management expects revenues to increase by 8% both from price and volume increases by 4% each. EBITDA guidance is US$190-200m with gross profit margin to remain stable at 18-19%. This guidance has taken into account potential softer sales due to the elections and macro situation in Indonesia. Assuming an EBITDA of $190m, we estimate its ending cash balance to be about US$125m after interest expenses of about US$40m, tax payment of US$20-25m, working capital of US$20m and capex of about US$165m. Its current cash balance is about US$180m, of which about 70% is denominated in foreign currencies. The company is considering hedging its USD coupon for up to US$50m. While the company has recently got a AA- rating for local currency bond, there is no immediate plan to raise funding from it but will be a possible route to fund expansion when the market stabilizes. Currently the company has two working capital lines one from HSBC of US$88m and one from CIMB Negara of US$60m.

China Fishery Overall we view the refinancing of the short term debt will remain as a key positive catalyst for the bonds in the near term. Though the bond price has gone by 3.5 points to 99.5 since late November, it may still have some upside of about 1.5 points and a YTM of 9.5%. The company aims to close a 4-year syndicate loan by the end of February. There will be 4-7 banks participating and all-in pricing will be below 400bp with an average life of 2.5 years. Depending on what size the company would be able to obtain, it may consider calling the COPEIN 2017 bonds given its high coupon. The bonds will be callable from 10 February 2014 at 104.5. In terms of the business update, the group has harvested 100% of the quota in Peru and fishmeal prices are now at about US$1,450 per ton, which is the average price for the past six months, although they are
8

selling it at about US$1,400. Business is as usual in Russia. Current cash balance is US$70-80m. The company will announce results on 10 February.

West China Cement While we expect its 2H results to be largely in line with expectations, cement prices seemed to be weaker than managements expectations. This should be a key factor for earnings growth this year as sales volume will increase slightly. We do not expect the company to call the bonds but it is possible next year. While we do not see much negative catalyst on the bonds in the near term, valuation does not look cheap at Z+535bp and we prefer MIEHOL 2016 at similar spread level. Sales volume for 2013 is 17.7m tons versus guidance of 18m tons and 15m tons in 2012. Average selling prices (ASP) was lower in 2H at about RMB225-230 per ton versus RMB233 per ton in 1H. Gross profit per ton would be about RMB42-45 per ton versus RMB45 in 2012. Given its higher volume in 2013, EBITDA may come at about RMB1.2bn versus RMB1.1bn in 2012 and RMB570m in 1H13. Current cash is about RMB600m including pledged cash (RMB150m as of June) versus short term debt of about RMB500m. Net profit will likely be less than RMB400m while dividend payouts will be no more than 30%. Capex was RMB400-500m in 2013 with same guidance for 2014. Management does not have any acquisition plans, as assets look expensive at about RMB400-500 per ton. For 2014, sales volumes are estimated at 19-20m tons. Gross profit is about RMB45 per ton, as the company sees price recovering to current levels of RMB236 per ton. We expect its EBITDA to remain flat at RMB1.2bn and its ending free cash balance to be about RMB570m after considering interest expense of RMB275m, capex of RMB500m, dividend of RMB100m, tax payments of RMB100m and working capital of RMB100m.

Review of last weeks new issues

COGO: Came back with a tighter set of Change of Control (COC) clauses in its second attempt to launch a USD5yr, which now requires CHIOLI to hold a minimum 30% interest in the company, up from the previous version which did not specify a minimum ownership requirement by CHIOLI. The company tested the market in the T+375bp or Z+371bp area and managed to print USD400m at T+370bp despite a weak order book of USD900m. COGO2019 traded down to T+371/376 given the tight print. In our view, we believe COGO should trade on par to YUEXIU given COGOs smaller size, lack of recurring income, focus on lower tier cities and its remote linkage to the SASAC which is however offset by its better funding access leveraging on CHIOLIs ownership. With COGO19s trading at Z+367bp, slightly inside YUEXIU18s at Z+381bp, we do not see much value at the current level. Wharf: Guided a USD5yr at T+210bp and managed to print USD400m at T+195bp on strong interest from accounts. Despite our fair value estimate of T+200bp for the new issue, the bonds managed to tighten to T+195/193bp in the secondary market, given a lack of WHARF supply in the market. With the papers currently quoted at T+191/186bp (Z+183/177bp), we believe it looks slightly expensive. We prefer WHARF 4.625% 2017 at Z+171bp for Wharf exposure. China Aoyuan: Kicked start its 5NC3 RegS at 11.75% initial guidance, and managed to print USD300m at 11.45% on a strong book of over USD1.2bn. While the issue level appears to be only fair with reference to the existing CAPG2017 (3.9yr paper back then traded at 10.8% mid), the new issue in fact re-priced the CAPG curve CAPG2017 is currently quoted at 10.4% and CAPG2019 tightened to 10.8% in a yield chasing environment and the companys aggressive 2014 presales target, coupled with its recent strong presales performance. Although we do not rule out the possibility of seeing a better entry point later in 1Q should the supply indigestion re-price the whole sector, we expect the paper to outperform property peers into 2014 given its higher carry.

Fantasia: Proposed the issuance of USD250m 5NC3 in the 11% area, when its USD20s were trading at 10.9% mid. After receiving a strong orderbook of over USD2.6bn, the company managed to print USD300m at 10.625%. The papers traded up by 1pt in the secondary on its first trading day, and re-priced the FTHDGR curve a ~30bp tighter on demand for double digit yielding papers. With FTHDGR19s currently quoted at 100.4/101.1 (10.5%/10.1%) versus CAPG19s at 10.8%, we believe it should hover around the current level in the near term, in light of a heavy pipeline ahead offsetting the buying interest on the yieldy papers. Nevertheless, we expect the papers to outperform in 2014, for its higher carry. Shimao: Launched its USD7NC4 initial guidance in the 8.375% area, and managed to print USD600m at 8.125% on interest of over USD2.8bn from 188 investors, compared to SHIMAO 2020 which traded at 7.6% back then. The new issue is offering a 20/30bp concession to the existing, which tightened to 7.9% currently, and appears fair in our opinion. We are Neutral overall on SHIMAO series, but continue to like the credit and recommend it as one of core holdings in the portfolio. Yuzhou: Proposed to issue a USD5NC3 with initial guidance in the 8.875% area. The company printed USD300m at 8.625% on USD2bn of interest from 139 accounts. The bonds traded down a tad in the tight print and three new issue announcements on its first trading day. With YUZHOU2019 currently quoted at 99.5/100 (8.75%/8.6%), ~30bp wider than its 18s, it looks fair across the YUZHOU curve. However, we believe YUZHOU series trading at only ~75bp above GRNCH and ~30bp inside second-tier names like KWGPRO are considered expensive.

Our views on new issues

January 21, 2013
Powerlong Views on proposed CNH 3yr Powerlong proposed a RMB800m-1bn 3yr CNH issue as early as today with initial guidance in the 9.875% area. Proceeds will be 80% used to repay its RMB750m 11.5% CNH due March 2014, and 20% for general corporate purposes. We view the initial guidance unexciting, and it appears fair relative to PWRLNG CNH16s (2.35yr papers) at 9.3%. Meanwhile, we remain cautious on the PWRLNG USD series on its heavy utilization of offshore bonds, which suggests on-going refinancing needs for the next five years. For similar return, we prefer CAPG19s, FTHDGR17s and FTHDGR19s. Business update: Despite a slow start in 2013 (achieved 74% of FY13 target in 10M13), Powerlong caught up in Nov/Dec, and achieved RMB9.4bn presales for the full year (117% of FY13 target). With a target of repositioning its land bank toward upper-tier cities, the group spent RMB6.3bn to acquire 2.6m sqm GFA land in Shanghai, Hangzhou and Xiamen in 2013. This represents ~67% of the groups presales as compared to peers 30% historical norm and 40-50% average in FY13. Expansion was aggressive. The group had a land reserve of 10m sqm by end Dec13 (Dec 12: 7.8m sqm), and, according to the management, 24% of this is in cities like Shanghai and Tianjin, with 52% in second-tier cities. Powerlong is targeting at RMB12bn presales (+27% y-o-y) in 2014 from RMB25bn of saleable resources. Despite recording negative operating cash flows of ~RMB2.45bn during FY13 after paying down RMB3.3bn in land premiums, management guided to flat operating cash flows into FY14 RMB11-11.5bn presales collection, RMB1.3bn rental and other income, RMB6bn construction expenses, RMB3.5bn land premiums including RMB2.3bn for discretionary new land addition, and RMB1.2bn for outstanding land premium payments (the group had RMB2.8bn outstanding land premium by end Dec13, but it expects RMB1.6bn to be borne by its potential JV partners) - RMB3.6bn SG&A tax and interest. Cash flow projections appear optimistic given the uncertainties around the capital contribution from its JV partners. In terms of financials, given the groups aggressive expansion, total debt is expected to rise to RMB15.5bn by end-December (June RMB14.6bn) while cash should remain about flat at RMB4bn (June RMB4.4bn),

10

leaving net debt a tad higher at RMB11.6bn (June RMB10.2bn). Management suggests that its net gearing ratio should increase from June (61%) but should stay within 70% threshold. In sum, we expect metrics to deteriorate slightly in its FY13 results. Although we believe the companys debt structure should have benefited from the benign capital market last year. According to the management, it has repaid the majority of its trust loans in FY13; we are concerned about its on-going refinancing needs ahead. As an indication, including this new issues, Powerlong will have offshore bonds maturities literally in each year from now through 2018. Although we acknowledge that each of the maturities ranges from only HKD1bn to USD250n, this can still be worrying as we are less certain about a continuous strong appetite for Chinese property small cap papers for the next five years. In sum, we remain cautious on PWRLNG series until it becomes more well-established with better funding access (i.e., able to print papers even in a weaker market). Although we believe the company has been heading in the right direction (repositioning towards the upper tier cities), we believe it is still too soon to conclude that the company is a re-rating story. Meanwhile, even after this bond issuance, we believe the company will still need to deal with the HKD1bn in bonds that are due in September 2014. <Agnes Wong>

January 22, 2013

Alam Sutera - Our views on the new 2019 bonds Alam Sutera (Alam) plans to issue US$225m in 5NC3 Regs/144A bonds (B1/B+/B+). The bond proceeds will be used to fund the tender offer of the US$150m 2017 bonds and for general corporate purposes. Note that about US$82.45m of the 2017 has been tendered. The terms of the new bonds are the same as those in the 2020 bonds, with a fixed charge coverage ratio at 2.5x. The pricing guidance of the proposed bonds is about 9.25%. Based on the existing 2020 bonds at mid Z+719bp and 2017 bonds at mid Z+700bp, the new bond offers a new issue premium of about 30-40bp. When compared to the YTM of the 2020 bonds at 9.0-9.4%, the new bonds look only fair. That said, given our expectation that there is limited new bond supply risk from Indonesian corporates and the relatively small issue size of the proposed bonds, we think the bond should hold up relatively well in the secondary market and view its fair value in the high 8-9% range. In its business update, the company indicated that it achieved marketing sales of about IDR4.82trn in 2013. The company has been able to diversify its marketing sales into new projects such as Pasar Kemis and the industrial site in Bekasi. Earlier on, management estimates that the Pasar Kemis project will account for about 43% of total marketing sales in 2013 from 12% in 2012. For 2014, management expects marketing sales to be about IDR5trn. We believe Pasar Kemis (Survarna Sutera Township) will likely remain as a key contributor to marketing sales (about IDR2trn according to management guidance) given its focus on the mid to low-income buyers. This should help offset potential softer sales in other higher-end projects such as Alam Sutera Township (IDR2trn). Moreover, the company expects to generate sales from the Jakarta CBD office tower (IDR1trn). We expect its recurring income to remain insignificant with an annualized figure of IDR180bn in 2013. As of September 2013, its total landbank was about 2,184 ha, of which most was located in Pasar Kemis, Tangerang (70% of total), Serpong, Tangerang (10%) and North Serpong, Tangerang (9%). For 9M13, the company spent IDR2.5trn on land acquisitions versus its budget of IDR3trn. The acquisitions mainly came from Pasar Kemis, the land in North Serpong that Modernland sold to Alam which is next to its Alam Sutera Township. For 2014, management indicated that it will spend about IDR1.2-1.5trn on land acquisitions mainly in Pasar Kemis (IDR300bn) and North Serpong (IDR1.2trn). Note that the company has plans to increase its landbank in Pasar Kemis from 1,536 ha as of September 2013 to about 2,600 ha. On the land purchase from Modernland, Alam completed the purchase of about 50 ha out of the 150 ha in the agreement as of December 2013. Management plans to develop the land bought from Modernland into phase 3 of the Alam Sutera Township. Given the macro situation and the various property cooling measures being implemented in Indonesia last year, we see potential risk that marketing sales may miss target this year. That said, assuming marketing
11

sales in 2014 are 25% lower than the management target of IDR5trn (i.e., IDR3.75trn), we expect the company to maintain a reasonable liquidity profile with a total cash outflow of about IDR3.4trn assuming construction costs of IDR600-700bn, land acquisitions of IDR1.2-1.5trn, interest expenses of about IDR500bn, SG&A expenses of IDR300bn, tax payments of IDR160bn, dividend payments of IDR250bn. Note that the company has no short term debt as of September 2013. Following the bond issuance, we estimate its total debt at about IDR6.6trn using the current IDR/USD exchange rate. Note that the company has hedged 80% of the principal of the existing USD bonds at a range between IDR9,400-11,000. We estimate its total proforma cash balance to be about IDR3.4trn and its EBIT to be about IDR1.6trn in 2013. Proforma debt / capital is estimated to be about 54%. <Annisa Lee>

January 23, 2013

Hold new DAHSIN LT2 24nc19; Buy ICBCAS LT2 23nc18 vs Sell ICBCAS LT2 2020 Dah Sing issued USD225m of new-style LT2 10nc5yr with a contractual point-of-non-viability (PONV) loss absorption feature at CT5+375bp or Z+369bp overnight. The bond has tightened by about 12bp to CT5+364/362bp or Z+358/356bp. At current levels, we think that it looks about fairly valued relative to CINDBK new-style LT2 24nc19 (Z+413/402bp), since DAHSIN old-style LT2 2020 (Z+253/238bp) trades 51bp inside of CINDBK old-style LT2 2020 (Z+304/289bp), and we apply the same spread differential (51bp) to CINDBK 24nc19 (Z+407bp mid) to arrive at our fair value at Z+357bp area. The pricing of the new DAHSIN LT2 24nc19 (Z+358/356bp) also highlights the cheapness of ICBCAS new-style LT2 23nc18 (Z+343/333bp) in our view. We suggest investors Buy ICBCAS new-style LT2 23nc18 vs Sell ICBCAS old-style LT2 2020 (Z+202/192bp) to pick up about 141bp. We think that such PONV premium at 141bp looks too excessive, given the implementation of resolution regime (with statutory bail-in power) by the HKMA in January 2016. Why use CINDBK 24nc19 (instead of ICBCAS 23nc18) as a comparable? The structure of the new DAHSIN LT2 24nc19 is largely the same as the CINDBK LT2 24nc19 (i.e. both have partial permanent write-down PONV loss absorption clause, which can only be triggered by the HKMA). We think that the CINDBK LT2 24nc19 is more comparable to DAHSIN LT2 24nc19 than ICBCAS LT2 23nc18, given the similar fundamentals, technical backdrop and structure between CINDBK and DAHSIN. Increasing institutional investor involvement in the new-style LT2s (with contractual PONV structure) is a long-term positive for their technicals: The primary allocation statistics of the three HK banks new-style LT2s were shown below: 1) ICBCAS 4.5% 23nc18: 45% to PBs vs 55% to institutions (including 30% to asset managers; 12% to insurance; and 12% to banks) 2) CINDBK 6% 24nc19: 17% to PBs vs 83% to institutions (including 43% to asset managers; 30% to insurance; 3% to banks; and 5% to corporates) 3) DAHSIN 5.25% 24nc19: 29% to PBs vs 71% to institutions (including 41% to asset managers; 9% to insurance; 19% to banks; and 2% to corporates) The institutional involvement has increased from 55% in the first deal (ICBCAS) to 70-80% area in the subsequent two deals (CINDBK and DAHSIN), mainly driven by higher asset manager involvement (from 30% in ICBCAS to 40-45% range in CINDBK and DAHSIN). We view a broadened investor base with more institutional involvement as a long-term positive for the technical backdrop of the new-style contractual PONV LT2s. Resolution regime (with statutory bail-in power) will blur the difference between new-style and oldstyle LT2s we expect the PONV premium to compress: As discussed in our Hong Kong banks Thoughts on resolution regime proposed by HKMA 13 January, the proposed resolution regime with statutory bail-in power by the HKMA will virtually make all the existing old-style LT2s and senior unsecured bonds become loss-absorbing under the statutory approach. We expect the PONV premium of HK banks to compress over time, potentially driven by widening of the old-style LT2s, and to a lesser extent, tightening

12

of the new-style LT2s. In the Netherlands with a resolution regime, ABNANV EUR LT2 2022 (new-style with contractual PONV; Z+225bp mid) trades only 20bp over ABNANV EUR LT2 2021 (old-style; Z+205bp mid). In contrast, ICBCAS LT2 23nc18 (Z+338bp mid) trades 141bp over ICBCAS LT2 2020 (Z+197bp mid), DAHSIN LT2 24nc19 (Z+357bp mid) trades 111bp over DAHSIN LT2 2020 (Z+246bp mid) and CINDBK LT2 24nc19 (Z+407bp mid) trades 111bp over CINDBK LT2 2020 (Z+296bp mid). While part of the above premium reflects the non-call risks (e.g. CINDBK 24nc19 trades 58bp over CINDBK 22nc17, which in turn trades 53bp over CINDBK 2020), we still expect the PONV premium of HK banks to compress over the long run, particularly for ICBCAS, which has the widest PONV premium but the lowest probability of triggering the PONV clause (given ICBCASs stronger fundamentals than DAHSIN and CINDBK). Non-call risks need to be factored in, but it does not change our conclusion: Since these new-style LT2s with contractual PONV clause (and also old-style non-step LT2s in a country with statutory bail-in power) fully comply with Basel III, they would not benefit from the Basel III 10% p.a. amortization for noncompliant legacy subdebt. That said, the normal 20% p.a. amortization in the last 5 years before maturity could still provide some incentive for banks to call these LT2s. Nonetheless, we would factor in a 50% probability of non-call for these LT2s, but the blended Z-spreads would not be sharply different from the simplistic Z-spread-to-call that we used above for RV and thus will not change our conclusion: 1) ICBCAS 23nc18: Z+338bp to call; Z+315bp to maturity; blended spread at Z+326bp, which is still 129bp over ICBCAS 2020 (Z+197bp); 2) DAHSIN 24nc19: Z+357bp to call; Z+350bp to maturity; blended spread at Z+353bp, which is 107bp over DAHSIN 2020 (Z+246bp); 3) CINDBK 24nc19: Z+407bp to call; Z+417bp to maturity; blended spread at Z+412bp, which is 116bp over CINDBK 2020 (Z+296bp). <William Mak>

HY Corporates
January 20, 2013
Greentown: proposed a USD350m Junior NC5 perpetual (500bp NC step up in yr 5) as early as today with initial guidance in the 9.25% area. Proceeds will be used to redeem the HKD2.55bn perpetual subordinated convertible securities (that it placed to Wharf in June 2012), and for general working capital purposes. Despite the high coupon step up of 500bp in a non-call event (in year 5), which makes the new issue somewhat resemble the straight bonds, we believe a ~1.35% pick up (with reference to GRNCH19s at 7.9%) does not compensate for the weaker bondholder protection, especially when the new issue will be junior in nature. As an indication, assuming a hypothetic SHUION17s at 6.5% and comparing to the Senior SHUION perp (callable in 2017 with a 300bp NC step up) at 8.4%, it suggests a 1.9% pick up for investors to go down the credit curve from straight bonds to a Senior perpetual (not Junior perpetual). Meanwhile, if we assume a hypothetic BJCAPT 18s at 5.5%, and comparing to the Senior BJCAPT perp (callable in 2018 with a 500bp NC step up) at 7.5%, it suggests a 2% pick up over the straight bonds. Meanwhile, it is worth noting that the USD300m GRNCH19s will mature in March 2019, only two months after the first-call date of this perp. It may not be as easy for GRNCH to refinance both the straight maturities and this perpetual call, should the prevailing market conditions be unfavorable. In sum, although we agree that at 9.25%, the new issue may look optically cheap versus the rest of the perp trading at a 7 or 8% handle, and therefore, it may receive decent support; we however believe this actually highlights the cheapness of GRNCH18s (7.6%) and 19s (7.9%). Details of the perpetual subordinated convertible securities (PSCS): The HKD2.55bn PSCS was placed in June 2012 to Wharf and has a distribution rate of 9% for the first five years, stepping up to 11% for the 5th-10th year and UST5+initial spread+2% thereafter. It will become

13

convertible after three years (June 2015) at HKD7.4/share (versus the current share price at HKD10.98/share). The PSCS is callable anytime at 103.5 before June 2015. Distribution is deferrable and cumulative and there is a dividend stopper for non-payment. <Agnes Wong> Cifi: proposed a USD200-300m 5NC3 as early as today, with initial guidance in the 9.25% area. 70% of the proceeds will be used to repay the onshore trust loans, while the remainder will be used for general corporate purposes. While we view the initial guidance which offers a 50bp pick up over the existing CIFIHG18s (4.2yr papers) as only fair, we still expect some small upside of less than 1 point on its first trading day, if the deal is printed at the current level, given a lack of CIFIHG papers in the market. If guidance tightens, we would be uncertain about secondary market performance. Meanwhile, we believe the deal may be able to re-price the CIFIHG18s in the near term. For a longer-term trading strategy, although we believe CIFIHG should be able to receive support for its decent presales into 2014 and its ability to form joint ventures with the top-tier developers, we believe the credits as they trade only ~25bp wider than the second tier names like KWGPRO do not offer much upside. We instead we recommend names like HPDLF16s at 9%, which appear to be a solid trade (given its high assets recovery ratio) for a short-term investment. <Agnes Wong> China South City: proposed issuing a USD300m 5NC3 as early as today with the initial guidance in the 8.625% area. Proceeds will be used for general corporate purposes. With CSCHCN17s quoted at 7.8% YTW (callable in 2015) and 8.7% YTM, we believe the new issue (8.625%) does not offer much premium over the existing. Nevertheless, with strong momentum on the credits after the announcement of share placement to Tencent, we believe it may receive decent support. Although we agree that such a placement is credit positive, we believe it has been fully reflected in the current bond price. For a similar return however, we recommend GZRFPR 19s (8.25%) and GZRFPR20s (8.68%). <Agnes Wong>

January 21, 2013

Gemdale: We believe the company may have breached the change of control (COC) clause on its CNH15s, USD17s and CNH18s. Based on the latest stock exchange disclosure dated 27 November 2013, Sino-Life accumulated a total of 9.8082% effective interest in Gemdale, while Shenzhen Futian Investment and Development Co (SFID) has 7.85% as stated in its CNH2018 bond offering memorandum dated 14 March 2013. Since the COC clauses in the three bond documents each requires SFID to remain the largest direct or indirect holder of the issued share capital of the company, the fact that Sino-Life appears to have become the largest shareholder may mean it has triggered the 101 COC put of the bonds. Meanwhile, Sino-Life stated in the disclosure that it has transferred the voting rights of a 4.808% interest in Gemdale to SFID, which means SFID should continue to maintain its controlling power over the company. Given that both GEMDAL CNH15s and USD17s are trading above 101, investors are unlikely to put back the notes if the COC clause is triggered. This means the company may need to file a consent solicitation to loosen its COC clause. Meanwhile, with the high coupon of GEMDAL CNH15s at 9.15%, we will not be surprised if the company proposes a tender offer to redeem it early. For GEMDAL CNH18s trading at 97/98 area, we believe it provides a decent potential upside of 2-3 points based on the news. <Agnes Wong> Bumi Resources: Asia Resource Minerals Plc (ARMS, previously Bumi Plc) announced that it has agreed with the Bakrie Group to extend the completion deadline of the separation of Bumi Resources and ARMS by four weeks, until February 21, 2014. The Bakrie Group has agreed that the US$50m currently held in escrow will be transferred to ARMS by January 23, 2014 and will only be refundable to the Group if ARMS is in material breach of the existing agreement. Moreover, both parties have agreed that no general meeting of Bumi Resources to consider agenda items (ie, the CIC transaction) put to the shareholders on December 20, 2013 and January 10, 2014 will be held before the completion. We view the news as credit neutral and the delay has highlighted potential tight liquidity faced by the family. We reiterate our view that Bumi Resources will need to receive fresh capital or restructure its debt (with a meaningful haircut) to continue as a going concern. Given the uncertainty as to how the company

14

will deal with its refinancing requirements in 2014, and the risk of having a messy and lengthy debt restructuring process as seen in Bakrieland and Bakrie Telecom, we remain cautious on the credit and are better sellers of the BUMIIJ bonds at 66.5-69.25. <Annisa Lee> Midwest Vanadium: Atlantic Ltd announced through an ASX filing that Midwest will soon be in a position to commence exports of vanadium trioxide (V2O3) from its Windimurra operations. V2O3 is produced at the penultimate stage in the production of ferrovanadium. We understand from company management that vanadium trioxide sales into high-performance end-use markets should result in V2O3 sales at a premium to ferrovanadium (FeV) on a V unit basis, with a significant premium for producing vanadium carbonitride. Vanadium carbonitride is even more efficient than ferrovanadium in the manufacture of micro-alloyed highstrength steels, allowing steel makers to save costs, and sells at a ~US$3/kg premium to ferrovanadium. As this process is expected to bypass the electric arc furnace, we expect the product margin to also benefit from costs. Management has further clarified that the decision to sell V2O3 was because of the receipt of export authorization, with no change in the forecast vanadium capacity of the plant. We believe this announcement is positive for the company as it allows Midwest to export potentially higher-margin products, before final processing through the electric arc furnace, resulting in better commercialization and derisking of the asset. Separately, Atlantic provided a further update that it continues to pursue a potential legal action against Mineral Resources Ltd (ASX: MRL) regarding the purchase of the crushing, milling and beneficiation plant which has been a source of problems, with the company quantifying the additional capex and losses in excess of A$120mm. MRL, in a subsequent filing, has maintained that Atlantics claim is without foundation. However, given the uncertainty involved in the process, we do not factor in any benefit to Midwest from this potential legal claim. With the recent indenture changes effective December 2013, the coupon on the bonds will step up th to 12.25% from 16 February 2014 and to 13.25% from 16 February 2015, the call price premium has been increased by 2.75% and the note holders also receive an additional 0.5 points equivalent of bonds, together implying significant upside for investors. We continue to like the senior secured ATIAU 2018s (83/86, 19.1%/17.9% YTW) and recommend investors Buy the bonds at current levels for an attractive yield with price appreciation coming from continued ramp up supported by strong financial backing from the promoters and a capable management. <Gourav Dhavale>

January 22, 2013

Gajah Tunggal: Local news reported that the government and the Commission VII of Parliament agreed to increase the electricity tariff for the industry 13 group by 38.9% starting from May. This group includes those with power consumption above 220kVA, and this regulation will apply to companies such as Gajah. We have confirmed with management that Gajah will be impacted by the hike. The electricity tariff will increase by 38.9% by December 2014 and prices will rise every two months starting from May 2014. We believe the news should have limited negative impact on its profit margins. We note that energy accounts for about 8% of total production costs, of which about 30% comes from electricity. The average tariff increase in 2014 will be about 17%, based on the gradual increment plan. This will translate into a profit margin reduction of about 0.4%. In 2015, assuming the tariff increases are applied, its profit margins will be reduced by 0.9%. We therefore do not expect this tariff increase to materially impact its profit margin, EBITDA and liquidity position. We continue to like the 2018 bonds at 7.5-7.8% for carry. <Annisa Lee>

January 23, 2013

Dalian Wanda: Plans to issue a USD10yr bond (Baa3/S&P: BBB-/BBB+) with initial guidance in the T+475bp (Z+482bp or 7.6%) area. Proceeds will be used to fund the projects in China and overseas, and for general corporate purposes. While initial guidance offered ~50bp of value (fair value at T+420bp, or Z+427bp) with reference to its BBB- peers, the deal has then re-priced the BBB property space 10-20bp wider. Taking YUEXIU23s as an example, the most affected by this new issue, the bond has widened by
15

20bp to T+395/380bp after the DALWAN announcement. This has made the new issue less attractive than it was from a RV perspective. Simply making reference to the re-priced price, we see fair value of the new DALWAN 10yr at T+437bp, or Z+445bp. We would however see T+450bp, or Z+457bp, as a minimum to ensure secondary market performance given sluggish trading sentiment. For our view on Dalian Wandas fundamentals, please refer to our previous commentary Dalian Wanda - Fair with small upside, 18 November 2013. Fair value estimate at T+437bp, or Z+445bp: Although DALWAN18s trade fairly flat to YUEXIU18s, which appears to suggest the new DALWAN24s should price with reference to YUEXIU23s (T+395/380bp or Z+417/402bp), we note that the YUEXIU 4-9yr curve was very flat and as such we do not see this as a good indicator for judging fair value. Rather, the CHIOLI18-32 curve suggests 12.6bp pa in Z-spread for an additional one-year tenor. Assuming 16bp pa in Z-spread for DALWAN given its weaker profile, we derive fair value for the new DALWAN 10yr at T+437bp or Z+445bp, with reference to DALWAN18s at T+362bp or Z+362bp. <Agnes Wong> Fufeng / West China Cement: S&P affirmed Fufengs BB credit rating and revised its outlook from Negative to Stable. The rating action was triggered by its expected financial performance over the next twelve months, with MSG prices unlikely to fall further from current levels. While xanthan gum prices should continue to fall, the company should generate free cashflow due to its low capex in 2014. All these are in line with our views. Separately, S&P affirmed West China Cements B+ rating and revised its outlook from Negative to Stable. The rating action was triggered by the companys improved liquidity position due to the reduction of short term debt and the expectation that the company will not make any acquisitions over the next 12 months. That said, the rating agency also highlighted the companys small operating scale, single product, geographic concentration and exposure to cyclical demand and volatile raw material costs. Overall, we share S&Ps view, although we see cement prices as remaining a key factor of its operating performance. With FUFENG 2016 bonds now trading at 6.0-6.6% and WESCHI 2016 at 5.6-6.4%, we do not see much value in the bonds relative to select property names such as GEMDAL 2017 at 6.46.7%, GZRFPR 2016 at 6.1-6.5% or YLLG 2017 at 6.2-7.3%. <Annisa Lee>

January 24, 2013

Sound Global: Announced that it has converted some RMB15m of CBs into new shares of the company. After the conversion, the outstanding amount of CBs is about RMB585m. Every CB holder of RMB100,000 will be entitled to convert their holdings into 29,549 HK shares, putting the breakeven price of conversion at HK$4.06/sh vs a current share price of HK$7.7. We therefore see a high likelihood that all CBs outstanding will be eventually be converted into equity. Note that the company will de-list from the Singapore Stock Exchange on 27 January. Separately, in terms of a business update, the company has recently won a number of contracts, including BOT (build-operate-transfer) projects for sewage treatment plants in Xinjiang (aggregate investment of RMB230m) and Anhui province (total investment of RMB240m). With a free cash balance of about RMB2.8bn as of September, we are comfortable with the liquidity position considering its short-term debt of RMB638m. The company also seems to maintain a fairly stable working capital cycle, despite its business expansion. While total debt amounted to about RMB3bn, we believe the outstanding CBs will be converted into equity, which implies it effectively has a net cash position. Overall, we expect the credit profile to remain stable and view the EPSGF 2017 at 8.8-9.2% as offering value, with about 50bp upside or about 1.5 points compared to other China industrial names. <Annisa Lee>

16

Disclaimer
This material has been prepared by a sales and trading department of a Nomura affiliate in the Asia ex-Japan region, and if applicable, with the contribution of one or more of its other affiliates. It is made available to you on a confidential basis by the Nomura affiliates (collectively, "Nomura Group"), as the case may be. This is not an investment research or a research recommendation within the meaning of applicable regulatory rules in the European Economic Area, nor is it research or a research recommendation under the rules of the U.S. Self Regulatory Organizations or under applicable rules in Hong Kong. This is not analyst report as defined by the Japan Securities Dealers Association (JSDA). This publication should therefore not be relied upon as a research. This material is: (i) for your private information only, and we are not soliciting any action based upon it; (ii) not to be construed as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such offer or solicitation would be illegal; and (iii) provided on the basis that it should not be relied upon for any purpose other than the purposes of discussion. While all reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, no representation, warranty or undertaking, expressed or implied, is made and no responsibility or liability is accepted by the Nomura Group and/or its directors, officers and employees as to the accuracy, completeness, merchantability or fitness for a particular purpose of the information contained herein or any other information provided by any other person in connection with the information described herein or their distribution or for the results obtained from the use of this information. Nomura Group and/or its directors, officers and employees do not accept any liability whatsoever for any loss or damage (including, without limitation, direct, indirect or consequential loss or loss of profits or loss of opportunity) suffered by you or any third party in connection with the use of this material or its content. It is being provided to you because you have requested a copy and it is not intended for investors who are unfamiliar with the relevant markets or who are unwilling or unable to bear the risks associated with any investment entered into in connection with this material. You should refrain from entering into any transaction unless you fully understand all the risks involved and you have independently determined that the investment is suitable for you. We are not your designated investment advisor. If you are in doubt as to any aspect of this material, you should consult your professional advisors. Opinions expressed are current opinions as of the date appearing on this material only and the information, including the opinions contained herein, are subject to change without notice, and may differ from, or be inconsistent with the views of Nomura Group research analysts who publish research report. All projections, valuations and statistical analyses are provided to assist the recipient in the evaluation of the matters described herein. They may be based on subjective assessments and assumptions and may use one among methodologies that produce different results and, to the extent that they are based on historical information, they should not be relied upon as an accurate prediction of future performance. The staff from the sales and trading department of the Nomura Group responsible for preparing this material have received compensation based on various factors including the Nomura Groups total revenues, a portion of which is generated by its sales and trading desks. The Nomura Group may from time to time perform investment banking or other services (including but may not be limited to acting as advisor, manager or lender) for, or have solicited for or may solicit investment banking or other business from, companies or issuers mentioned herein and the affiliates of any such companies or issuers mentioned herein (each a Mentioned Company). Further, the Nomura Group, and/or its officers, directors, employees and agents, including persons, without limitation, involved in the preparation or issuance of this material may, from time to time, have long or short positions in, and buy or sell, the securities, or derivatives (including but not limited to options and futures) thereof, of any Mentioned Company. In addition, the Nomura Group may act as a market maker, principal and, or agent with respect to the buying and selling of the securities of any Mentioned Company. As a result of Nomura Groups business relationships, it may possess information about assets or companies mentioned herein, including information about investment performance and other financial and operational matters. Nomura Group has no responsibility or obligation to, and will not, disclose that information, nor provide any advice or recommendation, to prospective investors based on such information. Nomura manages conflicts identified through the following: their Chinese Wall, confidentiality and independence policies, maintenance of a Stop List and a Watch List, personal account dealing rules, policies and procedures for managing conflicts of interest arising from the allocation and pricing of securities and impartial investment research and disclosure to clients via client documentation. Disclosure information is available at http://www.nomura.com/research/. This material has been approved for distribution in the United Kingdom and European Union by Nomura International plc (NIplc), which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange. It is not intended for retail clients. It is intended only for investors who are "eligible market counterparties" or "professional clients" for the purposes of applicable regulatory rules in the European Economic Area, and may not, therefore, be redistributed to other classes of investors. Nomura Securities International, Inc. ("NSI"), a Nomura entity in the United States, accepts responsibility for the distribution of this material in the United States. The securities described herein may not have been registered under the U.S. Securities Act of 1933, and, in such case, may not be offered or sold in the United States or to U.S. persons unless they have been registered under such Act, or except in compliance with an exemption from the registration requirements of such Act. Unless governing law permits otherwise, you may be required to contact a Nomura Group entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. This publication is distributed in Hong Kong by Nomura International (Hong Kong) Ltd. ("NIHK"), which is regulated by the Hong Kong Securities and Futures Commission. This publication is distributed in Japan by Nomura Securities Co, Ltd. only for professional investors as defined by the Financial Instruments and Exchange Act of Japan, in Australia by Nomura Australia Limited (A.C.N 003 032 513), a holder of an AFS licence (No. 246412) with the Australian Securities and Investment Commission (only for wholesale investor as defined by the Corporations Act), in Singapore by Nomura Singapore Limited (Registration number 197201440E, regulated by the Monetary Authority of Singapore), in Malaysia by Nomura Securities Malaysia Sdn Bhd, in Korea by Nomura Financial Investment (Korea) Co., Ltd. only for professional investors as defined by the Financial Investment Services and Capital Market Act. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without our prior express consent. Further information on any of the securities mentioned herein may be obtained upon request. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this material or any other damage that which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version of this material.

17