Asia Credit Compendium 2014 04 12 13 05 19

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Global Research |
Asia Credit Compendium 2014
All rights reserved. Standard Chartered Bank 2013
We dedicate this edition of the Asia Credit Compendium to our dear colleague Jeremy Wee, who passed away on 24 October 2013. He will be greatly missed by everyone who knew and worked with him.
Preface
Asian credit markets have faced multiple headwinds since mid-2013. Expectations that the US Federal Reserve will start tapering its quantitative easing programme in the coming months have caused US Treasury (UST) yields to rise substantially since May 2013. We expect UST yields to rise further in the coming year as they adjust towards a new level in line with the US economic recovery. This period of transition is having a profound impact on Asian credit markets and is keeping many investors sidelined. EM debt markets have benefited substantially from the accommodative policies of Western central banks as money has flowed to EM in search of yield. As global growth particularly US growth firms up, investors are concerned about the possibility of severe dislocations in EM debt markets as money is withdrawn from the sector. Emerging economies with large current account deficits are most vulnerable to a sharp withdrawal of portfolio flows. Tactical money has been exiting EM debt and continues to flow into developed equity markets. While EM debt and credit markets are vulnerable during this period of adjustment, we believe they have a bright future and will enjoy a substantial increase in investor interest over the medium term. Today, EM credit is no longer a small off-index allocation for major fixed income players. This asset class which is now bigger than the US high-yield market is considered a legitimate and mature asset class and occupies a core position in fixed income portfolios. Institutional investors and money are loyal to the space, and we expect more money to be allocated to it in the coming years. We expect continued high issuance levels in the EM G3 credit space in 2014-15, following record issuance in the past couple of years. Around USD 340bn of EM G3 debt and USD 120bn of Asian G3 debt is due to mature in the next couple of years. This will need to be refinanced. Moreover, regulatory pressures including Basel III implementation are causing a significant portion of loan financing to move to the bond space. We expect these pressures to continue to promote the development of the Asian and EM credit space, across both the G3 and local-currency segments. We expect China Inc. to continue to dominate issuance in the coming years; it contributed just short of c.50% of the G3 issuance from Asia in 2013. We expect increasing numbers of SOE issuers from China, spurred by market reforms, to access international capital markets. Market participants in the Asian credit sector should welcome this issuance, as it will broaden and deepen the market over time. However, the larger number of names, and high issuance volumes at a time when the UST markets are in transition, create short-term challenges. Investors in Asian credit markets will need to be more vigilant and discerning in credit selection. With this compendium, we aim to help investors navigate this period of flux and make more informed choices about credit selection. This is the fifth edition of our Asia Credit Compendium, which we hope becomes the benchmark Asian credit guide and a must-have for any investor involved in the Asian credit space. In this edition, we cover 181 credits 11 sovereigns, 61 banks, 66 high-grade corporates and 43 high-yield corporates. We discuss in detail the drivers of Asian credit markets, including economic and credit fundamentals, market technicals and valuations. We also provide overviews of sectors including banking, quasi-sovereigns and property. We would like to thank all of our colleagues based in the region who provided valuable support, guidance and local insight. Without them, this publication would not have been possible.
Kaushik Rudra Global Head of Credit Research Standard Chartered Bank 4 December 2013
Contents
Asia macroeconomic overview
Asia Supportive global growth, at last!
2
Credit strategy
Asian credit fundamentals Greater differentiation warranted Asian credit technicals Waning support
Appendix 1: Expected issuance in 2014 Appendix 2: Asian bond markets: Size and allocation dynamics 6 32 54 61 66
Asian bond valuations All about credit selection
Sector themes
Asian quasi-sovereigns Analysing the risks Banking sector As the tide goes out China property sector Repositioning and rebalancing
78 87 97
Credit analysis (in alphabetical order)

Sovereigns
1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. China India Indonesia Malaysia Mongolia Pakistan Agricultural Bank of China Ltd. Axis Bank Ltd. Bangkok Bank PCL Bank Negara Indonesia PT Bank of Baroda Bank of China (Hong Kong) Ltd. Bank of China Ltd. Bank of Communications Co. Ltd. Bank of East Asia Ltd. Bank of India Bank Rakyat Indonesia PT BDO Unibank Inc. Busan Bank Canara Bank China CITIC Bank International Ltd. China Construction Bank Corp. China Development Bank Chong Hing Bank Ltd. CIMB Bank Bhd. Daegu Bank Dah Sing Bank Ltd. DBS Bank Ltd. Export-Import Bank of China Export-Import Bank of India Export-Import Bank of Korea Export-Import Bank of Malaysia Fubon Bank Hong Kong Ltd. Hana Bank HDFC Bank Ltd. Hong Leong Bank Bhd. ICICI Bank Ltd. 118 120 122 124 126 128 142 144 146 148 150 152 154 156 158 160 162 164 166 168 170 172 174 176 178 180 182 184 186 188 190 192 194 196 198 200 202 7. 8. 9. 10. 11. Philippines South Korea Sri Lanka Thailand Vietnam 130 132 134 136 138
Banks
32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. IDBI Bank Ltd. Indian Overseas Bank Indonesia Eximbank Industrial and Commercial Bank of China (Asia) Ltd. Industrial and Commercial Bank of China Ltd. Industrial Bank of Korea Kasikornbank PCL Kookmin Bank Korea Development Bank Korea Exchange Bank Korea Finance Corp. Krung Thai Bank PCL Malayan Banking Bhd. NongHyup Bank (NACF) Oversea-Chinese Banking Corp. Ltd. Public Bank Bhd. RHB Bank Bhd. Rizal Commercial Banking Corp. Rural Electrification Corp. Shinhan Bank Siam Commercial Bank PCL State Bank of India Suhyup Bank Syndicate Bank Union Bank of India United Overseas Bank Ltd. Vietnam JS Commercial Bank (VietinBank) Wing Hang Bank Ltd. Wing Lung Bank Ltd. Woori Bank 204 206 208 210 212 214 216 218 220 222 224 226 228 230 232 234 236 238 240 242 244 246 248 250 252 254 256 258 260 262
ii

High-grade corporates
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Axiata Group Bhd. Beijing Enterprises Holdings Ltd. Bharat Petroleum Corp. Ltd. China Merchants Holdings (International) Co. Ltd. China National Petroleum Corp. China Overseas Land & Investment Ltd. China Petrochemical Corp. (Sinopec) China Railway Construction Corporation Ltd. China Railway Group Ltd. China Resources Gas Group Ltd. China Resources Power Holdings Co. Ltd. China State Construction International Holdings Ltd. China Vanke Co. Ltd. CLP Power Hong Kong Ltd. China National Offshore Oil Corp. (CNOOC) ENN Energy Holdings Ltd. GS Caltex Corp. Guoco Group Ltd. Hang Lung Properties Ltd. Henderson Land Development Co. Ltd. Hongkong Land Holdings Ltd. Hutchison Whampoa Ltd. Hyundai Motor Co. Indian Oil Corp. Ltd. Indian Railway Finance Corp. Kerry Properties Ltd. Korea Electric Power Corp. Korea Expressway Corp. Korea Gas Corp. Korea National Oil Corp. KT Corp. Li & Fung Ltd. Lifestyle International Holding Ltd. PT Adaro Energy Tbk. Agile Property Holdings Ltd. Alliance Global Group Inc. PT Berau Coal Energy Tbk. PT Bumi Resources Tbk. Central China Real Estate Ltd. China Fishery Group Ltd. China Metallurgical Group Corp. China SCE Property Holdings Ltd. China Shanshui Cement Group Ltd. CIFI Holdings Group Ltd. CITIC Pacific Ltd. Country Garden Holdings Co. Ltd. Evergrande Real Estate Group Ltd. First Pacific Co. Ltd. Franshion Properties China Ltd. PT Gajah Tunggal Tbk. Glorious Property Holdings Ltd. Greentown China Holdings Ltd. Guangzhou R&F Properties Co. Ltd. Hopson Development Holdings Ltd. PT Indika Energy Tbk. 266 268 270 272 274 276 278 280 282 284 286 288 290 292 294 296 298 300 302 304 306 308 310 312 314 316 318 320 322 324 326 328 330 400 402 404 406 408 410 412 414 416 418 420 422 424 426 428 430 432 434 436 438 440 442 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. Lotte Shopping Co. Ltd. Nan Fung International Holding Ltd. New World Development Co. Ltd. Noble Group Ltd. NTPC Ltd. Oil & Natural Gas Corp PCCW Ltd./Hong Kong Telecommunications Ltd. PT Pertamina (Persero) PT Perusahaan Listrik Negara Petroliam Nasional Bhd. Poly Real Estate Group Co. Ltd. POSCO Power Grid Corp. of India Ltd. PTT Exploration & Production PCL PTT Global Chemical PCL PTT PCL Reliance Industries Ltd. Shenzhen International Holdings Ltd. Sime Darby Bhd. Singapore PowerAssets Ltd. Singapore Telecommunications Ltd. Sino Land Co. Ltd. Sinochem Hong Kong (Group) Company Ltd. SK Innovation Co. Ltd. SK Telecom co. Ltd. State Grid Corporation of China Sun Hung Kai Properties Ltd. Swire Pacific Ltd. Swire Properties Ltd. Thai Oil PCL Wharf Holdings Ltd. Wheelock and Co. Ltd. Yuexiu Property Co. Ltd. PT Indosat Tbk. International Container Terminal Services Inc. Kaisa Group Holdings Ltd. PT Kawasan Industri Jababeka Tbk. KWG Property Holding Ltd. PT Lippo Karawaci Tbk Longfor Properties Co. Ltd. MIE Holdings Corp. Mongolian Mining Corporation Shimao Property Holdings Ltd. SM Investments Corp. SOHO China Ltd. Star Energy Geothermal (Wayang Windu) Ltd. Sunac China Holdings Ltd. Texhong Textile Group Ltd. Vedanta Resources Plc West China Cement Ltd. Yanlord Land Group Ltd. Yanzhou Coal Mining Co. Ltd. Yuzhou Properties Co. Ltd. Zoomlion Heavy Industry Science and Technology Co. Ltd. 332 334 336 338 340 342 344 346 348 350 352 354 356 358 360 362 364 366 368 370 372 374 376 378 380 382 384 386 388 390 392 394 396 444 446 448 450 452 454 456 458 460 462 464 466 468 470 472 474 476 478 480 482 484 486 487 487 488 489
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High-yield corporates
Glossary of abbreviations Contributors contact details

Credit Research Team Economic Research Asia
Disclosures appendix
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iv
Asia macroeconomic overview
Asia Supportive global growth, at last!

Analyst: David Mann (+65 6596 8649)
Economic outlook
Major developed economies are likely to add to Asias growth in 2014, after years of Asian outperformance against a weak global backdrop. This outperformance reflects the strength of the regions economies, which have proven their ability to outperform in most scenarios other than a sharp global downturn. While the backdrop for markets will be challenging in H1-2014 as the US heads towards ending QE, the reasons for this tightening (i.e., stronger growth) will likely help current account (C/A) balances around the region. Asian growth and C/A balances should also receive support from a return to positive growth in the euro area following two years of decline. Policy implementation in the form of infrastructure investment and progrowth reforms is a swing factor for growth in 2014 Policy implementation will be an important swing factor for Asian growth in 2014. In many countries such as the Philippines, Malaysia, Indonesia and Thailand this will mean implementing public infrastructure investment plans. In others such as China, India and Japan it will mean implementing reforms to unleash growth potential. Elections in India and Indonesia may raise the risk of populist policies early in 2014. The key question is whether the newly elected governments will be able to reduce these economies dependence on portfolio flows and shift more towards more FDI inflows. Inflation is unlikely to be a major concern for most markets in 2014 as key food and energy prices remain subdued. China, the worlds second-largest economy, should see a consolidation of growth. We forecast 7.4% GDP growth in 2014, following 7.6% in 2013. 2013 saw the implementation of easier reforms such as cutting red tape and the anti-corruption drive. 2014 will be about tackling the tougher issues of land and state-owned enterprise (SOE) reform. We believe the new leadership is determined to push ahead with these reforms. This should boost confidence in the growth outlook for 2014 and beyond. We do not expect another downshift in Chinas growth in the next few years. ASEAN economies are likely to continue to grow strongly in 2014, helped by structurally supportive factors. These factors include competitiveness gains versus China in the Mekong delta region, which will attract more FDI flows; continuing urbanisation as more industries develop; and the implementation of infrastructure investment plans.
We do not expect another downshift in Chinas growth for the next few years at least
Figure 1: Asia ex-Japan* macroeconomic forecasts Improved global backdrop in 2014

2013 GDP (real % y/y) IMF Inflation IMF Current account balance (% GDP) IMF 6.4 6.2 3.4 3.8 2.1 2.2 2014 6.6 6.2 3.9 3.7 2.8 2.4 2015 6.5 6.3 3.7 3.6 2.9 2.5
Figure 2: External growth to be more supportive in 2014 Contributions to growth: domestic vs. external (H1-2013 data)
12 10 8 6 4 2 0 -2 -4 -6 PH MY CN IN ID HK SG TH TW KR
Source: CEIC, Standard Chartered Research
Domestic
GDP growth
External
Note:* GDP-weighted total of 14 regional economies; Source: Standard Chartered Research, IMF
Asia Credit Compendium 2014 Balance of payments

Current account dynamics will matter again for markets in 2014 We expect C/A balances in Asia ex-Japan economies to improve modestly in 2014. India and Indonesia, the economies with the biggest C/A deficits in 2013, are likely to remain in deficit. We expect Indias deficit to widen marginally to 2.8% of GDP in FY15 from 2.4% in FY14 as domestic growth improves; this would be a substantial improvement from the 4.8% deficit in FY13. Given our view that commodity prices will not rebound sharply in the medium term, we believe Indonesias C/A deficit is increasingly structural and will take at least three years to return to surplus. We revise our C/A deficit forecasts to 3.6% for 2013 (from 2.9%) and to 3.1% for 2014 (from 1.9%), as exports are likely to remain sluggish and Bank Indonesia (BI) policy tightening may not cap GDP growth and imports sufficiently. We expect the balance of payments to turn to a USD 16.0bn deficit in 2013 from a USD 0.1bn surplus in 2012, and to remain in deficit (USD 1bn) in 2014.
Policy
Investor flows to the region may be even more discriminating in 2014, depending on policy implementation In 2014, Asian countries will need to implement the right policies to attract long-term capital after years of struggling with indiscriminate portfolio flows to the region. Such policies would support longer-term growth prospects after years during which markets applied much less scrutiny to this issue. Pressure to maintain yield spreads against US Treasuries, combined with still-elusive exchange rate appreciation, may mean pressure for tighter domestic monetary conditions. We expect monetary tightening cycles in the majority of Asian economies to start in Q3-2014. Taiwan and Indonesia are the exceptions. BI is likely to continue to tighten policy in early 2014 (we expect 50bps of rate hikes in Q1), as we believe it has given increased weight to containing the current account deficit. In Taiwan, we expect the tightening cycle to begin in Q2-2014, triggered by the second-round impact of electricity price hikes and higher food prices y/y due to the low base effect. Policy makers across the region have shown a desire to tame leverage growth in the government, corporate and household sectors. Implementation has varied while Singapore and Hong Kong have introduced strong macro-prudential policies to cool their property markets, we have seen more talk than action elsewhere, such as in Thailand. For more on our views of leverage risks in Asia, see SCout, 1 July, 2013, Asia leverage uncovered.
Politics
Elections in India and Indonesia will be the political focus in 2014. Both markets may have a rough ride in early 2014 (after a difficult 2013) amid worries about electionrelated policy paralysis and tighter global liquidity conditions. In Indias case, the key question is whether a relatively strong or weak coalition government will be elected. Uncertainty is high given the long-term trend of local rather than national issues driving voting behaviour, and the fact that 20% of voters will be first-time voters. In Indonesia, we expect election-related spending to support a modest GDP growth acceleration to 5.8% in 2014 from 5.6% in 2013. Neither of the current presidential front-runners (Jakarta Governor Joko Widodo or retired General Prabowo Subianto) is likely to change course on economic policy.
Asia Charts of the year

Figure 3: Most economies are likely to accelerate in 2014 Real GDP growth (%, y/y)
12 10 8 6 4 2 0 CN IN HK KR TW SG ID MY PH TH VN
Figure 4: Credit growth has generally eased in Asia

25
10 year average 2013F
Credit growth, % y/y
2014F 2015F
20 15 SG 10 5 0 0 2 4 6 8 10 12 Nominal GDP growth, % y/y US HK US MY SG MY TH HK ID CN TH IN
CN IN ID
Q1-2013 5Y average
14
16
Note: Countries with a gap of more than 5ppt are above the diagonal line; Source: CEIC, Standard Chartered Research
Figure 5: China is now a dominant ASEAN export market ASEAN-5 exports, 2000-2012
25 2000 20 15 2012
Figure 6: Regional current account balances in 1996, 2007 and our 2014 forecasts (% of GDP)
20 15 10 5 TW CN 0 IN -5 -10 ID KR PH MY TH 1996
10 5 0
US EU CN ASEAN IN MENA
2007
2014F
Figure 7: Inflation to remain manageable in 2014 % (annual averages)

9 8 7 6 5 4 3 2 1 0 CN IN HK KR TW SG ID MY PH TH VN
Figure 8: Lending growth is recovering in ASEAN % y/y

40
10 year average
2014F 2013F 2015F
35 30 25 20 15 10 5
China ASEAN
0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Credit strategy
Asian credit fundamentals Greater differentiation warranted

Analysts: Shankar Narayanaswamy (+65 6596 8249), Sandeep Tharian (+44 20 7885 5171) Asian credit markets have had a roller coaster of a year in 2013. Total returns trended upwards until May. They then dipped into negative territory in June due to higher UST yields and widening credit spreads as the Fed started to talk about QE3 tapering. Spreads have retraced back close to April 2013 levels (they are still wider than January levels), but higher UST yields have kept total returns in negative territory in 2013.
We expect 2014 to be a lacklustre year for Asian credit

Spreads would have to widen from end-November 2013 levels for demand and supply to match in the Asian credit markets in 2014 Asian credit markets face fundamental headwinds due to (1) the external vulnerabilities of sovereigns as QE-driven flows into Asian fixed income slow, and (2) weaker credit metrics given rising leverage at both the macro and corporate levels. Moreover, while fixed income inflows to Asia could pick up moderately due to range-bound UST yields in H1-2014, supply is also likely to pick up substantially. At end-November spread levels, we expect supply to overwhelm demand for Asian credit in 2014. Thus, spreads would have to widen in order for demand and supply to match. We expect JACI credit spreads to widen by c.22bps in 2014. US economic fortunes and their influence on UST yields will be the more important driver of total returns in Asian credit. We forecast the 10Y UST yield at 3.40% at end2014 (65bps higher than end-November 2013 levels), and this will erode total returns for the year. While we are entering 2014 with a larger spread cushion than in 2013, the expected 65bps rise in UST yields would wipe out a substantial portion of the carry for the year in AXJ credit (5.2% JACI Composite yield at end-November 2013). Thus, total returns are likely to be in low single digits, and may slip into negative territory for the second year running if spreads widen more in 2014 than the 22bps we expect. In such a scenario, we would continue to prefer credit risk over duration risk in our portfolio, as rising UST yields remain the biggest risk to AXJ credit in terms of both total returns and flows.
US economic prospects remain the key driver of Asian credit markets

We forecast that tapering will be delayed until June 2014 and that the first hike in the federal funds target rate (FFTR) will happen in early 2016. US growth is likely to remain soft in H1-2014 due to weaker-than-expected consumer spending and continued pressure on government spending amid fiscal woes. UST yields are likely to remain range-bound in H1-2014 as the market prices in these scenarios. Inflows to EM are likely to be supported as the Fed maintains its accommodative policy for Figure 1: Returns dipped into negative territory in H2-2013 JACI total return index (indexed at Dec-12=100)
102 101 100 99 98 97 96 95 94 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13
Figure 2: HY to generate positive returns on carry Expected return contributions in 2014 by sector (ppt)
10 8 6 4 2 0 -2 -4 -6 -8 Composite Sov. Quasi-sov.* HG corp.* HY corp.*
*Includes financials; Source: Standard Chartered Research
Net return
Credit carry
Treasury carry Treasury delta Credit delta
Source: Standard Chartered Research

longer than previously expected. However, flows are unlikely to be as strong as in 2011-12. Meanwhile, supply is likely to remain strong and front-loaded given rangebound UST yields, heavy redemptions and a structural increase in Asian corporates demand for debt funding. Asian credit spread moves in 2013 were linked more to the fortunes of sovereigns and their vulnerability to flows than to individual company credit metrics
External vulnerability is also an important determinant

Rising UST yields and slowing flows have negatively impacted the external positions of AXJ sovereigns. As reflected in 2013 spread movements, sovereign fundamental metrics and their vulnerability to flows have been a bigger driver of credit spread movements than the corporates individual credit metrics. This is especially true during a transition phase from a period of excess liquidity driven by coordinated central bank easing to more normal liquidity conditions. Strong QE-driven inflows to EM distorted valuations, causing credit spreads to tighten substantially, especially in 2012. The subsequent normalisation of liquidity conditions and international flows will lead to a widening of credit spreads as the demand/supply equilibrium adjusts to new liquidity conditions. This adjustment process is unlikely to be smooth or uniform. Countries with external vulnerabilities (balance-of-payments and current account pressures) are likely to bear the brunt of a sell-off. Liquidity is thin and the exit doors are small, so even small outflows as a percentage of the asset class will have a disproportionately large impact. This was highlighted in the spread widening in response to the Feds tapering talk in May 2013. Credits from externally vulnerable sovereigns like India and Indonesia widened much more than those from Korea, which has built up a strong external position.
Simultaneous growth in major global economies is likely to revive Asias export-led growth
Despite Asian economies vulnerability to flows, we see growth improving across the region (albeit from a lower base in 2013). Simultaneous growth in major global economies looks more likely in the next 12-18 months than at any time since 2006. That is likely to revive export-led growth in Asia. Excluding China and the Philippines, we expect growth in all Asian economies to be faster in 2014 than in 2013. Current account balances are likely to stabilise and improve modestly, reducing the burden on FX adjustment to attract inflows. While currencies may be under pressure, we expect currency volatility to be lower than in May-June 2013. India, Indonesia and Malaysia have taken measures to reduce their subsidy burdens. However, they might need to reduce subsidies further and take other structural measures to improve their fiscal positions enough to withstand a reduction of inflows to the region. We expect externally vulnerable Asian economies to see spread widening ahead of tapering in 2014. Figure 4: China set to dominate Asian credit markets China and Korea credits as a proportion of JACI (%)
Figure 3: Sri Lanka and Mongolia have weak external positions External debt/current account receipts (%, 2012, x-axis); short-term external debt/FX reserves (%, 2012, y-axis)
120 100
Vietnam Sri Lanka (175, 158)
30 25 20 China
Negative
80 60 40 20 0 0 Neutral
Malaysia Thailand China Bangladesh Philippines Korea India Indonesia Mongolia (253,50)
15 10 5 0 2008
Korea
Positive 25 50 75 100 125 150
2009
2010
2011
2012
2013
Note: (1) Short-term debt also includes principal of long-term debt falling due in the next 12 months; (2) For India and Korea, short-term debt includes non-resident deposits over one year; Sources: World Bank, Moodys, Bloomberg, Standard Chartered Research
Source: Bloomberg, Standard Chartered Research

However, because both investors and sovereigns are better prepared now, spreads are likely to be less volatile than in 2013.
Chinas increasing importance in Asian credit

China has replaced Korea as the most prolific G3 bond issuer in Asia ex-Japan Along with the US, Chinas economic fortunes are also important for Asian credit. China is taking its rightful position as an important driver of Asian credit markets, and has replaced Korea as the regions most prolific issuer. Issuance from China has grown substantially and constituted 48% of Asian issuance in 2013. Chinas influence extends to bonds issued across Asia, given the importance of Chinas economic prospects to sectors like Korean steel, Indonesian coal and Hong Kong banks. Chinas growth gradually picked up in H2-2013 and we expect the momentum to continue in H1-2014. The focus in 2014 is likely to shift to reform from growth, in our view. However, China needs to maintain a certain rate of economic growth in order to keep unemployment low, and we therefore expect the official growth target of 7% for 2014 to be met. We forecast 7.4% growth in 2014. Chinas focus on reforms is likely to have longer-term implications for bond markets. A greater emphasis on market forces in the corporate and financial sectors is likely to boost issuance by Chinese corporates as they seek to diversify their funding bases. SOE reforms including making SOEs more commercial and dismantling state monopolies are likely to increase the focus on standalone credit metrics. We expect further credit differentiation between Chinas quasi-sovereigns. Property developers sales volumes and profit margins may also come under pressure as more city and local governments impose property taxes to reduce their reliance on land sales for revenue.
Increased emphasis on market forces should lead to higher issuance from China credits
Growing macro and corporate leverage is a concern

Asias growing macro leverage has been widely discussed. Analysis by our economists and equity research analysts suggests that Asian leverage is at manageable levels (see SCout, 1 July 2013, Asia leverage uncovered). While there are pockets of concern, particularly corporate leverage in China and Korea, low household leverage in India, Indonesia and China creates potential for leveragedriven growth in these economies over the medium term. Asian credit quality is deteriorating, and weaker credit metrics are not fully reflected in credit spreads We believe a bigger concern is increasing leverage in the Asian corporate sector especially among USD bond issuers and the subsequent weakening of credit metrics. The average AXJ corporate debt-to-GDP ratio rose from 76% in 2007 to 97% in 2012, 20ppt higher than the US level and much higher than Latam and Eastern Europe. China and Korea are the biggest outliers, with ratios above the 110% mark. Among the names with USD bonds outstanding, based on our SCALE measure, Asias credit quality peaked in H1-2008 at a score of 6.3 and deteriorated gradually to 5.1 in H1-2013 (see SCout, 5 July 2013, A new SCALE for Asian corporate credit). This is attributable to softening profitability and cash flow amid slow growth, as well as increasing debt levels. Corporate credit spreads in Asia have been heavily sovereign-driven as the markets have focused more on macro liquidity and external vulnerabilities than on sector prospects and company credit metrics. This may continue in 2014 as the market remains focused on the timing of Fed tapering and rate hikes. However, we believe credit fundamentals will come to the fore as the external environment normalises over the next couple of years. This will lead to wider spread differentiation among credits based on sector prospects and individual fundamentals, rather than macro events being the main driver. Hence, it is imperative that investors be more discerning in their sector and credit selection to limit potential downside.
Credit fundamentals will come to the fore as the external environment normalises over the next couple of years

Strong Asian growth will drive allocations in the medium term
Asias vulnerability to flows and increasing leverage is only one side of the story. More broadly, we believe that despite challenges global growth prospects through 2030 are still buoyant, led by strong growth in emerging markets (see Special Report, 6 November 2013, The Super-cycle lives: EM growth is key). The rising global GDP share of fast-growing emerging markets, especially in Asia, will be the biggest driver of stronger global growth in the next two decades, in our view. Growth in emerging markets will be driven by strong investment in Asia and increasing urbanisation, which has much further to go in China and other EM economies. While Asia faces challenges as more countries fall into the middleincome trap and reforms stall, we believe that the region will lead global economic growth in the next decade. Asian fixed income markets, both G3 and local-currency, are likely to grow strongly over the next decade This has important implications for fixed income markets in Asia. (1) Allocations to Asia are likely to grow strongly given the regions growing GDP share; (2) strong and vibrant capital markets will be needed to fund Asias investments in infrastructure; and (3) the increasing age and wealth of the Asian population will increase the share of fixed income products in personal investment portfolios at the expense of cash and properties, supporting the increasing local bid for fixed income paper in Asia. As a result, fixed income markets both local-currency and G3 are likely to grow strongly over the next decade.
Risks to our call for range-bound spreads

Faster-than-expected rate normalisation: Early tapering (in December 2013, January 2014 or March 2014) on better-than-expected US growth would catch the markets off-guard and lead to a spike in UST yields and a correction in credit spreads. Slower-than-expected rate normalisation: A dip in US growth and a pick-up in unemployment are key risks to our call. Such a scenario would lead to a continuation of the QE programme, resulting in lower UST yields, which would support duration in AXJ credit. Sharp slowdown in China: A dip in Chinas GDP growth is a risk to our call given Chinas increasing size and its dominance of AXJ credit markets. A credit event in China could cause credit spreads across Asia to widen. Event risks leading to extended capital-market shutdown: This is a risk given that refinancing requirements are set to pick up.
Figure 5: Rising macro leverage in Asia Corporate debt to GDP (%)

125 100 75 50 25 Latam 0 2006 2007 2008 2009 2010 2011 2012
Source: BIS, OECD, IMF, S&P, Standard Chartered Research
Figure 6: Profitability pressure and rising leverage x (LHS), % (RHS)

2.4 2.2 18 16 14 12 ROCE (RHS) 10 8 H1-05 H1-06 H1-07 H1-08 H1-09 H1-10 H1-11 H1-12 H1-13
UK Japan Asia ex-Japan USA EE & ME
Leverage
2.0 1.8 1.6 1.4 1.2 1.0
Asia Credit Compendium 2014 US growth will continue to drive flows into Asian credit
EM credit has benefited substantially from easy monetary conditions in the past two to three years. These conditions, combined with firmly anchored UST yields, have led to strong inflows to EM credit. The partial reversal of these flows as the Fed indicated the withdrawal of easy monetary conditions and its impact on Asian credit spreads highlighted the strong influence of events in the US and Europe on Asia.
US growth is likely to remain soft in the near term

Household debt deleveraging and the slow job-market recovery are headwinds to US consumption growth US growth or the lack thereof is a key driver of Asian credit spreads, in our view. The implementation of Obamacare, the still-unresolved debt ceiling debate (which could potentially extend into 2014), and consequent fiscal headwinds are likely to result in lower 2014 growth than we originally expected. We now forecast US 2014 and 2015 growth at 2.4% and 2.8%. After a weak H1-2014, we expect growth to improve gradually in H2. Household deleveraging and the slow job-market recovery are headwinds to consumption growth, the biggest engine of the US economy. We expect household consumption to pick up gradually as fiscal headwinds dissipate. However, government spending remains a drag on GDP growth. Investment growth is likely to support growth, aided by the continued uptick in the housing sector and an expected pick-up in corporate investment.
Softer data is likely to keep UST yields range-bound

We expect the Fed to start tapering by June 2014 and to start gradually guiding a FFTR hike in early 2016 We expect unemployment and inflation to move gradually towards the Feds respective targets of 6.5% and 2.5%, but they are unlikely to reach these levels by end-2015. We forecast that unemployment will fall to 6.8% and inflation will rise to 1.6% by end-2014. The weaker inflation and unemployment outlook suggests that tapering is unlikely to start soon. We expect the Fed to start tapering by June 2014, and to reduce bond buying by USD 20bn per month to end tapering by late 2014. We also expect the Fed to start guiding a rise in the federal funds target rate (FFTR) in early 2016, rather than the current market expectation of mid-2015. The delay in tapering and expected rate hikes is likely to keep UST yields range-bound until at least H1-2014. Range-bound USTs are likely to support flows into EM credit, including Asia. We expect a fair degree of volatility in UST yields, especially around the time of data releases. Given the shock in May-June 2013, the credit markets do not want to be caught off guard by a hawkish shift in the Feds stance, and are therefore likely to remain cautious in adding duration in 2014.
Figure 7: We expect US growth to accelerate; H2-2014 to be better than H1 Contributions to US quarterly real GDP growth, ppt
Private consumption Residential investment Gov't spending Net exports Non-resid. investment Quarterly GDP growth, % q/q
Figure 8: Key US forecasts
2013 GDP, % y/y Core PCE inflation, % y/y Unemployment, % Current account, % of GDP 1.7 1.3 7.2 -2.5 0-0.25 0.24 2.75*
2014 2.4 1.6 6.8 -2.5 0-0.25 0.25 3.40
2015 2.8 1.9 6.4 -2.9 0-0.25 0.50 3.80
4 3 2 1 0 -1 -2 -3
Forecasts
FFTR rate, % USD 3M LIBOR, %
Q1-2012
Q3-2012
Q1-2013
Q3-2013
Q1-2014
Q3-2014
10Y UST yield, %
*End-November 2013; Source: Standard Chartered Research
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Rising UST yields in 2014 are likely to depress total returns
The expected rise in UST yields is likely to limit overall returns on Asian credit to low single digits at best While USTs are likely to remain range-bound in the near term, we expect the 10Y to rise by 65bps in 2014, and we see a similar move in the 5Y. UST yield moves are likely to be slightly smaller in 2014 than in 2013, and the cushion from carry will be slightly larger. Nevertheless, capital losses on account of UST moves are likely to erode most of the carry from coupon in Asian credit markets in 2014. We expect this to limit returns on Asian credit to low single digits at best. This is likely to limit flows from retail investors and private banks, acting as a significant negative technical factor for Asian credit in 2014.
Europe and Japan are likely to continue monetary easing

Inflation is unlikely to become an issue in Europe soon, so we expect easy monetary conditions to be maintained in 2014 The European economy is improving only gradually and remains fragile, with a wide north-south divide. While growth is picking up as headwinds diminish, it is unlikely to be strong enough to close the output gap. We forecast growth at 1.3% in 2014, rising to 2.1% in 2015. Given the still-wide output gap, inflation is unlikely to become an issue soon. The European Central Bank (ECB) is therefore likely to maintain easy monetary conditions (it has guided that rates would remain at current or lower levels for an extended period of time) and extend its refinancing operations in order to spur credit growth, especially in peripheral countries. Japans strong fiscal and monetary policy stimulus has pushed economic growth higher; we forecast 2013 growth at 2.1%. However, the next stage of the recovery is likely to be more difficult. Unleashing domestic demand potential is key to a sustainable recovery, and this will require structural reforms including fiscal consolidation and higher investment (leading to sustainable wage growth). In the meantime, we expect monetary easing to continue. The Bank of Japan (BoJ) has already announced plans for monetary easing in 2014 that involve doubling its balance sheet. While much of the liquidity generated is likely to be invested domestically, we expect some of this liquidity to flow into foreign bonds as well. At the global level, the Fed remains the primary gatekeeper of liquidity. The ECB and BoJ both play crucial roles in the global financial system, but we believe the effects are mostly felt in their own domestic markets. While continued easing by Japan and Europe is likely to help, it will not compensate for the Feds withdrawal of QE.
While continued easing by Japan and Europe is likely to help, it will not compensate for the Feds QE withdrawal from a market standpoint
Figure 9: Central bank balance sheets continue to grow Fed, ECB, BoE, BoJ (% of nominal GDP)
50 45 40 35 30 25 20 15 10 5 0 2007 Fed BoE ECB BoJ
Figure 10: Asias 2014 GDP growth is likely to be below the long-term average GDP growth y/y (%)
12 10 8 6 4 2 0 2000-2012 average
2013F 2014F
2015F
2008
2009
2010
2011
2012
2013
CN
IN
HK
KR
TW
SG
ID
MY
PH
TH
VN
Source: Federal Reserve, ECB, BoE, BoJ, Standard Chartered Research
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Asias external vulnerabilities to come into play when tapering starts
While fixed income assets from externally vulnerable economies like India and Indonesia sold off, Korean fixed income assets were relatively stable While liquidity and economic conditions in the developed world have an overarching impact on EM credit markets (including Asia), the extent of this impact varies across geographies, sectors and rating categories. It also depends on a number of fundamental and technical factors, which we call external vulnerabilities. These include (1) government funding risks, (2) external debt dynamics, (3) current account dynamics, (4) portfolio flow risk, and (5) bank funding risks (see Credit Alert, 26 June 2013, EM risk aversion: Impact on Asian sovereign credits). Externally vulnerable countries that have benefited from easy liquidity conditions since 2010 are bearing the brunt of expected liquidity tightening, while countries with strong external positions have fared better. The best example of this dichotomy is the divergence in credit spread movements between externally vulnerable economies like India and Indonesia and less vulnerable economies like Korea. While India and Indonesia credits have sold off substantially (along with their currencies and localcurrency bonds), Korean credit spreads, as well as currency and rates, have been relatively stable. We think externally vulnerable Asian economies are likely to see spread widening in the lead-up to tapering in 2014. However, because both investors and sovereigns are better prepared now, spreads are likely to be less volatile than in 2013.
Vulnerabilities to reappear when Fed starts QE tapering in 2014

Indonesia, India, Sri Lanka and Mongolia have weaker external positions than their peers and carry moderate risk, in our view While the Feds decision not to start QE tapering as expected in September 2013 has given Asian economies some breathing room, we expect their vulnerabilities to reappear when markets focus on tapering in 2014; this may occur well ahead of the actual start of tapering. In our view, Indonesia, India, Sri Lanka and Mongolia have weaker external positions than peers and carry moderate risk. A lack of reform in these markets has left their economies vulnerable to bottlenecks and to fiscal and balance-of-payments deterioration. That said, we expect potential capital outflows to have a smaller impact on these economies in 2014 than in 2013, as their current account deficits are likely to narrow on better external demand. While Indonesia has taken a prudent macroeconomic stance and hiked policy rates, improvements will only be gradual. It remains heavily reliant on external borrowings, and foreign participation in its local-currency debt markets is high. India looks slightly better positioned for 2014; we expect government measures to help narrow the current account deficit to 2.4% of GDP in FY14 from 4.8% in FY13. Sri Lankas FX reserves are low relative to its net funding needs over the next 12 months (external vulnerability indicator of 181%), but planned external debt issuance should keep the BoP in modest surplus. Mongolia has drawn down its FX reserves in 2013 and will need to attract significant FDI inflows in 2014 to avoid a BoP deficit.
Figure 11: Indonesia, India, Sri Lanka and Mongolia are the most vulnerable Assessing the vulnerabilities of Asian sovereigns to EM risk aversion
Government funding risks Positive Positive Negative Neutral Negative Negative Neutral Negative Neutral External debt dynamics Positive Neutral Negative Neutral Positive Negative Neutral Negative Positive Current account dynamics Positive Negative Negative Neutral Neutral Negative Positive Negative Neutral Susceptibility to capital outflows Positive Negative Negative Neutral Positive Positive Neutral Negative Neutral Bank funding risks Neutral Neutral Neutral Neutral Positive Neutral Positive Neutral Negative
China India Indonesia Korea Malaysia Mongolia Philippines Sri Lanka Thailand
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Malaysia and the Philippines appear more comfortably positioned on most of these metrics. Koreas external position has improved significantly in recent years, allowing it to weather outflows and global liquidity tightening better.
Asian economic growth is likely to pick up in 2014

Current account balances are likely to stabilise and improve modestly, reducing the burden on FX adjustment to incentivise inflows Despite threats to flows and recent financial-market distress, we expect growth to improve across Asia. We believe optimism is in order, as simultaneous growth in major global economies looks more likely in the next 12-18 months than at any time since 2006. That is likely to revive Asias export-led growth. Excluding China and the Philippines, we expect all Asian economies to grow faster in 2014 than in 2013. Current account balances are likely to stabilise and improve modestly, reducing the burden on FX adjustment to incentivise inflows. India, Indonesia and Malaysia have taken measures to reduce their subsidy burdens, but more may be needed to improve their fiscal positions to counter the impact of tightening global liquidity. Some economies, such as Indonesia and India, could see more upside if they implement key reforms.
Politics plays a role in Asian credit markets

Politics and political transitions will be an important driver of Asian economies in 2014. Many countries in the region will undergo political transitions that could affect economic growth and sovereign credit fundamentals. Most Asian countries have mature political systems, and policy continuity is generally expected. However, populist tendencies tend to take hold during election periods. This could lead to loose fiscal policy, with implications for fiscal metrics. Political change may also lead to policy uncertainty, affecting inflows especially to Indonesia and India, which will hold elections in 2014. We see a bigger impact on inflows to India than to Indonesia. Political uncertainty in Thailand could also affect credit markets in 2014. Indonesia has a busy political calendar in 2014: parliamentary elections in April, presidential elections in July, and a possible second round in October if there is no clear winner in June. The elections are unlikely to have a big market impact, in our view, as policy continuity is expected. Indias general elections in mid-2014 are more important, in our view. India is in a state of policy paralysis, and this is unlikely to be resolved if the new government does not have a decisive mandate. A strong and stable government would lead to better governance and would be able to push through reforms. In such a scenario, pent-up investment demand could quickly come online, and India could receive significant capital inflows in anticipation of a higher growth trajectory. However, the risk of a weak coalition, with negative consequences for the economy and markets, cannot be ruled out. The governments reluctance to cut subsidies (especially on diesel) and the implementation of the food security bill are also likely to strain the fiscal deficit. Even if India misses its fiscal deficit target of 4.8% of GDP for FY14, S&P is likely to wait for the election results and clarity on the new governments policy stance before making a decision on Indias credit ratings, in our view. The state election results (due on 8 December) could be an indicator of the political landscape ahead of the national elections. Thailands path to sustained political stability is difficult because of the deep-rooted political conflict between opponents and supporters of exiled former PM Thaksin Shinawatra. The governments attempt to pass into law a bill to grant amnesty to Thaksin has led to political noise and triggered anti-government protests. PM Yinglucks administration also faces a legal challenge related to the amendment of the constitution and the THB 2tn borrowing bill. Protracted political uncertainty could negatively affect the credit spreads of quasi-sovereign names, which, in our view, are not currently pricing in any political risk.
Figure 12: Real GDP growth should pick up in 2014 (% y/y)

2009 China Hong Kong India* Indonesia Malaysia Philippines Singapore South Korea Thailand 9.1 (2.7) 8.0 4.5 (1.7) 1.1 (1.3) 0.2 (2.2) 2010 10.3 7.0 8.5 6.1 7.2 7.6 14.5 6.2 7.8 2011 9.2 5.0 6.5 6.5 5.1 3.8 5.1 3.6 0.1 2012 7.7 1.5 5.0 6.2 5.6 6.8 1.3 2.0 6.4 2013F 7.6 3.0 4.7 5.6 4.7 7.2 3.9 2.7 3.0 2014F 7.4 4.0 5.3 5.8 5.3 6.7 4.4 3.8 4.7 2015F 7.0 4.5 5.8 6.0 5.3 7.0 4.6 3.6 6.0
* India data is for fiscal year ending in March of the following year (e.g., 2010 data is for year ended Mar-2011); Source: IMF, Standard Chartered Research
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Indonesia: Focus is on external vulnerabilities rather than growth
Indonesias push to raise growth above 6% led to stresses in the system, in our view Indonesias sovereign spreads have been volatile given the external vulnerabilities of the sovereign. The policy focus is likely to be on reducing external vulnerabilities by reducing the twin deficits and prioritising stability over growth. In our view, the authorities push for growth above 6% led to stresses in the system, including high credit growth and a large current account deficit. Addressing these issues will be the central banks key focus. We expect the policy stance to remain hawkish and credit growth to slow in 2014. The current account deficit is likely to narrow gradually, leading to stability in the Indonesian rupiah (IDR) and an improvement in the FX reserves. We expect further improvements to be gradual as structural issues persist. We forecast that GDP growth will rise modestly to 5.8% in 2014 from an expected 5.6% in 2013. Indonesia will hold parliamentary elections in April 2014, followed by presidential elections in July 2014. The election outcome is unlikely to have a significant effect on the market view of Indonesia, in our view. We do not see near-term downside risk to Indonesias credit ratings, although we also think S&P is unlikely to upgrade it to investment grade in 2014. Indonesias fiscal position is comfortable, and its external position can withstand further stress in case of a further decline in FX reserves and portfolio outflows. That said, Indonesia is exposed to tighter global liquidity conditions given the governments weak funding profile and its reliance on international investors. It will have funding needs of c.USD 6bn in global markets in 2014 and will need to attract USD 12bn of portfolio inflows to avoid deterioration in its balance-of-payments position. USD 3bn of redemptions between March and May 2014 could prompt the government to advance USD funding plans to Q1. Spreads have tightened back after widening in mid-June, reflecting Indonesias fundamental challenges. This, coupled with supply pressure (especially in Q1-2014), keeps us Underweight the Indonesian sovereign sector.
We do not see near-term downside risk to Indonesias credit ratings; however, S&P is unlikely to upgrade it to investment-grade status in 2014
Korea: Strong external position supports credit spreads

We expect Koreas GDP growth to improve to 3.8% in 2014, supported by a pick-up in global growth and higher demand from the US, ASEAN and China In Korea, the strong external sector continues to support the weak domestic sector. We expect GDP growth to improve to 3.8% in 2014, supported by a pick-up in global growth and rising demand from the US, ASEAN and China. However, the boost from improving export growth is not yet feeding into stronger domestic activity. The risk is that export growth will remain decoupled from domestic investment. A more decisive recovery in the external sector may be needed to convince companies to boost Figure 14: India, Indonesia, Mongolia and Sri Lanka look much worse on extended Guidotti-Greenspan rule ST external debt + current account deficit/FX reserves (%)
250 2012 2010 200 150 100 50 0 BD CN IN ID KR MY MN PH LK TH VN BD CN IN ID KR MY MN PH LK TH VN
Note: (1) As a conservative calculation, current account balance for sovereigns is added to short-term external debt only for sovereigns that run deficits; (2) 2010 current account balance is based on actual figures; (3) 2012 current account balance is based on forecasts for 2013; Source: Moodys, Standard Chartered Research
Figure 13: Koreas external position has strengthened, as measured by the Guidotti-Greenspan rule Short-term external debt/FX reserves (%)
180 160 140 120 100 80 60 40 20 0
Source: Moodys, Bloomberg, Standard Chartered Research
The higher the ratio the higher the vulnerability
The higher the ratio the higher the vulnerability
2010 2012
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capacity. Exports have been Koreas growth engine in recent years, but the economys heavy dependence on exports is a source of concern as companies move production to emerging markets to stay competitive. The weak housing market and stretched household debt are major obstacles to the domestic economic recovery. This could lead to an uptick in NPLs for Korean banks from current low levels, though this is unlikely to be a near-term concern. Korea is considered a safe haven in the Asian context due to its strong external account The strong and improving external sector has helped Korean credit spreads outperform the rest of the Asian investment-grade space in 2013, a year when the market focused on countries external vulnerabilities rather than individual issuers credit metrics. Koreas ratio of short-term external debt to FX reserves has improved significantly since the global financial crisis. This reflects efforts by the authorities to reduce short-term external debt and build FX reserves. The risk profile of the banking system has also improved, with a lower reliance on wholesale funding the KRW loan-to-deposit ratio declined to 108% in 2012 from 137% in 2007, and the USD loan-to-deposit ratio has improved to 180% from 287%. We therefore expect Korean spreads to be better supported than they have been during previous periods of risk aversion. Korean corporates weaker credit metrics are a concern Weaker corporate credit metrics are not priced in at current spread levels The credit metrics of Koreas quasi-sovereign and corporate credits are on a declining trend. This is partially reflected in the credit ratings of private corporates but is not reflected in the quasi-sovereign space, where ratings are notched up for sovereign support. Credit spreads also do not reflect the deterioration in credit quality. One reason for this is the strong involvement of US accounts, which tend to compare the Korean space to US HG credits rather than to the rest of Asia. However, given Chinas increasing dominance of the Asian HG space, we expect China HG (especially credits rated A and above) to become the preferred Asian asset class for US HG investors. This could lead to the underperformance of Korean corporate bonds and narrowing spread differentials between similarly rated Chinese and Korean credits. We prefer China credits over Korea credits in the single-A and above space.
Thailand: Political risk is not priced in

Political risk in Thailand is not priced in at current credit spread levels, in our view. Thailands political environment is tense, and extended periods of political instability could pose downside risks to growth. This political instability is difficult to resolve because of the deep-rooted political conflict between opponents and supporters of exiled former PM Thaksin Shinawatra. While we expect growth to pick up in 2014, this is predicated on government investment spending. Thailands THB 2.0tn infrastructure Figure 15: Indonesia has moderate funding risk External funding as percentage of total (%, 2010-12 average, xaxis); foreign holdings of governments LC debt (%, current, y-axis)
0 50 45 40 35 30 25 20 15 10 5 Thailand Korea Neutral risk Indonesia 5 Malaysia 10 15 20 25 30 35 40 50 45 40 35 30 25 20 Sri Lanka 15 10 Mongolia 5 (73,0) 0 35 40 Indonesia Malaysia Mongolia Philippines Korea Sri Lanka Thailand Vietnam Moderate risk
Figure 16: Indonesia has become more reliant on external borrowings, while the Philippines has scaled back
External funding/ total (%) 2010 2012 15.3 5.8 22.8 21.3 24.5 21.8 97.1 11.1 23.8 Foreign holdings of local government debt (%) 2010 Nov-2013 30.6 28.4 ~0 8.1 13.7 10.0 8.9 < 5% 32.3 45.7 ~0 13.6 16.8 13.0 18.6 < 5%
Philippines Low risk Vietnam India 0 Bangladesh 0 5 10 15 20
25
30
Note: (1) For Vietnam, foreign holdings are approximated using data for debt that is not held by onshore banks and the auction quota for local banks; (2) We have scaled down the outliers to fit in the chart and shown the actual data in brackets (x-axis, y-axis format); Source: ADB, National sources, Bloomberg, Standard Chartered Research
Note: (1) Red indicates significant deterioration, green indicates significant improvement; (2) For Mongolia, we have assumed foreign holdings to be negligible; Source: ADB, National sources, Bloomberg, Standard Chartered Research
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spending plan is off-budget, and recent policies such as the rice pledging scheme, tax rebates for first-time car buyers, and corporate tax rate cuts are likely to pressure the budget target. Thailands fiscal position compares favourably to peers, and infrastructure projects will boost medium-term growth potential. We therefore think pressure on its sovereign ratings is unlikely in the near term. Short-term bouts of political unrest in Thailand are unlikely to lead to appreciable spread widening The scarcity of Thai paper, which has supported Thai credit spreads, is gradually disappearing with increasing issuance from Thai banks. PTT Group dominates the space and derives support from the sovereign ratings, which will keep its spreads tight. In our view, short-term bouts of political unrest are unlikely to lead to appreciable spread widening. However, an extended period of political uncertainty would affect economic growth and thereby banks asset quality; it could also lead to a widening of credit spreads, as current spreads do not adequately price in political risk, in our view. We therefore recommend an Underweight stance on Thai credits.
India: Likely elections in mid-2014 could be preceded by volatility

While Indias government has emphasised its intention to meet the fiscal target, a lack of action to contain fiscal slippage will keep the markets worried Indian credits, like their Indonesian counterparts, have had a roller-coaster year. Spreads widened substantially from June-September, then tightened back in as the Fed postponed QE tapering. India is structurally vulnerable to external flows given its large twin deficits, which are unlikely to be resolved soon. The macroeconomic backdrop is challenging due to high inflation, rising policy rates and concerns about FY14 fiscal deficit slippage, a key monitorable for rating agencies. While the government has repeatedly emphasised its intention to meet the fiscal target, a lack of concrete action to achieve this will keep market concern elevated. The government has taken steps to reduce fuel subsidies, the biggest contributor to the subsidy bill, but is unlikely to cut them substantially ahead of general elections in May 2014. Lower tax collection and a possible failure to meet the disinvestment target may further strain the fiscal position. Thus, the only option left for the government to meet the fiscal deficit target is to cut investment spending, which would further pressure growth in the medium term. Government measures taken since then should help narrow the current account deficit to 2.4% of GDP, while spending cuts are likely to limit the fiscal deficit to c.5% of GDP in FY14. India appears to be stuck in a vicious growth-inflation-deficit cycle. To improve medium-term growth without leading to spiralling inflation, more investment spending is needed to create capacity. However, private-sector investment is stagnant amid policy inertia, which is likely to persist. The government is also unable to increase investment spending given the large fiscal deficit and the heavy subsidy burden. India needs to undertake structural reforms to revive investment demand, expand the tax net and rationalise subsidy spending. The focus will be on the national elections in 2014; the new government will face the difficult tasks of reviving growth and addressing governance and policy issues. Downgrade fears have subsided for now, with S&P guiding that it will wait for the new government and the announcement of its policies before taking action; this should give us until at least end-2014. Significant slippage on the fiscal deficit target could prompt rating reviews from other agencies as well. Indian credit spreads could rally if the state election results point to a decisive mandate in the national election Credit spreads for the Indian complex senior financials as well as quasi-sovereign corporates widened again in late 2013 and are trading well wide of similarly rated credits across broader EM. The state election results (due on 8 December) may indicate the political landscape ahead of the national elections. If the results point to a decisive mandate in the national election, all Indian assets, including credits, could rally. However, political uncertainty around the time of general election (likely in Q2) could coincide with the start of the Feds QE tapering, leading to increased spread volatility. We therefore prefer to start the year with an Overweight position in India and reassess our positioning at the end of Q1.
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Higher infrastructure spending is needed to improve growth momentum
Asia Credit Compendium 2014 Still bullish on EM medium-term The super-cycle lives
Countries and regions with growth rates of 4% or more accounted for 20% of the world economy in 1980; this has risen to 37% today and is set to reach 56% by 2030 Despite major challenges, we believe global growth prospects through to 2030 are still buoyant (we refreshed our analysis in Special Report, 6 November 2013, The Super-cycle lives: EM growth is key). The growing global GDP share of fastergrowing emerging markets will be the biggest driver of stronger global growth in the next two decades, in our view. Countries and regions with growth rates of 4% or more accounted for 20% of the world economy in 1980; that share has risen to 37% today and is set to reach 56% by 2030, based on our forecasts. This is likely to boost global growth to 3.5% in the 2000-30 period from 3.0% in the 1973-2000 period. Strong investment will drive growth in emerging markets. Asian economies with high rates of investment growth account for a growing share of the world economy, and urbanisation has much further to go in China and other EM economies. Emerging countries will continue to achieve high catch-up growth rates, although some (like China) will likely slow further over time, while others (such as India, Indonesia and Brazil) will need significant reforms to realise their potential. Enablers of Asias past growth, such as the commodity boom and export-led growth, may no longer be relevant There are risks to growth. China, which is likely to remain the biggest driver of global growth, risks falling into a middle-income trap, which could lead to a sharp drop in growth. Major structural issues facing China include over-investment in some sectors; high bank, SOE and government leverage; and a frothy real-estate sector. The leverage problem is not restricted to China, and could also create pressures in other EM countries. Important enablers of past growth, such as the commodity boom and export-led growth, may no longer be relevant. Reforms are the biggest challenge and are a consistent theme across EM. In order to maintain the strong growth momentum of the past decade, most economies will need to implement far-reaching reforms that will require tough decisions. Figure 17: Our growth projections Real GDP growth, % p.a.
Updated 1980-99 2000-12 2013-20 2021-30 2000-30 China 9.9% 10.0% 7.0% 5.3% 7.7% India 5.6% 6.9% 6.3% 6.9% 6.8% Asia ex-CIJ 6.9% 5.5% 5.7% 5.4% 5.5% SSA 2.4% 5.5% 5.6% 5.8% 5.6% MENA 2.9% 5.2% 4.6% 5.0% 5.0% Latam 2.5% 3.5% 4.2% 4.1% 3.8% CIS -1.8% 5.6% 3.4% 3.1% 4.2% US 3.2% 1.9% 2.8% 2.5% 2.3% EU-27 2.1% 1.3% 1.9% 1.8% 1.6% Japan 2.9% 0.9% 1.5% 1.2% 1.1% ROW 2.8% 2.7% 2.9% 3.0% 2.9% World 3.0% 3.0% 3.9% 3.8% 3.5%
Note: We have revised our methodology slightly so these numbers are not directly comparable with our 2010 Super-cycle Report. Using either method, world growth is projected to increase in 2000-30 compared with the earlier period. Source: Standard Chartered Research
Figure 18: Fast-growing countries account for a rising share of global GDP Share of world GDP of regions growing at 4% or more
60 50 40 30 20 MENA 10 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Latam India
China
SSA Asia ex CIJ
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Implications
EM economies growing share of global GDP will be a key driver of allocations
Asias changing demographics will play a part in increasing the share of fixed income in Asian retail portfolios
Emerging markets, led by China and India, will increasingly shape the world. We think the EM share of global GDP will rise to 63% by 2030 (39% for AXJ) from 38% in 2010. This will remain a big driver of the allocation of investment funds to EM in general, and to AXJ in particular, as allocations catch up with GDP shares. Significant investment in infrastructure and energy resources will be needed in emerging markets. This will be a key driver of demand for credit in EM, with the G3-denominted debt capital markets playing a key role. The global middle class is likely to expand rapidly, and most of its new members will be in Asia. This represents a significant opportunity for corporates to expand. Rising per-capita incomes and ageing populations will help drive rapid growth in demand for financial products in EM countries, especially in Asia. Fixed income will account for an increasing portion of the investment pie as ageing populations seek income certainty over capital gains. This supports our theory that we are in a medium- to long-term period of structural growth in EM fixed income demand and supply. While a cyclical slowdown is possible as UST rates normalise in 2014, we expect the growth trend to resume thereafter.
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Asia Credit Compendium 2014 Chinas increasing dominance of Asian credit

Reform over growth is the new mantra for China
Chinas policy focus is likely to shift to reform over growth in 2014 Chinas growth momentum picked up in Q3-2013, and we expect it to continue in 2014. A number of key growth indicators indicate that the recovery is broad-based and domestically driven. We expect Chinas economy to expand 7.4% in 2014, slightly faster in H1 than in H2. In 2014, the policy focus is likely to shift to reform from growth, in our view. That said, statements from policy makers suggest that while reforms are on agenda, China needs to maintain a certain level of economic growth in order to keep unemployment low. We expect the official growth target of 7% in 2014 to be met.
Third Plenum decides on reform agenda for 2014

Reforms are likely to focus on the functioning of government, fiscal decentralisation and increasing the role of market forces At the Chinese Communist Partys Third Plenum meeting in November 2013, the leadership debated and thrashed out economic policy. It laid out what we see as Chinas biggest package of market reforms since the early 1990s.The key principle behind the reforms is the primacy of markets as the allocator of resources. This is likely to have diverse ramifications, including the reduction of subsidies, the removal of capital controls, interest rate reforms and the reduction of state intervention in business. Increasing the efficiency of SOEs is likely to be a focus. The intent is to focus state capital on strategic sectors, and to classify SOEs as public (military equipment), mostly public (oil and telecoms), mostly market, and market (autos, electronics, etc.). Government capital will be directed mainly towards public and mostly public SOEs, and the rest will be opened up to private-sector competition and privatisation. Financialsector reforms, including the liberalisation of lending and deposit rates, are already underway and we expect them to gain momentum.
Reform agenda could affect the fortunes of Chinese credits

Liberalisation of lending and deposit rates is likely to lead to increased issuance from China Inc. The changes being discussed are likely to affect AXJ USD bond markets in various ways in the short to medium term. They could affect a broad spectrum of issuers and are likely to lead to increased issuance from China Inc. Quasi-sovereign credits of all sizes would be affected by the break-up of monopolies and increased reliance on market-based financing, which would spur new issuance from the sector. Property companies would be affected by measures aimed at building sustainable revenue sources for local governments, such as the introduction of property taxes, and by a reduction in local governments reliance on land-sale revenues.
Chinas growing influence on Asian credit markets

China and its fortunes are among the biggest drivers of Asian credit markets. China is taking its rightful place in the Asian credit markets based on the size of its economy, and has replaced Korea as the most frequent programmatic issuer. Chinas share of new issues from Asian credits has grown to 48% from less than 2% in 2009, and bonds outstanding from Chinas issuers had grown to 26% of the total as of end-November 2013 from 6% in January 2010. The liberalisation and increasing market orientation of Chinas SOE sector is likely to be a key focus of the government, along with financial-sector reform. This should prompt more quasi-sovereign credits across the credit spectrum to access capital markets for their funding needs. Moreover, Chinese credits will likely continue to dominate the HY corporate space given the dominance of Chinas property sector. We therefore expect the proportion of bonds outstanding from Chinese
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issuers to rise to 50% of the AXJ G3 bond market by the end of this decade. China Inc.s increased activity is not restricted to the USD bond markets. Credit growth has remained strong and in excess of nominal GDP growth since the 2009 stimulus-driven credit expansion, and this is reflected in higher leverage levels in the corporate and the government sector. Chinas economic fortunes have an impact across Asia given increasing trade and capital linkages. A recent study by our macroeconomic research team highlights Chinas growing influence on economic growth in the rest of Asia. This influence is felt not only through trade, but also through capital and tourism flows. China is becoming a bigger trade partner for Asian economies. Its growth will affect commodity and intermediate goods exporters, including Indonesian coal companies and Korean steel-sector credits.

Resolving LGIV debt problems is important
Chinas government may seek to create sustainable revenue sources for local governments so that they can support investment projects on their own The resolution of local government investment vehicle (LGIV) debt is another area of focus in China. It is widely accepted that local governments do not have the necessary resources to service all of the debt owed by LGIVs. The easy way out for the central government would be to take over all the projects and issue central government bonds to fund them. However, this would let all parties off the hook and raise the issue of moral hazard, raising the risk of similar problems recurring later. We expect the focus to be on slow resolution, which would involve restricting access to credit (in terms of both volume and cost) and injecting commercially valuable assets into LGIVs to increase bankability. The central government may also seek to create sustainable revenue sources for local governments, enabling them to support these projects on their own balance sheets rather than through LGIVs. Securitisation and restructuring could also be used to resolve the debt overhang of some commercially viable LGIVs. While China has the wherewithal to refinance all LGIV debt through a central government bailout bond, this would risk creating moral hazard The central government is attempting to contain the problem by restricting LGIVs access to credit, carrying out a strict national audit, encouraging LGIVs to pledge decent commercial collateral to banks, and instructing local governments to deal with their debt problems themselves. These measures should improve local government budget discipline and force local governments to begin to sell their assets. This strategy protects the central governments balance sheet.
LGIV debt resolution process could have implications for USD bonds
Moral hazard is a big risk in Chinas domestic financial sector given the dominance of government-related entities in commerce The biggest challenge and one not addressed by the above measures is moral hazard, where lenders to LGIVs or even weak SOEs incorporate an element of government support that affects the amount and pricing of lending to these entities. To address this, we could expect a controlled bankruptcy of a LGIV or a small SOE, used as a catalyst to reform these sectors. The banking sector is also likely to suffer losses as part of the LGIV debt resolution process given the extent of its direct and indirect exposure to LGIVs. This could necessitate capital injections into some banks, leading to closures and/or acquisitions of some small, troubled banks. (For more details on Chinas LGIV debt overhang, see On the Ground, 2 October 2013, Local debt: USD 3.6-4.0tn and counting.)
Implications of Chinas reform agenda for AXJ bond markets

Reforms leading to reduced involvement by the state sector have positive long-term implications, but could have negative short-term effects Key implications of Chinas expected reforms for the USD bond markets are as follows:
Financial-sector reforms, including more market-based access and marketbased cost of funding, are likely to prompt more issuers to look at the USD capital markets as a funding source. This is especially true for quasi-sovereign credits, which have hitherto largely depended on bank funding. The push to increase SOEs market orientation could lead to a gradual reduction in state support for some of these entities as they transition from being statemanaged to independently managed. Stripping out non-core businesses could affect SOEs that rely on these non-core businesses; for example, Sinochem Group is heavily dependent on its property business (Franshion Properties). In such a context, the standalone credit metrics of the quasi-sovereigns become more important. This is especially true for BBB-rated SOE names, where a deterioration in credit metrics or a change in rating agencies view of the availability of support could push ratings to sub-investment grade. We expect issuance from quasi-sovereign Chinese credits to grow substantially in 2014, in line with the growth seen in 2013.
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The push to make SOEs more market-oriented should encourage greater credit differentiation

Reforms could lead to heavier issuance from Chinas corporates and increasing credit differentiation among quasi-sovereign credits
Property-sector reforms may have an important impact given the large share of China property-sector bonds in the AXJ USD bond universe. A push to introduce property taxes in some cities to boost local government revenue could affect property prices and sales volumes. The government also wants to reduce local governments reliance on land-sale revenues. This could reduce the availability of land, leading to higher land prices and lower margins. Steps taken to resolve the LGIV debt overhang could indirectly affect AXJ USD bond markets. A default by an LGIV or a small SOE would carry risks. If such a default snowballs into a more systemic asset-quality problem for Chinas financial sector, this could lead to a broader sell-off or a period of risk aversion, and would affect all Asian USD bond markets given Chinas increasing dominance of the space. Banks with large exposures to LGIV debt could also face asset-quality problems as the government takes measures to reduce the LGIV debt burden. This could require capital injections into some banks. While these problems would likely be concentrated with smaller banks, large nationwide banks could also see a decline in asset quality.
21
Asia Credit Compendium 2014 Leverage: A concern or an opportunity?

Leverage is a double-edged sword while it allows for the use of future earnings to drive growth, excessive leverage can lead to asset bubbles Leverage is not necessarily a bad thing. It has been a factor enabling economies in emerging Asia to grow rapidly and increase their share of global GDP. In Korea and China, for example, leverage has been used to create capacity and build infrastructure to achieve rapid growth. However, leverage is a double-edged sword. Excessive use of leverage (especially cheap leverage) can lead to the over-extension of balance sheets, investment in uneconomic asset creation, and asset bubbles, creating stresses in the economy. We took a granular view of leverage and solvency across the Asian corporate, household and government sectors in a recent report (SCout, 1 July 2013, Asia leverage uncovered). We summarise our key findings below. Strong government and household balance sheets across most of Asia provide flexibility to counter inevitable bumps as the economic cycle turns We conclude that Asias current leverage levels are broadly manageable. There are areas of concern and pockets of opportunity areas where leverage remains low. Our study shows that Asias fundamentals remain robust. Strong government and household balance sheets across most of the region provide flexibility to counter inevitable bumps as the economic cycle turns. Having learned from the Asian financial crisis of 1997-98, governments in the region have been using macroprudential measures to control leverage. We see scope for several Asian economies to increase borrowing to maximise their growth potential. A detailed analysis of macro leverage levels in AXJ reveals pressure points across the region, including Chinas corporate leverage and Koreas household leverage. However, the household sectors of China, India and Indonesia all have room to use leverage to achieve faster and more resilient growth given their currently low levels of leverage. Chinas overall leverage is a clear cause for concern. The corporate sector is most exposed given its high leverage and weak cash flow. Koreas high household and corporate leverage are also worrying and are a drag on growth. Indias stresses are confined to listed corporates, a relatively narrow slice of total credit. ASEAN flashes isolated warnings high household leverage in Malaysia and rapid leverage growth in Thailand. We divide Asian economies and sectors into three broad leverage categories: those that are areas of concern (shown in red in Figure 21 below), those with moderate risks (yellow), and those with low risk and room for further leverage (green). In all cases, it is vital to know the story behind the numbers while some countries have low absolute leverage levels, debt in some sectors may have grown at an unsustainable pace. Figure 19: Total private debt-to-GDP ratio AXJ catches up with the world average, while G7 continues to deleverage (%)
180% 160% 140% World 120% 100% 80% 60% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: BIS, IMF, Standard Chartered Research
Figure 20: Rising corporate leverage in Asia Corporate debt-to-GDP (%)

80% 70% 60% 50% AXJ 40% 30% 20% 10% 0% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: BIS, OECD, IMF, S&P, Standard Chartered Research
G7
Corporate Government Households
22
Figure 21: Leverage and credit growth: Summary across countries, sectors and individual metrics (%, except where otherwise noted)
China 214% 609 -0.1 136% 331 -0.3 16% 117% 47% 3.4x 33% 73% 20% 50% 14% 2% 5% 78% 1.9% 6% 20% 6% 0.6% 6.3% 3.1% 4.7% 25% 32% 64% 25% 35% 8% 5% 4% 15% 2% 4% 4% 7% 7% 18% 56%7 0.8% 3% 2% 43% 11.6% 32% 11% 21% 42% 47% 45% 83% 34% 26% 135% 177% 60% 18% 17% 85% 79% 76% 75% 31% 79% 48% 6% 14% 55% 21% 34% 17% 2.5x 2.2x 1.6x 2.8x 1.5x 26% 50% 28% 45% 25% 29% 1.9x 11% 64% 75% 147% 16% 2% 13% 113% 2.5% 7% 40% 2.2% 17% 48% 65% 127% 55% 17% 113% 45% 33% 68% 19% 12% 6% 24% 14% 4% 14% -8.9 -4.8 10.2 -3.5 3.7 3.6 3.4 -427 364 1082 257 452 343 512 -28 -3.1 10% 61% 187% 73% 34% 198% 124% 38% 143% 109% -0.7 -0.7 1.1 -1.1 -0.1 -0.2 1.0 -0.1 424 1 -141 324 467 -26 424 149 446 1.8 120% 1191 6.9 16% 53% 42% 2.1x 33% 65% 68% 91% 53% 7% 12% 45% 4.1% 12% 268% 137% 58% 232% 181% 81% 255% 149% 166% Hong Kong SAR* India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand
Colours indicate leverage and potential stress; red = high, yellow = moderate/sustainable, green = low
Total credit/GDP
Economy
Credit-GDP growth gap (bps)2
(Credit growth -)/10-yr
Total borrowings/GDP
Private nonfinancial sector
Credit-GDP growth gap (bps) 3,5
Credit growth less LT average (ppt) 3,5
Debt service ratio
Business borrowings/GDP
Debt/equity
- Private corporate sector
Debt/EBITDA1
Interest burden ratio
Debt service ratio1
Household borrowing/GDP
Borrowing/household income
- Household sector
Borrowing/financial assets
23
Interest burden ratio
Debt service ratio
Government debt/GDP
Government4
Int. payments/Govt. revenue^
Debt service ratio^
Note: We have based the thresholds for high, moderate and low on findings from Cecchetti et. al., The real effects of debt, BIS, September 2011, which estimates thresholds beyond which GDP growth slows.
* In this table, and throughout this report, the private-sector debt estimates for Hong Kong used to calculated leverage relative to GDP are based on loans for use in Hong Kong; but aggregate credit growth is calculated on the basis of total loans booked in Hong Kong. For the economy as a whole, we estimate based on total loans booked in Hong Kong. ^Repayment schedule obtained using DDIS function on Bloomberg. Includes T-bills and other short-term instruments; does not include central bank debt and other quasi-public debt. 1 For listed corporates (excluding financial institutions), debt/equity, debt/EBITDA and DSR are calculated for publicly listed non-financial corporations. Interest burden ratio is defined as interest expense/EBIT for the listed universe. 2 Difference between annualised 5-year average credit growth and GDP growth. 3 Annual credit and GDP growth for the latest period. 4 Debt numbers are in gross terms. 5 Credit-GDP growth gap and credit growth vs. LT avg are calculated based on real GDP and real private-sector credit. 6 Debt service ratio is calculated with GDP as the denominator. 7 Malaysian government debt as per IMF estimates. The governments official government debt estimate is 52% of GDP. Sources: Bloomberg, BIS, IMF, Standard Chartered Research estimates

Leverage in China and Korea is cause for concern
Chinas high and rapidly growing leverage highlights its investment in capacity creation to fuel growth over the next decade Chinas leverage has grown exponentially in the past few years (the fastest in Asia) total debt to GDP rose to 214% as of Q1-2013 from 162% in 2007. This is almost on par with Korea, which has much higher per-capita GDP. To some extent, Chinas high and rapidly expanding leverage reflects heavy investment in capacity creation to spur growth over the next decade. However, a rapid build-up of leverage always carries risks. Lending to uneconomic projects that could lead to a rise in financialsector NPLs is one such concern. Chinas challenge with LGIV debt, a big portion of which has gone into uneconomic projects without debt-servicing capability, is well documented. Leverage has also increased substantially in the corporate sector and this could lead to future debt-servicing issues. On the positive side, the government has identified addressing excessive lending and overcapacity in the corporate sector as a key policy priority. We expect efforts to reduce overcapacity in the next few years. This could lead to bankruptcies and defaults, raising the spectre of problem loans for the largely state-owned banking sector. However, we believe China has sufficient financial means to inject capital and restructure its problem lenders if required. Korea has high overall leverage levels; its household and corporate sectors are both heavily indebted. While direct government indebtedness is low, quasi-sovereigns ballooning debt is a concern. The rapid build-up of debt in the aftermath of the Asian crisis helped to boost GDP growth to an average of 7.7% (in real terms) between 1999 and 2002, but left a legacy of debt that is still being dealt with. Still-strong export growth across industry sectors supports high debt levels in the corporate sector. Leverage in the household sector is a bigger worry, in our view. Koreas aggregate household leverage is high across all leverage metrics. (Household credit figures may be inflated by the inclusion of an unusually large quantity of small business loans, as some businesses find it easier to get personal loans rather than business loans.) While we expect no negative surprises or tail-risk events arising from Koreas high leverage, it could dampen growth. Korea has introduced macro-prudential regulations aimed at reducing domestic leverage and managing the flow of credit to desired sectors (i.e., SMEs). This has contained leverage growth in recent years. The focus on increasing banks lossabsorption capacity through proactive provisioning and higher capital adequacy hurdles has ensured the health of the banking sector. Koreas biggest area of
Government indebtedness and increasing corporate leverage are sources of concern in India
Koreas rapid build-up of debt in the aftermath of the Asian crisis helped to boost GDP growth, but left a legacy of debt that is still being dealt with
Figure 22: Breakdown of leverage by sector, 2006 versus 2012 Debt/GDP, %

400% Households - 2006 Households - 2012 300% Private corporates - 2006 Private corporates - 2012 Government - 2006 Government - 2012
200%
100%
0% 2006 2012 2006 2012 2006 2012 2006 2012 2006 2012 2006 2012 2006 2012 2006 2012 2006 2012 2006 2012 2006 2012
Japan
Hong Kong SAR
Singapore
Korea
China
Malaysia
Thailand
Taiwan
India
Philippines*
Indonesia
*Household and corporate debt data is not available for 2006; Source: BIS, IMF, Standard Chartered Research
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Sharp reduction in external vulnerability has made Korea a safe haven in the Asian context strength has been the sharp reduction in its external vulnerability. Learning from the challenges faced by Korea Inc. after the 2008 Lehman crisis, Korean regulators have focused on reducing banks reliance on short-term external debt. This is reflected in Koreas declining share of the USD new-issue markets. The countrys strong and growing export sector and expanding current account surplus have also reduced debt-related concerns.
India, Malaysia, Singapore and Hong Kong: Moderate risk

Indias overall leverage levels are moderate. High government indebtedness has always been a concern; increasing corporate leverage is now also a concern, in our view. A growing proportion of corporate leverage has been funded externally, increasing Indias external vulnerability. Malaysia has seen a steep rise in household debt in recent years, leaving it with a high household debt-servicing ratio. This warrants attention, as Malaysia already rivals Korea and the US in terms of household debt to GDP. Tempering this concern is the fact that Malaysia (like Singapore) has built up financial assets as part of individuals mandated public pension fund accounts. Singapore and Hong Kong have both seen large increase in leverage in the past few years. The relatively small and open nature of both economies means a larger amount of corporate debt is taken on to enable business in other jurisdictions. This is particularly true for Hong Kong given its strong links to mainland China.
Indonesia, Philippines and Thailand: Low risk

These countries low leverage levels give them more room to use leverage to boost growth Our leverage metrics identify Indonesia, the Philippines and Thailand as having low risk. Indonesia has the lowest debt-to-GDP ratio of the countries in our study. This means it has plenty of room to use leverage over the long term to strengthen the economy against shocks and to spur faster growth. However, we are concerned about growth in both external and private-sector debt in recent years. GDP growth has slowed despite faster credit growth. This indicates that credit growth is not feeding into GDP growth as efficiently as in the past. The Philippines has plenty of room to expand private-sector leverage further. However, the concentration of industry in the hands of a few conglomerates has raised concerns about single-borrower limits. This also limits growth in corporatesector leverage. The low level of leverage in the economy means there is room to finance the governments ambitious Public-Private Partnership infrastructure investment plans. Higher household leverage would help to sustain the recent strength in consumer demand, a significant contributor to GDP growth. Thailand only just makes it into this category thanks to its low government indebtedness. Household debt growth has been particularly strong lately, driven by government measures to increase home and car ownership through subsidies and access to cheap credit. Thus, the credit quality metrics of the banks need to be watched in the next couple of years. Government leverage levels are set to increase given the THB 2tn infrastructure spending plan.
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Asia Credit Compendium 2014 Corporate credit metrics are on a weakening trend
Rising leverage and the deteriorating credit quality of corporate borrowers are mediumterm concerns The rising leverage and deteriorating credit quality of Asian corporate borrowers, particularly those with USD bonds outstanding, are possible medium-term concerns. Asian corporates have leveraged up their balance sheets since 2007. The average AXJ corporate debt-to-GDP ratio grew from 76% in 2007 to 97% in Q1-2013 20ppt higher than the US and much higher than Latam and Eastern Europe. China and Korea are the major outliers, with ratios above the 110% mark. We have developed the Standard Chartered Asia Leverage Evaluator (SCALE) methodology to evaluate the credit metrics of corporates at the individual and aggregate level (see SCout, 5 July 2013, A new SCALE for Asian corporate credit). The SCALE is made up of five equally weighted metrics covering profitability, coverage, leverage and capital structure. It can be used to analyse credit trends at the sector and sub-sector level, and to screen for credits that have strong (or weak) credit profiles and trade cheap (expensive) for their fundamentals and rating category. We believe this methodology offers investors an additional tool to their fundamental analysis framework for assessing Asian credits. Based on SCALE, Asias corporate credit quality peaked in H1-2008 (at a score of 6.3) and has deteriorated gradually since it fell to 5.1 in H1-2013. This is attributable to softening profitability and cash flow amid slow growth. Corporates have also relied increasingly on debt-funded investments as debt funding has gotten cheaper relative to equity. Hence, the aggregate debt of the 195 corporates in our sample has risen at a CAGR of 19% since 2007, far outpacing the 11% y/y rise in funds from operations (FFO) during the same period. The SCALE has been declining since 2007 for 55% of the credits in our sample. As of H1-2013, only 10 corporates had a score above 8.0 (35 in 2007), while 41 names had a score below 3.0 (21 in H1-08). However, with growth in large Asian economies slowing and debt funding still relatively cheap, Asian corporates may leverage their balance sheets further in pursuit of growth. The sectors with the sharpest declines include Korea quasi-sovereigns (5.3 to 3.3), China SOEs (7.4 to 5.8) and Asian coal producers (6.7 to 3.0). On the other hand, the SCALE scores for Hong Kong property names (5.3 to 5.0), integrated energy credits (8.7 to 8.0), and Indonesian private corporates (4.7 to 4.5) have held up well.
The SCALE can be used to analyse credit trends at the sector and subsector level, and to screen for credits that have strong (or weak) credit profiles and trade cheap (expensive) for their fundamentals and rating category.
The aggregate debt of the 195 corporates in our sample has risen at a CAGR of 19% since 2007, much faster than the 11% y/y rise in FFO during the same period
Figure 23: Corporate leverage is rising across Asia Corporate debt to GDP (%)
2006 China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Thailand AXJ Latin America E. Europe 95.0 120.1 42.3 15.3 88.5 32.2 34.6 53.8 52.2 75.8 23.5 31.9 2009 108.9 134.2 54.2 14.4 111.6 38.0 34.5 68.6 48.2 89.9 21.7 39.1 Q1-13 116.6 181.6 53.2 17.4 117.8 45.0 32.5 74.0 51.9 97.4 21.6 42.2
Figure 24: Asia remains in the investment phase Gross capital formation to GDP (%, 2012)
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% LatAm IN ID MY SG OECD VN KR HK PH EU US CN UK TH
Source: BIS, IMF, S&P, Standard Chartered Research
Source: World Bank, Moodys, Standard Chartered Research
26

Figure 25: Profitability pressure and rising leverage x (LHS), % (RHS)
2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 H1-05 H1-06 H1-07 H1-08 H1-09 H1-10 H1-11 H1-12 H1-13
Figure 26: Debt service ratios have declined x (LHS), % (RHS)

18 16 14 12 17 16 15 14 13 12 11 10 9 8 8 H1-05 H1-06 H1-07 H1-08 H1-09 H1-10 H1-11 H1-12 H1-13
Leverage
65 60 55 50 FFO/debt (RHS) 45 40 35 EBITDA/ interest 30 25 20
ROCE (RHS)
10
Figure 27: Deteriorating credit quality of Asian issuers Lower SCALE since 2007
6.4 6.2 6.0 5.8 5.6 5.4 5.2 5.0
Source: Bloomberg, company data, Standard Chartered Research
Figure 28: Changing capital structure of Asian corporates Aggregate financials (H1-2005 to H1-2013, USD bn)
7.6 7.4 7.2 7.0 6.8 6.6 6.4 6.2 6.0 5.8 5.6 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Debt, 34% Equity 66% Debt, 40% +1,270 -337 +125 + 965 +241 Equity, 60%
Altman-Z (RHS)
SCALE H1-05 H1-06 H1-07 H1-08 H1-09 H1-10 H1-11 H1-12 H1-13
Balance Net Dividend Net Net Other Balance sheet income equity debt adjustments sheet H1-2005 financing financing H1-2013
Source: Bloomberg, company data, Standard Chartered Research
Figure 29: Looking at SCALE across sub-sectors

2007 Electricity utilities Gas utilities Telecom Integrated energy Refining & petchem Coal producers HG quasi-sovereigns HG private corporates HY corporates 5.3 5.2 8.0 8.7 6.5 6.7 6.9 6.4 5.3 2009 4.2 4.5 7.4 8.3 5.7 4.6 6.1 6.2 4.9 H1-2013 3.6 4.0 6.8 8.0 4.9 3.0 5.7 5.5 4.1 China SOEs Korean quasi-sovereigns Korean private corporates HK property Chinese HY property China HY industrials Indonesia HY corporates Philippines corporates AXJ 2007 7.4 5.3 6.1 5.3 5.1 6.3 4.7 5.4 6.3 2009 6.6 3.4 5.0 5.5 4.9 5.5 4.3 5.0 5.7 H1-2013 5.8 3.3 5.1 5.0 3.6 4.6 4.5 4.5 5.1
Note: Higher (lower) SCALE indicates higher (lower) financial strength; Source: Bloomberg, Standard Chartered Research
27

Disconnect between SCALE and valuations
We believe credit fundamentals will come to the fore as the external environment normalises, leading to wider spread differentiation among credits based on sector prospects and individual fundamentals Corporate credit spreads in Asia have been heavily linked to sovereign-related factors as the markets have focused more on macro liquidity and external vulnerabilities than on sector prospects and company credit metrics. This may continue in 2014 as the market focus remains on the timing of Fed tapering and rate hikes. However, we believe credit fundamentals will come to the fore as the external environment normalises over the next couple of years. This will lead to wider spread differentiation among credits based on sector prospects and individual fundamentals, rather than macro events being the main driver. Rising UST yields, slowing top-line growth and an expanding cost base (especially labour costs) could lead to a further deterioration in Asian corporate balance-sheet strength and lower SCALE scores over the next two to three years. State support underpins the credit ratings and credit spreads of many quasi-sovereign credits in Asia. The proliferation of issuers and the liberalisation of the quasi-sovereign sector (especially in China) will make standalone credit metrics a more important determinant of credit spreads. Hence, it is imperative that investors become more discerning in their sector and credit selection in order to be able to price credits appropriately.
Figure 30: Spreads have been immune to lower SCALE bps

600 550 500 450 400 350 300 250 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 JACI corporate spreads SCALE (RHS) 5.9 5.8 5.7 5.6 5.5 5.4 5.3 5.2 5.1 5.0
Figure 31: and changing market composition bps (LHS), % (RHS)

600 550 500 450 400 350 300 250 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 HY corporates share of total Asian USD bonds (RHS) 40 35 30 JACI corporate spreads 25 20 15 10 5
28
Asia Credit Compendium 2014 Worsening credit quality is also a worry for banks
Asias economic growth is stabilising, albeit at a lower level than previously Rising leverage and deteriorating credit quality have implications for the Asian banking sector. While Asian banks are well capitalised and funded, and their asset quality remains benign, we think asset quality in most markets has peaked and is likely to deteriorate further (a continuation of 2013). Apart from China, most major economies are likely to see higher economic growth in 2014, which is supportive of credit quality. However, rapid loan growth (in excess of nominal GDP growth) has led to higher leverage in the financial system. China and Korea stand out as the most vulnerable countries from this perspective. While this is normal in developing economies as banking penetration increases, credit-fuelled investment growth has led to asset bubbles in economies like China. That said, slower-than-long-term trend growth in China and India should result in slower loan growth in 2014. Asian banks asset-quality and capital-adequacy indicators have improved in the past five years, although the improvement in asset-quality indicators was partly driven by rapid credit growth. Banks loss-absorption capacity has improved substantially in the past few years (India is an exception) and will cushion asset-quality stresses. External vulnerabilities are likely to become an important driver, especially given the increasing dependence on external funding of banks and their corporate clients. For example, recent Indian rupee (INR) and Indonesian rupiah (IDR) depreciation led to increased asset-quality concerns for Indian and Indonesian banks given their exposure to corporates with foreign-currency funding. We are more sanguine about liquidity risks given the Asian banks limited dependence on wholesale funding. However, asset quality could deteriorate in case of currency volatility. Despite increased headwinds to Asian banks in 2014, we maintain Stable outlooks on most of the Asian banking sectors under coverage. However, we are less constructive on most of these sectors than in 2013, and we have a slight negative bias. We maintain Negative outlooks on the banking sectors of China, Hong Kong and India, reflecting asset-quality deterioration across these markets. Asian banks have used the capital markets for funding rather than capital raising in 2013. This split may change in 2014, in our view. While banks will continue to opportunistically seek USD funding for refinancing and to expand their USD loan portfolios, we also expect them to use the USD bond markets to fund their requirements for Basel III-compliant capital. In our view, current spread differentials reflect the fundamental differences in bank credits across geographies. For our detailed fundamental views on Asian banks, see the banking-sector overview (As the tide goes out).
Asian banks loss-absorption buffers have improved since 2007
Figure 32: Summary of our views of Asian banking sectors under coverage
China Operating environm ent Outlook Profitability Outlook Asset quality Outlook Funding and liquidity Outlook Capital adequacy Outlook OVERALL OUTLOOK Hong Kong India Indonesia Malaysia Philippines Singapore Korea Thailand
Negative
Negative
Negative
Neutral
Neutral
Neutral
Neutral
Neutral
Neutral
29
Asia Credit Compendium 2014 Demand/supply to be matched at higher spread levels

2013 showed that EM-centric flows are important to Asia
Parts of Asia are still capitaldeficient and will continue to depend on international flows Fund flows into Asia from international investors will remain an important driver of Asian credit. Easy monetary conditions globally under quantitative easing have been a key driver of the EM rally of 2010-12. Flows are not just important to credit markets; portoflio flows into Asian equity and fixed income markets have been an important source of funding for current-account-deficit countries like India and Indonesia. While Asia is a net contributor of capital to the world, parts of the region are capital-deficient and will continue to depend on international inflows. Even within the credit space, while Asia has a strong local bid, it still relies on EM-centric flows from international investors. We expect demand for EM credit assets, including Asian credit assets, to continue to grow in 2014. EM has become a mature asset class in the eyes of international investors and has a dedicated investor base; we expect a consistent bid from these investors. EM USD bonds have grown substantially in the past five years, and EM USD credit is now a bigger asset class than US HY credit. We strongly believe that asset allocation will be driven by GDP shares as EM countries increase their share of global GDP, they will receive increasing allocations from investment funds, and EM fixed income will get a share of this. Emerging markets received an influx of QE-driven flows from 2010 to mid-2013. As QE is withdrawn, some of these inflows may turn to outflows. This is especially true of retail-driven inflows in fact, c.50% of inflows from retail investors have already been withdrawn. However, structural inflows to EM from institutions like pension funds and insurance companies are likely to continue. US and European pension funds, which have c.USD 25tn in assets, are still underinvested in EM and Asian fixed income, and we expect them to consistently increase allocations. Moreover, the HG corporate space in Asia especially bonds rated single-A and above is receiving an increasing bid from US and global HG funds, reducing the importance of dedicated EM investors. In the first few months of 2014, we expect flows to remain supportive given range-bound UST yields. We expect international flows to ebb in H2-2014 as UST yields rise. Overall, we expect fund flows to play a smaller role in 2014 than in 2013 or 2012.
We strongly believe that asset allocation will be driven by shares of global GDP
Figure 33: EM funds see outflows in 2013 Cumulative inflows to asset classes (USD bn)
1,400 1,200 1,000 800 600 400 200 0 -200 -400 -600 2009 2010 2011 2012 2013 DM equities EM bond (RHS) EM equities (RHS) DM bond 250 200 150 100 50 0 -50
Figure 34: We expect USD 124bn of issuance in 2014 USD bn

2014 (P) 2013 2012 2011 2010 0 20 40 60 80 100 120 140 Banks HG Corp HY Corp Sovereigns
Source: EPFR, Standard Chartered Research
Note: 2014 supply expectations assume normal market conditions; Source: Bloomberg, Standard Chartered Research
30

Local bid remains important to Asian credit
The local bid continues to gain importance in Asian credit markets, supported by strong demand from local real-money funds and private banks. This was evident in 2013 despite the slowdown in international flows into EM, a record USD 123bn of bonds were priced in Asia. 60% of these bonds were placed with Asian accounts, the same level as 2012. How much of this is cyclical and how much is structural is a subject of debate. Asias changing demographics are a structural driver, in our view ageing populations will lead to a preference for fixed income over equity. Moreover, a large share of Asias private wealth is held in low-yielding deposits. As the liquidity and availability of fixed income products increase, there will be a shift from deposits into higher-yielding fixed income.
We expect USD 124bn of supply in AXJ G3 bond markets

Asian debt markets are in the midst of a multi-year growth cycle, in our view. We expect the following drivers to sustain strong issuance in 2014: The structural component of growth in capital markets remains strong. The regions economies are still growing and its capital markets are becoming more entrenched as a source of funding, a sign of a maturing financial system. Cyclical tailwinds will support issuance as Fed tapering is pushed back and USTs remain benign until at least mid-2014. In this environment, issuers will take advantage of still-low all-in yields to price new issues.
G3 issuance in Asia started to pick up in 2009 after the Lehman crisis, and the first round of maturities will be in 2014. We expect USD 120bn of redemptions and possible refinancing in Asia in 2014 and 2015. We therefore expect issuance levels to remain high for the next couple of years. Chinas financial-sector reforms will lead to the liberalisation of lending and deposit rates, spurring increased issuance from China Inc.
While we expect inflows to Asia to continue in 2014, they are likely to be smaller in scale than those seen between 2010 and mid-2013. This, combined with our expectation of strong supply, suggests that demand and supply are likely to be balanced at higher spread levels than end-November 2013 levels. We discuss supply-demand dynamics in more detail in the next section, Asian credit technicals Waning support.
31
Asian credit technicals Waning support

Analysts: Sandeep Tharian (+44 20 7885 5171), Shankar Narayanaswamy (+65 6596 8249)
AXJ credit technicals Not as strong as before

Fundamentals to overtake technicals
We expect fundamentals to have a bigger impact on Asian credit in 2014 as technical support wanes The technical backdrop for AXJ credit, which has overwhelmed fundamentals in recent years, is likely to be less supportive as we enter 2014. While Fed tapering may be delayed well into 2014, we believe that the genie is out of the bottle with regards to tapering and its effects including higher bond yields, bond fund outflows and the exacerbation of fundamental issues facing some EM credits. We expect the technical backdrop in AXJ to remain supportive of credit in 2014. However, dynamics are likely to change, with fundamentals having a greater influence on the direction of credit spreads. In the next few sections, we look at the evolving technical landscape in AXJ credit. The first four months of 2013 were a repeat of 2012 dynamics the search for yield, buoyed by monetary easing by central banks worldwide, ensured the steady flow of funds, supporting credit spreads. In AXJ, both international flows and the increasing local bid (mainly from retail/private banks) provided important support. The Feds announcement in mid-May of possible QE tapering caught many investors off-guard. The resulting sell-off not only weakened technical support but also exposed fundamental weaknesses in EM more broadly.
Upward trend in bond supply Still a reality?

While supply may see a marginal cyclical slowdown, we believe the trend of higher supply is intact We expect bonds both local and international to increase as a share of the AXJ funding mix (see SCout, 9 November 2012, Basel III triggers metamorphosis of Asian corporate funding). However, we expect a cyclical slowdown in bond issuance due to rising rates and the normalisation of liquidity. Rising rates will likely curb bond issuance as EM debt yields are repriced higher in tandem with US Treasuries. Given this, while we still believe Asia is in the midst of a structural boom in capital markets, we expect issuance growth to slow over the next 12-18 months. The underlying upward structural trend is likely to continue. We explored this theme in detail in Credit Alert, 24 September 2013, Supply amid rising rates.
USD credit markets lose some of their lustre

Syndicated loan volumes in AXJ started the year slowly, but picked up in May-June as bond markets dried up after the Feds May announcement of possible tapering (Figure 1). Despite the pick-up, cumulative syndicated loan volumes as of endOctober were still c.8% lower than the same period in 2012 and 13% lower than Figure 1: AXJ loan volumes could pick up Cumulative AXJ syndicated loan volume by month (USD bn)
350 300 250 200 150 100 50 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Dealogic, Standard Chartered Research
Figure 2: Local-currency issuance weak in 2013 vs. 2012 AXJ LC corporate issuance compared across years (USD bn)
700 600 500 YTD Oct 2013 400 300 200 100 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010
2011 2012
2012
YTD Oct 2013 2011 2010
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2011. Regulatory tightening is preventing rapid growth in the syndicated loan market. In terms of pricing, syndicated loan markets have started to look attractive to issuers again (see Figure 5). Average all-in pricing of AXJ HG loans and USD bond yields (as measured by JACI IG yields, a proxy for USD bond pricing) have moved in opposite directions since March 2013 as rising interest rates makes bond pricing less attractive compared to last year. However, the advantages of longer-term financing, low UST yields, more covenant-lite borrowing, and access to a diverse set of investors mean that G3 bond issuance is still attractive to a majority of issuers. Local-currency bond issuance, which started the year at a record pace, lost steam after the Feds May announcement as local rates and currencies came under pressure across Asia. As Figure 2 shows, local corporate bond issuance was c.15% lower y/y as of end-October, albeit significantly higher than the levels in preceding years. While local-currency corporate bonds rely more on local investors than international investors, they are still affected by global risk sentiment.
G3 issuance is at a record pace across EM

G3 issuance in EM has been relatively healthy Despite the slowdown in bond issuance in summer 2013, G3 issuance across EM is higher than in previous years. EM issuance especially in CEEMEA and Latam has picked up since August and looks set to end the year at record levels (Figure 3). G3 issuance in AXJ has also been healthy since the summer lull as of end-October, it was up c.8% from the same period in 2012, a record year of issuance in the AXJ G3 bond space. Despite the weak EM backdrop of continuous outflows and rising rates, demand for AXJ new issues has remained healthy (Figure 6). This demand can be attributed mainly to thinning liquidity in secondary trading, which is forcing investors to Figure 4: AXJ bond issuance has surpassed 2012 level Cumulative AXJ G3 bond issuance by month (USD bn)
140 CEEMEA Asia 120 100 80 Latam 60 40 20 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Bond Radar, Standard Chartered Research
Figure 3: EM issuance picked up in Q3-2013 Cumulative EM G3 bond issuance by region (USD bn)
180 160 140 120 100 80 60 40 20 0
Source: Bond Radar, Standard Chartered Research
2013 2012 2010 2011
Figure 5: Bond pricing does not look that attractive AXJ IG loans all-in pricing vs. AXJ USD IG credit yield
260 240 220 200 180 160 140 120 100 Jan-10 Jul-10 Jan-11 Loan all-in (bps) AXJ yield (RHS, %) 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
Figure 6: Demand for new issues is still supportive 10-deal moving-average ratio of AXJ USD book to issue size
20 18 16 14 12 10 8 6 4 2 Jan 10 Oct 10 Jul 11 Mar 12 Aug 12 Jan 13 Mar 13 May 13 Nov 13
Source: Dealogic, Bloomberg, Standard Chartered Research
33

use their cash to build up meaningful positions via the primary market. Decent newissue premia are also incentivising many investors to wait for new issues rather than get involved in the secondary market. While demand for AXJ new issues is still high, investors are becoming highly selective about which ones they participate in. Some new issues, mainly from debut HY issuers, have seen very low participation.
China G3 credit market doubles

The G3 market outstanding in China more or less doubled over the course of 2013; Chinese credits dominate the JACI with c.25.8% representation overtaking Korea Net issuance in AXJ G3 credit was a healthy USD 88bn as of 22 November 2013 slightly higher than the 2012 level (Figure 7). Close to 76% of this occurred in the first five months of 2013; issuance has picked up again since September. China is the biggest story in AXJ G3 credit issuance this year. As of 22 November, Chinese credits had issued c.USD 59bn in bonds YTD, representing c.48% of overall AXJ gross issuance. As Figure 8 shows, this is roughly equal to Chinas tradable market outstanding as of end-2012. Given low redemptions in China in 2013, this has resulted in Chinas tradable market doubling in size to c.USD 105bn in 2013. Chinese credits overtook Korean credits to have the biggest representation in the JACI, with a weight of 25.8% (up from 16.8% at end2012). Quasi-sovereign names dominated issuance (c.USD 24bn), and property companies were big issuers. Both were also heavy issuers in 2012. Net issuance in other AXJ credit markets has been muted this year, apart from India and Indonesia. Indian issuance YTD has been split across banks (c.USD 6.0bn), HG corporate (USD 4.0bn) and HY corporates (USD 1.9bn). Issuance from Indonesia has been mainly by the sovereign and quasi-sovereigns; Indonesia is the only net issuer this year in the AXJ sovereign space (Figure 10). AXJ sovereign issuance as a Figure 7: AXJ G3 bond space enjoys strong net issuance AXJ G3 2013 issuance/redemptions by month (USD bn)
25 20 15 10 5 0 -5 -10 Redemptions Jan Feb Mar Apr May Jun
Figure 8: Chinese markets double in size AXJ G3 2013 issuance/redemptions by country (USD bn)
80 70 60 Issuance Net issuance 50 40 30 20 10 0 -10 -20 CN Tradable market (2012)
Issuance
Net issuance
Jul
Aug Sep Oct Nov Dec
Redemptions KR HK IN ID Others SG MY PH
Note: Others include MN, SL, TH, VN; Source: Standard Chartered Research
Figure 9: Bank issuance is in line with expectations AXJ G3 2013 issuance/redemptions by bank type (USD bn)
50 40 30 Net issuance 20 10 0 -10 -20 Korean banks Indian banks Sing banks Other banks
Note: Other banks include CN, HK, ID, MY, MN, PH, SL, TH, VN; Source: Bloomberg, Standard Chartered Research
Figure 10: Indonesian sovereign the lone net issuer AXJ G3 2013 issuance/redemptions by sovereigns (USD bn)
25 20 15 10 5 Issuance Tradable market (2012)
Tradable market (2012)
Issuance
Redemptions
0 -5 ID PH LK VN MN MY
Redemptions KR CN
34

whole has been low relative to previous years. This reflects shifting dynamics in EM credit markets, where corporate issuance is far outstripping sovereign issuance, especially in AXJ.
Corporate issuance has remained healthy

AXJ G3 corporate issuance has been relatively healthy in 2013; net issuance in the banking space has been smaller in comparison Combined net issuance from the AXJ G3 corporate credit markets totalled c.USD 69bn YTD as of 22 November 2013, split between HG (USD 39bn) and HY (USD 30bn). China is the main driver issuance from the China HG sector has more than doubled in 2013. Hong Kong and Korean HG corporate issuance has been lower than in 2012; net issuance from the Korean HG sector has been close to zero. The Indonesian HY sector has also had almost no net issuance. AXJ corporate issuance is concentrated among the big four China, Korea, Hong Kong and India while issuance from other jurisdictions has been sporadic. YTD net issuance in the banking space (as of 22 November) was a relatively small USD 16bn, or c.17% of the tradable market. The senior space accounted for most of the gross issuance of USD 26.5bn. Sub-debt issuance was relatively low (c.USD 1.0bn), although AXJ credit markets witnessed the first Basel-III compliant deals in H2-2013. Korean banks had decent net issuance, with many issuing to pre-fund their 2014 liabilities as market conditions remained conducive. Issuance from Indian banks was also strong in H1-2013, before they were priced out of capital markets owing to spread widening during the summer months.
Figure 11: China HG bond market more than doubles AXJ G3 2013 issuance/redemptions by HG corp. (USD bn)
45 40 35 30 25 20 15 10 5 0 -5 -10 China HG Other HG HK HG
Note: Other HG includes IN, MY, SG and TH; Source: Bloomberg, Standard Chartered Research
Figure 12: China HY issuance surges AXJ G3 2013 issuance/redemptions by HY corp. (USD bn)
30 25
Issuance
Tradable market (2012) Net issuance
20 15 10 5 0 Issuance
Tradable market (2012) Net issuance
Redemptions Korean HG
-5
Redemptions China HY Indo HY Other HY
Note: Other HY includes HK, PH, SG, MN and IN; Source: Bloomberg, Standard Chartered Research
Figure 13: 144a issuance is on a declining trend Proportion of 144a/non-144a in G3 issuance by year
100% 80% 144a 60% 40% 20% 0% 2010 (Asia) 2011 (Asia) 2012 (Asia) 2013 (Asia)
Source: Bond Radar , Standard Chartered Research
Figure 14: NR issuance higher than in 2012 Proportion of AXJ G3 issuance by HG/HY/NR
100% 80% 60% 40% NR HY
HG
Non 144a
20% 2013 (Latam) 2013 (CEEMEA) 0% 2010 2011 2012 2013

Source: Bond Radar , Standard Chartered Research
35

144a-compliant issuance on a declining trend
More RegS deals were priced in AXJ credit markets in 2013 than in previous years 144a-compliant issuance volume in AXJ remains on a declining trend (Figure 13), and 144a issues fell below 50% of total issuance in 2013. AXJ issuance has typically been 65% 144a and 35% RegS in recent years, as US investors were crucial to the success of new issues, especially larger ones. The increased localisation of investors in AXJ credit markets has reduced the need for debut issuers (more of which have tapped the G3 bond market) to provide the extra disclosures required for 144acompliant issuance. Apart from veteran AXJ issuers sovereigns and Korean credits and multi-tranche China SOE deals, most issuance of AXJ G3 credit has been in the RegS format in 2013. 144a issuance was slightly higher in CEEMEA than in AXJ and significantly higher in Latam, where 144a issuance is close to 95% of the total given Latam issuers higher reliance on US investors.
Key patterns in AXJ new-issue allocation

A comparison of AXJ new-issue allocation patterns shows the following trends: 1. Passively declining US participation: We see this decline as passive, as it has been driven by: (1) a lack of 144a issuance in AXJ as the local bid crowds out US investors, and (2) labelling issues, as most of the money raised and managed locally by the Asian arms of the large US-based fund houses is classified as Asian in the new-issue statistics. US participation is greatest in highly rated and longer-duration bonds (10Y and above). These bonds are of interest to both EM and US HG investors, who look at Asia for spread pick-up over US HG names. Korean HG has been their long-term favourite, but as Korean HG issuance has declined, they have shifted to similarly rated Chinese Figure 15: US participation in China HG is still strong Weighted average allocations by sov./HG corp.
100% 80% 60% 40% 20% 0%
2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2013 YTD 2013 YTD 2013 YTD 2013 YTD
Figure 16: European participation in banks is healthy Weighted average allocations by bank
100% 80% 60% 40% 20% 0%
2010 2011 2012 2010 2011 2012 2010 2011 2013 YTD 2013 YTD 2012 2012 2013 YTD 2013 YTD
US
Europe
Asia*
US
Europe
Asia*
Sov
China HG
Korean HG
HK HG
Korean banks
Indian banks
Other banks
*Includes a small amount of Middle East participation; Source: Standard Chartered Research
*Includes a small amount of Middle East participation; Note: Other banks include HK, SG, MY and TH; Source: Standard Chartered Research
Figure 17: Retail/PB presence in HG is ebbing Weighted average allocations by sov./HG corp.
100% 80% 60% 40% 20% 0%
2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2013 YTD 2013 YTD 2013 YTD 2013 YTD
Figure 18: Retail/PB show interest in other banks Weighted average allocations by bank
100% 80% 60% 40% 20% 0%
2010 2011 2012 2010 2011 2012 2010 2013 YTD 2013 YTD 2011
AM/HF
Banks
Ins./Pens.
Retail/PB
AM/HF
Banks
Ins./Pens.
Retail/PB
Sov
China HG
Korean HG
HK HG
Korean banks
Indian banks
Other banks
Note: Other banks include HK, SG, MY and TH; Source: Standard Chartered Research
36

Asian participation in AXJ credit has steadily increased, even as US participation has passively declined 2. HG names. US investors are still interested in Korean banking issuance but have limited interest in Indian banks, and their interest in Chinas property sector has declined in recent years. Steady European participation: European involvement in Asian credits has been fairly steady over the past few years. European real-money investors continue to like Korean HG, Korean banks and Indian banks. They have also showed growing interest in the BBB/BB rating categories given the rising number of CEMBI-based mandates from Europe; this also reflects the issuance profile in Asia in 2013. Interest in Asian HY comes primarily from the European private banking (PB) accounts, which have a similar interest profile to Asian PB accounts. This interest in non-core HY names in Asia (Chinese industrials and other non-China/Indonesian HY) could also be a function of allocation, as Asian PB orders for stronger Chinese HY property issues appear to be filled before European PB orders. 3. Rising Asian participation: Asian participation is mainly from financial institutions (FIs) and retail/PB accounts. These investors have the highest allocation to non-rated (NR) bonds from the Asian credit space since they are not constrained by rating criteria (as international real-money investors are) and are more familiar with the credits. Regional FIs prefer Hong Kong HG and Indian banks. Retail/PB interest from Asia is skewed towards the higher-beta space. On average, 60% of Asian perpetual bond allocations go to PBs. Retail/PB investors have moved away from highly leveraged positions in HG issuers (Korea/Hong Figure 19: China prop. has limited sponsorship from US Weighted average allocations by HY corp.
100% 80% 60% 40% 20% 0%
2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2013 YTD 2013 YTD 2013 YTD 2013 YTD
Figure 20: International investors prefer the long end Weighted average allocations by tenor
US Europe Asia *
US
Europe
Asia *
100% 80% 60% 40% 20% 0%

2010 2011 2012
2010
2011
2012
2010
2011
2013 YTD
2013 YTD
2012 2012
China prop
China ind
Indo HY
Other HY
1Y-6Y
7Y-12Y
12Y and longer
Figure 21: Retail/PB involved in AXJ HY Weighted average allocations by HY corp.

100% 80% 60% 40% 20% 0%
2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2013 YTD 2013 YTD 2013 YTD 2013 YTD
Figure 22: Retail/PB are in short duration buckets Weighted average allocations by tenor
Retail/PB 100% 80% 60% 40% 20% 0%
2010 2011 2012 2010 2011 2012 2010 2013 YTD 2013 YTD 2011 2013 YTD
AM/HF
Banks
Ins./Pens.
AM/HF
Banks
Ins./Pens.
Retail/PB
China prop
China ind
Indo HY
Other HY
1Y-6Y
7Y-12Y
12Y and longer
37
2013 YTD

Kong/banks) to higher-beta HY sectors. Reasonably strong HY issuance has also supported this transition. These investors are predominantly involved in Asian credits at the short end of the duration spectrum. For an in-depth analysis of new-issue allocation patterns, see Credit Alert, 17 June 2013, The story in new-issue allocations.
Quality of AXJ issuance improved in H2

With heavier issuance from the higher-rated China SOE space, the quality of issuance in AXJ improved in H2-2013 To capture the quality of AXJ credit issuance, we calculate the issuance-weighted rating of AXJ new issues. This metric is calculated as the weighted-average rating (weighted based on issuance size) of new issuance, with AAA being 1 and CCCbeing 17 (a rating of 8 indicates BBB+; we have assigned a crossover number of 12 for NR deals since most NR deals in AXJ have been in the crossover space). In Figure 23, we plot the issuance-weighted rating of AXJ new issues since 2007. The rating tends to stay within the +/-1 standard deviation (SD) band, and market factors ensure that issuance quality is maintained deteriorating issuance quality leads to overall market underperformance, thereby cutting off market access for weak issuers (for more details on the methodology, see Credit Research, 20 June 2011, The peaking credit cycle 2007-11 issuance analysis). Issuance quality was moving gradually towards the +1 SD mark in late 2012 and early 2013 as HY corporates mainly from China dominated AXJ issuance. HY issuance waned after May 2013 following the rise in UST yields (and related credit spreads), as issuers were forced to pay more to tap the market. HG issuers dominated issuance in H2-2013, particularly China SOEs and Korean banks. This improved the quality of issuance, and the issuance-weighted rating moved closer to single-A.
New-issue performance A tale of two halves

New issues priced in H1-2013 performed poorly in comparison to those priced in H2, primarily due to the pricing premia offered. H1-2013 was dominated by new issues priced through the secondary curve, offering no concession to the investor. As the market experienced severe volatility from June-August, these new issues came under extreme pressure and underperformed, also owing to their higher liquidity. In H2-2013, new issues offered decent concessions to the secondary curve, thereby repricing the secondary market wider. The performance of these new issues has been mixed as investors have turned more cautious in deal selection.
Figure 23: Quality of AXJ issuance improves Issuance-weighted rating of AXJ new issues vs. JACI (bps)
14 12 10 8 6 4 2 Jan-07 Issuanceweighted rating Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Mean -1 SD JACI spread (RHS) +1 SD 900 800 700 600 500 400 300 200 100 0
Figure 24: Similar spread volatility for 144a and non-144a issuance (AXJ G3 new-issue performance by rating)
Non-144a Rating bucket AAA+ A ABBB+ BBB BBBBB+ Average peak to trough move (bps) NA 75 47 73 82 99 148 181 Average spread volatility (%) NA 36 34 40 33 39 44 32 144a Average peak to trough move (bps) 49 57 70 79 NA 78 158 178 Average spread volatility (%) 43 43 41 63 NA 30 40 53
Note: Issuance-weighted rating is the weighted-average rating of new issues in a month (AAA being 1 and NR being 12); a higher number indicates a weaker rating; Source: Standard Chartered Research
38

No clear pattern between local and international support for AXJ bonds
There is no discernible trend in the performance of bonds based on investor allocations in the primary market US and European investors are generally viewed as being stronger holders of AXJ issues than local AXJ FIs and retail/PB investors. To test this theory, we calculated the average peak-to-trough move and the average spread volatility of all AXJ issuance (from January-May 2013) through the volatile June-August period, based on their rating and the primary allocation to local and international investors. We used the RegS/144a split as the broad metric to distinguish between local and international participation. The results are shown in Figure 24. Our analysis shows no clear distinction between the behaviour of local and international investors during volatile periods. International investors remained supportive of bonds rated A+ and above (mainly from Korea and China) during the period, while local investors supported single-A bonds (mainly Hong Kong bonds). Both international and local investors were unsupportive of weaker crossover and HY bonds as volatility spiked across the board. Thus, this exercise does not reveal a discernible trend. The performance of these bonds appears to be driven by a number of factors, of which investor holdings is just one.
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Asia Credit Compendium 2014 Expected supply and redemptions in 2014

Cyclical slowdown in the pace of supply
While several factors favour an upward trend in supply, we expect a marginal cyclical slowdown in the pace of supply We expect a number of factors (listed below) to drive the AXJ credit supply cycle in 2014. UST rates will be an important driver. To understand the effect of rising rates on supply dynamics and how issuance patterns might evolve, we looked at what transpired in US bond markets in previous rate-hike cycles (1994-95 and 2004-06). In terms of issuance volumes, the US bond market of the early 1990s is comparable to the EM bond market today average US corporate credit monthly issuance volumes were c.USD 50bn in the early 1990s, similar to current average monthly volumes in EM. We think EM credit markets could experience a similar cyclical shift to the one seen in US in 1994-94 (Figures 25 and 26), when supply was lower than the trend. In such a shift, issuance volumes would drop as rates normalise and pick up strongly thereafter. However, we do not envisage a sharp drop in AXJ supply for the reasons outlined below.
Factors favouring an upward trend in supply

1. Still-low all-in yields: Despite the rise in UST yields in 2013, yields are below their long-term averages. This means it is still attractive for issuers to tap the USD bond market and lock in low yields. Rising yields are likely to deter some opportunistic issuers mostly HY and crossover debut issuers but regular issuers should continue to tap the USD bond market to meet their financing needs. Redemptions: Refinancing of redemptions will be a key driver of USD issuance in 2014. 2014 marks the beginning of a wave of redemptions in both EM and AXJ as 5Y paper issued in 2009 and beyond when AXJ credit supply picked up dramatically starts coming due. We expect c.USD 55bn of redemptions in AXJ in 2014, skewed towards H1 (c.USD 32bn); this compares with USD 35bn of redemptions in AXJ credit markets in 2013. We expect Korean credits to have the biggest redemptions in 2014 c.USD 19bn, USD 11.5bn for banks and USD 7.5bn for corporates. Sovereigns (mainly Indonesia) and China HY corporates (USD 8.6bn) are next. The majority of the China HY corporate redemptions are callable bonds (USD 7.4bn) that might not be called if conditions are unsuitable. While many issuers have already pre-funded their liabilities in 2013, the upcoming redemption profile c.USD 130bn in 2015-16 should keep issuers coming back to the USD market to refinance. Some of these liabilities could be financed in other markets, such as loans and local currency, but the USD capital markets will retain their importance.
Korean credits have the biggest redemptions in 2014, followed by sovereigns and China HY corporates
2.
Figure 25: US issuance fell during 1990s rate-hike cycle US corp. bond issuance (USD bn) vs. floating (% of total)
90 80 70 60 50 40 30 20 10 0 Jan-93 May-93 Sep-93 Jan-94 May-94 Sep-94 Jan-95 May-95
*Shaded area represents period when federal funds target rate was raised to 6% from 3%; Source: Dealogic, Standard Chartered Research
Figure 26: Marginal decrease in longer-tenor issuance US corp. issuance by tenor

40 35 30 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-93 May-93 Sep-93 Jan-94 May-94 Sep-94 Jan-95 May-95
Perpetuals
>=10Y
5Y-10Y
<=5Y
Floating (RHS)
Total
25 20 15 10 5 0
40

China may again lead AXJ issuance in 2014 3. Local support in AXJ: While global sentiment towards EM credit remains volatile, local support for AXJ USD credits is strong, as our allocation data shows. We do not expect this support to decline sharply, and we expect it to anchor demand for rising supply in the AXJ credit space. Issuance from China: We expect issuance from Chinese credits, both SOEs and others, to stay strong in 2014. In 2013, HG and HY issuance from China resulted in a doubling of the market size, Chinas hard-currency debt is a tiny fraction of its local-currency debt, and as the country pursues financial reform, wider capital market access should naturally follow. Basel III is likely to further increase the cost of disintermediation, forcing corporates to tap the capital markets for funding 5. Bank regulation and its impact on loan volumes: We expect loan volumes to decline as Asian banks face rising intermediation costs given higher capital and liquidity requirements under Basel III. As issuers financing needs rise, they will need to fill some of this gap by tapping the hard-currency bond markets. While loan markets may increase their share in the interim as rising UST yields make loans more attractive than bonds, G3 bond issuance will remain attractive to the majority of issuers given the advantages of longer-term financing, low UST yields, more covenant-lite borrowing, and access to a diverse set of investors. Capital borrowing: Financial issuers in Asia could also tap the USD bond markets to meet their capital needs if they continue to witness growth in their assets. The start of issuance of Basel III deals in AXJ could spark issuance of related instruments, especially by Hong Kong banks. Many of them also have callable capital coming due in the next few years and may want to strengthen their capital bases ahead of the calls. Expansion needs: While the AXJ credit cycle has deteriorated as leverage rises, Asian HG corporates (especially from China and Korea) will continue to need to fund expansion and acquisitions. On the other hand, still-unresolved problems in the West and slow global growth expectations are translating into lower business confidence, which may prevent aggressive investment and expansion. Asian issuers increasing willingness to issue in 144a format: AXJ issuers are becoming increasingly aware of the plateauing local support for AXJ USD bonds. Many of them are now more willing to go the 144a route which requires higher disclosures to tap the bigger pool of US investors. Floating-rate issuance: With demand for floating-rate issuance rising on expectations of higher rates, issuance of such instruments may rise marginally. Floating-rate issuance suffers from a chicken-and-egg syndrome. It has been limited in the EM/Asian G3 bond universe since 2007-08 as issuers and investors preferred fixed issuance, especially as rates collapsed. Moreover, the biggest buyers of floating-rate paper were banks and their off-balance-sheet vehicles; these buyers have become much less active. Most of the new EM/Asian mandates in the real-money space have been fixed-rate, especially since 2008 a period marked by a record flow of funds into emerging markets. Large issuers do not view this as a big enough space for them to price benchmark-sized public transactions. Some fund managers are considering raising fresh floating-rate mandates, which could be attractive to end investors in a volatile rate environment. However, these investors are sceptical of their ability to deploy these funds effectively in liquid floating-rate issuance. Investing in syndicated loans is an option, but this would be at the cost of liquidity given the relative illiquidity of loan markets, especially in Asia.
4.
6.
7.
8.
Floating-rate issuance could pick up in 2014
9.
41

We expect issuance in non-USD currencies to pick up 10. Issuance in non-USD currencies: As rising rate pressures affect the USD curve, many issuers are moving to issue in other currencies (such as the EUR, JPY and CHF), where curve pressures are lower. Demand is also strong, with selected euro-denominated funds willing to invest in stronger AXJ credits for diversification purposes. We expect many highly rated AXJ issuers (A+ names in China and Korea) to tap this market.
Factors working against a rise in supply

1. Macro sentiment: The global macro picture is likely to be highly volatile going into 2014. Investor sentiment could shift rapidly in response to a variety of events, including the debt-ceiling debate in the US, QE tapering, euro-area worries and election-related uncertainty in India and Indonesia, among others. Supply would tend to fall in such an environment, as cycles conducive to issuance (i.e., healthy investor risk appetite) could be short. Shaky demand for credit: We expect global demand for fixed income instruments to wane amid a rising rate environment. We have already seen signs of this in global fund flows, with flows favouring higher-beta equities over rate-sensitive fixed income instruments. The silver lining is that institutional investors who have dedicated mandates to invest in EM credit have not suffered significant outflows and remain invested in EM credit.
Global flows already favour higherbeta equities over rate-sensitive fixed income instruments
2.
Figure 27: Asian bonds Expected redemptions in 2014 USD bn

10 9 8 7 6 5 4 3 2 1 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Figure 28: We expect healthy issuance in 2014 USD bn

2014 (P) 2013 2012 2011 2010 0 20 40 60 80 100 120 140 H1 H2
Figure 29: Issuance by sector USD bn

2014 (P) 2013 2012 2011 2010 0 20 40 60 80 100 120 140 Banks HG Corp HY Corp Sovereigns
Figure 30: Asian G3 2014 expected supply and redemptions by country (USD bn)
120 100 80 60 40 20 0 -20 -40 CN KR ID IN Others HK SG PH MY Redemptions Tradable market (2013) Issuance Net issuance
Note: Others include MG, SL, TH, VN; Source: Standard Chartered Research
42

We expect c.USD 124bn of USD issuance in 2014
We expect USD 124bn of issuance in AXJ credit in 2014, skewed towards H1 Based on the factors outlined above, we expect a healthy c.USD 124bn of issuance in the AXJ G3 credit markets in 2014. We expect issuance to be concentrated in short-duration sectors; we see limited 30Y+ issuance as rising rates reduce demand for such paper. While floating-rate issuance could pick up marginally, we do not expect it to be large. The c.USD 124bn issuance figure might look high, especially compared to 2013 and in light of less conducive factors for issuance in 2014. However, our net issuance forecast of c.USD 69bn is lower than previous years, and is modest compared to the size of the market. We have estimated supply based on a name-by-name exercise carried out on most credits under our coverage. A table showing our name-by-name supply expectations can be found at the end of this section.
Issuance is likely to be skewed towards H1

We expect issuance to be concentrated in H1-2014, particularly in Q1, as issuers try to lock in low rates given market expectations of a tapering and possible associated rate rises towards the end of H1-2014. Many issuers that have done road shows this year are waiting until the beginning of 2014 to tap markets, especially if macro conditions remain stable. This also helps some issuers to match their financing and liabilities to the calendar year. A heavy supply pipeline in Q1-2014 is increasingly becoming the consensus view.
Figure 31: Asian G3 2014 expected supply and redemptions by bank region (USD bn)
50 40 30 20 10 0 -10 -20 Korean banks Indian banks Sing banks Other banks
Other banks include CN, HK, ID, MY, MN, PH, SL, TH, VN; Source: Bloomberg, Standard Chartered Research
Figure 32: Asian G3 2014 expected supply and redemptions by sovereigns (USD bn)
30
20
Issuance
Net issuance
10
0 Redemptions Redemptions -10 ID LK PH KR VN MN MY HK CN

Figure 33: Asian G3 2014 expected supply and redemptions by HG corp. (USD bn)
60 50 40 30 Tradable market (2013)
Figure 34: Asian G3 2014 expected supply and redemptions by HY corp. (USD bn)
50 40 30 20 Issuance Net issuance Tradable market (2013)
20 10 0 -10 China HG
Net issuance
Issuance 10 0 Redemptions Redemptions -10 China HY Indo HY
Korean HG
HK HG
Other HG
Other HY
Other HG includes IN, MY, SG, TH ; Source: Bloomberg, Standard Chartered Research
Other HY includes HK, PH, SG, MN; includes callable bonds; Source: Bloomberg, Standard Chartered Research
43

Issuance patterns in 2014 to slightly differ from 2013
We expect sovereign and bank gross issuance to be slightly higher in 2014 than in 2013; HG corporate issuance to be similar to 2013; and HY corporate issuance to be lower Of the USD 124bn of issuance we expect in 2014, sovereign issuance will be considerably higher (USD 13.5bn) than in 2013 (USD 6.5bn). We expect the majority of this to come from Indonesia (USD 6bn), followed by Sri Lanka (USD 1.5bn) and Thailand (USD 1.5bn). HG corporate issuance may be similar to 2013 levels, with China expected to lead again. We expect bank issuance (USD 32bn) to be higher in 2014 than in 2013 (USD 27bn), especially if subordinate issuance new Basel IIIcompliant instruments picks up amid benign a macro environment. We expect HY corporate issuance in 2014 (USD 25bn) to be lower than in 2013 (USD 37bn), as most debut issuers appear to have already tapped the market. Moreover, apart from the callable bonds (which are discretionary in nature), there are no significant redemptions in the HY corporate space.
China HG is expected to lead the way

We expect China HG corporate issuers to continue to lead AXJ credit issuance in 2014, forecasting USD 24bn of issuance. This is lower than the USD 31bn issued by this sector in 2013. While traditional SOEs such as CNPC and CNOOC may issue in 2014, we do not expect big-ticket, multi-tranche deals like those seen in 2013. This could bring down issuance levels relative to 2013. We expect c.USD 8bn of issuance from new issuers in the China HG G3 bond market. Issuance could be skewed by the lower-rated HG names (BBB and crossover credits), which could put pressure on spreads in this category.
Net issuance in Korea to be almost flat

China HG issuance is likely to be strong; we also expect healthy issuance from India, while Korean net issuance may be close to zero We expect no significant net issuance from Korean credits either banks or HG corporates despite our reasonable gross issuance forecast. We expect USD 13.4bn of bank G3 issuance and USD 7.3bn of HG corporate issuance to be met with equivalent redemptions Korea has the highest expected redemptions in the AXJ G3 space in 2014. Korean banks could also issue in the British pound and Swiss franc markets (as well as the euro market) to tap increasing demand from these markets. Korean net issuance was slightly positive in 2013 thanks to marginal net issuance by banks.
Indian issuance is likely to be relatively strong

If market conditions remain benign, issuance from Indian credits may be strong in 2014 we expect USD 14bn of issuance, split between banks (USD 6bn) and corporates (USD 8bn). Most of this may be front-loaded, with issuers expecting to tap the markets before the election in May. Indian banks may first issue subordinate debt (new-style Tier 1s) to boost their capitalisation levels, before deciding to issue senior bonds. Some new Indian quasi-sovereign credits could also opportunistically tap the G3 bond markets in 2014. Appendix 1 on page 54 shows our detailed name-by-name issuance projections for 2014.
Redemptions are set to rise in AXJ

AXJ redemption profile is expected to grow in the next few years; USD 55bn of redemptions are expected in 2014, USD 65bn in 2015 Redemptions for the AXJ G3 universe are poised to rise in the next few years as short-duration bonds issued since 2009 come due. We expect c.USD 55bn of redemptions in 2014 and c.USD 65bn in 2015, with the redemption profile gradually increasing thereafter. Over the next five years (until 2018), we expect Korean credits to face c.USD 90bn of redemptions, followed by China (c.USD 71bn) and Hong Kong (c.USD 50bn). Indian credits will also have reasonable redemptions of c.USD 28bn, evenly split across the years.
44

By sector, we expect c.USD 26bn of sovereign redemptions in the next five years; c.USD 15bn of these are in the next two years. Indonesia (c.USD 5bn) and the Philippines (c.USD 3.5bn) lead the redemption profile over the next two years. In the quasi-sovereign and corporate sectors, China and Korea redemptions are both c.USD 69bn over the next five years. Korean redemptions are more front-loaded, given that issuance from China picked up only after 2011. Also, the immediate redemption needs of Chinese credits arise largely from callable bonds, where the call can be postponed depending on market conditions. The majority of Hong Kong corporate redemptions are also mostly back-loaded, occurring in 2017-18. Overall, we expect c.USD 226bn of quasi-sovereign and corporate redemptions from the AXJ credit space in the next five years. In the commercial banking space, we expect c.USD 65bn of redemptions between now and 2018; half of this is from Indian and Korean commercial banks. Indian banks have c.USD 21bn of bonds coming due skewed towards the post-2016 period and mostly callable sub-debt. Korean banks have a more moderate c.USD 16bn coming due over the next five years.
Figure 35: Sovereign redemptions in Asia (bond maturity profile until 2018, USD bn)
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018 China Hong Kong Indonesia Korea Sri Lanka Malaysia Philippines Thailand Vietnam
Figure 36: Non-sovereign redemptions in Asia (bond maturity profile until 2018, USD bn)
25 China Hong Kong Indonesia India Korea Sri Lanka Malaysia Philippines Singapore Thailand Vietnam
20
15
10
0 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12016 Q22016 Q32016 Q42016 Q12017 Q22017 Q32017 Q42017 Q12018 Q22018 Q32018 Q42018
45
Asia Credit Compendium 2014 Fund flows: Past the point of inflection
Fund flows shift decisively towards supporting equities over bonds
There has been a clear shift in fund allocations from fixed income to equities At the beginning of 2013, most market participants saw outflows from fixed income funds as a distant reality. However, the Feds indication In May 2013 that tapering could happen as early as September 2013 prompted the reversal of flows from bond funds mostly into equity funds. This implied that the so-called Great Rotation was happening earlier than expected. As Figure 38 shows, bond funds globally were more or less flat in terms of flows, while equity funds mainly developed-market (DM) funds enjoyed healthy inflows. This is a clear reversal of the trend since the Lehman bankruptcy in 2008. Prospects of earlier-than-expected rate hikes are prompting many investors to rethink their strategy towards rate-sensitive fixed income funds, and to turn to less ratesensitive asset classes such as equities and real estate.
EM bond funds suffer significant outflows, driven by retail

EM bond funds suffered significant outflows after the Feds May announcement as rising rates and falling currencies exposed fundamental weaknesses in EM. EM countries with current account deficits witnessed rapid portfolio outflows as weakening currencies hit sentiment. YTD as of end-October, EM bond funds had suffered c.USD 7bn of outflows. A detailed look at EM bond fund flows during YTD through end-October reveals three key patterns:
Figure 37: Trackable EM funds hold only c.21% of debt Total EM HC tradable debt outstanding vs. EM-dedicated HC bond fund AUM (USD bn)
1,400 1,200 1,000 800 600 400 200 0 2003 2005 2007 AUM as a % of debt (RHS) EM HC bond funds AUM 2009 2011 2013 EM HC debt tradable 25 20 15 10 5 0
Figure 38: Equity funds were the darling in 2013 Yearly flows into global bond and equity funds (USD bn)
600 500 400 300 200 100 0 -100 -200 -300 2008 2009 2010 2011 2012 2013 YTD Equity funds
Bond funds
Note: EM HC bond funds include only open-ended funds which can be tracked; Sources: EPFR Global, BIS, Bloomberg, Standard Chartered Research
Source: EPFR Global, Standard Chartered Research
Figure 39: EM HC funds suffer the most Yearly flows into EM bond funds by currency (USD bn)
40 30 20 10 0 -10 -20 2008 2009 2010 2011 2012 2013 YTD
Figure 40: EM bond funds lost c.10% of AUM Cumulative flow of funds into broad risk assets (% of AUM)
20 15 EM LC Hard currency
Local currency
10 5 0 -5 DM equity EM equity HY bond DM bond
Blended currency
-10 -15 Jan-13 Mar-13 May-13 Jul-13
EM HC
Sep-13
Nov-13
46

Retail investor outflows seem to be stabilising; institutional support continues 1. Retail investors were the main driver of outflows (Figure 41 shows retail investors exit from EM bond funds in 2013). Retail investors are typically the last to act and mostly follow institutional investors, as indicated by fund flow patterns in the past few years. However, the launch of ETF products has given these retail investors an easier (and faster) way to play the EM risk story. ETF flows account for c.35% of EM bond outflows in since May 2013, despite representing only c.7% of EM bond funds AUM (see Credit Alert, 2 July 2013, Delving deeper into EM bond fund flows). Institutional investors, on the other hand, have remained supportive of EM bond funds. Retail investors have remained supportive of HY bonds, mainly from the US. Cumulative inflows since 2010 (when QE started) show that retail investors have pumped c.USD 65bn into EM bond funds. YTD as of 27 November 2013, though, they have withdrawn c.USD 30bn. While retail-driven outflows may continue, we believe that most of the outflows have already occurred. We expect the pace of outflows to slow in 2014 as institutional support continues. 2. EM hard-currency (HC) bonds suffered more than local-currency (LC). While LC bonds floundered more in total-return terms due to the dual impact of the currency and rates sell-offs, EM HC bond funds suffered the highest redemptions among EM bond funds. As Figure 40 shows, EM bond funds lost c.10% of their AUM over the five months since May. The most recent fund flow data indicates a reversal of this trend, however. Institutional investors appear to be supporting EM HC bond funds over EM LC, even as retail investors exit both types of funds. Figure 42: EM sovereign funds face most redemptions Cumulative flow of funds into EM bond funds by mandate (% of AUM)
180 160 140 Institutional 120 100 80 60 Retail 40 20 0 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 -20 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 -40% Sovereign Corporate -9%
Figure 41: Retail investors are main driver of outflows Cumulative flow of funds into EM bond funds by investor type (USD bn)
120 100 80 60 40 20 0 Jan-10
Jul-13
Oct-13
Figure 43: Allocations to EM Asia plateau Allocation profile of EM bond funds (%)
60 50 40 30 20 Emerging Asia 10 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Figure 44: Global bond funds reduce their Asian allocation Allocation profile of global bond funds (%)
9 8 7 Latam 6 5 4 3 2 1 0 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13
Emerging Europe
Emerging Europe
Latam
Emerging Asia
47

In 2014, we expect investors to prefer EM HC bonds marginally over EM LC bonds due to the increased likelihood that weakening EM currencies will erode EM LC bonds total returns. EM HC bonds are pricing in rising rates their spread cushion to withstand a rise in UST yields has improved significantly since 2012 and should fare better than EM LC in 2014. Accordingly, we expect institutional flows to shift into EM HC, as was seen in late October. 3. EM sovereign-dedicated funds suffered the most. In the period from January 2012 to May 2013, EM bond funds with a corporate mandate witnessed c.170% growth in AUM (Figure 42). In contrast, funds with a sovereign mandate saw lower AUM growth of c.30%. This reflects the shift in the EM investment profile from traditional sovereign mandates to more corporate-oriented ones. Since May, EM corporate bond funds have lost c.9ppt of their AUM in outflows, while sovereign bond funds have lost c.40ppt. Given that rate-hiking cycles affect more rate-sensitive sovereigns first, this trend is likely to continue until the weakening fundamental backdrop also starts affecting corporate numbers.
EM-dedicated open-ended funds hold 21% of all EM tradable debt

Trackable EM bond fund flows represent only a fifth of all EM tradable debt While inflow-outflow dynamics have become an important metric to assess the trend in overall global fund flows, it is important to understand how representative they are. Total EM HC debt outstanding is c.USD 1.2tn (this includes only the tradable, and therefore more liquid, portion of the market), and has been growing rapidly (CAGR of 9.7%) since 2008. EM-dedicated HC bond funds i.e., open-ended funds that invest in this debt have enjoyed even higher growth (current AUM of c.USD 250bn, CAGR of 30% since 2008) thanks to substantial liquidity injections by global central banks. Despite this growth, these funds held only c.21% of all outstanding EM HC debt as of end-June 2013. Even if they are transient (i.e., more susceptible to outflows), they still represent only about one-fifth of all EM debt outstanding. The rest is held by a variety of other investors including financial institutions, insurance/pension/wealth funds and retail/PB accounts some of which could also be transient in nature.
Fund flows in 2014 Past the worst

Fund flows will remain an important driver of EM/AXJ bond performance dynamics in 2014. We believe EM bond funds have seen the worst of the outflows and expect flow dynamics to be more balanced in 2014. As explained above, we expect the pace of outflows driven mainly by retail investors to slow as transient money is driven out. On the other hand, we expect institutional investors to maintain their support for EM as an asset class, despite the weak macro backdrop. This view is based on the fact that EM credit is now a legitimate, dedicated asset class and not a marginal off-index Figure 45: EM redemptions are pseudo-inflows Redemption profile of EM bonds (%)
70 60 50 40 30 20 10 0 Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Q4-2015
Figure 46: EM debt is a bigger asset class than US HY EM credit and US HY outstanding over years (USD bn)
2,000 1,600 1,200 US HY 800 400 EM debt
Rest of EM
Asia 0 1990 1993 1996 1999 2002 2005 2008 2011

Source: BIS, Bloomberg, Standard Chartered Research
48

asset class, as it was in the 1990s and even in early 2000s. EM credit has overtaken US HY in recent years in terms of total outstanding (Figure 46), and a multitude of EM-dedicated bond funds have been launched. In fact, many of the funds earmarked for EM exposure are being launched as EM debt mandates rather than equity mandates (we explore this further in the section on pension funds below). However, given the backdrop of rising rates, we do not expect a significant increase in institutional investor allocations to EM in the next few years. Global bond allocations to EM have already plateaued after been on a rising trend since 2008 (Figure 44).
EM bond redemptions Pseudo-inflows

Healthy EM redemptions over the next few years should provide cash for funds to re-invest in credit markets While we do not expect large incremental inflows to EM bond funds in 2014, we expect EM G3 bond redemptions to result in pseudo-inflows to these funds over the next few years. We expect c.USD 335bn of EM G3 bond redemptions in the next two years USD 155bn in 2014 and USD 180bn in 2015 as the majority of short-dated bonds issued since-2009 come due. 2014 redemptions mark a significant shift in the redemption profile of EM G3 bonds relative to the past few years. Assuming EM open-ended bond funds hold c.21% of this debt, we expect total flows of c.USD 70bn due to redemptions in 2014-15. We have attempted to understand how these funds manage redemption cash. Most of the major real-money funds that we track shift their bond holdings with maturities of less than one year to their money-market funds and gain access to the cash, which they then re-invest in the EM space. This means that these funds have already re-deployed some of the cash from 2014 redemptions, or are in the process of doing so. This may partly explain why they have maintained a decent cash level (c.4.5%), despite suffering outflows. With the EM redemption profile likely to remain on an upward trend in 2015, we expect these pseudo-inflows to be a supportive factor for EM bond funds.
Threats to fund flows

With EM bond fund flows delicately balanced, we expect the following factors to threaten broader EM fund flows. 1. A sustained recovery in global growth to better-than-expected levels. This could cause even institutional investors who have been loyal to EM bonds to rethink their strategy. While many of them are long-term strategic investors, their shortterm reluctance to add more money to EM bonds could have a knock-on effect on fund flows, especially as retail interest wanes. Further erosion in retail investor interest. While broader retail interest in EM bonds has waned, retail/PB interest in AXJ bonds is still strong. These investors are again shifting from leveraged investments in HG bonds (which have offered attractive return opportunities in the past) to HY bonds, which are again trading cheap. However, cheap equity valuations in EM and the prospect of higher returns could prompt this client base to shift into other asset classes, particularly on clear signs of macro improvement. Tail-risk events. The materialisation of tail-risk events such as an unexpected break-up of the euro area or a technical default in the US could cause a rapid disappearance of risk appetite, accompanied by outflows.
2.
3.
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Asia Credit Compendium 2014 Global pension funds: Bridging the gap
Pension fund assets continue to grow
Global pension fund assets continue to grow, with a current asset base of USD 33tn as of August 2013 Global pension funds have enjoyed reasonable growth they have expanded at a 7% CAGR since 2001 and had an asset base of c.USD 33tn as of August 2013. US pension funds continue to dominate, with c.USD 18.5tn of assets, followed by Japan (c.USD 3.7trn) and the UK (c.USD 2.7trn). US and European (including UK) pension funds represent more than 75% of pension assets globally (Figure 47), and the top three regions US, Japan and the UK represent more than 80% of global pension assets. Their allocation strategies are the main driver of institutional flows into the various asset classes.
Bridging the asset/liability gap

Pension funds have had a widening asset/liability gap since 2001. This has been exacerbated by regulatory change and poor performance. The US Pension Protection Act 2006 (PPA) required US pension funds to move to a discount rate based on the smoothing of US AA-rated corporate yields to calculate the present value of their liabilities. Given record-low yields, this resulted in a rapid spike in liabilities. The performance of these pension funds has also been poor over the past decade, exacerbated by the bursting of the dot-com bubble, the global financial crisis, and the subsequent sovereign debt crisis in the West. Pension funds asset-liability mismatch seems to be improving Pension funds globally have marginally bridged their asset-liability mismatch in the past year (Figure 48), owing mainly to a shift in allocations from equities (which have traditionally formed a sizeable part of their allocations) to bonds and alternative asset classes that include EM. In this section, we guesstimate the extent of incremental flows into EM debt as a result of pension funds increasing allocations to alternate asset classes. In order to assess pension fund allocation profiles, we look at the four main pension fund regions and calculate EM allocations wherever data is available. We also infer incremental fund flows into the Asian HC debt market. In this context, while Asian pension funds are as important to fund flows as those from other regions, they are already substantial players in the Asian debt market (they participate in c.15-20% of Asian new issues). Also, given their small size relative to their US/European counterparts, the incremental impact of their increased allocations on Asian flows is likely to be small at this point.
Figure 47: US/European (incl. UK) pension funds represent 75% of overall assets Global pension fund assets by region (USD tn)
US Japan UK Australia Canada Netherlands Switzerland Denmark Germany Brazil Korea Sweden South Africa Finland Malaysia Singapore France 3.7 18.5
Figure 48: Asset/liability mismatch is decreasing Pension fund assets, liabilities and asset/liability indicator for 11 major economies, 1998=100
200 150 100 50 0 -50 -100 -150 -200 -250 1998 2001 2004 2007 2010
Source: CityUK, Towers Watson, Standard Chartered Research
1.6 1.5 1.2 0.7 0.7 0.5 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2
2.7
Asset-liability ratio (RHS)
130 Assets 120 110 100 90 80 70 Liabilities 60 50
Source: OECD, Towers Watson, Standard Chartered Research
50

Shifting allocations; EM debt is still under-invested
EM debt allocations seem to be improving, despite a marginal shift in allocations from fixed income to equities Pension funds have experienced a strategic shift in allocations from equities to other asset classes including bonds since 2007. The move to market-based rates (US PPA 2006), along with the unstable empirical duration of US equities, caused international pension funds to significantly reduce their allocation to equities between 2001 and 2011 (Figures 49-52). Pension funds from the Nordic region slashed their allocations to equities to 20% from 40%. However, the latest poll of pension funds allocations indicates that equities are regaining interest. This shift is stark for US pension funds their average equity allocations have risen to 52% from 44% in 2012, while their bond allocations have fallen to 28% from 31% (Figure 49). Japanese pension funds have also increased their equity allocations (to 35% from 31%) while marginally reducing their bond allocations. UK/European pension funds have maintained their equity allocations, while marginally reducing their bond allocations and increasing their allocations to alternative asset classes (to 17% from 14%). Determining pension funds EM-specific allocations is difficult. Some pension funds place these allocations in the others or alternate asset class categories, while others gain indirect exposure through mutual funds (which form a sizeable part of pension fund allocations). Anecdotal evidence suggests that the average EM allocation of US pension funds is a mere 1.7% (c.USD 315bn). We estimate US pension funds specific allocation to EM debt at c.0.7%. The lack of EM market depth and liquidity, combined with the misperception that EM is riskier than DM, has kept
Figure 49: US pension funds increase equity exposure Estimate of US pension fund asset allocation
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2006 2007 2011 2012
Source: Towers Watson, Standard Chartered Research
Figure 50: Japanese pension funds also add to equities Estimate of Japan pension fund asset allocation
Equities Bonds Other Cash
Equities
Bonds
Other
Cash
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001
2002
2006
2007
2011
2012
Figure 51: UK pension funds maintain bond allocations, add to other investments Estimate of UK pension fund asset allocation
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2006 2007 2011 2012
Figure 52: Bond allocations drop marginally Estimate of Australia pension fund asset allocation
Equities Bonds Other Cash
Equities
Bonds
Other
Cash
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001
2002
2006
2007
2011
2012
51

allocations low. However, given the size of EM capital-market assets outstanding (c.USD 19.2tn, as per IMF data), this allocation is relatively small even considering the tradable market of c.USD 8tn. US pension funds allocations to EM debt are much smaller than those of European pension funds Details on European pension fund allocations to EM are more readily available. According to Mercer (which conducts an annual survey of UK and European pension funds), the average EM allocation of UK pension funds had risen to 5.2% in 2013 from 4.1% in 2011. Similarly Europe ex-UK pension funds allocation rose to 4.9% in 2013 from 3.9% in 2011. As mentioned above, most of these allocations are classified as an alternate asset class, a category that has seen increasing allocations in the past few years. The bigger pension funds tend to invest directly in alternatives (such as EM) than via the fund of funds route. While European (including UK) pension funds overall allocation to EM is c.5.2%, we estimate their allocation to EM debt at c.2.5%. This figure varies within the region, with some Nordic pension funds having higher allocations (c.7-9%) to EM debt. The proportional allocation to EM debt is likely to increase, especially among UK/European pension funds as they invest more in alternate asset classes despite the broader global shift in pension fund allocations to equities from bonds.
EM allocations on the rise

The Mercer survey also polls UK/European pension investors on their planned strategic asset allocation shifts in the coming years. Based on this survey, c.24% of UK/European pension funds expect to increase allocations to alternatives over the next few years, while they expect to reduce allocations to equities both domestic and non-domestic (Figure 55). Within the alternatives, a significant proportion of pension funds plan to increase their allocation to growth-oriented fixed income, as shown in Figure 53. Within growth-oriented fixed-income, EM debt is expected to receive a significant boost average allocations to this asset class are c.5% for pension funds with a dedicated EM debt allocation. We expect global pension fund allocations to EM to increase Globally, we expect pension funds to increase their EM allocations, driven by the following factors: (1) a continuing drive to bridge funding shortfalls EM yields (both bond and dividend yields) are higher than those in DM, offering an attractive opportunity; (2) relatively high growth potential in EM countries, along with healthier balance sheets and ample policy headroom relative to the debt-ravaged balance sheets of the West; and (3) increasing market depth and liquidity in EM, which will make these markets easier to access and navigate. We estimate a 1-2ppt increase in Figure 54: EM debt to receive the highest incremental allocation within growth oriented fixed income UK/Europe strategic allocation to growth-oriented fixed income
14 12 10 8 6 Decrease 4 2 0 HFs -10 -5 0 5 10 15 20 EM debt HY Convertible Absolute Senior loans Private debt bonds total return bond strategis % plans with allocation % average allocation
Figure 53: UK/European pension funds plan to increase allocation to growth-oriented fixed income assets % of UK/Europe plans expecting to change allocation to alternative asset class
Multi asset Growth-oriented fixed income Real assets PE Increase
Source: Towers Watson, Mercer, Standard Chartered Research
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EM allocations globally, with the US allocation to EM debt rising to 2.0% from 0.7% over three years. The smaller size of EM assets will likely keep allocations small relative to DM. Excluding assets that are inaccessible to global investors (such as those in China), EM assets make up only c.8% of global investable assets. However, EM assets have been growing significantly EM debt has expanded at a CAGR of 14% since 2000 and is poised to grow at healthy rates in the coming years.
Quantifying expected flows

In order to estimate USD flows into EM debt in the next three years, we make the following assumptions: (1) global pension funds continue to grow at a CAGR of 6%; and (2) allocations to EM debt increase to 2% for US pension funds (from 0.7%) and to 4.2% for UK and European funds (from 2.5%). Based on these assumptions, we estimate incremental flows of c.USD 530bn into EM debt over the next three years. Assuming 50% of these flows are into EM HC, we estimate c.USD 265bn of incremental flows into EM HC debt. Assuming a 25% allocation to Asia by EM HC bond funds, this translates into c.USD 67bn of incremental flows in the next three years, or roughly c.USD 22bn a year. This could act as a strong anchor for increased issuance in Asia.
Figure 55: UK/European pension funds increase allocation to alternatives while reducing those to equities % of UK/Europe plans expecting to change investment strategy
Alternatives Domestic index-linked govt. bonds Other matching assets Domestic corp. bonds Domestic FI govt. bonds Non-domestic corp. bonds Non-domestic equity Property Non-domestic govt. bonds Domestic equity -30 -20 -10 0 10 20 30 Decrease Increase
53
Asia Credit Compendium 2014 Appendix 1: Expected issuance in 2014

Credit Sovereigns Bangladesh Pakistan China India Indonesia Malaysia Mongolia Philippines South Korea Sri Lanka Thailand Vietnam Banks Senior China Export-Import Bank of China Other China banks Hong Kong ICBC Asia Other HK banks India Axis Bank Ltd. Bank of Baroda Bank of India Canara Bank Export Import Bank of India HDFC Bank ICICI Bank Ltd. IDBI Bank Ltd. Indian Overseas Bank Rural Electrification Corp. Ltd. State Bank of India Syndicate Bank Union Bank of India Other Indian banks Indonesia Bank Negara Indonesia Export Import Bank of Indonesia PT Bank Mandiri (Persero) Tbk. PT Bank Rakyat Indonesia (Persero) Tbk. Korea Busan Bank Daegu Bank Export Import Bank of Korea Hana Bank Hyundai Capital Industrial Bank of Korea Kookmin Bank 0 0 4,000 800 0 1,500 1,000 Unlikely to issue in the USD market Unlikely to issue in the USD market Programmatic issuer in the G3 market; Could opportunistically tap the market Unlikely to issue in the USD market Regular issuer in the G3 market. Has USD 1bn of redemptions in 2014 0 Unlikely to issue in the USD market 0 Unlikely to issue in the USD market 0 Unlikely to issue in the USD market 0 Unlikely to issue in the USD market 500 Could issue to fund new business 0 Given capital needs, would be more inclined to issue sub-debt, market conditions permitting 0 Given capital needs, would be more inclined to issue sub-debt, market conditions permitting 0 Given capital needs, would be more inclined to issue sub-debt, market conditions permitting 500 Could issue to fund new business; has a USD 150mn bond due in 2014 0 Unlikely to tap the market 1,000 Could issue to fund new business; has a USD 200mn bond due in 2014 0 Given capital needs, would be more inclined to issue sub-debt, market conditions permitting 0 Given capital needs, would be more inclined to issue sub-debt, market conditions permitting 0 Unlikely to tap the market 1,000 Could issue to fund new business; given capital needs, would also be inclined to issue subdebt, market conditions permitting 0 Given capital needs, would be more inclined to issue sub-debt, market conditions permitting 0 Given capital needs, would be more inclined to issue sub-debt, market conditions permitting 500 Issuance likely from new issuers 700 Has USD 700mn of redemptions in 2014. 1,000 Some HK banks could opportunistically issue in the USD senior space 1,000 Has USD 1bn of redemptions in 2014 2,000 Possibility of more credit-supported transactions (e.g., SBLC or guarantee) or issuance by other leasing subsidiaries 1,000 Could look to issue in USD, market conditions permitting 750 Could look to issue in USD, market conditions permitting 0 Unlikely to issue in the offshore market 0 Unlikely to issue in the offshore market 6,000 Expected to issue USD 6bn in the G3 markets to fund the deficit and USD 3bn of redemptions 0 Unlikely to issue in the offshore market 0 Unlikely to issue in the offshore market 1,000 Expected to issue USD 1bn to maintain offshore presence 1,000 Expected to issue USD 1bn to maintain offshore presence 1,500 Could look to issue in USD to fund budget deficit (USD 750mn sovereign and USD 750mn guaranteed quasi-sovereign debt) 1,500 Could look to issue in USD to fund infrastructure projects 750 Could look to issue in USD, market conditions permitting Expected issuance (USD mn) Comments
54

Credit Korea Development Bank Korea Exchange Bank Korea Finance Corp. KHFC NH Bank Shinhan Bank Woori Bank Malaysia CIMB Bank Bhd. Export Import Bank of Malaysia Hong Leong Bank Malayan Banking Bhd. RHB Bank Bhd. Mongolia Development Bank of Mongolia TDB Mongolia Philippines Banco De Oro Development Bank of Philippines Rizal Commercial Bank Singapore DBS Bank Ltd. OCBC UOB Sri Lanka Bank of Ceylon National Savings Bank Thailand Bangkok Bank Kasikornbank Krung Thai Bank Siam Commercial Bank Other banks Others Banks Subordinated China banks Hong Kong Bank Indian banks Singaporean banks Thai banks HG corporates China Baidu Beijing Enterprises Bright Foods China Aluminium China Guangdong Nuclear Power China Longyuan China Merchants China Metal China Oil Field Services China Railway Resources 0 750 0 0 500 0 0 0 500 0 Unlikely to issue in the USD market Large capex plans could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Large capex plans could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Planned expansion of rig fleet could lead to USD issuance Unlikely to issue in the USD market 1,000 500 2,500 2,250 500 Some larger Chinese banks might tap the USD Tier 2 market Some larger HK banks might tap the USD Tier 2 market We expect Indian public-sector banks to issue Tier 1 capital to boost capitalisation levels Could tap the Tier 2 or Tier 1 USD market; USD Tier 2 refinancing amounts in 2014 are UOB: USD 1bn, DBS: USD 750mn, OCBC: USD 500mn Some larger Thai banks might issue Tier 2 1,500 Issuance likely from debut issuers 750 0 500 500 Could opportunistically tap the market Unlikely to issue in the USD market Could opportunistically tap the market Could opportunistically tap the market 0 0 Unlikely to issue in the USD market Unlikely to issue in the USD market 500 0 0 Could opportunistically tap the market Unlikely to tap the USD senior space Unlikely to tap the USD senior space 0 0 0 Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market 0 0 Unlikely to issue in the USD market Unlikely to issue in the USD market 0 0 0 0 0 Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Expected issuance (USD mn) 4,000 0 0 0 500 800 800 Programmatic issuer in the G3 market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Has c. USD 700mn of redemptions in 2014 Could opportunistically tap the market Could opportunistically tap the market Comments
55

Credit China Railway Construction China Resources Cement China Resources Gas China Resources Land China Resources Power China State Construction China Vanke China Zhengtong CNOOC CNPC COFCO COLI COSCO ENN Energy Golden Eagle Retail Hainan Airlines Meiya Power Poly Real Estate Shenzhen International Sinochem Sinopec/Sinopc State Grid Corp. of China Tencent Tingyi Want Want China Yanzhou Coal Yuexiu Property Zijin Mining Group Other China credits Hong Kong Champion REITs Cheung Kong CLP Power Hang Lung Properties Henderson Land HK Electric Hong Kong China Gas Hong Kong Land Hutch Hysan Development Co. IFC Development KCRC Kerry Properties Li & Fung Lifestyle International MTRC Nan Fung New World Development Noble PCCW Smartone Sun Hung Kai Properties Swire Pacific 0 0 1,000 0 0 0 0 500 1,500 0 0 0 0 0 0 0 0 0 500 500 0 800 500 Unlikely to issue in the USD market Unlikely to issue in the USD market Could look to issue in USD market to fund acquisitions Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Has an upcoming maturity in 2014 USD 2bn maturity in 2014 could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Could look to issue in USD, market conditions permitting Unlikely to issue in the USD market USD 600mn maturity in 2014 could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Could look to prefund 2015 redemptions Holding company could issue in the USD market Unlikely to issue in the USD market Has an MTN programme of around USD 7bn Could issue opportunistically
56
Expected issuance (USD mn) 500 0 500 300 0 500 0 0 2,500 2,000 500 0 0 0 500 0 0 0 500 1,000 2,500 2,000 0 0 0 1,000 0 0 8,000 Unlikely to issue in the USD market
Comments Large capex plans could lead to issuance Large capex plans could lead to issuance Debt expiry; has been relatively quiet Unlikely to issue in the USD market Large capex plans could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Large overseas investments could be partly funded though USD market Large overseas investments could be partly funded though USD market Large capex could be partly funded though USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Could issue in USD, market conditions permitting Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Expansion of logistics business could lead to opportunistic issuance Large capex plans could lead to issuance Large overseas investments could be partly funded though USD market Large capex plans could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Large capex plans and refinancing needs could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Large cross-border acquisitions, significant expansion plans and tightening onshore liquidity could lead to USD issuance

Credit Swire Properties Wharf Wheelock & Co. Other HK credits India Bharat Petroleum Bharti Airtel Indian Oil Corp. Indian Railway Finance NTPC ONGC Videsh Powergrid Corp. of India Reliance Other Indian credits Indonesia Pertamina PLN Korea Doosan Infracore GS Caltex Hyundai Motor Hyundai Steel Kia Motors Korea East West Power Korea Electric Korea Gas Korea Highway Korea Hydro & Nuclear Power Korea Land & Housing Korea National Oil Korea Rail Korea Resources Korea Southern Power Korea Water Korea Western Power KT Corp. Lotte Shopping Other Korean gencos POSCO Samsung SK Broadband SK Innovation SK Telecom Other Korean credits Malaysia Axiata Bhd. Genting Bhd. Guoco IOI Corp. MISC Bhd. Petronas Sime Darby Telekom Malaysia 0 0 0 0 500 0 0 0 Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Opportunistic issuance in USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market
57
Expected issuance (USD mn) 0 500 0 1,000 0 1,000 0 500 750 1,000 500 1,000 1,000 3,000 1,000 0 500 0 0 0 0 1,000 500 500 1,000 0 1,000 0 0 0 0 0 500 0 750 750 0 0 0 0 750 Unlikely to issue in the USD market
Comments
Has high ST debt; issuance is mainly to meet high capex needs Unlikely to issue in the USD market Opportunistic issuance expected by first-time issuers Unlikely to issue in the USD market Will look to issue in USD to lower its dependence on loans Unlikely to issue in the USD market Large investment plans for Indian railways to lead to offshore issuance Large capex plans for capacity addition could lead to USD issuance Overseas acquisitions could lead to USD issuance Could issue opportunistically Overseas gas ventures will be partly funded through USD issuance Overseas acquisitions could lead to USD issuance by new issuers Large capex plans could lead to issuance Large capex plans could lead to issuance Unlikely to issue in the USD market Could issue to fund 2014 and 2015 redemptions Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Large capex plans could lead to issuance USD 500mn maturity in 2014 could lead to issuance USD 500mn maturity in 2014 could lead to issuance USD 1bn maturity in 2014 could lead to issuance Large refinancing needs will be primarily met through local markets USD 1bn maturity in 2014 could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market USD 600mn maturity in 2014 could lead to issuance Unlikely to issue in the USD market Large capex plans could lead to issuance USD 700mn maturity in 2014 could lead to issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Some new Korean issuers could tap the USD market

Credit Tenaga Other Malaysian credits Singapore CapitaMall Trust CapitaLand PSA Corp. Singapore Power SingTel Temasek Other Singapore credits Thailand IRPC PTT Exploration PTT Global Chemicals PTT Pcl Thai Oil Other Thai credits HY corporates China Agile Anton Oilfield Beijing Capital Land Beijing Enterprises Water CCRE China Aoyuan China Fisheries China Minmetals China Oil & Gas Corp. China Oriental China Properties Group China SCE China Shanshui Cement CIFI CITIC Pacific CITIC Resources CITIC Telecom Country Garden CSI Properties Evergrande Fantasia Fosun International Franshion Fufeng Future Land Gemdale Glorious Property Greenland HK Holdings Ltd. Greentown China Guangzhou R&F Hengdeli Holdings Ltd. Hopson Kaisa KWG Property 600 0 300 0 0 0 350 0 0 0 0 200 0 400 500 300 0 1,200 0 1,500 0 500 300 0 0 400 0 750 500 500 0 0 400 500 May issue for land acquisitions, and has USD 300mn of 2016 bonds callable in 2014 Unlikely to issue in the USD market Could opportunistically tap the market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Could issue opportunistically Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Might call existing bonds to lower costs and extend maturity Unlikely to issue in the USD market Could opportunistically tap the market Could issue opportunistically Likely to issue mainly for refinancing needs Unlikely to issue in the USD market Has a maturity in 2014 and a callable bond (maturing 2017 callable 2014) Unlikely to issue in the USD market Could issue in H2-2014 given the Jan-15 maturity Unlikely to issue in the USD market Could opportunistically tap the market Could opportunistically tap the market Unlikely to issue in the USD market Unlikely to issue in the USD market Could opportunistically tap the market Unlikely to issue in the USD market Could opportunistically tap the market Could opportunistically tap the market Has a CNH bond redemption Unlikely to issue in the USD market Unlikely to issue in the USD market Could opportunistically tap the market Has 2016/17 callable in 2014 0 500 500 500 0 0 Unlikely to issue in the USD market Large capex plans could lead to USD issuance Large capex plans could lead to USD issuance Unlikely to issue in the USD market Unlikely to issue in the USD market Low possibility of new Thai issuers tapping the market 500 0 0 0 0 1,000 500 Likely to issue to refinance the 2015 maturity and meet capex needs Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Could look for opportunistic issuance in USD market Opportunistic issuance in USD market Expected issuance (USD mn) 0 1,000 Unlikely to issue in the USD market New issuers in USD market unlikely Comments
58

Credit Lai Fung Lai Sun Longfor MIE Holdings Mingfa Modernland China Parkson Retail Poly Property Powerlong Road King Shimao Shui On Shun Tak Sino Land Soho China SUNAC Texhong Wuzhou Xinyuan Real Estate Yanlord Yingde Gases Yuzhou Properties Zoomlion Other China HY HK HK Broadband K Wah International Pacnet Sun Hung Kai & Co. India Rolta Vedanta Other Indian HY Indonesia Adaro Alam Sutera Realty Berau Coal Bhakti Investama Cikarang Gajah Tunggal Indika Jababeka JAPFA Comfeed Lippo Karawaci Media Nusantara Modernland Multipolar Star Energy Tower Bersama Other Indo HY Mongolia Mongolia Mining 0 Unlikely to issue in the USD market
59
Expected issuance (USD mn) 200 0 500 0 0 0 0 350 0 300 1,000 500 0 0 750 500 0 0 0 450 0 0 0 3,000 0 0 300 0 0 1,250 1,000 800 0 1,000 0 0 0 0 250 0 0 0 0 0 0 0 1,500 Has a maturity in 2014 Unlikely to issue in the USD market Could opportunistically tap the market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Could opportunistically tap the market Unlikely to issue in the USD market Could opportunistically tap the market Could opportunistically tap the market Has a bond maturity in 2015 Unlikely to issue in the USD market Unlikely to issue in the USD market
Comments
Could opportunistically tap the market, depending on market conditions and expansion needs Could opportunistically tap the market, depending on market conditions and expansion needs Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Has a 2017 bond callable in 2014 Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Debut issuance likely Unlikely to issue in the USD market Unlikely to issue in the USD market Likely to refinance existing bonds to extend maturity Unlikely to issue in the USD market Unlikely to issue in the USD market USD 500mn maturity, opportunistic issuance in USD market Opportunistic issuance in USD market Opportunistic issuance to call 2019 bonds if price is right Unlikely to issue in the USD market To call 2015 bonds and do a likely exchange of 2017 bonds Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Likely to issue in 2014 Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Debut issuance is likely

Credit Philippines Alliance Global Carmen Copper Filinvest First Pacific First Gen Corp ICTSI JGS Megaworld Petron Corp. PSALM San Miguel SM Investments Other Philippines HY Singapore Olam International Sound Global Stats ChipPac 0 0 0 Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market 0 0 0 300 0 0 0 0 0 0 0 400 1,500 Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market To issue for investment purposes Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market Unlikely to issue in the USD market ST debt expiry and high capex needs Debut issuance is likely Expected issuance (USD mn) Comments
60
Asia Credit Compendium 2014 Appendix 2: Asian bond markets: Size and allocation dynamics
Figure 56: EM bond markets have grown in size Size of international bond and note markets
USD bn 0 Asia Latam Emerging Europe Africa & Middle East Asia Developed 13 14 15 16 17 18 0% Quasis + agency 20% 40% 60% 80% 100% Banks 2007 Q2-2013 Emerging Europe Africa & Middle East General government 200 400 600 800 Latam Corp.
Figure 57: Proportion of sovereign bonds in Asia is lower Composition of international bond and note markets
Developed markets USD tn 12
Source: BIS, Standard Chartered Research
Figure 58: EM bond markets continue to grow at a healthy pace Growth in international bond and note markets (USD bn)
700 600 500 400 300 200 100 Latam Eastern Europe Asia Africa & Middle East Developed (RHS) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Q22013
Figure 59: Asian G3 bond market composition (as of 22 November 2013, USD bn)
140 120 100 80 60 40 Quasi. 20 0 China Korea Hong Kong Indonesia India Philippines Singapore Malaysia Thailand Sri Lanka Vietnam
Notes: Stock of all bonds, both tradable and non-tradable; does not include notes; composite ratings are used to differentiate HG and HY; Source: Bloomberg, Standard Chartered Research
Corp.
Fin.
Total size: Sovereigns: Quasi-sovereigns: Financials: HG corporates: HY corporates: NR corporates
USD 537bn USD 79bn USD 138bn USD 78bn USD 119bn USD 66bn USD 57bn
Sov.
61
100%
100%
100%
*Indicates a retap; Source: Standard Chartered Research
20% 0% 0% Sovereigns Sovereigns INDON '23 INDON '43 INDON '23* KOREA '23 INDOIS '19 INDON '23 INDON '43 INDON '23* KOREA '23 INDOIS '19 AM/HF Banks US
40%
60%
80%
20%
40%
60%
80%
20%
40%
60%
80%
0%
China HG
China HG
China HG
US
**Includes small amount of Middle East participation; Source: Standard Chartered Research
GUAINV '18 GUAINV '23 CHRAIL '23 VANKE '18 CHCONS '18 BEIENT '18 RLCONS '23 BRTFOD '18 IFCDCN '19 HUANEN '18 POLYRE '18 LONGYU '16 MEIPOW '18 CHGDNU '18 CHALUM '49 CHIOLI '18 CHIOLI '23 CHIOLI '43 COFCO '18 COFCO '23 DALWAN '18 CHMED '18 Europe Insurance/Pension
*Indicates a retap; **Includes small amount of Middle East participation; Source: Standard Chartered Research
Figure 62: Asia 2013 RegS-only new-issue allocation profile by geography (HG corporates)
Figure 60: Asia 2013 144a-eligible new-issue allocation profile by geography (sovereigns and HG corporates)
Figure 61: Asia 2013 144a-eligible new-issue allocation profile by investor type (sovereigns and HG corporates)
62
Europe Retail/PB Korea HG KORESC '18 KOROIL '18 KORGAS '18 GSCCOR '18 KOHNPW '18 KOWEPW '18 KOEWPW '18 Other HG TOPTB '23 TOPTB '43 RILIN Perp BHARTI '23 BHARTI '23* PERTIJ '23 PERTIJ '43 PTTEPT '18
Asia**
Asia**
CNPCCH '16 CNPCCH '18 CNPCCH '23 SINOPE '16 SINOPE '18 SINOPE '23 SINOPE '43 SINOCH '49 CNOOC '16 CNOOC '18 CNOOC '23 CNOOC '43 WANTSP '18 GERGHK '23 CHGRID '18 CHGRID '23 CHGRID '43 CNOOC '23 SINOPE '18 SINOPE '23 SINOPE '43
CNPCCH '16 CNPCCH '18 CNPCCH '23 SINOPE '16 SINOPE '18 SINOPE '23 SINOPE '43 SINOCH '49 CNOOC '16 CNOOC '18 CNOOC '23 CNOOC '43 WANTSP '18 GERGHK '23 CHGRID '18 CHGRID '23 CHGRID '43 CNOOC '23 SINOPE '18 SINOPE '23 SINOPE '43
HK HG
Korea HG
SUNHUN '23 HYSAN '23 CPREIT '23 METLIG '18 CHEUNG '49 COSCCH '23 SWIPRO '20 PCCW '23 WHEELK '18 NOBLSP '18 HKHKD '23 YXREIT '18 SWIRE '23
Korea HG
KOSPO '18 SKENER '18 HATELE '18
KORESC '18 KOROIL '18 KORGAS '18 GSCCOR '18 KOHNPW '18 KOWEPW '18 KOEWPW '18
Other HG
Other HG
PWRGIN '23 SIMEMK '18 SIMEMK '23 ONGCIN '18 ONGCIN '23 IOCLN '23
TOPTB '23 TOPTB '43 RILIN Perp BHARTI '23 BHARTI '23* PERTIJ '23 PERTIJ '43 PTTEPT '18
100%
20%
40%
60%
80%
0%
100%
100%
20% 0% BOIIIN '18 Indian banks SBIIN '18 ICICI '19
40%
60%
80%
20%
40%
60%
80%
0%
BOIIIN '18
Indian banks
SBIIN '18
ICICI '19
China HG
KDB '16 AM/HF US KDB '18 Banks SHNHAN '18 HANABK '16 Asia** Korean banks EIBKOR '18 KHFC '18 KOFCOR '18 KDB '19 WOORIB '18
KDB '16
AM/HF Europe
KDB '18
Banks
SHNHAN '18
HANABK '16
GUAINV '18 GUAINV '23 CHRAIL '23 VANKE '18 CHCONS '18 BEIENT '18 RLCONS '23 BRTFOD '18 IFCDCN '19 HUANEN '18 POLYRE '18 LONGYU '16 MEIPOW '18 CHGDNU '18 CHALUM '49 CHIOLI '18 CHIOLI '23 CHIOLI '43 COFCO '18 COFCO '23 DALWAN '18 CHMED '18 Insurance/Pension
Figure 64: Asia 2013 144a-eligible new-issue allocation profile by geography (banks)
Figure 65: Asia 2013 144a-eligible new-issue allocation profile by investor type (banks)
Figure 63: Asia 2013 RegS-only new-issue allocation profile by investor type (HG corporates)
Insurance/Pension
63
EIBKOR '18
Korean banks
KHFC '18
Retail/PB NSBLK '18 BBLTB '18 BBLTB '23
HK HG
Retail/PB
KOFCOR '18
KDB '19
WOORIB '18
SUNHUN '23 HYSAN '23 CPREIT '23 METLIG '18 CHEUNG '49 COSCCH '23 SWIPRO '20 PCCW '23 WHEELK '18 NOBLSP '18 HKHKD '23 YXREIT '18 SWIRE '23 KOSPO '18 SKENER '18 HATELE '18
Korea HG
NSBLK '18
Other banks
Other financials
BBLTB '18
Other HG
BBLTB '23
PWRGIN '23 SIMEMK '18 SIMEMK '23 ONGCIN '18 ONGCIN '23 IOCLN '23

Figure 66: Asia 2013 RegS-only new-issue allocation profile by geography (banks)
100% 80% 60% 40% 20% 0% EXIMBK '23 UNBKIN '18 CITICS '18 NACF '18 DBGFNG '18 BAKCEY '18 ZHTONG '18 BCHINA '23* CINDBK '24 VICVN '18 CINDBK '24 HDFCB '18 HDFCB '16 KTB '23 ORIEAS '18 IDBI '19 SUELIN '18 BBRIIJ '18 ICBCAS '23 ICBCAS '23 VED '19 BCHINA '23 HAISEC '18 VED '23 HAISEC '18 KEB '18 KEB '23 Indian banks Korean banks Other financials
US
Europe
Asia**
Figure 67: Asia 2013 RegS-only new-issue allocation profile by investor type (banks)
100% 80% 60% 40% 20% 0% EXIMBK '23 BAKCEY '18 UNBKIN '18 HDFCB '18 HDFCB '16 CITICS '18 NACF '18 KEB '18 KEB '23 KTB '23 DBGFNG '18 BCHINA '23* ZHTONG '18 ORIEAS '18 RLTAIN '18 IDBI '19 SUELIN '18 BBRIIJ '18 BCHINA '23 Indian banks Korean banks Other financials
AM/HF
Banks
Insurance/Pension
Retail/PB
Figure 68: Asia 2013 144a-eligible new-issue allocation profile by geography (HY corporates)
100% 80% 60% 40% 20% 0% KAISAG '18 CHIOIL '18 COGARD '23 COGARD '21 STAREN '20 FUTLAN '18 PTJAP '18 MPEL '21 ASRIIJ '20 TBIGIJ '18 ANTOIL '18 INDYIJ '23 GJTLIJ '18 BHITIJ '18 China HY Indo HY Other HY
US
Europe
Asia**
64
100%
100%
100%
20% 0% 0% MPEL '21 CHIOIL '18 ANTOIL '18 COGARD '23 FUTLAN '18 KAISAG '18 COGARD '21 Banks AM/HF China HY
40%
60%
80%
20%
40%
60%
80%
20%
40%
60%
80%
0%
US
AM/HF Europe China HY INDYIJ '23 GJTLIJ '18 ASRIIJ '20
Banks
China HY
Insurance/Pension
Figure 70: Asia 2013 RegS-only new-issue allocation profile by geography (HY corporates)
Figure 71: Asia 2013 RegS-only new-issue allocation profile by investor type (HY corporates)
Figure 69: Asia 2013 144a-eligible new-issue allocation profile by investor type (HY corporates)
Insurance/Pension
65
Asia**
Indo HY
Retail/PB
STAREN '20 TBIGIJ '18 PTJAP '18 BHITIJ '18
Retail/PB ICTPM '23 JGSPM '23 PCOR Perp PCOR Perp* FDCPM '20 FIRPAC '23 MEGPM '23 SMCPM '23 CITPAC '49
XINHD '18 FOSUNI '20 MIEHOL '18 SHTGF '20 TEXTEX '19 PRKSON '18 CAPG '17 KAISAG '20 SHIMAO '20 HPDLF '18 LASUDE '18 AGILE Perp FTHDGR '20 GZRFPR '20 GZRFPR '20* PWRLNG '18 CHINSC '17 CENCHI '20 MINGFA '18 GRNCH '18 GRNCH '18* KWGPRO '20 GLOPRO '18 GLOPRO '18* SUNAC '18 BJCAPT '49 CIFIHG '18 XINYUA '18 POLHON '18 GRNCH '19 YUZHOU '18 CHINPR '18 FRANSH '18 MOLAND '18
XINHD '18 FOSUNI '20 MIEHOL '18 SHTGF '20 TEXTEX '19 PRKSON '18 CAPG '17 KAISAG '20 SHIMAO '20 HPDLF '18 LASUDE '18 AGILE Perp FTHDGR '20 GZRFPR '20 GZRFPR '20* PWRLNG '18 CHINSC '17 CENCHI '20 MINGFA '18 GRNCH '18 GRNCH '18* KWGPRO '20 GLOPRO '18 GLOPRO '18* SUNAC '18 BJCAPT '49 CIFIHG '18 XINYUA '18 POLHON '18 GRNCH '19 YUZHOU '18 CHINPR '18 FRANSH '18 MOLAND '18 CITPAC '20 RLTAIN '18 Other HY VED '19 VED '23 VICVN '18
Other HY
Other HY
ICTPM '23 JGSPM '23 PCOR Perp PCOR Perp* FDCPM '20 CITPAC '20 FIRPAC '23 MEGPM '23 SMCPM '23 CITPAC '49
Asian bond valuations All about credit selection

Analysts: Shankar Narayanaswamy (+65 6596 8249), Sandeep Tharian (+44 20 7885 5171)
Spread tightening A tough ask for 2014

AXJ credit to have a widening bias
Spreads would have to widen from end-November 2013 levels for demand and supply to match in the Asian credit markets in 2014 We expect JACI credit spreads to widen by 22bps in 2014 due to fundamental and technical headwinds facing Asian credit markets. The external vulnerabilities of sovereigns are likely to come back into focus as QE-driven inflows to Asian fixed income slow. Weaker credit metrics due to rising leverage at the macro and corporate levels are also a concern. Moreover, while fixed income inflows to Asia could pick up moderately due to range-bound UST yields, supply is also likely to pick up substantially. At end-November spread levels, we expect supply to overwhelm demand for Asian credit in 2014. Thus, spreads would have to widen in order for demand and supply to match. Providing some comfort is the fact that AXJ credits now have a larger spread cushion to withstand UST widening than they did at the same time last year. Rising rates will pose challenges for all fixed income assets, including credit. We forecast the 10Y UST yield at 3.40% at end-2014 (65bps higher than end-November 2013 levels), which will erode total returns for the year. Total returns are likely to be in low single digits, and may slip into negative territory for a second straight year if spreads widen more in 2014 than the expected 22bps. In such a scenario, we would continue to prefer credit risk over duration risk in our portfolio, as rising UST yields Figure 2: Bonds underperform on rising yields YTD total-return performance of selected risk assets (as of 22-Nov 2013, %)
3.1 2.9 2.7 JACI 2.5 2.3 260 240 220 200 Oct-12 Jan-13 Apr-13 UST 10Y (RHS) Jul-13 Oct-13 2.1 1.9 1.7 1.5 US stocks Europe stocks US dollar, trade-weighted Asia stocks EMEA bonds Oil Asia bonds US bonds Global bonds Latam bonds EM stocks EM sov. Gold -30 -20 -10 0 10 20 30
Total returns are likely to be in low single digits at best, and to slip into negative territory for a second year if spreads widen marginally
Figure 1: UST/credit spread correlations are high JACI credit spread (bps) vs. UST 10Y yield (%)
340 320 300 280
Figure 3: EM credit spreads are only marginally wider EM credit spreads by region (bps)
550 500 450 400 350 300 250 200 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13
Note: CS regional credit indices used; Source: Bloomberg, Standard Chartered Research
Figure 4: Indonesian bonds suffer in Asia Spread performance of selected AXJ sovs/quasis (bps), YTD as of 22-Nov 2013
30Y 10Y 5Y 30Y 10Y 5Y 30Y 10Y 5Y 30Y 10Y 5Y -50 0 50 100 150 Indonesia Philippines
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Latam EEMEA Asia
China
Korea

remain the biggest risk to AXJ credit in terms of both total returns and flows. That said, spread cushions are low and credit metrics are on a weakening trend. This means credit selection will be important, especially in the crossover and HY corporate spaces.
Rising rates erode total returns in 2013

2013 was a tough year for bonds
DM equities were the biggest winners in 2013, while EM equities and bonds suffered The sharp rise in UST yields after the Feds May announcement of possible QE tapering later in 2013 hurt bond-market performance globally. Bond prices fell due to rising UST yields and widening credit spreads as retail investors withdrew funds from the asset class (Figure 2). Developed-market (DM) equities were the biggest winners in 2013, while EM equities suffered. In the EM fixed income space, both localcurrency and hard-currency bonds were negatively affected; EM local-currency bonds lost more in total-return terms due to the sell-off in the EM rates and FX markets. The sovereign sector was the worst performer in the EM credit space, owing to its higher duration and tighter starting spread levels. Correlations between AXJ credit and UST yields increased sharply after the Feds May announcement (see Figure 1). More recently, there are signs of a breakdown in this correlation as the rise in UST yields slows. Opinion is divided on the direction of UST yields some market participants expect them to be range-bound due to the delay in tapering, while others are nervous about holding duration even in the short term. The forced selling of EM bonds also appears to have ended as the shock associated with rising USTs is increasingly priced in. Despite the roller-coaster ride they endured throughout the year, EM credit spreads are ending the year only marginally wider than where they started (Figure 3). AXJ credit has suffered the sharpest widening (c.22bps), followed by CEEMEA (+14bps) and Latam (+8bps).
Rising rates erode total returns in Asian credit; carry was the key factor
Sovereign bonds were the worst performers due to their higher duration and lower spread cushion relative to the rest of the AXJ credit space Asian USD credits had a total return of -1.24% for 2013 (as of 27 November). Sovereigns underperformed (-7.2%), while HY corporates outperformed (+3.5%). The breakdown of total-return components for AXJ credit (Figure 8) shows that widening USTs were the primary driver of the erosion in total returns. This particularly affected the sovereign space, which has the highest duration and is therefore the highest sensitivity to interest rates. Sovereigns were affected by both rising yields and the resulting widening of credit spreads. The quasi-sovereign space, where duration was high at the beginning of 2013 (5.6), also suffered from both rising yields and widening spreads. Sovereign spreads widened by c.50bps in 2013, mainly due to the underperformance of Indonesia (Figures 4 and 6). Indonesia was a relative outperformer until May, after Figure 5: Sovereign spreads have widened YTD spread movement (bps)
Sovs Quasi HY Corp IG Corp Composite -20 -10 0 10 20 30 40 50 60
Figure 6: driven mainly by Indonesia YTD spread movement (bps)

Sri Lanka Indonesia Philippines Singapore Malaysia India Vietnam Korea Thailand China HK Taiwan -100 -50 0 50 100 150 200
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Despite marginal spread tightening AXJ HG corporate credits printed negative returns owing to rising UST yields which Indonesian rupiah (IDR) weakening worsened current and capital account dynamics. Despite marginal spread tightening, AXJ HG corporate credits printed negative returns owing to rising UST yields. Credits from India, where the current account deficit is a big concern, also underperformed in 2013. HY corporates achieved positive total returns owing to their low duration and higher carry. Despite the deluge of supply from China, Chinese credit spreads tightened in 2013 as investors digested the issuance well. Korean credits also performed well as international support remained strong despite geopolitical tensions on the Korean peninsula. Relatively low net issuance from Korean issuers also kept Korean spreads tighter than similarly rated credits from elsewhere in AXJ.
Liquidity situation is getting weaker

Higher regulatory and disintermediation costs have forced dealers to reduce their bond inventory, thereby weakening shock-absorbing mechanisms in markets Bid/offer spreads in Asia are shrinking. Based on this measure, liquidity in AXJ credit markets has been on an improving trend since 2011. Bid/offer spreads are tightest in the Korean credit space (banks and HG) and in the broader 5Y sector, reflecting the larger amounts of bonds outstanding and consistent demand for this part of the curve. Within the HY space, the liquidity of China credits appears to be improving. That said, secondary-market liquidity is significantly weaker than before the global financial crisis, for the reasons outlined below. Higher regulatory and disintermediation costs have forced dealers to reduce their bond inventory even as the bond markets are growing, weakening markets shock-absorbing mechanisms and leading to higher volatility. This asymmetric liquidity exaggerates price action, and results in dislocations on both the way up and down. Given poor secondary-market liquidity, asset managers are focusing mainly on the primary markets to deploy cash and build meaningful positions.
Figure 7: Secondary liquidity is still weak Bid-offer price since 2011 by sector
5 4 3 2 1 0 India Senior Korea Senior China HG HK HG Korea HG China HY Tights 10Y Indo HY Phili HY 30Y 5Y Wides Current
Figure 8: Rate rise has eroded total returns YTD return attribution by sector (ppt), as of 27-Nov-13
10 5 0 -5 -10 -15 Composite Sov. Quasi-sov.* HG corp.* HY corp.*
*Includes financials; Source: Bloomberg, Standard Chartered Research
Credit carry Treasury carry Treasury delta Credit delta Net return
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Asia Credit Compendium 2014 Drivers of AXJ credit performance in 2014

Spread tightening will be hard to come by
Heavy issuance with only a moderate improvement in inflows is likely to push AXJ credit spreads marginally wider in 2014 as weaker fundamentals and adverse demandsupply dynamics prevail Asian credit markets face fundamental headwinds due to (1) the external vulnerabilities of sovereigns as QE-driven inflows to Asian fixed income slow, and (2) weaker credit metrics given rising leverage at the macro and corporate levels. Moreover, while fixed income inflows to Asia may rise moderately due to range-bound UST yields, supply is also likely to pick up substantially. Heavy issuance with only a moderate improvement in inflows is likely to push AXJ credit spreads marginally wider in 2014 as weaker fundamentals and adverse demand-supply dynamics prevail. The following factors favour a tightening of credit spreads: 1. Global growth is still low: We expect US economic growth to remain weak in H1-2014; this is likely to keep UST yields range-bound in the near term and delay the first Fed rate hike to 2016, supporting flows into EM. Moreover, we expect the Bank of Japan and the European Central Bank to maintain monetary easing to support growth. While their continued easing will not compensate for the Feds eventual withdrawal of QE, it should lead to increased inflows to EM. Continuing institutional support: Institutional support for EM/AXJ credit has remained intact, even as retail investors have withdrawn. As we highlight in the Technicals section, allocations to EM by pension/insurance funds are still rising, despite a marginal decline in overall fixed income allocations. While the pace of institutional money flows into EM may slow in 2014 given expected low-singledigit returns, we believe higher allocations to EM are a structural phenomenon driven by changing perceptions of stronger EM countries and growth in investible asset classes in EM. Relative value versus other regions: While AXJ credit spreads are tighter than other EM credit spreads (Figure 3), this reflects the higher average rating of AXJ credits relative to Latam and CEEMEA. On a rating-adjusted basis, AXJ credits in both the A/AA and HY corporate categories offer relative value versus similarly rated credits, especially in the US. The increasing participation of US HG investors in AXJ credit especially in the growing China A-and-above space given the relative value it offers should support spreads despite heavy supply. Improving market depth and breadth on increasing AXJ credit supply: Increasing supply is a double-edged sword. While it may cause spreads to widen as new supply is digested, it has the benefit of improving the depth and breadth of AXJ credit markets. AXJ credit markets have witnessed tremendous growth in the past three years with the evolution of new sectors such as China HG and Indian seniors. While there may be a cyclical slowdown in issuance in 2014, we believe the structural upward trend remains intact. Increasing redemptions in AXJ in the next few years should also keep the supply pipeline open. Steady local participation: Participation from local investors has been an important factor in the development of the AXJ credit markets. These investors range from financial institutions to retail/PB accounts and invest across the market. As we highlight in the Fundamentals section, Asias ageing population will continue to support fixed income instruments over equities, especially given the weak outlook for equities in most markets. Relative value versus comparable local-currency markets: While there are pockets of value in the local-currency space both in isolation and on a swapped basis versus the US dollar we expect the broader local-currency markets (unhedged) to underperform hard-currency markets in US dollar terms in H1-2014. Our FX strategists expect North Asian FX to outperform Southeast
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Institutional support for EM/AXJ credit has remained intact, even as retail investors have withdrawn
2.
The pace of institutional money flows into EM may slow in 2014 due to expected low-single-digit returns
3.
While there may be a cyclical slowdown in issuance in 2014, the structural upward trend remains intact, in our view
4.
We expect local-currency markets (unhedged) to underperform hardcurrency markets in USD terms in H1-2014
5.
6.

Asian FX in 2014, with the pace of appreciation picking up in H2. Expectations of a stronger Chinese yuan (CNY) and offshore Chinese yuan (CNH) may support Dim Sum bond issuance and performance. The following factors favour a widening of credit spreads: 1. Sustained rise in UST yields: As we highlighted above, correlations between AXJ credit spreads and UST yields have increased dramatically in the past few months (Figure 1). Rising UST yields reduce total returns and encourage outflows from EM funds, triggering a sell-off. Slowing flows also weaken the fundamental metrics of externally vulnerable sovereigns that rely on international flows to funds their current accounts. This exacerbates the sell-off as investors price in weaker fundamentals. Thus, we see a further rise in UST yields as the biggest threat to AXJ credit spreads and total returns in 2014. A panic sell-off of UST yields in the next three to six months triggered by a potential Fed tapering announcement would also likely trigger a credit sell-off, repeating the cycle seen in June 2013. We expect externally vulnerable Asian economies to see spread widening before tapering in 2014. However, because both investors and sovereigns are better prepared now, spreads are likely to be less volatile than in 2013. Concentrated supply: Issuers in the AXJ credit markets will use periods of UST (and credit) stability to print deals as they seek to refinance upcoming maturities while locking in rates before the rates rise further. While we expect overall supply in 2014 to be similar to 2013, supply is likely to concentrated in Q1. The frontloading of new issues could force issuers to offer a new-issue premium to attract investors, putting pressure on the secondary curve. Such short periods of elevated supply could cause marginal spread widening, despite strong demand for new issues (as investors build positions primarily via the new-issue market). Rising corporate leverage: The weakening credit metrics of Asian corporates and banks need to be monitored closely, as credit selection and pricing are important in a year of carry-dominated returns. Asian corporates and banks have enjoyed stronger credit metrics than their counterparts from DM and other EM regions. However, corporate credit quality is declining as a result of weak earnings and higher debt. While this is not a major concern yet, possible rating downgrades in the years ahead could trigger a sell-off in the affected credits, especially in the crossover and HY space. In particular, crossover credits from Chinese and Korean private corporate are at risk, in our view. An associated rise in default rates as weaker credits have difficulty accessing capital markets could exacerbate the situation.
The concentration of new issuance in Q1-2014 may force issuers to offer a new-issue premium to attract investors, putting pressure on the secondary curve
2.
Proper credit selection and pricing is important in a year of carrydominated returns
3.
Figure 9: USTs pose the biggest risk to total returns 10Y UST yields (%)
4.0
Figure 10: Spread cushion has improved vs. 2012 UST spread widening required to wipe out total returns (bps)
Composite
3.5 3.0 2.5 2.0 1.5 1.0 Dec-10 65bps HY corp. HG corp. Quasi. Sov. May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 0 50 100 150
2012 2013
200
Note: UST spread widening is calculated over a 12M period and assumes a constant credit spread; Source: Bloomberg, Standard Chartered Research
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4. Tail-risk events: While the probability of a tail-risk event has decreased since end-2012, we believe the following are still risks: Potential pressures from a failure to resolve the US debt-ceiling debate. An unexpected deterioration in European growth prospects, leading to a reversal of the recovery Isolated geopolitical pressures, for example in the Middle East and on the Korean peninsula Spillover effects from an engineered default in Chinas banking/SOE sector as reforms agreed at the Third Plenum are implemented Deteriorating political conditions, especially in India, Indonesia and Thailand
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Asia Credit Compendium 2014 Expected performance of AXJ USD credit in 2014
We expect total returns to be flat for the year
We expect c.22bps of spread widening in 2014, with sovereigns and HY corporates underperforming in spread terms Of the various factors highlighted above, we expect UST yields to have the biggest impact on AXJ total returns in 2014. While we do not expect rising rates to trigger a credit sell-off of the magnitude seen in June 2013, spreads may come under marginal pressure, further eroding total returns. Our sector-by-sector return expectations for AXJ credit are shown in Figure 11. We expect c.22bps of spread widening in 2014, with sovereigns and HY corporates underperforming. We forecast a c.65bps rise in UST yields, with the 10Y at 3.40 by end-2014. In such a scenario, we expect flat returns for AXJ credit in 2014. Sovereigns are likely to underperform in total-return terms. HY corporates are likely to outperform as their higher carry and lower duration cushion them from rising UST yields. While sharp UST moves could trigger a knee-jerk widening of credit spreads, we do not expect spreads to remain wide, as investors are likely to put cash to work once the rise in yields slows. The spread cushion for AXJ credits to withstand a further sell-off in UST yields has increased to c.105bps from c.75bps at end-2012. On a sector basis, we calculate the cushion spread as the rise in UST yields that the sector can withstand before total return from carry is wiped out (see Figure 10). We carried out this exercise assuming flat spreads, and over a 12-month horizon. We expect UST yields to widen c.65bps from current levels in 2014 (we forecast the 10Y UST at 3.40% at end-2014), leaving a 40bps margin for AXJ credits. Thus, the associated credit spread widening of c.3050bps could wipe out the years total returns To illustrate the sensitivity of AXJ credit to USTs, we plot the total returns of various AXJ credit sectors for every 5bps move in UST yields (Figure 16). We consider two scenarios: (1) UST yields fall by c.25bps in 2014 for reasons such as weaker-thanexpected US growth and continuing stimulus measures. In such a scenario, we would project AXJ total returns at c.5.3%, with HY corporates outperforming at 7.5%. (2) USTs widen by c.100bps, more than our expected c.65bps, resulting in AXJ total returns of -1.3%; sovereigns would underperform at -4.8%. The only silver lining for total returns is that the spread cushion for AXJ credits to withstand rising UST yields has increased to c.105bps from c.75bps.
We expect flat returns for the year
The spread cushion for AXJ credit has risen to 105bps from 75bps at end-2012
Figure 11: Asia to see flat total returns in 2014 Expected spread moves over next 12 months by sector (as of 25-Nov-2013)
JACI subsector Sovereigns Quasisovereigns* HG corporates* HY corporates* Composite Current spread (bps) 226 212 225 524 287 Current weight (%) 15.0 19.4 44.0 21.6 100.0 Expected spread movement (bps)^ 30 22 15 30 22 Expected return (%) -2.08 -0.35 0.44 3.58 0.60
Figure 12: HY to generate positive returns on carry Expected return contributions in 2014 by sector (ppt)
10 8 6 4 2 0 -2 -4 -6 -8 Composite Sov. Quasi-sov.* HG corp.* HY corp.*

*Includes financials; Source: Standard Chartered Research
Net return
Credit carry
Treasury carry Treasury delta Credit delta
*Includes financials; ^positive number indicates spread widening; Source: Bloomberg, Standard Chartered Research
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We prefer credit over duration; credit selection gains importance
In Figure 12, we plot expected contributions to AXJ credit returns for 2014. We expect carry to remain the biggest contributor to total returns, while moves in USTs and credit spreads will erode total returns. On this basis, we continue to prefer going down the credit curve rather than the duration curve to capture carry. It is important to distinguish between good carry and bad carry. Investors need to strike a balance between credit quality and going down the credit spectrum in search of yield. We prefer to be invested in stronger HY credits in the region, such as Tier 1 property names, and avoid going significantly down the credit curve for the extra yield. While we are mindful of the possibility of further spread widening among HY corporate credits as fundamentals overtake technicals, we do not expect a sharp widening in HY corporate spreads in 2014. Moreover, we expect carry in this segment to offset spread widening and the rise in UST yields. We expect carry to remain the biggest contributor to total returns, while moves in USTs and credit spreads will erode total returns While we expect credit carry to be the main theme for 2014, duration may start to look interesting once UST yields move higher. 10Y/30Y spread differentials in selected credits are relatively steep, but investors are shunning duration due to risk of rising UST yields.
History lessons
Credit curves could steepen as investors avoid duration and flatten thereafter, especially after USTs stabilise at a higher level To substantiate our argument that duration may become interesting when UST yields rise, we looked at historical moves in spreads and rates in previous rate-rise cycles. The 10Y UST spiked c.95bps between October 2010 and February 2011 from around 2.80%, similar to its current level (as of 26 November 2013) see Figure 13. AXJ HG spreads were also at similar levels to now, but HY spreads were tighter (Figure 14). During the previous rate-rise cycle in 2010-11, spreads suffered a kneejerk reaction to rising USTs but settled down thereafter. 10Y/30Y credit curves (for which we use US credits as a proxy) steepened initially (Figure 15) as investors shunned duration, but flattened thereafter as rising USTs were priced in. We may see similar move in AXJ credit this time. Credit curves could steepen as investors avoid duration and flatten thereafter, especially after USTs stabilise at a higher level.
Figure 13: 10Y UST was at similar levels in Oct-2010 10Y UST yield (%)
4.0 3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4 2.2 2.0 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11
Figure 14: Asian HY suffered a knee-jerk reaction to UST rise but tightened thereafter JACI HG and HY spread (bps)
400 350 HY 300 250 HG 200 150 Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
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Figure 15: Credit curves steepened before flattening in previous rate-hike cycle 10Y/30Y UST rate and US credit curve differentials (bps)
20 15 10 5 0 -5 UST widening -10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 10Y/30Y (credit) 180 160 10Y/30Y (rates, RHS) 140 120 100 80 60 40 20 0
Figure 16: Sovereigns will be most affected Expected return profile for AXJ credit sectors for various UST moves (%)
10 8 6 4 2 0 -2 -4 -6 -8 -10 -12 -30 -15 0 15 30 45 60 75 90 105 120 135 150 165
*This exercise assumes constant spread widening, as highlighted in Figure 11; Source: Standard Chartered Research
Base case HG corp. HY corp.
Comp. Quasi. Sov.
Source: Haver Analytics, Standard Chartered Research
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Figure 17: Recommendations for the Asian credit space in 2014
Sector Sovereigns Indonesia Recommendation Underweight Rationale Sovereigns are still the highest-duration sector in Asia and are likely to suffer the most from rising UST yields. Indonesia is vulnerable to outflows from EM given its relatively weak external position. Thus, Indonesia sovereign spreads could remain volatile and potentially widen in anticipation of Fed tapering. Current 10Y sovereign spreads (250bps as of 26 November 2013) do not fully price in these risks, in our view. Thus, we will wait for better entry points to increase exposure to this sector Philippine sovereign bond spreads have remained relatively stable thanks to the strong local bid. However, absolute spreads are low and, in our view, do not offer a spread cushion to withstand a rise in UST yields. Korean sovereign bonds are trading at tight spread levels and do not offer a spread cushion against rising UST yields. We prefer Sri Lanka over Mongolia and Vietnam. All the three sovereigns are vulnerable to slowing external flows given their weak external positions. In our view, the current spread levels of their bonds do not fully compensate for these risks. We are Underweight these HY sovereigns. Neutral While HG corporates are sensitive to rising UST yields, pockets of value remain. Selected Asian HG corporates offer value versus comparable global bonds. Upcoming issuance from Chinese HG corporates may be large, as was the case in 2013. However, we do not expect heavy issuance from higher-rated (A+ and above) SOE credits in the oil and gas space. Issuance is likely to be concentrated among lower-rated credits. On a relative value basis, higher-rated China SOE names appeal to US HG investors, who are increasingly looking at the Chinese HG space to add exposure to China (or Asian HG). We like the higherrated China SOE credits, especially the 10Y space, as these bonds offer value versus similarly rated names in rest of AXJ. 5Y/10Y spreads are also wide in the China SOE space, in our view. Hong Kong property-sector names have strong credit profiles, while the industrial names enjoy high ratings and a strong local bid. We believe some triple-B corporates offer good risk/reward. The stronger Korean quasi-sovereign corporates offer value versus the banks, especially commercial banks. These stronger credits appeal to US HG investors. There is currently no meaningful spread differentiation between the Korean quasi-sovereign corporates, but we prefer to hold names with stronger standalone metrics, such as Korea Hydro and Korea Oil. Korean private-sector credits are extremely tight and suffer from weakening fundamentals and a rating overhang. We are Underweight private corporates. Indonesian quasi-sovereigns, especially the long end (30Y), are attractive both on a curve basis (the 10Y/30Y curve is steep at around 55bps) and versus the sovereign (130bps over the sovereign). However, we are wary of the 30Y sector given its sensitivity to rising UST yields. 10Y quasi-sovereigns are fairly valued compared to the sovereign bonds, in our view. We will wait for better entry points, especially around new issues, to add to our weights in this sector. In the crossover space, we prefer Indian corporates over Indonesian corporates. Credit spreads for Indian quasi-sovereign corporates widened again in late 2013 and are trading well wide of similarly rated credits across broader EM. With S&P guiding that it will wait for the new government and its policies before acting, Indian credits could rally, especially if the state election results (due on 8 December) point to a decisive mandate in the national election. However, political uncertainty around the time of general election (likely in Q2-2014) could coincide with the start of the Feds QE tapering, leading to increased spread volatility. We therefore prefer to start the year with an Overweight position in Indian corporate. We will reassess our positioning at the end of Q1. The rest of the HG corporate space is fairly rich, in our view. The Thai corporate complex enjoys a scarcity bid from international investors and a strong local bid. However, we believe that current spread levels (as of 27 November) do not reflect fundamental and political pressures facing the country. Thai corporates are also relatively tight within the EM/Asian BBB complex. We marginally prefer Malaysian HG corporates over others as the diversification choice among AXJ HG corporates.
Philippines
Other IG sovereigns HY sovereigns
HG corporates China
HK Korea
Indonesia
India
Others
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Sector Financials - Senior Recommendation Underweight Rationale We are Underweight the senior space in AXJ credits. We do not think spreads reflect the expected downturn in the credit cycle and weakening asset-quality. The implementation of Liquidity Coverage Ratio (LCR) rules will also put pressure on senior bank spreads as bank ALM desks shift their preference from bank paper to corporate bonds/ Korean policy banks and commercial banks are both trading tight, in our view. Moreover, we think current spread differentials between quasi-sovereigns and commercial banks do not reflect differences in credit fundamentals. Relatively low net issuance has also kept spreads tight. We view the Korean senior bond space as a relatively low-beta play with limited carry returns. We prefer policy banks (such as KOFCOR, EIBKOR and KDB) over commercial banks (SHNHAN, WOORI). While the Indian senior space is wider than corporates one of the few Asian markets where this is the case we believe this reflects asset-quality pressures on Indian banks. India senior bonds offer attractive carry versus other banks in the Asian senior space, trading c.200bps wider than Korean banks and 150bs wider than Thai and Malaysian banks. Indian financials are trading flat to Indonesian senior financial bonds and 50bps inside Turkish senior bonds This makes them our preferred sector in the Asian financial space. Among Indian financials, we prefer private-sector banks such as ICICI and HDFC over SOE banks. Private-sector banks are better capitalised and have better asset quality than SOE banks. S&Ps November 2013 rating downgrade of IDBI to BB+ due to weakening asset-quality metrics should eventually result in greater differentiation between public- and private-sector banks, with the latter outperforming, in our view. We prefer to gain carry by owning the Indian private-sector banks, especially in H12014. The rest of the AXJ senior space is relatively tight, in our view. The Thai senior space does not reflect macro risks in Thailand, in our view. The Malaysian senior space is close to fair value and does not look compelling. We think SBLC-enhanced bond issuance from China could pick up in 2014 and would offer proxy exposure to Chinas banks at higher spread levels, especially if the SBLC/guarantee language is strong. Overweight Old-style T2s and T1s offer value in the AXJ credit space on both a carry and a ratingadjusted basis. However, the sector suffers from illiquidity. We see little value in the new-style instruments, where issuance could pick up in 2014. Indian T1s (at a yield of c.9.2% to call) are the most attractive in the AXJ sub-debt space, in our view. We believe that these old-style instruments will be called by the banks. However, they are highly illiquid, with wide bid/offer prices, and entering or exiting positions is difficult. Overweight We recommend an Overweight position in the AXJ HY corporate space. While we expect credit spreads to widen, we expect HY corporates to be the only sector to generate positive returns in 2014 due to the sectors higher carry. While we expect spreads to drift wider, we do not expect a sharp sell-off. Both Moodys and S&P forecast lower default rates for speculative-grade Asian bonds in 2014. While credit metrics are weakening, we do not expect this to affect credit spreads, as much of the HY refinancing in Asia is likely to occur in late 2015 and 2016. The AXJ HY corporate space is held mainly by local investors, particularly retail investors. A shift in their investment preference to other asset classes could upset the HY corporate sector, but we do not foresee this in 2014. Chinese HY companies have sound liquidity positions. Most HY developers have achieved good sales results and successfully raised offshore capital to extend debt maturities and reduce funding costs. Industrial companies have improved their working-capital conditions to preserve cash. However, we do not expect the companies credit profiles to improve much in the near future. Given policy uncertainty and ongoing structural changes that may slow growth, we are cautious and selective on names in the sector. We recommend that investors hold a core portfolio of HY credits with bonds from strong developers in Tier 1 and 2 cities for the coupon carry. We expect lower supply from this sector in 2014 than in 2013, but supply may be frontloaded early in the year. We prefer Chinese HY credits over Indonesian HY credits. The Indonesian coal names in particular may come under pressure in 2014 given the still weak outlook on coal prices and the continued regulatory overhang on the sector . We see value in credits such as Vedanta, which offers a decent coupon and has a reasonably liquid curve.
Korea
India
Others
Financials Subordinate India
HY corporates
China
Indonesia
Others
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Sector themes
Asian quasi-sovereigns Analysing the risks

Analysts: Jaiparan Khurana (+65 6596 7251), Victor Lohle (+65 65968263), Nikolai Jenkins (+65 6596 8259) Government ownership of corporates and banks in Asia has proven to be a doubleedged sword in many cases. Governments often take an interventionist approach and require quasi-sovereigns to implement public policy objectives, not always on a commercial basis. At the same time, there are many examples (including in the recent past) of governments stepping in to provide support when quasi-sovereigns have faced financial difficulties. In China, SOEs comprise an increasingly heterogeneous mix of credits, with widely varying credit profiles. While Chinas ability to support its SOEs is strong, its willingness to support all of them is unproven. Hence, it is important to focus on each SOEs fundamental business and financial risk profile, in addition to assessing the strength of its government linkage. We provided a framework for differentiation among Chinese SOE credits based on ownership profile, strategic importance, government support, regulatory issues, financial risk, bond language and rating notching in China SOE credits Supply deluge. In Korea, while the credit quality of quasi-sovereign corporates has deteriorated due to government-mandated infrastructure projects and overseas acquisitions, the sovereigns willingness and ability to support the quasi-sovereigns are high. To differentiate among Korean quasisovereign credits, we looked at their intrinsic credit quality, the notching used by rating agencies to arrive at final ratings, and the companies relative strategic importance to the Korean government in Korean quasi-sovereigns Some pockets of value. We think it is also important to differentiate among quasi-sovereigns in other jurisdictions in Asia. The table below provides details on the strategic importance, government support, and standalone financial profiles of Asias important quasisovereign credits. In each geography, corporates are listed first, followed by banks. Figure 1: Quasi-sovereign credit profiles
Country Govt. holding (direct and indirect) Notch-up (down) Ratings Aa3/AA100.0% Aa3/AA3 1 High Constructs and operates most of Chinas T&D network, and its services cover 88% of China's territory. Strong Effective cost pass-through in recent years and prudent financial management have led to a strong financial profile. Moody's S&P Strategic importance Standalone financial profile
China State Grid
Sinopec Group
100.0%
Aa3/A+
High Accounts for 60% of Chinas Strong Strong financial profile has refined oil product supply and 70% been affected by low profitability of of its crude oil imports. refining operations and overseas acquisitions. High Accounts for 60% of Chinas Strong While the profitability of refined oil product supply and 70% refining operations is low and capex of its crude oil imports. is sizeable, the CNY 19bn equity raising in 2013 should keep credit metrics stable. High Plays a dominant role in developing China's offshore oil and gas reserves, and it will likely be used as a vehicle to support the country's long-term energy-security goals. High Plays a dominant role in developing China's offshore oil and gas reserves, and it will likely be used as a vehicle to support the country's long-term energy-security goals. Strong Leverage is low at 1.0x. However, financial profile has weakened since the Nexen acquisition.
Sinopec Corp.
73.9%
Aa3/A+
CNOOC Group
100.0%
Aa3/AA-
CNOOC Ltd.
64.5%
Aa3/AA-
Strong While the company maintained a net cash position from 2001-12, the Nexen acquisition has resulted in a significant increase in debt.
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Country Govt. holding (direct and indirect) 100.0% Notch-up (down) Ratings Aa3/AAMoody's 1 S&P 0 High Accounts for 70% of Chinas oil and gas reserves and 60% of its oil and gas production. Of the entities owned by SASAC, CNPC is the largest in terms of assets and the second largest in terms of revenue. Moderate Provides most of the oilfield and drilling services for CNOOC Group, which plays an important role in Chinas energy sector. Moderate Chinas largest railway construction contractor, with a market share of c.50%. Plays an important role in the country's investment-led growth. Strong Large scale and solid operational profile have helped to maintain financial metrics. However, growth in the overseas portfolio and domestic capex will likely lead to continuing negative FCF and a gradual increase in leverage levels. Moderate Balance-sheet strength moderated with the Awilco acquisition in 2008. Rising capex will keep metrics under pressure. Moderate Low net debt/EBITDA and strong interest coverage. However, leverage has been rising due to larger working-capital requirements and investments in real-estate development and BT/BOT projects. Moderate While it has maintained strong leverage levels in the past few years, its large investment plans will lead to a gradual deterioration in credit metrics. Moderate Enjoys steady earnings due to its strong market positions and non-cyclical businesses. However, leverage will remain high due to large capex plans. Weak Larger working-capital requirements due to payment delays by CRC. Investment in real estate and mining development has led to high leverage. Weak Thin profit margins and consistently negative FCF in the past few years. Large investments in oil and gas will prevent a material improvement in metrics in 2014. Weak Leverage is currently high at 8.9x. The company is constructing 14 nuclear power plants, which will prevent an improvement in credit metrics in 2014. Moderate Consistently solid operating performance and prudent financial management have led to stronger metrics than peers. Strategic importance Standalone financial profile
CNPC
China Oilfield
53.6%
A3/A-
China Railway Construction
61.3%
A3/A-
CR Gas
63.3%
Baa1/NR
NA
Moderate One of Chinas largest city-gas distributors in a fragmented market. Plays an important role in promoting the governments policy of increasing the share of natural gas in China's energy mix. Moderate Primary listed vehicle of the Beijing municipal government for raising capital to fund public utility projects. Moderate Second-largest railway construction contractor in China, with a market share of c.40-45%. Plays an important role in the country's investment-led growth. High Chinas largest importer and distributor of fertilisers, and one of its largest crude oil importers (c.10% share). It also operates strategic oil and fertiliser reserves on behalf of the government. High Chinas largest nuclear power company, with a 55% market share in nuclear generation. CGN will play an important role in China's plans to expand its nuclear generation base. Moderate Has nationwide coverage and a well-established brand name in Chinas property market, although its share is below 1% given the fragmented nature of the market.
Beijing Enterprises
59.3%
Baa1/A-
China Railway Group
56.1%
NR/BBB+
NA
Sinochem
100.0%
Baa1/BBB
China General Nuclear
90.0%
A3/NR
NA
China Overseas Land
29.3%
Baa1/BBB+
CR Land
68.0%
Baa1/BBB
Low One of Chinas many property Moderate While the lack of a costcompanies, although it is important pass-through mechanism is a concern, capex levels have peaked. to CR Holdings given its large contribution to profits. Moderate Accounts for only 2% of Chinas power generation capacity, but the company is important to CR Holdings since it is a major contributor to cash flow. Moderate Has a 60% market share in toll roads in Shenzhen and is the primary vehicle for logistics investment by Shenzhen SASAC. Moderate We expect credit metrics to improve gradually as the company manages capex and investment in line with operational cash flow. Moderate Strong growth in tollroad traffic has improved SZIHLs leverage levels. Potential large investments in the logistics business need to be monitored.
CR Power
63.5%
Baa2/BBB
Shenzhen International
48.6%
Baa3/BBB
79

Country Govt. holding (direct and indirect) 54.8% Notch-up (down) Ratings Baa2/BBB Moody's 0 S&P 0 Moderate While it is the leading investor/operator in the ports sector, it is a competitive industry, and the company only has minority stakes in most of its projects. Low One of many construction companies in China. More than 50% of its revenue comes from Hong Kong and Macau. That said, the scale of its affordable housing projects in China is growing. Moderate Operates in less strategic sectors where the number of private-sector players is high. That said, it plays a role in maintaining food quality in Shanghai. Moderate China's largest wind power generator and accounts for c.15% of the country's installed wind power capacity. Moderate Largest power generation company in Asia and accounts for 11.8% of Chinas power generation capacity. Low The company's generation capacity is small with respect to China's power sector. It is the primary offshore arm for non-nuclear development. Moderate Among Chinas top three property developers and has strong geographic diversification and a sizeable low-cost land bank. Low One of Chinas many property companies. However, it is an important part of the Yuexiu Group, the largest SOE by asset size owned by Guangzhou SASAC. Moderate Operates container terminals and has a market share of 40% in China. It plays an important role in ensuring China's competitiveness in global trade. Low Among Chinas smaller property companies, although it is strategically important to the Sinochem Group given its significant contribution to profits. Moderate One of Chinas largest engineering and construction companies, with a dominant position in steel-plant construction. Moderate Among the largest SOEs in Shandong and contributes significantly to the provincial economy by virtue of its 50,000strong workforce. Moderate The company does not have leading market positions in any of its businesses. That said, it is an important part of CITIC Group. Moderate While the company has maintained a steady capital structure, large acquisitions in the past 12 months have weakened cash-flow metrics. Weak While the company will need to raise a significant amount of debt to fund its BT projects, it has demonstrated a willingness to maintain a prudent gearing ratio. Weak Acquisition of Weetabix has put pressure on Bright Food's leverage. Credit metrics are unlikely to improve materially in 2014 given significant capex. Weak Leverage is high, and the company wants to double its installed capacity by 2015. Large capex will be primarily debt-funded. Weak Debt/capital is high at over 80%, and leverage is at 7.5x. Large capex plans will keep its credit metrics in check. Weak Leverage is high at 9.7x, and while operating margins are likely to improve, negative FCF will exert further pressure on credit metrics in 2014 Weak Debt/capital is high at 60% due to its debt-funded expansion strategy. However, growth in contracted sales should help to maintain credit metrics. Weak Yuexiu's credit metrics are moderate, with debt/capital of 49.3%, and its liquidity profile is strong. Weak Leverage is high at 6.8x. The disposal of CIMC for a cash consideration of USD 1.2bn will marginally improve financial metrics. Weak While cash-flow protection metrics are modest, we expect leverage to remain stable in 2014 thanks to prudent investment spending. Weak Credit metrics are weak due to high working-capital requirements and large investments in overseas resources projects. Weak Large investments and acquisitions in recent years have been largely debt-funded, leading to a moderation in credit metrics. The decline in coal prices in 2013 has also affected profitability. Weak Large investments in the iron ore project have led to a sharp increase in debt levels. While capex is peaking, we expect negative FCF and credit metrics to stay weak. Strategic importance Standalone financial profile
China Merchants Holdings
China State Construction
57.1%
Baa3/BBB-
Bright Food
100.0%
Baa3/BBB-
China Longyuan Power
57.3%
Baa3/BBB+
China Huaneng Group HK
100.0%
NR/NR
NA
NA
Meiya Power
90.0%
NR/NR
NA
NA
Poly Real Estate Group
44.1%
Baa2/BBB+
Yuexiu Property
49.8%
Baa3/NR
NA
COSCO Pacific
43.2%
NR/NR
NA
NA
Franshion
62.9%
Baa3/BB+
China Metal
100.0%
Baa3/BB+
Yanzhou Coal
52.9%
Ba1/BB+
(1)
CITIC Pacific
57.6%
Ba1/BB
80

Country Govt. holding (direct and indirect) 100.0% Notch-up (down) Ratings Aa3/AAMoody's NA S&P NA High The largest of China's three central government-controlled policy banks, though it was converted to a joint stock company in December 2008. CDB reports directly to the State Council. Implicit support for the bank exists in the form of a liquidity guarantee. High One of three policy institutions in China reporting directly to the State Council. It is a key conduit for the implementation of the governments economic and diplomatic policy. Implicit support for the bank exists in the form of a liquidity guarantee. High China's third-largest bank and a key implementation arm for government economic policies in rural areas. The bank has the countrys largest distribution network (23,500 branches). ABC has received government support in the past. High One of Chinas big four stateowned banks. BOC is the market leader in foreign exchange and trade finance. Like the other large commercial banks, it has received government support in the past. High It has historically been a market leader in infrastructure financing. Like the other large banks, it has received support in the past and plays a key role in the implementation of China's economic policy. Moderate Standalone financial profile is stronger than those of the other policy banks. Its profitability is comparable to that of the commercial banks. Reported assetquality indicators are sound and capital adequacy is reasonable. Reported NPL numbers might not fully reflect the economic reality. Weak Weak fundamentals as a result of low earnings generation capacity, high dependence on wholesale markets for funding, and above-average leverage. Disclosure and transparency are below average. Moderate ABCs reported credit metrics are slightly weaker than peers because of lower (albeit improving) earnings generation capacity, worse-than-average assetquality indicators and below-average capital adequacy. Like the other commercial banks, NPLs might not fully reflect the economic reality. Moderate Reported credit metrics are sound, with high profitability, good asset-quality indicators and strong capital adequacy. However, reported NPL numbers might not fully reflect the economic reality. Moderate Reported fundamentals are sound. The banks strong funding base underpins aboveaverage profitability. Although CCB's reported asset quality is sound, we are concerned about potential assetquality deterioration, and reported NPL numbers might not fully reflect the economic reality. Moderate Reported fundamentals are robust, with high profitability, sound asset-quality indicators and strong capital adequacy. However, we are concerned about a potential deterioration in asset quality. Reported NPL numbers might not fully reflect the economic reality. Strategic importance Standalone financial profile
China Development Bank
Export-Import Bank of China
100.0%
Aa3/AA-
NA
NA
Agricultural Bank of China
82.0%
A1/NR
Bank of China
68.0%
A1/A
China Construction Bank
57.0%
A1/A
Industrial and Commercial Bank of China
70.6%
A1/A
High The largest of Chinas big four banks; plays a role in China's broader development objectives. In the past, ICBC has received government support.
Korea Korea Electric 51.1%
Aa3/A+ A1/A+ 4 5 High Dominant electric utility in South Korea, with 89% generation share and monopoly in T&D. Weak While recent tariff hikes as positive, large capex plans will keep leverage elevated.
Korea Hydro and Nuclear
51.1%
A1/A+
High Sole nuclear power generator Moderate Has the strongest in Korea. Accounts for c.32% of the financial profile among the gencos. country's power capacity. However, large capex plans will increase leverage levels. High World's largest LNG buyer. Has an effective monopoly on the import and transmission of natural gas in South Korea. Weak While the FCPT mechanism has been reinstated and the government is likely to reduce capex plans, we expect leverage to remain high (albeit stabilising) due to the large funding gap.
Korea Gas
55.0%
A1/A+
81

Country Govt. holding (direct and indirect) 100.0% Notch-up (down) Ratings A1/A+ Moody's 7 S&P 7 High Helps to secure long-term energy needs and manages the country's oil stockpile. Receives regular equity contributions and lowcost loans from the government. High Policy mandate to construct and operate expressways in South Korea. Regular capital injections from the government to support its investment requirements. High Central agency for the development and management of water resources in Korea. Receives regular subsidies from the government. High Plays a distinct policy role in the land and housing sector. Has the exclusive right to develop industrial land and is the countrys largest housing supplier. High Plays a public policy role of procuring mineral resources for South Korea. Receives ongoing capital contributions from the government. High South Korea's export credit agency and arguably its key policy bank. Low KoFC is scheduled to remerge with KDB in mid-2014. Weak While the government is likely to scale back overseas acquisition plans, we expect leverage to remain high (albeit stabilising) due to the large funding gap. Moderate Lack of transparency in toll rate-setting, large capex plans will keep leverage elevated. Strategic importance Standalone financial profile
Korea Oil
Korea Expressway
99.9%
A1/A+
Korea Water
100.0%
A1/A+
Weak Financial metrics have weakened due to large debt-funded capex.
Korea Land and Housing
100.0%
A1/A+
10
Weak Not-for-profit business model and long recovery cycle for land development and rental housing investments have led to poor financial metrics. Weak Poor profitability and ambitious expansion plans with a long recovery cycle.
Korea Resources
100.0%
A1/A+
11
Export-Import Bank of Korea Korea Finance Corp. Korea Development Bank Industrial Bank of Korea
100.0%
Aa3/A+
Moderate Limited earnings generation capacity. Dependent on the sovereign for capital growth. Weak Small size, low profitability, high reliance on wholesale funding sources.
100.0%
Aa3/A+
NA
100.0%
Aa3/A
High The abandonment of Weak Low profitability, high privatisation plans suggests that reliance on wholesale funding KDB will remain one of Koreas main sources. policy banks. High Policy tool for providing support to the SME sector. Unlikely to be privatised in the medium term. Moderate While it does not enjoy support in the form of a solvency obligation, it is the key channel for implementation of government agricultural policy. Moderate Core agency for South Korea's fishery development. However, it does not benefit from a solvency obligation. Low Likely to be privatised in the medium term. As a commercial bank, it should not be treated as a typical quasi-sovereign. Moderate High concentration in the SME sector, limited ability to significantly diversify its earnings base. Weak Despite a very strong retail deposit base, profitability is low and asset quality is worse than average. Also, despite a recent reorganisation, organisational structure remains complex. Weak Low earnings generation capacity, limited franchise, and obligation to repay 2001 capital injection to the government. Moderate Strong franchise as South Koreas second-largest bank. High risk appetite and belowaverage asset quality.
72.0%
Aa3/A+
NongHyup Bank
0.0%
A1/A
Suhyup Bank
100.0%
A2/A-
Woori Bank
57.0%
A1/A-
82

Country Govt. holding (direct and indirect) Notch-up (down) Ratings Baa3/BBB100.0% Baa3/BBB2 0 High Sole arranger of lease financing for India's Ministry of Railways. High Owns 60% of Indias oil and gas reserves, accounts for 62% of oil and 49% of gas production. High Largest power=generating company in India (28% share). Has received government support in the past through direct loans/guarantees. High Operates more than 90% of Indias power transmission network. Strong Consistent track record of profitability, impeccable asset quality and strong capitalisation. Strong Has very strong credit metrics and generates strong CFO, despite large subsidies provided to downstream companies. Moderate Large capex plans will primarily be debt-funded; this will check the improvement in financial metrics. Weak Large budgeted capex will lead to a significant increase in debt, and the company is likely to post negative FCF in the next few years. Weak Government control of retail fuel prices and 'ad hoc' subsidysharing mechanism lead to poor profitability and volatile cash flow. Weak Government control of retail fuel prices and 'ad hoc' subsidysharing mechanism lead to poor profitability and volatile cash flow. Strong Moderate profitability and low NPLs, but high dependence on wholesale funding and high concentration risks. Moderate Dominant market position is a key strength, although declining profitability, weakening asset quality and moderate capital are concerns. Moderate Good profitability and low NPLs, but high restructured portfolio, high dependence on wholesale funding and concentration risks. Poor health of state electricity utilities poses risk to asset quality. Moderate Stable low-cost deposit base and strong international banking operations. Asset quality remains a concern. Capitalisation is better than many state-owned peers. Moderate Asset-quality metrics better than state-owned peers, but stress likely to persist. Stable lowcost deposit base and corporate banking franchise. Weak Stable commercial banking franchise. Very low loan-loss coverage is an issue in an environment of weakening asset quality. Weak Low profitability, high although declining dependence on wholesale deposits. Asset-quality metrics among the weakest in the sector. Capital is insufficient. Moody's S&P Strategic importance Standalone financial profile
India Indian Railway Finance Corp. ONGC
69.2%
Baa2/BBB-
(1)
(4)
NTPC
75.0%
Baa3/BBB-
(1)
Power Grid
69.4%
NR/BBB-
NA
Indian Oil Corp.
78.9%
Baa3/NR
NA
Moderate Leading position in India's refining (31% capacity share) and petroleum product marketing (44% share) sectors. Moderate Indias third-largest refiner (15% share) and secondlargest distributor of petroleum products (23%). High India's export credit agency and key policy bank.
Bharat Petroleum Corp. Ltd. Export-Import Bank of India
54.9%
Baa3/NR
NA
100.0%
Baa3/BBB-
NA
NA
State Bank of India
62.3%
Baa3/BBB-
High Indias largest bank, with a considerably larger market share than its closest competitor. Plays an important role in meeting the governments financial inclusion goals. High Plays a key policy role in financing power infrastructure in rural and semi-urban India. History of demonstrated government support, including capital injections, guarantees to raise funding, and assistance in NPL resolution. Moderate Indias third-largest bank. Good franchise, particularly in western India. State-owned banks have been supported in the past.
Rural Electrification Corp.
66.8%
Baa3/NR
NA
NA
Bank of Baroda
55.4%
Baa3/NR
NR
Bank of India
64.1%
Baa3/BBB-
Moderate Indias fourth-largest bank, with a nationwide presence. Has received government support in the past. Moderate Indias sixth-largest bank, with a well-established distribution network biased towards southern India. State-owned banks have been supported in the past. Moderate One of many stateowned banks, but has received government support many times in the past. It has also received regulatory forbearance as it transforms into a commercial bank.
Canara Bank
67.7%
Baa3/NR
NR
IDBI Bank
71.7%
Baa3/BB+
83

Country Govt. holding (direct and indirect) 57.9% Notch-up (down) Ratings Baa3/BBBMoody's 2 S&P 1 Moderate One of many stateowned banks, with a corporatefocused loan book. State-owned banks have been supported in the past. Moderate One of many stateowned banks, with a well entrenched position in its home state of Tamil Nadu. Has received government support many times in the past. Moderate One of many stateowned banks, with a good franchise in southern India. State-owned banks have been supported in the past. Weak Stable commercial-banking franchise with a bias towards western and central India. Assetquality deterioration has accelerated, and capital appears inadequate. Weak Weak profitability due to high provisioning costs. Assetquality metrics among the weakest in the sector. Capital is insufficient. Weak Has performed well against mid-sized peers in recent years, but weaker in the past few quarters. Higher credit costs and low income diversity will keep profitability muted. Strategic importance Standalone financial profile
Union Bank of India
Indian Overseas Bank
73.8%
Baa3/BBB-
Syndicate Bank
66.2%
Baa3/BBB-
Malaysia Petronas 100.0%
A3/AA1/A0 (3) High Ensures Malaysia's energy self-sufficiency and contributes over a third of federal government revenue. Strong Net cash position. Large capex plans should be largely internally funded.
Telekom Malaysia Tenaga
55.0%
A3/A-
Moderate Dominant fixed-line Moderate High dividend payments operator. Has government support will check any improvement in for its high-speed broadband project. leverage levels. High Owns c.48% of generation capacity and is the monopoly operator of Malaysias electricity T&D network. Moderate Strong operational links with Petronas as it provides LNG transportation. Moderate Absence of an automatic cost pass-through mechanism and gas shortages have affected financial metrics. Weak Weak operating performance due to a slump in freight rates and capex plan will keep cash flow under pressure.
83.0%
Baa1/BBB+
MISC
62.7%
Baa2/BBB
Axiata
59.6%
Baa2/BBB+
Moderate Second-largest mobile Moderate Increased dividends and operator in Malaysia. Owns stakes in potential acquisitions could various Asian wireless operators. moderate the credit profile. High Malaysias export credit agency and one of the key Development Finance Institutions. It has benefited from government support in the past. High Largest bank in the country, with a dominant market share; the banker of choice for large government entities. As a commercial bank, it is not a typical quasi-sovereign. Moderate Significant player in the Malaysian banking system. Although not majority-owned by the government, systemic support is expected. As a commercial bank, it is not a typical quasi-sovereign. Weak Although capital adequacy is strong, asset quality has been very weak. The bank is wholly reliant on the wholesale markets for funding, and earnings generation capacity is low. Moderate Strong market position as Malaysias largest bank. Profitability is reasonable, capital adequacy is strong, and asset quality has been steadily improving. Moderate NPLs are higher than the industry average, as it still carries legacy bad loans. However, profitability is sound and capital adequacy is good.
Export-Import Bank of Malaysia
100.0%
A3/NR
NA
Malayan Banking Berhad
58.0%
A3/A-
CIMB Bank Berhad
45.0%
A3/A-
Thailand PTT 66.4%
Baa1/BBB+ Baa1/BBB+ 1 1 High Largest corporate in Thailand. An integrated player with presence across the energy value chain. High Plays a key role in developing Thailand's hydrocarbon reserves. Moderate Large capex plans, acquisitions and volatile profitability in the refining and petrochemical operations have led to high leverage levels. Strong Strong profitability; USD 3bn equity-raising exercise has strengthened capital base. Large debt-funded acquisitions pose a risk.
PTT Exploration
65.3%
Baa1/BBB+
84

Country Govt. holding (direct and indirect) 49.1% Notch-up (down) Ratings Baa1/BBB Moody's 1 S&P 0 Moderate PTT Groups flagship refinery; has strong operational integration with its parent. Moderate Thailands largest petrochemical company. Flagship downstream company of PTT Group. High Third-largest commercial bank in Thailand, with a 15% market share. Provider of cash management services for Thai government agencies. Government and SOE lending made up 8% of loans at end-September 2013. Moderate While capex plan is conservative and can be funded internally, the size of its operations is small and earnings are volatile. Moderate High budgeted capex for capacity expansion and volatile petrochemical margins will pressure its financial profile. Moderate Diverse loan base and strong deposit base. Improving capitalisation, NPL ratio and coverage. Fundamental credit metrics, although improving, are weaker than similarly sized peers. Strategic importance Standalone financial profile
Thai Oil
PTT Global Chemicals
48.9%
Baa2/BBB
Krung Thai Bank
55.0%
Baa1/BBB
Indonesia Pertamina 100.0%
Baa3/BB+ Baa3/BB+ 0 0 High Indonesias only fully integrated oil and gas company, with a strong market position across the value chain. It is the highest revenue contributor among Indonesia's SOEs. High Indonesia's only fully integrated electric utility and monopoly operator of the T&D network. Receives regular subsidy support through the national budget. High Wholly owned by the government of Indonesia, which is (1) legally precluded from privatising the bank and (2) legally required to replenish its capital using funds from the state budget if its capital falls below a specified amount. High Second-largest bank in Indonesia, holding 14% of system deposits and 12% of system loans. Moderate While current leverage levels are strong, debt levels will increase substantially due to the massive budgeted investment programme. Moderate Large capex plans for capacity expansions will keep leverage levels elevated at c.5.3x.
PLN
100.0%
Baa3/BB
Export Import Bank of Indonesia
100.0%
Baa3/BB+
Moderate Moderate profitability and NPLs, but asset quality has been improving. Dependence on wholesale funding and high loan concentration are risks.
Bank Rakyat Indonesia
56.8%
Baa3/BB+
Strong The most profitable large Indonesian bank. Asset quality has remained resilient despite its focus on consumer, SME, and microlending segments. Capitalisation is supported by strong earnings and a conservative dividend policy. Moderate Asset quality is weaker than its peers due to its legacy policy role, but has improved. Profitability is robust, but structurally weaker than peers. Capitalisation was boosted by 2010 rights issue, but will weaken due to loan growth.
Bank Negara Indonesia
60.0%
Baa3/BB
Moderate Fourth-largest Indonesian bank by assets (8% market share). Government has provided capital support, including contributing to 2010 rights issue; government made sweeping management changes in 2008.
Singapore Temasek 100.0%
Aaa/AAA Aaa/AAA 0 0 High Holds and manages investments of the Singapore government, including a number of key corporates. High Major supplier of defence products and electronics solutions/services to Singapore government. High Main operator of container terminals in Singapore, the world's largest trans-shipment hub. High Sole owner of power T&D assets in Singapore. Also has a large operation in Australia. High Sole owner of power T&D assets in Singapore. Wholly owned by Singapore Power. Strong Large, diverse portfolio leads to steady income streams and high financial flexibility. Has a net cash position on a standalone basis. Strong Low leverage, net cash position, strong liquidity.
ST Engineering
50.4%
Aaa/AAA
PSA International Singapore Power
100.0%
Aa1/AA
NA
Moderate Strong cash flow generation, but leverage levels are moderate and capex plan is high. Moderate High leverage; planned disposal of SP AusNet will reduce leverage. Moderate Aggressive upstreaming of dividends to Singapore Power in the past and high budgeted capex.
100.0%
Aa3/AA-
SP Power Assets Ltd.
100.0%
Aa3/AA-
85

Country Govt. holding (direct and indirect) 51.9% Notch-up (down) Ratings Aa3/A+ Moody's 2 S&P 1 Moderate Leading telecom operator in Singapore. Holds minority stakes in various Asian wireless operators. High Sole operator of the Hong Kong rail network. Government provides capital grants for some projects. High Railway asset holding company. Strong supervision by the government. High Helps to develop the mortgage finance market, which will enhance banking stability and promote home ownership. Moderate Strong FCF generation offset by high dividend payouts, capex and acquisitions in ITE space. Strategic importance Standalone financial profile
SingTel
Hong Kong MTR Corp. 76.7%
Aa1/AAA Aa1/AAA 4 3 Moderate Credit metrics are moderate. Property exposure and overseas investments heighten risk profile. Moderate Leverage is gradually improving due to variable rental payments and lowering of capex. Strong Satisfactory capital base, strong liquidity and prudent credit risk management.
Kowloon-Canton Railway Corp. Hong Kong Mortgage Corp.
100.0%
Aa1/AAA
NA
100.0%
Aa1/AAA
Philippines PSALM 100.0%
Baa3/BBBBaa3/BBB3 NA High Critical role in restructuring and liberalising the Philippines power sector. Irrevocable government guarantees for all its debt. Weak Highly leveraged capital structure.
Napocor
100.0%
Baa3/BBB-
NA
NA
High Sole provider of electricity to Weak Operating losses expected remote areas of the Philippines. Also in the next couple of years. operates and maintains generation assets not sold to PSALM. Irrevocable government guarantees for all its debt. High Plays an important public policy role supporting various developmental aims. One of only two development banks in the Philippines. Wholly owned by the government, which also guarantees most of its funding. Moderate Policy focus limits profitability, although stronger than at other policy banks. Healthy liquidity is supported by an improving deposit-funding base, although reliant on borrowings. Moderate NPLs and adequate capitalisation.
Development Bank of the Philippines
100.0%
NR/BBB-
NA
NA
Sri Lanka Bank of Ceylon 100.0%
B1/B+ B1/NR 1 NA High Largest bank in Sri Lanka and one of the main bankers to the government. High Pivotal role as a de facto funding conduit for the government. Weak Very strong loan growth has led to deterioration in capital adequacy, asset-quality indicators and funding profile. Weak Very strong deposit franchise and liquidity position are offset by low profitability and weak capital adequacy.
National Savings Bank
100.0%
NR/B+
NA
Vietnam VietinBank 65.0%
B2/BBB2/BB0 0 High Second-largest Vietnamese bank, with a c.12% market share, and one of five majority-owned by the government. Weak Weak asset quality and low earnings generation capacity. However, recent share issuance to Bank of Tokyo-Mitsubishi UFJ provided a strategic shareholder and boosted capitalisation.
Mongolia Development Bank of Mongolia 100.0%
B1/BBB1/BBNA NA High The only policy bank in Mongolia with a mandate to secure funding for key government development projects. The government guarantees the banks foreign-currency funding, and support is unlikely to be withdrawn near-term. Weak As a financer of infrastructure and industrial development projects in Mongolia, the bank has high concentration risk in a risky economy.
86
Banking sector As the tide goes out

Analysts: Victor Lohle (+65 6596 8263), Simrin Sandhu (+65 6596 6281), Nikolai Jenkins (+65 6596 8259)
Summary
Asia is on a lower growth path over the longer term Asian banks face increased headwinds in 2014. From a macroeconomic perspective, while growth is likely to be higher in 2014 than in 2013, Asian economies have moved onto a lower long-term growth path relative to recent years. This is particularly true of the larger economies of China and India. Slower economic growth is likely to result in slower loan growth for banks in a number of markets, following years of very strong loan growth. Credit cycles in most Asian banking systems have either turned or are turning lower, and this will eventually be reflected in the banks asset-quality indicators. In India, this process is firmly underway. In other countries, such as China, it is not captured in reported asset-quality indicators or is only just starting. The combination of lower trend economic growth, potentially higher interest rates later in 2014, and tight liquidity in some countries might trigger asset-quality deterioration in markets such as Thailand and Malaysia. However, reported asset-quality indicators in most banking systems (with the exception of India) are strong, and loss-absorption capacity has improved in the past few years. Another key theme for Asian banks in 2014 will be the impact of US tapering. As the global liquidity tide goes out, country-specific macro vulnerabilities are likely to become more pronounced; these include current account deficits, significant capital inflows or increases in foreign bank credit inflows, rising leverage, and the risk of asset bubbles. India and Indonesia appear particularly vulnerable from a macroeconomic perspective. However, we also see macro and political risks in economies such as Thailand and Malaysia. at a time when funding positions have deteriorated From a funding perspective, strong credit growth in recent years has led to a deterioration in banks loan-to-deposit ratios (LDRs), although they remain below 100% in most systems (except Thailand and Korea). Banks external vulnerability, as measured by their reliance on wholesale and foreign-currency funding, appears little changed in most Asian countries. However, foreign-currency LDRs have risen for banks in Thailand, Singapore and Hong Kong. While there are no signs of imminent danger, high reliance on wholesale foreign-currency funding increases banks vulnerability to potential funding stresses in some markets. Asian banks have maintained robust capital adequacy ratios, despite strong credit growth in recent years. Banks in most Asian countries (with the exceptions of China and Indias public-sector banks) have reported improving capital adequacy ratios.
Credit cycles in most banking systems have turned or are turning lower; however, most systems are starting from a strong position
The spillover effects of Fed tapering could exacerbate vulnerabilities
Capital adequacy in most systems is sound
Figure 1: Summary of our views of Asian banking sectors under our coverage
China Operating environm ent Outlook Profitability Outlook Asset quality Outlook Funding and liquidity Outlook Capital adequacy Outlook OVERALL OUTLOOK Hong Kong India Indonesia Malaysia Philippines Singapore Korea Thailand
Negative
Negative
Negative
Neutral
87
Neutral
Neutral
Neutral
Neutral
Neutral

This is the main reason for their stronger loss-absorption capacity. Indian publicsector banks stand out for their weak capital adequacy and will continue to rely on government capital injections. Given increasing headwinds, we are less constructive on most of the Asian banking sectors under our coverage in 2014 than in 2013. However, we maintain Stable outlooks on most sectors. We have Negative outlooks on China, Hong Kong and India, reflecting asset-quality deterioration. Figure 1 summarises our views of the Asian banking systems under our coverage. The market is pricing in most of the risks to banks in India and Indonesia, in our view. However, we think potential vulnerabilities in Thailand and Malaysia are not fully priced in. In Malaysia, we are concerned about possible asset-quality deterioration, though this is likely to take a few years to play out, assuming normal conditions. In Thailand, we see vulnerability to potential funding stresses and asset-quality strains arising from the increasingly leveraged Thai household sector. Given current spread differentials, we prefer Korea over Thailand and Malaysia. We also like India given the wide spread differentials versus BBB- credits in Asia.
Macroeconomic outlook
Growth in 2014 is likely to be higher than in 2013, but below the longterm trend The economic growth outlook for Asia in 2014 is similar to 2013. We expect marginally higher growth across the region, with the exceptions of China and the Philippines, where we forecast marginally lower growth than in 2013. From a longerterm historical perspective, Asian economies notably China and India are now on a lower growth path than in the previous decade. This points to slower loan growth for banks in the longer term. Even so, most Asian economies will still grow at a reasonable pace in 2014 relative to other parts of the world. The impact of the US Feds tapering will be a key macroeconomic challenge in 2014. As the global liquidity tide goes out and interest rates start to rise in some economies, country-specific vulnerabilities are likely to become more apparent. The most vulnerable countries are those with current account deficits (India, Indonesia and Thailand) or deteriorating current account positions (Malaysia). Countries that have experienced significant bond inflows such as Indonesia, Malaysia and Thailand are also vulnerable. We are also keeping an eye on countries that have seen significant increases in foreign bank credit inflows in recent years, such as China, Thailand and Malaysia.
Figure 2: Growth is slower than in the previous decade Real GDP growth, %
12 10 8 6 4 2 0 CN HK IN ID MY PH SG KR TW TH VN
Figure 3: Foreign bond holdings are rising % of local bonds held by foreigners
50%
2000-12 average
40% 2013E 2014F 30% 20% 10% 0% Jan-08 PHP
MYR
IDR
THB KRW
Jan-09
Jan-10
Feb-11
Feb-12
Mar-13
Source: National sources, Standard Chartered Research
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Asia Credit Compendium 2014 Asset quality Turn in the credit cycle
Rapid loan growth has led to increased leverage
Asian banks have experienced robust loan growth in the past five years, underpinned by strong economic growth, low interest rates and ample liquidity. Loan growth exceeded GDP growth in almost every Asian country from 2007-12. As a result, Asias overall leverage encompassing government, private-sector and household debt increased during the period. We summarise our views of the vulnerability of the household and corporate sectors in Asian banking systems in Figure 4. China and Korea are the countries of most concern. China is of particular concern because of its combination of rapid credit growth and high leverage. Korea also stands out because of high leverage in the consumer and private sectors. However, Koreas government has used macroprudential tools to limit leverage and reduce external vulnerability, so we do not expect a material deterioration in asset quality. Economies with moderate risks include Hong Kong, Singapore, Malaysia, and India. Singapores household leverage is above average for the region. While Hong Kongs household sector is slightly less leveraged than Singapores, its corporate sector is more leveraged. Loans to mainland China account for a significant portion of Hong Kongs leverage growth. Our concerns about Malaysia centre on household leverage, though this is partly explained by the fact that consumers can obtain residential mortgages using funds in their mandatory pension schemes. Indias increasing corporate leverage is a concern, although overall leverage has been relatively stable over the past five years. Figure 4: Corporate and household vulnerability Leverage and debt serviceability
HIGH Malaysia Korea 180 Singapore Thailand Hong Kong Indonesia MEDIUM VULNERABILITY IN THE CORPORATE SECTOR
Figure 5: Rising housing prices Residential property prices (rebased, 1997 = 100)
200 Hong Kong
VULNERABILITY IN THE HOUSHOLD SECTOR
MEDIUM
160 140 120 100 80 2007 2008 2009 2010 2011 2012
Malaysia Singapore Indonesia Thailand South Korea
Philippines LOW
China India HIGH
LOW
China
Figure 6: Loan growth has been strong in recent years Loan growth vs. nominal GDP growth, 2007-12 (CAGR)
25% Indonesia 20% Loan growth 15% 10% 5% 0% 0% 5% 10% 15% Nominal GDP growth 20% 25% China India
Figure 7: Total leverage has increased Debt/GDP, %

400 350 300 250 200 150 Dec-07 Dec-12
Hong Kong
Thailand South Korea
Singapore Malaysia Philippines
100 50 0 HK SG KR CN MY TH TW IN PH ID
Source: Central banks, IMF, Standard Chartered Research
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Asset bubbles
Hong Kong and (to a lesser extent) Malaysia are the Asian economies most vulnerable to potential real-estate asset bubbles, in our view, as property prices have risen sharply in the past five years (Figure 5). Policy makers in Hong Kong, Malaysia and Singapore have taken steps to cool domestic property markets. Also, relatively low loan-to-value ratios in Hong Kong and Singapore should protect banks in the event of rising mortgage delinquencies. Malaysias loan-to-value ratios are higher than those of Singapore and Hong Kong, giving banks less protection in the event of a downturn in the property market.
What next?
Lower economic growth, higher interest rates and tight liquidity could be catalysts for asset-quality deterioration Credit cycles in the region have either turned lower (e.g., India and China) or are turning. We therefore expect asset quality to deteriorate. However, reported assetquality indicators in most Asian banking sectors are fairly robust, with the exceptions of India (where asset-quality indicators are weak) and China (where the reported numbers might not reflect the full picture). Reported NPLs are low, and loan-loss coverage is high in most sectors in the region. Looking ahead, lower economic growth, higher interest rates and tight liquidity in some countries could be catalysts for asset-quality deterioration. We expect interest rates to rise in late 2014 in Hong Kong, Malaysia, the Philippines, and (to a lesser extent) Indonesia and South Korea. In India, we see little respite from weakening asset quality over the next year. Publicsector banks in particular are under stress given their higher exposure to problem sectors like infrastructure. The pace of reform is slow, and is likely to remain so with elections on the horizon. High corporate leverage amid anaemic economic growth and rising rates will pressure borrowers ability to service debt. Private banks have weathered the asset-quality down-cycle far better than their public-sector peers. We expect this trend to continue given private banks more conservative disposition and greater focus on the retail sector, where asset quality is healthier. Reported asset-quality indicators in Korea deteriorated slightly in 2013 due to the reclassification of non-performing corporate loans. However, the banks overall NPL ratios are relatively low thanks to significant write-offs and NPL sales. Although some large corporate sectors (such as construction, shipbuilding and shipping) remain weak and leverage in the system is high, we do not expect headline reported assetquality indicators to deteriorate considerably in 2014.
Figure 8: NPL ratios are low in most countries NPL ratios (%)
6
Figure 9: Loan-loss coverage is comfortable Loan-loss reserves to NPLs (%)

350 300
H1- 2013 4 End-2008 2
250 200 150 100 50 End-2008 H1-2013
0 CN HK IN ID MY PH SG KR TH
Source: National regulators, Banks, SNL, Standard Chartered Research
0 CN HK IN ID MY PH SG KR TH
Source: National regulators, Banks, SNL, Standard Chartered Research
90

In China, strong loan growth has underpinned a steady improvement in the larger banks reported asset-quality indicators in recent years. Despite a gradual uptick in NPLs since 2013, reported NPL ratios are very low on an absolute basis. Our concern is that reported asset-quality indicators may not fully reflect the real picture, particularly given banks exposure to potentially troublesome sectors. We expect Chinese banks reported asset-quality indicators to deteriorate, albeit very gradually. In Hong Kong, asset-quality indicators are at cyclical lows. Exposure to mainland China is our main concern, although banks high exposure to the property sector and Hong Kongs relatively high household debt are also concerns. Most banks exposure to the mainland has increased rapidly since 2009. Given our concerns about asset quality in China, we expect Hong Kong banks asset-quality indicators to deteriorate in the medium term. In Malaysia, asset quality appears healthy in the household and corporate sectors. However, asset-quality metrics are at cyclical lows and have benefited from the favourable macroeconomic environment and steady loan growth of recent years. We expect asset quality to gradually deteriorate as recent lending begins to season. Fiscal consolidation and recent lending curbs could affect the most vulnerable household debtors. The asset quality of Singaporean banks is among the strongest in Asia. However, as in other systems in the region, NPL ratios have benefited from recent loan growth, particularly to borrowers in Greater China. Deterioration is likely as these loans season. We expect reported asset-quality indicators to remain stable, as continued lending growth should dilute the impact of a modest uptick in NPLs. In Thailand, policy-driven growth in consumer lending in 2011 and 2012 has resulted in rising NPL formation for lenders that are exposed to the increasingly indebted household segment. We expect this trend to continue in 2014.
Funding Still a strength, but for how much longer?

LDRs have deteriorated in some markets, but overall external funding vulnerability has not increased materially Strong credit growth in recent years has led to a deterioration in the funding position of Asian banks (as measured by LDRs). However, LDRs remain below 100% in most systems, with the exceptions of Korea and Thailand. While Koreas LDRs are the highest in the region, they have improved as a result of government efforts to address banks funding positions, and measures by some banks to address difficulties faced during the global financial crisis. Thailands overall LDR has remained above 100%, despite improvements since regulatory changes were made in February 2012. LDRs have also deteriorated in Singapore, Hong Kong and Indonesia. Asian banking systems external vulnerability has been little changed in the past few years, despite the deterioration in their funding positions. Wholesale and foreigncurrency funding as a percentage of total funding have both remained broadly stable. The open economies of Singapore and Hong Kong stand out for their relatively high reliance on wholesale and foreign-currency funding. Koreas reliance on wholesale funding is also high, although it has declined in recent years.
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Higher foreign-currency LDRs in some markets need to be closely monitored Thailand, Singapore and Hong Kong stand out for their deteriorating foreign-currency LDRs. Thailands rose to 211% at end-2012 from a 10-year low of 161% in 2007. In Singapore and Hong Kong, the deterioration has been driven by strong USD loan growth to Greater China. While there are no signs of imminent danger, heavy reliance on wholesale foreign-currency funding increases vulnerability to potential funding stresses, in our view. Competition for retail deposits is likely to intensify as a result of the implementation of Basel III liquidity provisions, while corporate deposits are likely to become a more expensive and less attractive source of funding for banks. While rules on the phased local implementation of Liquidity Coverage Ratio (LCR) provisions in January 2015 have not been finalised, some jurisdictions (such as Hong Kong and Singapore) have released consultation papers. Among corporate deposits, operational deposits will become much more attractive than non-operational deposits because they are stickier in nature. In theory, banks with strong transaction banking franchises will benefit, as they can get more operational deposits. Increased competition for deposits is likely to result in a higher cost of funding for banks. Based on the consultation papers, local rules on what can be included as High Quality Liquid Assets (HQLA) are likely to be stricter than the Basel guidelines. For example, some countries will not allow equities or corporate debt securities rated below A- to be included as Level 2B assets. Figure 10: Overall funding position has deteriorated LDR ratios, %
140 2007 2012 H1-2013 120 100 80 30% 60 40 20 0 KR TH SG ID MY IN PH CN HK
*For India, FY07 and FY12 data is used; Source: Central banks, Standard Chartered Research
Figure 11: Wholesale funding is largely unchanged Wholesale funding to total funding
60% 50% 40% 2007 2012
20% 10% 0% SG HK KR TH IN* PH MY ID

Figure 12: Reliance on foreign-currency funding is unchanged Foreign-currency funding to total funding
80% 70% 60% 50% 40% 30% 20% 10% 0% SG HK PH ID IN* KR TH MY CN
*For India, FY07 and FY12 data is used; for China and the Philippines, only data on foreigncurrency deposits is available; for Malaysia, external liabilities are used as a proxy; Source: Central banks, Standard Chartered Research
Figure 13: Thailands foreign-currency LDR is deteriorating Foreign-currency LDRs

300% 250% 200% 150% 100% 50% 0% TH KR CN SG ID HK MY
2007 2012
2007
2012
92
Asia Credit Compendium 2014 Profitability

Profitability is unlikely to improve Asian banking systems (with the exceptions of China and India) have faced margin compression over the past five years. In India, private-sector banks have reported rising margins, while public-sector banks have seen a contraction. Despite the contraction in margins, profitability measures have remained broadly stable in most systems thanks to a combination of higher lending volumes and cyclically low loanloss provisions. Korea and India stand out for their high provisions as a percentage of pre-provision profits. In both countries, loan-loss provisions consume c.40-50% of banks profits, on average. In Korea, this has been exacerbated by sluggish loan growth, which explains the banks low profitability. Profitability measures for most Asian banks are unlikely to improve in 2014. First, NIMs are unlikely to improve significantly in most countries. While we expect interest rates to rise in some markets, rate hikes are likely to take place later in 2014. Also, funding costs are likely to increase because of increased competition for sticky deposits ahead of LCR implementation in early 2015. This may slow the improvement in NIMs. Second, the cost of risk is likely to rise. In most Asian countries (except Korea and India), provisions are at cyclical lows. If asset quality deteriorates, the cost of risk will rise.
Figure 14: Net interest margins (%)

3.5 3.0 CN 2.5 2.0 1.5 1.0 2009 2010 2011 2012 H1-13
* India data is for fiscal year-end; China data is for H1-2013 and includes reporting banks only; Source: SNL, regulators, Standard Chartered Research
Figure 15: Costs/income (%)

60 TH IN 40 MY KR 30 20 10 0 CN HK SG IN KR MY TH
* India data is for fiscal year-end; China data is for H1-2013 and includes reporting banks only; Source: SNL, Standard Chartered Research
50
2009
2012
H1-13
HK
SG
Figure 16: Provisions and profits

100% 80% 60% 40% 20% Provisons Profits
Figure 17: ROA (%)

2.5 2.0 1.5 1.0 0.5
2012 2008
H1-13
2009 2012 H1-13 2009 2012 H1-13 2009 2012 H1-13 2009 2012 H1-13 2009 2012 H1-13 2009 2012 H1-13 2009 2012 H1-13
0%
0.0 CN HK SG IN KR MY TH
* India data is for fiscal year-end; China data is for H1-2013 and includes reporting banks only; HK includes HSBC, Source: SNL, Standard Chartered Research
CN
HK
SG
IN
KR
MY
TH
*Data for India is average of banks under our coverage, fiscal year-end; China data is for H12013 and includes reporting banks only; Source: SNL, Standard Chartered Research
93
Asia Credit Compendium 2014 Capital adequacy Still a strength for most systems
Higher capital adequacy results in large buffers in most countries Despite strong credit growth in recent years, Asian banks have maintained robust capital adequacy ratios. With the exceptions of banks in China and Indian publicsector banks, banks from other countries have reported an improvement in capital adequacy ratios. As a result, Tier 1 capital ratios for most Asian banking sectors are at or above 10% and mainly comprise equity. In most countries, Basel III implementation has not had a material impact on capital adequacy (Korea implemented the capital adequacy provisions of Basel III on 1 December 2013). Improving capital adequacy ratios are also the main reason for banks stronger lossabsorption capacity. This positions banks in most Asian countries well to withstand a potential deterioration in asset quality in 2014. However, because of regulatory forbearance, the loss-absorption buffers of banks in countries such as China and India are smaller than reported. Also, while Asian banks capital adequacy was starkly higher than that of US or European banks in the past, this differential has disappeared as US and European banks have increased their capital bases. Indian public-sector banks stand out for their weak capital adequacy. Poor profitability in the context of strong asset growth has pressured capital ratios. Additionally, low loan-loss coverage across the sector reduces banks ability to withstand asset-quality shocks. In India, asset-quality stresses are likely to persist amid muted market appetite for public-sector bank equity issuance; as a result, public-sector banks will continue to rely on government capital injections to maintain adequate capitalisation.
Supply Senior gross supply in line with 2013; sub supply to increase
Supply in the USD space should be higher than in 2013, but banks are also likely to tap other G3 currencies more actively We expect around USD 32bn of G3 gross supply from Asian banks in 2014, up from around USD 26.6bn in 2013. On a net basis (net of redemptions), we expect only around USD 13bn of supply. We also expect Asian banks to tap the non-USD space (e.g. EUR) more actively in 2014. Higher issuance of subordinated debt is likely to be a key theme in 2014. Only a handful of issuers tapped the local-currency and USD markets to issue Basel III-compliant debt in 2013. As investors become more familiar with this asset class, we expect Basel III USD subordinated issuance to increase. More importantly, weaker institutions are likely to be able to tap this market as it becomes more established. We expect subordinated USD debt issuance from India, China, Hong Kong and Singapore. Figure 19: results in higher loss-absorption buffers Composition of loss-absorption buffers
12% H1-2013 10% 8% 6% 2008 4% 2% 0% -2% 2007 2012 2007 2012 2007 2012 2007 2012 2007 2012 2007 2012 2007 2012 2007 2012 2007 2012 Earnings buffer Excess capital Loan loss coverage
Figure 18: Higher capital adequacy Tier 1 capital ratio (%)

16 14 12 10 8 6 4 2 0 -2 CN HK IN* ID MY SG KR TH
* Indian banks under coverage, FY09 and FY13; Source: Banks, national regulators, SNL, Standard Chartered Research
SG
IN PRVT
CN
TH
MY
KR
HK
ID
IN PSB
*Data for Indian banks is as of 31 March 2013, loss-absorption buffers are calculated as preprovision profits, plus Tier 1 capital in excess of 8.5% plus loan loss reserves minus NPLs as a percent of RWA; Source: Banks, IMF, SNL, Standard Chartered Research
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We expect Korean banks to be the largest issuers on a gross basis Korean banks will again be the largest issuers in Asia on a gross basis in 2014, in our view. We expect c.USD 13.4bn of G3 gross issuance from Korean banks in 2014, up from USD 11bn in 2013. On a net basis, we expect slightly negative USD supply from Korean banks, as some might issue in non-USD currencies. Policy banks are likely to dominate issuance, with a projected USD 9.5bn of G3 gross issuance. We expect no issuance of Korean subordinated debt in the USD space, as such debt is likely to continue to be issued in the domestic market. We expect Indian banks to be prominent USD issuers in 2014. We expect gross G3 issuance of c.USD 6bn. Given limited redemptions in 2014, net issuance is likely to be around USD 5bn making Indian banks potentially the largest net issuers in Asia. Larger-than-expected supply is the key risk to Indian bank supply in 2014, in our view. Given the capital needs of Indias public-sector banks, we expect some of them to tap the USD Tier 1 market (c.2.5bn). The rest of the expected issuance from India is likely to be senior debt from private- and public-sector banks. In line with Chinas growing prominence in Asian debt markets, we expect Chinese banks to be more active in the debt markets in 2014. We expect c.USD 4bn of gross issuance, mostly in the senior space (c.USD 3bn of gross issuance). Given the relatively small amount of redemptions, this would make Chinese banks the second-largest net issuers after Indian banks. Larger-than-expected supply is the key risk to Chinese bank supply, in our view. Some of the expected issuance could be from leasing subsidiaries, via transactions with credit enhancement (SBLCs or guarantees) or in their own names. Some larger banks might consider tapping the subordinated space (Tier 2). We expect moderate supply from Hong Kong banks, at around USD 2bn of gross issuance. A handful of banks might consider tapping the Tier 2 space, and one or two Chinese-owned banks might tap the senior space. We expect relatively limited supply from Singaporean banks, at around USD 2.75bn of gross issuance. Given the volume of redemptions in 2014, this would translate into essentially no net issuance. However, the bulk of the issuance could be in the subordinated space, probably Tier 2. We expect Thai banks to remain active in the USD space in 2014, with expected gross issuance of USD 2.25bn. Although most of the expected issuance will be in the senior space, some banks that are more established in the debt markets might consider issuing Tier 2 debt later in the year, in our view. We do not expect any issuance from Malaysian banks in 2014, as in 2013. We see a possibility of issuance from Indonesia or the Philippines.
Indian banks might issue more on a net basis
Issuance from Chinas banks is likely to remain strong
95
Asia Credit Compendium 2014 Summary views of Asian banking systems

Figure 20: Summary of our credit views on each Asian banking sector
Country 2014 outlook 2013 outlook Rationale The credit cycle has turned and NPLs are gradually increasing. However, reported numbers might not provide the full picture of NPLs given the potential for forbearance. Also, strong loan growth has kept reported asset-quality indicators fairly strong. We expect reported NPL ratios to deteriorate gradually over the course of 2014. Our main concern is the banks exposure to mainland China, given rapid growth and the Hong Kong Negative Negative ongoing asset-quality deterioration there. However, exposure to the property sector and high household debt are also concerns. Rapid loan growth on the mainland has also resulted in a deterioration in banks foreign-currency LDRs. However, the banks are generally well positioned to weather a downturn. Indias public-sector banks will continue to face asset-quality issues given their large exposure to stressed sectors of the economy. Low loan-loss coverage magnifies assetIndia Negative Negative quality concerns. With credit costs likely to remain elevated, profitability and internal capital generation will remain muted, pressuring capital ratios. We expect ongoing reliance on the government to boost capitalisation, particularly in light of Basel III requirements. In contrast to their public-sector peers, we expect private-sector banks to be more resilient to the down-cycle, although their metrics may weaken marginally. Thanks to solid capital and earnings buffers, Indonesias large banks are resilient to external challenges and their fundamental metrics are likely to remain strong. For smaller Indonesian lenders, rising domestic interest rates have resulted in tighter domestic liquidity, which could weaken confidence in the sector. Banks profitability remains below the Asian average because of high loan-loss Korea Neutral Neutral provisions. Although some corporate sectors remain weak and leverage in the system is high, headline reported asset-quality indicators are unlikely to deteriorate materially in 2014. Although the banks remain vulnerable to external shocks, their position has improved thanks to policy measures. Malaysian banks will benefit from a continuation of the favourable growth and fundamental economic outlook in 2014. However, asset-quality metrics are at cyclical lows and may weaken gradually, as the impact of recent lending curbs could affect the most vulnerable household debtors. Asset-quality metrics are worse than regional peers, but NPL ratios are likely to decline. Philippines Neutral Neutral The favourable domestic operating environment should facilitate continued loan growth. Banks are also prepared for the full implementation of the capital provisions of Basel III beginning in 2014. Low margins at home will continue to push Singaporean banks to look overseas in Singapore Neutral Neutral search of yield. Tightening foreign-currency liquidity associated with lending to the Greater China region will also remain in focus, although the overall solid credit profile of Singapore banks will remain intact and among the strongest in Asia. Thai banks fundamental credit metrics should remain solid, underpinned by the healthy domestic operating environment. We expect political risks to gradually subside, leaving the banks fundamental credit profiles unchanged. However, asset-quality metrics are likely to reflect strains on the increasingly leveraged Thai household sector, which benefited from government stimulus measures that have now been withdrawn. Foreigncurrency wholesale borrowing risks will remain, but we think they are manageable.
China
Negative
Negative
Indonesia
Neutral
Malaysia
Neutral
Neutral
Thailand
Neutral
Neutral
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China property sector Repositioning and rebalancing

Analysts: Zhi Wei Feng (+65 6596 8248), Chun Keong Tan (+65 6596 8257)
Summary and recommendation

The China HY property sector has had one of its best years in 2013, with the largest issuance size; strong demand and steady prices, are backed by improved investor confidence and a relatively stable policy environment 2013 has been a largely uneventful year for Chinas property market, as we projected in China property sector A nascent recovery in Asia Credit Compendium 2013. The policy environment has been generally stable, despite some policy fine-tuning. Land and home prices in top-tier cities have risen significantly, backed by limited supply and strong demand. Most HY developers have achieved their operational goals, with solid sales performance. Offshore fund-raising activity has enabled them to expand their land reserves and extend debt maturities at lower funding costs. Most have maintained stable credit ratings, despite a marginal deterioration in credit metrics. The property sector saw a substantial increase in new issues both from existing and debut issuers. However, this has not resulted in increased investor fatigue, as it used to. Newly bonds (with a wide range of ratings) have been well placed among various investor types. Market sentiment towards the sector has also improved. We maintain our Stable sector view for 2014; new government policies targeting the sectors structural issues are unlikely to cause a sudden deterioration in developers operating and financing environment We maintain our Stable sector view for 2014. While we expect the government to introduce long-term policies, we do not expect them to shock the market via a significant impact on pricing, supply and demand, at least in the near term. We believe the policies will provide long-term direction for the property market. We think market consolidation will be a key theme. Developers will continue to expand and rebalance their land banks to enhance market share and competitiveness. While size is important, portfolio quality and composition will be key considerations when making land purchases. Developers should maintain high sales and asset turnover to ensure sound liquidity and credit profiles. Challenges and risks remain large land and housing price increases in top-tier cities are unsustainable We see challenges and risks. Strong land and housing price increases in top-tier cities are unsustainable, despite favourable supply-demand dynamics. Developers profitability will eventually be at risk if land prices continue to appreciate. While market stability is likely to be maintained, long-term rules and regulations, together with ongoing financial-sector reforms, will divert investment cash to sectors other than physical real estate. Any negative impact on sales will pressure the companies liquidity given their large amounts of capital locked up in land reserves. Taking into account fundamental factors and our technical view, we expect credit carry to be a key theme for Chinas HY property bond sector in 2014. With Fed tapering likely to start in mid-2014, we expect new issuance to be front-loaded early in the year, although full-year issuance is likely to be lower than in 2013. In addition to top-tier/higher-rated developers, we expect lower-rated names and new players to tap the market, offering a yield premium to attract investors. While we do not expect companies credit metrics and liquidity positions to weaken substantially in the short term, investors should consider their business models and portfolio quality in addition to their credit metrics to ensure that fundamental and technical risks are sufficiently compensated for. We maintain our two-tier investment approach to the China HY property market. We recommend that investors maintain (1) a core holding position in top-tier property names, taking into account factors such as liquidity and bid-offer spreads; and (2) a trading portfolio of high-beta names to generate alpha.
Credit carry will be a key theme for China HY property bonds; developers should expand and rebalance their land portfolios to enhance market share and competitiveness, while fund managers should maintain core holdings for stable carry and a trading portfolio for alpha
97

Most developers covered in this compendium have core property holdings and substantial market shares in their focus areas We believe that most of the 19 China HY property names for which we provide detailed single-name coverage in this publication have core property holdings, with high-quality projects in their targeted market segments and/or geographical regions where they have substantial market shares and are strongly established. This should help them to weather short-term market volatility. Developers such as Central China Real Estate (CCRE), Country Garden (Cogard), Greentown and Longfor have maintained a consistent business model, with core strengths in their major sector/geographical markets. While Greentown encountered liquidity pressure in 2010-11 following aggressive expansion, it has attracted strategic investors and capital injections thanks to its high asset quality and management track record. Some developers have been aggressive in the land market in 2013 in an effort to rebalance and/or enhance their land banks amid evolving market dynamics. They include Agile, CIFI, Evergrande, Kaisa, Shimao and Sunac. While execution risk remains, we take comfort in their track records and current financial status, as we expect Chinas property market to remain stable in the next 12 months. China SCE and Yuzhou, the two developers focused on Fujian province, benefited from a strong property market in the province in 2013. They are also expanding outside Fujian to achieve diversification and increase growth potential. However, their operating performance in markets outside their home base has varied, suggesting execution risks. That said, their strong home presence gives them a sufficient buffer to experiment in new markets, in our view. The sales performance of Guangzhou R&F, KWG and Yanlord has been mostly in line with their targets, despite their high-end focus in top-tier cities the sector most affected by home purchase restrictions (HPRs). We see high volatility in KWGs and Yanlords revenue bookings given their relatively low project bases. This also applies to small to medium-sized developers such as China SCE, Yuzhou, CCRE and CIFI. CCC-rated Glorious and Hopson have high asset quality but their sales substantially underperformed peers in 2013, mainly due to their business models and management issues. That said, we do not see imminent refinancing pressure on the companies, partly owing to their offshore bond issues in early 2013. This gives them some time to strengthen execution ability.
Figure 1: Monthly new sales and ASPs in Tier 1 and selected Tier 2 cities, 2011 to October 2013
10 9 8 GFA sold (mn sqm) 7 6 5 4 3 2 1 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Soufun, Standard Chartered Research
Tier 1 cities 2013 (RHS) 2012 (RHS) 2011 (RHS)
Tier 2 cities
25,000
15,000
2011
2012
2013
10,000
5,000
0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
98
ASP (CNY psm)
20,000

2013 A buoyant year on all fronts
2013 has been the best year for the offshore USD China property bond market since its start in the early 2000s 2013 has been the best year for offshore USD China property bond market since its start in the early 2000s. The sector printed a total of USD 18.85bn of bonds from HG and HY issuers in 11M-2013 a historical high (2012: USD 9.1bn). The heavy new-issue pipeline did not deter investors. All bonds were well placed in terms across investor types and geographies. While concentration risk remains a key consideration for bond investors, China HY property is the largest single sector in the Asia ex-Japan HY universe. It accounts for 42% of the total outstanding, with a diversified rating spectrum (Figures 2-7). We have also seen improved investor confidence in the sector in 2013. In addition to strict policies regulating the sector, issuers have done well in educating investors on sector practices and releasing monthly operational updates. At an average bid YTM of 8.3% (average duration of 3.3 years) as of 26 November 2013, bonds from the China HY property sector offer relative value (RV) in the HY universe (Figure 8). Property bonds rated BB and B have performed strongly throughout 2013, despite a short correction across all bond sectors due to macro concerns about Chinas economy and rising US Treasuries (USTs). Yielding an average of 6.8% with an average duration of 3.7 years, the BB names are currently only 79bps wider than their YTD tight level (173bps tighter than the YTD wide at endJune). At an average YTM of 8.5% with an average duration of 3.2 years, the B names are c.88bps wider than their YTD tights but 189bps tighter than their YTD wides. The average bid YTM for names rated BB has widened about 20bps from its end2012 level, but the Z-spread has tightened by 12bps. For B-rated names, the average YTM and Z-spread have tightened by about 40bps and 100bps, respectively. The outperformance of B-rated bonds has been driven mainly by strong investor demand for higher-yielding paper. However, yields of CCC-rated bonds have spiked 155bps, mainly due to name-specific issues. Even so, the three CCC rated developers (Glorious, Hopson and Powerlong) issued offshore bonds in early 2013, when the market was heading towards its YTD tight level and investors were chasing yield. The spread differential between BB and B rated names was flat in 2013, suggesting reduced price dislocation and volatility in the sector The yield differential between the BB and B property bonds has traded in a narrow range in 2013; it is currently 172bps, 163bps at YTD tights and 189bps at YTD wides. In comparison, spread differentials of BB and B rated names were 224bps at 2012 tights and 411bps at 2012 wides. In addition to signalling reduced volatility in the sector, this suggests that investors are monitoring the sector closely and are quick to spot price dislocations (of individual bonds and/or along the duration curve) given their familiarity with the sector and its issuers. The sector has the largest number of repeat issuers, and many of them have created their own curve, with two to three bonds maturing in the next 3-10 years. Figure 3: Outstanding China property bonds by rating As of November 2013, USD bn
10 8 6 4 2 China property China nonproperty Indo Phil India Others 0 BB+ BB BBB+ B BCCC+ CCC NR
China property bonds offer RV versus other HY sectors, at an average bid YTM of 8.3% for a duration of 3.3 years
Figure 2: Asian HY bond market by country and sector As of November 2013, USD bn
40 35 30 25 20 15 10 5 0
99

We think most HY property bonds are at fair value with limited price upside, although they offer higher carry than other HY sectors Based on historical YTMs and taking into account our Stable sector view, we think the current YTMs of most China property bonds are at fair value, with limited price upside. However, they still offer some yield pick-up compared with bonds in other HY sectors. The CIFIHG 18 and the GRNCH 18 have substantially outperformed peers in price terms YTD in 2013 (Figure 10), mainly due to the new-issuance premium offered in early 2013. The GRNCH 18 (B2/B+) was issued in February at a coupon rate of 8.5% p.a. (subsequent tap in March at 102.5), while the CIFIHG18 (B2/B) was printed in April at 12.25% p.a. (subsequent tap in September at 104). The GLOPRO bond has underperformed substantially within the China property space. Rated Caa2/CCC+, the company reported poor sales results in 10M-2013 (48% of its full-year target). In addition, its proposed privatisation raised investor concern about the companys potential transparency and corporate governance. The price decline in the longer-dated FRANSH 21 (Ba1/BB) from its YTD high of 108 to slightly above par currently, to yield 6.6%, is in line with investors UST view. The poor price performance of the AGILE 16, the KWGPRO 16/17 and the COGARD 17 is mainly due to their call schedules in 2014. With bond yields on a downward trend since January 2012 as low rates and the search for yield keep demand for HY paper strong, many issuers have found it advantageous to call and refinance their bonds in 2013 at lower cost and with less stringent covenants. Kaisa has called its 2015 bonds, Shimao has called its 2016 bonds and Central China Real Estate has exercised its make-whole option for the CENCHI 15 before the call date. Fundamentals have been generally supportive in 2013. Despite some fine-tuning, there have been no major policy changes. Easy access to offshore debt markets has enabled developers to repay expensive bank and other borrowings, optimise debt maturity structures, and reduce funding costs. They achieved satisfactory contracted sales results in 10M-2013, meeting or exceeding their full-year targets. This was underpinned by high available-for-sale stock from their larger land banks and strong price appreciation in top-tier cities. Backed by solid cash flow from sales and offshore fundraising, some developers have become the top bidders at government land auctions in Tier 1 and Tier 2 cities. Although downward pressure on profitability and credit metrics continues, we do not expect it to be a major concern in the next 12 months given that liquidity remains strong and refinancing risk is low (Figure 11).
With early redemption available via exercising calls or make-whole options, prices of bonds with call options in 2014 are capped at close to their call prices
Most HY developers have achieved strong sales, refinanced expensive debt, optimised their debt maturity profiles, and strengthened their land bank composition in 2013
2014 Repositioning to outperform

2014 will likely be another stable year for Chinas property market, but risks remain on both the fundamental and policy fronts We think 2014 will be another stable year for Chinas property market. However, challenges and risks remain. We do not think land and housing price appreciation in the top-tier cities is sustainable. We also expect the central and local governments to roll out new regulations targeting structural issues in the property sector in 2014-15, based on reform plans revealed after the Third Plenum in November. These policies will likely allow market forces to play a more important role in optimising land use and allocation, developing sustained demand, and ensuring stable housing prices and affordability. However, despite the long-term positives, we do not think China has fully developed the necessary legal, tax, and financial systems or technical platforms to support a raft of changes in the short term. As such, we expect moderate market volatility arising from policy. Given the stable market situation, we think that the developers should take the opportunity to (1) map out future development and expansion strategies, (2) align and optimise their portfolio composition with the future direction of policy, (3) maintain high sales and asset turnover, and (4) improve their credit profiles, while maintaining solid liquidity positions.
We think developers should rebalance their land banks and maintain high sales and asset turnover to achieve stable liquidity and credit profiles in 2014
100

We expect new issuance of China property bonds to be front-loaded in 2014, but total issuance size is likely to be lower than in 2013 We expect front-end-loaded new issues in the China property bond market in 2014, similar to 2013. That said, total issuance size is likely to be lower than in 2013, considering the developers funding needs, their balance-sheet capacity, propertymarket conditions and the likelihood of rising USTs given Fed QE tapering in mid2014. We also expect moderate offshore refinancing needs in 2014-15, although some developers may exercise their call options depending on how economical this would be and market conditions closer to the call dates (Figure 11). While the developers are likely to continue to expand, we believe the need to strengthen their portfolio composition and enhance their market shares has overtaken the importance of increasing their land bank size. Considering fundamental and technical factors, we expect HY property bond prices to remain stable in 2014. With credit carry being the main theme for the year, we believe bond selection based on fundamentals is important. Like developers, investors should build a dynamic portfolio of China HY property bonds. We recommend that investors maintain (1) a core holding position in top-tier property names, taking into account bid-offer spreads and market liquidity; and (2) a trading portfolio of high-beta names likely to outperform. While new issues offer diversification, liquidity and some yield premium, investors should consider the issuers business models, portfolio quality and financial profiles. This is particularly important in view of ongoing market consolidation and diverse market performance across cities and regions in China.
We recommend that investors engage in bottom-up credit work and maintain a dynamic bond portfolio for both carry and alpha
Figure 4: HY property bonds by issuance month 2011 to November 2013, USD bn

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13
Figure 5: China HY property indices* As of 26 November 2013, bps

3,000 2,600 2,200 1,800 1,400 1,000 B index
China's booming property market helped developers to raise offshore Funding funds at low cost costs started to rise with more issuance
General market conditions weakened due to European debt crisis, China hard-landing concerns
Market correction in mid-2013 due to macro concerns; China's property market has been mostly stable in 2013
BB index 600 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13
*Based on bid YTM; Source: Standard Chartered Research
Figure 6: Bond allocation by investor type New issues in 11M-2013

100% 80% 60% 40% 20%
KAISAG 20 COGARD 23 SHIMAO 20 HPDLF 18 LASUDE 18 AGILE Perp FTHDGR 20 GZRFPR 20 PWRLNG 18 CHINSC 17 CENCHI 20 CAPG 17 GZRFPR 20 KWGPRO GRNCH 18 FUTLAN 18 MINGFA 18 GLOPRO 18 KAISAG 18 GLOPRO 18 GRNCH 18 BJCAPT 49 SUNAC 18 CIFIHG 18 XINYUA 18 POLHON 18 CENCHI 18 CIFIHG 18 GRNCH 19 COGARD 21 YUZHOU 18 CHINPR 18 FRANSH 18 MOLAND 18 XIN 18
Figure 7: Bond allocation by region New issues in 11M-2013

100% 80% 60% 40% 20%
KAISAG 20 COGARD 23 SHIMAO 20 HPDLF 18 LASUDE 18 AGILE Perp FTHDGR 20 GZRFPR 20 PWRLNG 18 CHINSC 17 CENCHI 20 CAPG 17 GZRFPR 20 KWGPRO 20 GRNCH 18 FUTLAN 18 MINGFA 18 GLOPRO 18 KAISAG 18 GLOPRO 18 GRNCH 18 BJCAPT 49 SUNAC 18 CIFIHG 18 XINYUA 18 POLHON 18 CENCHI 18 GRNCH 19 COGARD 21 YUZHOU 18 CHINPR 18 FRANSH 18 EVERRE 18 MOLAND 18 XIN 18
AM/HF
Banks/CBs/PIs
US
Europe
Asia/ME
0%
0%
101

Figure 8: YTM and relative value by rating and sector*
2012 wide China property - BB-rated - B-rated - CCC-rated China non-property - BB-rated - B-rated Indonesian HY - BB-rated - B-rated Yield differential (bps) - BB vs. B (China property) - BB vs. B (China non-property) - China property vs. non-property - China property vs. Indon HY 411 187 181 490 224 192 (234) (8) 213 178 34 49 189 140 137 186 163 122 135 109 172 81 143 25 14.5% 12.1% 16.2% 25.8% 12.7% 12.2% 14.0% 9.6% 6.8% 11.0% 2012 tight 7.7% 6.5% 8.8% 11.8% 10.0% 9.5% 11.4% 7.8% 5.9% 8.7% End-2012 7.8% 6.6% 8.8% 11.8% 7.4% 6.9% 8.7% 7.3% 5.3% 8.2% 2013 wide 10.6% 8.5% 11.4% 14.9% 9.2% 8.8% 10.1% 8.7% 7.0% 9.1% 2013 tight 7.2% 6.0% 7.7% 9.4% 5.8% 5.5% 6.7% 6.1% 4.9% 6.5% 26-Nov-13 8.3% 6.8% 8.5% 13.3% 6.8% 6.6% 7.5% 8.0% 6.1% 8.8%
*Volatile and event-driven names such as the WINWY 16, HIDILI 15, BTELIJ 15, and BUMIIJ 16/17 are excluded from the study, and bond ratings are based on Bloomberg composite rating; Source: Bloomberg, Standard Chartered Research
Figure 9: China HY property, best performers Best performers in price terms, pt (YTD as of 26-Nov-13)
CIFIHG18 GRNCH18 ROADKG17 SUNAC18 FUTLAN18 KWGPRO20 CHINSC17 PWRLNG18 2.25 1.88 1.75 1.75 1.50 1.00 4.25 8.25
Figure 10: China HY property, worst performers Worst performers in price terms, pt (YTD as of 26-Nov-13)
AGILE16 KWGPRO16 KWGPRO17 COGARD17 FRANSH21 GLOPRO15 GLOPRO18 -15.75 -4.25 -4.25 -4.50 -5.38 -6.25 -7.50
Figure 11: Bond maturity and call schedule USD bn

12 10 8 6 4 Call schedule 2 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Based on maturity
102

Figure 12: Land-bank distribution and segment position (developers with land banks larger than 30mn sqm*)
Cogard Target market Main city focus Contracted ASP** Average land cost Pearl River Delta Hainan Fujian Central Yangtze River Delta Bohai Rim Northeastern China Western China Yunnan Others 14.6% 21.5% 3.0% 9.2% 9.0% 2.3% 13.1% 1.7% 2.5% 6.4% 10.9% 3.2% 21.0%^^ 2.1% 4.6% 57.6% 21.7% 7.5% 37.5% 12.9% 11.3% 7.3% 36.1% 17.0%
#
Agile Mid to high Tier 2/3 11,497 1,206 43.2 40.6% 22.5%
Greentown Mid to high Tier 1/2 19,067 2,734 41.4 5.3%
Shimao Mid to high Tier 1/2/3 12,866 2,160 31.0^
Longfor Mid to high Tier 1/2 12,679 2,028 37.8
GZ R&F Mid to high Tier 1/2 12,109 1,500 34.5 37.7%
Hopson Mid to high Tier 1/2 17,201 NA 33.0 53.1%
Mass to mid Tier 2/3 6,658 659 62.3 42.1% 0.7%

##
Land bank (mn sqm)
10.1%
##
5.0% 1.2% 20.8% 36.9% 9.6% 4.6% 29.0% 15.0% 31.5%
*Excl. Evergrande (land bank of 145mn sqm at an average land cost of CNY 800 psm/GFA); **contracted sales in 10M-2013, CNY psm; #land cost as of June 2013, CNY psm/GFA; êxcl. space from JV and Shanghai Shimao projects; ##including projects in Fujian for Cogard and projects in the central region for Shimao; ^^tourism properties; Source: Company data, Standard Chartered Research
Figure 13: Land-bank distribution and segment position (developers with land banks of 10-30mn sqm)
Kaisa Target market Main city focus Contracted ASP* Average land cost Pearl River Delta Hainan Fujian Central China Yangtze River Delta Bohai Rim Northeastern China Western China 35.1% 9.5% 9.4% 8.9% 11.2% 27.4% 11.5% 10.9% 17.6% 22.6% 45.4% 32.0% 63.5% 27.9% 8.6% 100%
#
Gemdale Mid to high Tier 1/2 12,718 3,100 19.0 21.3%
Sunac Mid to high Tier 1/2 21,460 4,130 16.5
Glopro Mid to high Tier 1/2 11,236 1,309 15.8
CCRE Mid to high Tier 2/3/4 6,602 717 12.3
Mid to high Tier 1/2/3/4 9,479 1,300 24.8 37.2%
Land bank (mn sqm)
*Contracted sales in 10M-2013; #land cost as of June 2013, CNY psm/GFA; Source: Company data, Standard Chartered Research
Figure 14: Land-bank distribution and segment position (developers with land banks smaller than 15mn sqm)
KWG Target market Main city focus Contracted ASP* Average land cost Pearl River Delta Hainan Fujian Central China Yangtze River Delta Bohai Rim Northeastern China Western China Others
*Contracted sales in 10M-2013; #land cost as of June 2013, CNY psm/GFA; Source: Company data, Standard Chartered Research
#
China SCE Mid Tier 2/3 10,778 1,127 9.8 2.8% 65.6%
Yuzhou Mid Tier 1/2/3 10,616 1,280 8.4
CIFI Mass to mid Tier 1/2 10,500 2,900 7.7
Yanlord High-end Tier 1/2 25,652 5,300 4.9 30.4%
Mid to high Tier 1/2 9,479 2,960 9.5 48.2% 7.9%
Land bank (mn sqm)
56.3% 3.9% 38.4% 44.0% 29.2% 8.1% 14.8% 33.4% 24.3% 11.9%
19.0% 12.5% 12.4% 31.6%
5.4%
103
Asia Credit Compendium 2014 Developers operational and financial performance

2014: A year to reposition to enhance strength
While 2013 started with a slowing economy and policy uncertainty in China, it has turned out to be a good year for most of the developers under our coverage. (1) they have performed well in terms of contracted sales, meeting or exceeding their full-year sales targets. (2) They have raised funds in offshore capital markets at low coupon rates to extend debt maturities and repay expensive borrowings (especially high-cost trust loans with typical maturities of 12-18 months). (3) Strong liquidity from property sales and offshore fund-raising has enabled them to expand and/or rebalance their property portfolios. We believe these activities will strengthen the developers competitiveness in their key target markets and geographical areas of focus, particularly in view of evolving market dynamics and ongoing sector consolidation. While property policies will have positive long-term effects, we do not think China currently has sufficiently developed legal, tax, and financial systems or technical platforms to support the nationwide implementation of such policies That said, we believe challenges and risks remain in Chinas property sector. We see the micro policies implemented in Tier 1 and Tier 2 cities in October-November 2013 (Figure 35) as a fine-tuning of existing measures, and do not expect them to have a large impact on the HY developers under our coverage. However, we expect the central and local governments to roll out regulations targeting structural issues in the property sector in 2014-15. These policies will likely allow market forces to play a bigger role in optimising land use and allocation, developing sustained demand, and ensuring stable housing prices and affordability. While we think such policies are positive for long-term market stability, we do not think China has sufficiently developed legal, tax, and financial systems or technical platforms at present to support the nationwide implementation of such policies. We think developers should take the opportunity of a stable property market in the next 12 months to implement their development/expansion strategies and optimise their land bank composition in line with future policy direction. This will help them to increase their competitiveness and grow stronger in the long term. In addition to rebalancing their property portfolios, developers should improve their credit profiles, while maintaining solid liquidity. Their total debt is likely grow. In addition to offshore borrowings to fund expansion and increase market share, we expect them to take on more project loans to support annual contracted sales growth targets of 15-30% from their increased land banks. We believe a business model combining high sales and asset turnover with a sustainable profit margin is more likely to lead to high profitability than is land hoarding.
Developers should take the opportunity afforded by a stable property market in 2014 to enhance their land bank composition and align it with future policy direction
Land bank composition and market share are key

Most of the developers covered in this report have strong market positions in their areas of focus We like most of the developers covered in this report, given their strong sector and geographical positioning and their market shares in their areas of focus. Large land banks and diversification generally give developers the necessary flexibility and stability to weather recurrent market downturns in a country with differing economic and demographic drivers across geographical locations. This applies mostly to large national players. For small and medium-sized developers, we think portfolio concentration in major target markets is more important than geographical diversification. Based on land bank composition, we think the 17 developers included in Figures 12-14 are strong market players. They have clear target markets focused on specific geographies. While their land bank concentration in their home bases has declined following years of expansion, their land reserves remain substantial, at 40-60% of their total land banks. These developers home bases are mostly in well-developed coastal regions, providing a sufficient buffer to weather market volatility.
104

Land markets in top-tier cities are more active than in lower-tier cities; 79% of the land acquisitions by 14 developers were in Tier 1 and Tier 2 cities, and 16% were in lower-tier cities in the affluent Pearl River Delta and Yangtze River Delta regions The developers are seeking land expansion opportunities mostly in Tier 1 and Tier 2 cities (see Figure 15 and Figures 31-32). Transactions in Tier 1 and Tier 2 cities accounted for 79% (c.CNY 151bn) of the known major acquisitions by the 14 developers (total: CNY 192bn) YTD in 2013. Of the remaining 21%, the majority (16% of total transactions) were in lower-tier cities in the Pearl River Delta and Yangtze River Delta regions, which have relatively affluent populations and welldeveloped infrastructure and transportation systems. Among the top-tier cities, the preferred cities are Beijing (CNY 29bn), Shanghai (CNY 26bn) and Hangzhou (CNY 27bn). While some key cities have high land sale values, we attribute this to individual developers land strategies. For example, Sunac and its JV partners contributed CNY 12.6bn of the total CNY 14.6bn of land sales in Tianjin. Shimao bought CNY 7.8bn worth of land in Suzhou (of a total of CNY 11.0bn) and CNY 6.5bn in Ningbo (of a total of CNY 10.1bn) in the Yangtze River Delta. In addition to residential properties, Agile, Shimao and Evergrande have substantial exposure to the tourism property segment. While land costs are generally low, developers need to invest heavily to build infrastructure and supporting facilities and amenities for such projects to succeed. In addition, the sector requires expertise in hotel, resort and entertainment management. Agile has continued to enhance its tourism property portfolio in 2013. In addition to Hainan, where it has established its brand name via the Clearwater Bay project (23% of its land bank), it added 4.7mn sqm of GFA (accounting for 11% of land bank) in Yunnan for a total of CNY 956mn (CNY 202 psm/GFA in 2012-13) for tourism property development. Evergrande has maintained its portfolio composition strategy of allocating 20% of its projects to tourism-related development. Shimaos attributable GFA from tourism properties totalled 6.4mn sqm as of June 2013 (17% of its total land bank, including projects with JV partners and under Shanghai Shimao), although this was lower than 8.2mn sqm (21% of the total) as of June 2012.
Agile, Evergrande and Shimao have a substantial presence in the tourism property segment
Sales and asset turnover are important

The majority of the 25 developers in Figure 16 reported strong contracted sales in 10M-2013; outperformers include CIFI, China SCE, Sunac and Yuzhou The majority of the 25 developers shown in Figure 16 reported strong contracted sales in 10M-2013, meeting or approaching their full-year sales targets. Commensurate with their larger land banks (see Figures 17-18), the developers achieved average annual sales growth of 20% in 2011-13. CIFI recorded the highest CAGR of 61% (to CNY 14bn in 2013E from CNY 5.4bn in 2011), followed by Sunac at a CAGR of 53% (to CNY 45bn from CNY 19.2bn). With sales having exceeded
Figure 15: Geographical distribution of major land acquisitions of selected developers, 10M-2013* CNY bn
30 25 20 15 10 5 0 Shanghai Wuxi Other Guangdong Guangzhou Nantong Suzhou Ningbo Jinan Other Yangtze River Other central Shenyang Shenzhen Hangzhou Other Bohai Rim Nanjing Changsha Wuhan Beijing Tianjin Dalian Fujian
105
*Major acquisitions of 14 developers Evergrande, Longfor, Agile, Shimao, Gemdale, Guangzhou R&F, Greentown, Sunac, CIFI, Yuzhou, China SCE, Yanlord, Kaisa and KWG; Source: Company data, Standard Chartered Research

their full-year targets by October 2013, we believe China SCE and Yuzhou, the two Fujian-based developers, will also record sales growth above 50% p.a. in the three years from 2011-13. Contracted ASPs are mostly stable or higher y/y, supporting the developers profitability in 2014-15 In line with strong performance in the top-tier cities in 2013, the developers ASPs have either increased or remained steady in 2013, depending on the composition of their available-for-sale stock for the year. We believe this will support their profit margins in 2014-15, when sales will be recognised upon project completion. We see room for some developers to improve asset turnover in terms of project delivery and revenue recognition (Figure 19), especially small to medium-sized developers concentrated in the mid- to high-end sector. These include Hopson, KWG, Yuzhou and Glorious. Hopson and Glorious have underperformed in terms of contracted sales in 2013, but Yuzhou has achieved strong contracted sales, exceeding its full-year target. KWGs sales in 10M-2013 were slightly behind schedule at CNY 13.4bn (84% of its full-year target of CNY 16bn) due to its high-end market concentration and its back-loaded project launch schedule.
Some developers still need to improve their asset turnover
Figure 16: Contracted sales performance in 2011-13F CNY bn (LHS); % of 2013 target achieved as of October 2013 (RHS)
160 140 120 100 80 60 40 20 0 Vanke Greentown Cogard Sunac Kaisa EVERRE POLYRE Glorious Yanlord Agile Longfor Yuexiu KWG China SCE Powerlong Yanlord CIFI Franshion Shimao CCRE COLI* GZ R&F Gemdale Fantasia Hopson Yuzhou CIFI 2011A 2012A 2013F % of full-year target (RHS) 160 140 120 100 80 60 40 20 0
*HKD bn; Source: Company data, Standard Chartered Research
Figure 17: Land bank (2009, 2011, June 2013) Large developers, mn sqm
150 120 90 60 30 0 GRNCH Cogard Agile Longfor Everre Shimao R&F Hopson 2009 2011
Figure 18: Land bank (2009, 2011, June 2013) Small to medium-sized developers, mn sqm
25 20 15 10 5 0 Glorious Sunac KWG SCE Gemdale Yuzhou CCRE Kaisa 2011 Jun-13 2009
Jun-13
Source: Company data, Standard Chartered Research
106

Liquidity is supported by both sales and debt
The developers have maintained strong liquidity thanks to solid contracted sales performance and offshore fund raising In addition to their solid contracted sales performance, the developers raised offshore bonds in various currencies, including USD, CNH, SGD and HKD. The 28 developers covered in Figure 21 raised an equivalent of USD 16.7bn of senior notes in 10M2013, compared with USD 5.7bn in 2012. The funds raised were mainly used to redeem high-cost debt such as onshore trust loans with short tenures of 12-18 months and offshore bonds raised in 2009-10 with relatively high coupon rates. This has enabled the developers to improve their debt structures via extended maturities and lower funding costs. Thanks to a receptive offshore market, with supportive technical factors including strong fund flows and demand for higher-yielding paper, developers of varying scales and financial profiles have printed offshore bonds. This should ease refinancing pressure in the next 12 months.
Active land market

Backed by strong liquidity, developers have been active in the land market to rebalance their land portfolios; portfolio composition (not size) is their priority now in making land decisions Backed by strong liquidity from contracted sales and offshore fund-raising, most developers have been active in the land market in 2013 (Figure 23). Land replenishment remains the priority for the large developers given their high sales turnover. Some small to medium-sized developers including Sunac, Kaisa, CIFI and China SCE have also been aggressive in the land market. We believe acquisitions will strengthen their presence in their existing market segments or in the cities/regions where they have established brand names and strong market knowledge. While Agile, Shimao and Gemdale have incurred high land costs, their land acquisitions were low in 2011-12.
Figure 19: Comparison of asset turnover * (%)

70 60 50 40 30 20 10 0 Vanke Sunac Cogard EVERRE POLYRE Fantasia Glorious Agile Yuzhou COLI Longfor KWG China SCE Greentown Powerlong China SCE Shimao CCRE CIFI Kaisa GZ R&F Gemdale Hopson Powerlong 35% 2012 LTM Jun-13
*Ratio of LTM revenue from property sales to average book value of trading assets; Source: Company data, Standard Chartered Research
Figure 20: EBITDA margin (2009 to H1-2013, %)

50 40 30 20 10 0 Greentown Vanke Agile Yuexiu Sunac Yanlord Cogard Longfor Glorious Kaisa EVERRE POLYRE Gemdale Fantasia GZ R&F Hopson Yuzhou COLI KWG Shimao CCRE CIFI 2009 2010 2011 2012 H1-13
107

Figure 21: Offshore bond issues by selected developers in 2012 to 10M-2013 USD mn
1,800 1,500 1,200 900 600 300 0 GZ R&F Longfor EVERRE Yuexiu POLYRE Kaisa* Yuzhou^ Gemdale* Fantasia* CCRE** Wanda Sunac Agile CIFI Vanke** Yanlord* Glorious Hopson Powerlong Cogard Fuland* COLI KWG SCE Powerlong Powerlong Glorious Greenland Franshion GRNCH* Shimao 2012 10M-2013
*Including CNH bonds issued, **including SGD bonds issued but excluding CNY 1bn 4.5% of 5Y CNH issued in November 2013; încluding HKD bonds issued; Source: Bloomberg, Standard Chartered Research
Figure 22: Total cash*/ST debt December 2009 versus June 2013, %
500 400 300 200 100 0 Kaisa EVERRE POLYRE Yuzhou COLI^ Fantasia Yanlord^ Vanke Yuexiu Agile CIFI GZ R&F GRNCH Sunac SCE Gemdale Hopson Glorious Yanlord Longfor Cogard Shimao CCRE^ KWG Jun-13 Dec-09
*Including restricted cash; ^ratios for COLI and Yanlord were larger than 500% as of Dec-09 and CCREs as of Jun-13; Source: Company data, Standard Chartered Research
Figure 23: Known land acquisitions 2011 to 10M-2013*, CNY bn

50 40 30 20 10 0 EVERRE Yuzhou POLYRE Vanke Sunac GZ R&F Gemdale Longfor Shimao CCRE CIFI COLI Agile SCE Kaisa KWG
2012
2011 10M-13E
*Estimate; Source: Company data, Standard Chartered Research
108

Credit profiles remain under pressure
Land purchases funded by internal cash and external debt, coupled with construction needs, have resulted in higher debt and put downward pressure on developers credit profiles Despite most developers using their bond proceeds to refinance debt, total debt continued to grow in H1-2013 as new construction starts increased to support sales. While most developers reported y/y revenue growth, profit margins shrank. With debt growth exceeding EBITDA and capital base increases, most of the 24 developers in Figures 23-26 reported weaker credit profiles in H1-2013. That said, most have kept their financial ratios within the rating thresholds. The three CCC rated developers (Hopson, Glorious and Powerlong) reported a significant weakening of their credit profiles and weak liquidity. Among the single-B names, KWG, Yuzhou and CIFI reported a sharper deterioration in their credit ratios than peers in H1-2013 total debt/LTM EBITDA rose to 8.7x for KWG, 7.1x for Yuzhou and 6.1x for CIFI; total debt/capital increased to 55.1% for KWG, 57.4% for Yuzhou and 61.2% for CIFI. We think the companies will lower their leverage ratios by end-2013 given their back-loaded project delivery schedules. However, net gearing ratios are likely to remain high in the short term, as total debt will probably remain high and aggressive land acquisitions will pressure cash levels. Small to medium-sized developers are likely to record volatile revenue recognition depending on their project delivery schedules, given their limited number of projects Given their smaller number of projects, small to medium-sized developers are likely to record more volatile sales revenue recognition than larger developers, depending on their project completion schedules. Product mix upon delivery will also have a greater impact on their profitability, especially for those with a higher proportion of sales in lower-tier cities in 2011-12. However, we expect less revenue volatility for small to medium-sized developers in the coming years, following strong sales growth in recent years on increased land banks and a larger proportion of sales from projects in top-tier cities in 2013. This will help them maintain stable credit profiles. That said, small developers generally have less room for error in operational and financial management.
Figure 24: Total debt/capital December 2009 versus June 2013, %

70 60 50 40 30 20 10 0 Powerlong EVERRE Yuzhou POLYRE Vanke CCRE Fantasia CIFI GRNCH Cogard Sunac SCE Gemdale Glorious Yuexiu Agile GZ R&F COLI Hopson Yanlord Longfor Shimao Kaisa KWG 50% Jun-13 Dec-09
*Estimate; Source: Company data, Standard Chartered Research
109
Asia Credit Compendium 2014 Chinas property market Diverse performance in 2013
Market performance has varied across cities, driven by their diverse supply-demand dynamics Chinas property market has had an uneventful 2013, as we projected in China property sector A nascent recovery in Asia Credit Compendium 2013. The policy environment has generally been stable, despite fine-tuning and consistent negative headlines on new and/or stricter policy controls. Land and home prices in top-tier cities appreciated sharply in 10M-2013. In the four Tier 1 cities, home prices rose 15% from their 2012 average and land prices jumped more than 50%, underpinned by limited supply and strong demand growth. The sharp fall in housing affordability, especially for low-end to mid-range buyers, prompted local governments to enforce stricter controls on home purchases in Q4-2013. On the other hand, oversupply in lower-tier cities has not eased much in 2013. Demand has remained weak in these cities, given their relatively unfavourable economic and demographic factors. This is despite some policy relaxation in these cities to encourage home purchases.
Stable policy environment

Market volatility arising from policy has subsided in 2013, although strict HPRs are still being enforced in top-tier cities 2013 has been a relatively stable year on the policy front in China, unlike previous years, when measures were taken at both the national and local levels to rein in property price appreciation and speculative purchases (Figure 35). That said, HPRs in top-tier cities have not been relaxed, and policies in Tier 1 and Tier 2 cities were fine-tuned in Q4-2013. These policies include (1) increasing minimum cash down
Figure 25: Debt/LTM EBITDA (2009 versus H1-2013, x)

10 8 6 4 2 0 Vanke Agile Yuexiu* Yanlord Longfor Cogard Yuzhou POLYRE Fantasia Sunac SCE Kaisa COLI KWG CCRE Powerlong 12.73 Powerlong* GRNCH* Hopson** Shimao CIFI EVERRE* Glorious** 2.0x Glorious Gemdale GZ R&F 12.77 19.85 10.92 71.18 18.27 26.55
2009
H1-13
5.0x
*Ratios were 71.2x for Evergrande, 12.8x for Yuexiu and 19.9x for Greentown in 2009; * ratios were 18.3x for Hopson and 26.6x for Glorious in H1-2013; Source: Company data, Standard Chartered Research
Figure 26: LTM EBITDA/interest coverage (2009 versus H1-2013, x)

10 8 6 4 2 0 Kaisa EVERRE POLYRE Yuzhou Fantasia Vanke CCRE CIFI Yanlord GRNCH Sunac SCE GZ R&F Gemdale Hopson Cogard Yuexiu Agile Longfor COLI* Shimao KWG 2009 H1-13 12.65 11.38
* COLIs ratios were 12.7x in 2009 and 11.4x in H1-2013, and Powerlongs ratio was 12.7x in 2009; Source: Company data, Standard Chartered Research
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payments for second-home purchases to 65% or 70% from 60%; (2) introducing stricter HPRs for non-residents wishing to purchase property in these cities; and (3) increasing land supply for mass-market and social housing projects. Considering price appreciation in top-tier cities and local governments commitment to maintaining housing affordability in their cities, we see the new guidelines as enhancements of existing policies. In contrast to the strong performance in top-tier cities, and stricter policy controls to stabilise land and home prices there, housing prices in lower tier cities have remained soft amid persistent oversupply and weak demand. As such, some lower-tier cities (such as Wenzhou, Wuhu, Zhoushan and Xuzhou in the Yangtze River Delta area) have relaxed some purchase controls to encourage demand. We expect the central government to roll out regulations targeting structural issues in the property market in 2014-15. These policies will likely allow market forces to play a bigger role in optimising land use and allocation, developing sustained demand, and ensuring stable housing prices and affordability. Such policies would be a positive for long-term market stability. However, we think China lacks sufficiently developed legal, tax, and financial systems or technical platforms at present to support such policy implementation across the country. As such, we think the new policies are likely be implemented in top-tier cities first.
Figure 27: Primary-home sales Tier 1 cities mn sqm (LHS), CNY psm (RHS)
70 GFA sold 60 50 40 30 20 10 0 2006 2007 2008 2009 2010 2011 2012 10M-13
Figure 28: Primary-home sales Tier 2 cities mn sqm (LHS), CNY psm (RHS)
25,000 120 100 80 60 10,000 5,000 0 40 20 0 2006 2007 2008 2009 2010 2011 2012 10M-13
ASP (RHS)
12,000 10,000
ASP (RHS)
20,000 15,000
GFA launched
GFA launched
8,000 6,000 4,000 2,000 0
GFA sold
Figure 29: Real-estate investment Funding sources

Domestic loans Foreign invt. Others Self-raised Deposits and adv. payments
Figure 30: Trust loans by sector (CNY bn)

Real estate Securities Others
100% 80% 60% 40% 20% 0%
9M-2013 Industrial and commercial enterprises
Financial institutions 2012
2006
2007
2008
2009
2010
2011
2012
10M2013
Infrastructure 0 1,000 2,000 3,000 4,000 5,000
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All funding sources are available
Developers, especially established ones, have enjoyed steady financing conditions in 2013, with access to all funding sources Financing conditions for developers have remained largely stable in 2013 (Figures 29-30). Domestic bank loans contributed CNY 1.6tn (c.16.4%) of total funds for real-estate investment in 10M-2013, up from CNY 1.5tn (15.3%) in 2012. Funds from sales deposits and advance payments contributed CNY 2.7bn, accounting for 28.1% of the total (2012: 27.5%), in line with developers strong contracted sales performance YTD. In addition to domestic sources, the stronger names (especially those with substantial regional and/or national presence) are able to access the offshore capital markets for lower-cost debt for longer tenure and have more flexibility in using proceeds. In contrast, domestic project financing is strictly for construction purpose, and requires development sites as collateral. The developers are required to pay a 10-20% premium over the one-year benchmark Peoples Bank of China (PBoC) rate of 6% p.a. Trust loans are still available to developers; CNY 475bn of loans were disbursed in 10M-2013, compared with CNY 316bn in 2012.
High price appreciation in top-tier cities

Tier 1 cities reported a 50% increase in land prices in 10M-2013 from the 2012 average, and a 15% increase in achieved ASPs Land-market activity has been focused in top-tier cities in 2013, reflecting developers medium- to long-term confidence in these cities given their favourable supplydemand dynamics. The average land price in Tier 1 cities rose to CNY 7,065 psm/GFA in 10M-2013, a sharp 50.5% rise from the 2012 average of CNY 4,695 psm/GFA. The average land price in Tier 2 cities rose 22.5% to CNY 2,032 psm/GFA (Figures 33-34). However, sales volume (GFA sold) in Tier 1 and Tier 2 cities was not impressive in 10M-2013. This partly reflects limited land supply, especially of prime sites in top-tier cities. Similar to land prices, ASPs in top-tier cities appreciated notably in 10M-2013, confirming the developers positive sentiment towards these cities. The ASP in Tier 1 cities rose 15.1% to CNY 19,386psm in 10M-2013 compared with the 2012 average of CNY 16,847psm. In Tier 2 cities, the ASP increased 7.3% to CNY 9,500psm compared with the 2012 average of CNY 8,856psm. GFA sold in Tier 1 cities totalled 35.0mn sqm in 10M-2013, much higher than the GFA launched of 21.5mn sqm. The supply shortage in Tier 1 cities, combined with price appreciation, contributed to strong land-market performance there. GFA sold in Tier 2 cities amounted to 59.1mn sqm in 10M-2013, accounting for 64% of total GFA launched for sale during the period. This suggests a supply-demand imbalance in some Tier 2 cities.
Figure 31: Land sales Tier 1 cities mn sqm (LHS), CNY psm/GFA (RHS)
45 40 35 30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011 2012 10M-13
Figure 32: Land sales Tier 2 cities mn sqm (LHS), CNY psm/GFA (RHS)
Accommodation value (RHS) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 100 0 2006 2007 2008 2009 2010 2011 2012 10M-13
600 GFA sold 500 400 300 200 Accommodation value (RHS)
2,500 2,000 1,500 1,000 500 0
GFA sold
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Asia Credit Compendium 2014 Affordability in top-tier cities has declined

We track Chinas housing affordability by calculating the minimum household income required for a typical residential property purchase We track Chinas housing affordability by calculating the minimum household income required for a typical residential property purchase. We base this on a 100sqm unit at the prevailing selling price, with a 25-year housing loan at 70% of the purchase price and monthly payments capped at 30% of the buyers household income. We use this minimum household income to construct our housing affordability index. The higher the index reading, the more affordable private homes are; a declining index means that housing affordability is deteriorating. Our annual update of the index suggests that affordability in most of the cities in our study deteriorated in 10M-2013 from 2012 (Figures 33-34) as property prices rose strongly in top-tier cities. This reversed the improvement in 2012. Housing affordability in Tier 1 cities worsened the most, declining about 15% from end-2012. Most Tier 2 cities that experienced policy fine-tuning in October-November saw a sharp decline in affordability Xiamen (-13.6%), Zhengzhou (-10.3%), Fuzhou (-10.1%), Changsha (9.8%), Nanjing (-9.7%) and Hangzhou (-9.3%). We expect property prices to remain stable or increase marginally in 2014 given government efforts to control price increases via HPRs and increased supply. As such, housing affordability in top-tier cities will remain stretched.
Housing affordability in top-tier cities deteriorated in 10M-2013 from end-2012 levels on rising property prices, reversing the improvement in 2012
Figure 33: Change in affordability index vs. increase in income (%)

50 40 30 20 10 0 -10 -20 Dalian Hefei Shenzhen Shenyang Wuhan Chengdu Zhengzhou Beijing Changsha Changchun Xiamen Affordability change (9M-13) Qingdao Chongqing Guangzhou Hangzhou Fuzhou Tianjin Shanghai 16.9% 18.2% 14.9% 18.4% 10.3% 10.7% 8.7% 6.4% 8.2% 8.7% 12.6% Nanjing Affordability change (2012) Increase in GDP per capita (2012)
Source: CEIC, CRIC, Soufun, Standard Chartered Research
Figure 34: ASPs and minimum qualifying monthly household income (MQMHI) in selected Tier 1 and Tier 2 cities
ASP as of Dec-12 (CNY psm) Shanghai Shenzhen Beijing Guangzhou Hangzhou Nanjing Dalian Tianjin Chongqing Chengdu Shenyang 22,285 19,070 20,435 13,404 16,358 11,819 10,383 10,248 7,065 6,215 7,246 Monthly payment (CNY) 9,642 8,251 8,842 5,800 7,078 5,114 4,493 4,434 3,057 2,689 3,135 MQMHI as of Dec-12 (CNY)* 32,140 27,503 29,473 19,333 23,593 17,047 14,977 14,780 10,190 8,963 10,450 ASP as of Oct-13 (CNY psm) 26,054 22,544 23,475 15,871 18,042 13,084 11,285 10,906 7,647 6,756 8,156 Monthly payment (CNY) 11,273 9,754 10,157 6,867 7,806 5,661 4,883 4,719 3,309 2,923 3,529 MQMHI as of Oct-13 (CNY)* 37,577 32,513 33,857 22,890 26,020 18,870 16,277 15,730 11,030 9,743 11,763 % change in MQMHI over 10M period
*Key assumptions: (1) housing loan is 70% of purchase price; (2) mortgage rate is the same for 2012 and 2013, at an appropriate discount to PBOC rate; (3) 30% of household income goes towards monthly payments; Source: CEIC, CRIC, Soufun, Standard Chartered Research
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Figure 35: Major events affecting the property market (2010-13)
Year/Month 2010 January Nationwide Nationwide April September Nationwide Nationwide 11 measures to boost the property market local governments urged to increase land supply, developers encouraged to accelerate property development 2 RRR hikes 10 property market-tightening measures to curb speculation, including increases in down-payment ratios for first- and second-home purchases Further fine-tuning of tightening measures introduced in April, with higher down-payment requirements for second-home purchases and the suspension of mortgages for third-home purchases and purchases by non-residents Interest rate hike RRR hike Interest rate hike Area of impact
October December
Nationwide Nationwide Nationwide
2011 January Chongqing Nationwide Nationwide Shanghai February Nationwide Nationwide Beijing Announcement of property tax for high-end residential market RRR hike Tightening measures introduced to cool property market, including a higher down-payment for secondhome purchases and a ban on third-home purchases Announcement of property tax details Interest rate hike RRR hike Beijing municipal government announces tough measures to curb property purchases, including a requirement that non-locals must have resided in the city for five years and provide proof of tax payments RRR hike Interest rate hike RRR hike Local governments required to submit price-control targets for home prices, which were mostly pegged to expected growth in disposable income RRR hike RRR hike Interest rate hike Reiteration of five control measures; HPRs may also be imposed in Tier 2 and Tier 3 cities China's Ministry of Housing and Urban-Rural Development (MOHURD) urges provincial governments to implement HPRs to control property prices HPRs introduced HPRs introduced (first Tier 3 city to impose such restrictions) Relaxation of HPRs announced, but withdrawn within hours HPRs introduced Ban on sale of property projects with ASPs above CNY 5,800psm from 10 November to 31 December 2011 PBoC announces the first RRR cut in three years on 30 November, effective from 5 December
March April
Nationwide Nationwide Nationwide Nationwide
May June July
Nationwide Nationwide Nationwide Nationwide
August
Nationwide Taizhou
September October November
Quzhou, Zhejiang province Foshan Zhuhai Zhongshan
December 2012 January
Nationwide
Chongqing Xiamen Zhongshan
Minimum ASP of taxable high-end residential projects raised from CNY 9,941psm to CNY 12,152psm Common housing redefined to allow more buyers to enjoy tax incentives After its previous HPRs lapsed, the city set a higher ASP cap of CNY 6,590psm - Subsidies of CNY 50psm for purchases of new homes of 70-90sqm, and CNY 150psm for units less than 70sqm - Additional subsidy of CNY 300psm for buyers with high educational qualifications Incentives for the sale of large-scale non-residential land Common housing redefined to allow more buyers to enjoy tax incentives
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February
Wuhu
Hefei Tianjin

Year/Month Area of impact Shanghai March April Beijing Beijing Common housing redefined to allow more buyers to enjoy tax incentives City official states that the definition of family includes parents and minor children. Unmarried adult children are considered a separate family unit and are permitted to purchase up to two homes Sellers of homes that have been held for five years or more are exempted from business tax. Deed tax is halved for buyers of common housing for owner occupation (the unit must also be the familys only home) Common housing redefined to allow more buyers to enjoy tax incentives Minimum cash down-payment reduced to 20% (capped at CNY 600,000) for first-time buyers taking CFF loans to buy homes with unit sizes of less than 90sqm Following the changes in Wuhan, more cities reduce minimum cash down-payments. They include Hohhot (Inner Mongolia), Nanchang (Jiangxi), Bengbu (Anhui), Kelamayi, (Xinjiang), Zhengzhou and Xinyang (Henan), Bingzhou (Shandong) and Shenyang (Liaoning) Limit on borrowing from housing provident fund raised to 25 times a persons outstanding balance in his/her fund account (capped at CNY 400,000) Purchase incentive introduced 6% rebate for buyers of units below 90sqm, 5% rebate for units of 90120sqm, and 4% rebate for units of 120-144sqm Local government units jointly release opinions/proposals to ensure the stability of the citys property market. First-time buyer redefined to include all buyers who currently own no housing units, regardless of their home-purchase history MOHURD reiterates that controls on the housing market will continue MLR and MOHURD jointly issue a notice reiterating that controls on the housing market will continue State Council sends out eight inspection teams to 16 provinces/cities to ensure that housing policies are being strictly implemented (including Beijing, Tianjin, Shanghai, Chongqing, Hebei, Jilin, Jiangsu, Zhejiang, Fujian, Shandong, Henan, Hubei, Guangdong and Sichuan)
Zhongshan May Wuhan Various cities
Chongqing Yangzhou June Zhengzhou
Nationwide July Nationwide Nationwide
2013 January March/April Chongqing Nationwide Minimum ASP of taxable high-end residential projects raised from CNY 12,152psm to CNY 12,779psm State Council issues a notice on stricter execution of property measures to continue to rein in speculative activity; this includes the enforcement of a 20% of capital gains tax on property sales in the secondary market. Local governments to respond by end-March 2013 First local government to announce property measures following the nationwide reiteration of stricter property measures. Provincial government announces that it will enforce strict home purchase and price restrictions in Guangzhou and Shenzhen (Tier 1 cities) and purchase restrictions in Zhuhai, Foshan. It reiterates that it will ensure strict implementation of the 20% capital gains tax The Shenzhen government pledges to guide developers in setting reasonable prices and strengthen oversight of pre-sales approvals. Home price increases will be capped by the growth rate of per-capita disposable income. Down-payment requirements and interest rates on second-home purchases will be adjusted when necessary Singles with Beijing resident status cannot own more than one residence. The municipal government will enforce a 20% capital gains tax, and only properties that have been held for five or more years will be exempt from the capital gains tax. Cash down payment for second-home purchases is increased to 70% from 60%, and property prices are kept flat at 2012 levels Banks are prohibited from extending credit to buyers of third homes and will strictly enforce policies relating to second-property purchases. The government will enforce a 20% capital gains tax for sales with previous purchase records. The municipal government will also be stricter in releasing sales licences and would require developers to provide detailed price lists. It will ensure that the final transaction price does not differ from the listed price, and that stable housing prices are benchmarked against Shanghais GDP growth and household income, among others Banks are temporarily prohibited from extending credit to buyers of third homes and will strictly enforce policies relating to second-property purchases. New-home price increases will be capped by the growth rate of per-capita disposable income. The local government will enforce a 20% capital gains tax for sales with previous purchase records Banks are temporarily prohibited from giving credit to buyers of third homes and will strictly enforce policies relating to second-property purchases. New-home prices to rise less than the average growth in urban residents disposable income. Strict enforcement of a 20% capital gains tax New-home prices to rise less than the average growth in urban residents disposable income. Strict enforcement of a 20% capital gains tax New-home prices to rise less than the average growth in urban residents disposable income. Strict enforcement of a 20% capital gains tax New-home price increases will be capped by the growth rate of per capita disposable income. Strict enforcement of a 20% capital gains tax
Guangdong province
Shenzhen
Beijing
Shanghai
Chongqing
Tianjin
Jinan Nanjing Dalian
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Year/Month Area of impact Xiamen Hefei Guiyang October/ November Shenzhen New-home price increases will be capped by the growth rate of per capita disposable income. Strict enforcement of a 20% capital gains tax New-home price increases will be capped by the growth rate of per-capita disposable income; strict enforcement of 20% capital gains tax New-home price increases will be capped by the growth rate of per capita disposable income; strict enforcement of 20% capital gains tax Maintain HPRs and differentiated credit policies, increase residential supply to 20% above the five-year average, tighten down payments and interest rates for second homes, ensure affordable housing construction target is met, increase market information disclosure Beijing will offer low-cost homes of no more than 140sqm at c.30% below prices of similar housing. It will also add 20,000 residential homes for self-use by year-end and another 50,000 in 2014. Units for selfuse commodity residential properties cannot be transferred for five years, and transfer after five years will be subject to a capital gains tax of 30% Increase in land supply: 2013 land supply to be 30% higher than the five-year average; stricter implementation of HPRs and property tax; down payment for second homes increased to 70% from 60%; further develop social housing system; tighter guidelines on reasonable pricing for developers Speed up approval of pre-sale permits for low-/medium-priced apartments; 2014 supply to match 2013 supply (20% higher than the five-year average); restrictions on purchases by non-residents; stricter implementation of HPRs; down-payment for second home increased to 70%; guidelines for reasonable pricing for developers Actively monitor market to ensure stable pricing; stricter implementation of HPRs; increase land supply and ensure 2014 supply is 10% higher than in 2013; increase supply of low-cost housing; suspend issuance of sales licences to projects with high prices and/or high price increases Continue to push out more land for sale in 2013; land supply in 2014 will be 20% higher than the fiveyear average; will urge developers to push out units for sale faster and impose a 20% land-hoarding tax for developers who delay construction work; stricter implementation of HPRs (residents of two housing units and non-residents of one unit are temporarily not allowed to buy hew homes); down payment of 70% for second home Land supply in 2013 to be 10% higher than previously planned; 2014 supply plans to be announced by Q1-2014, and supply will be 20-30% higher than in 2013; speed up pre-sale permit apartments; stricter implementation of HPRs; restriction on purchase of homes by non-residents; higher down-payment for second homes; increase supply of low-cost housing; stricter implementation of HPRs Small/medium-priced and low-cost housing to make up 75% of overall land supply; increase supervision of land prices and bids; increase restrictions on non-residents purchasing property; down-payment for second home to be raised to 65%; push out supply for more low-/medium-priced housing; stricter implementation of HPRs; increase availability of property-market information and monitoring of market; developer to get preferential financing terms if 70% of its projects are of medium-sized/small units Stricter implementation of HPRs; restrictions on purchase by non-residents; land supply in 2013 to be 20% higher than the five-year average, supply in 2014 to be 10% higher than the five-year average; higher down payment for second homes; actively monitor property market; provide guidelines on reasonable pricing for developers; speed up approval of pre-sale permits for low-/medium-priced apartments Land supply in 2013 to be 10% higher than the five-year average; actively monitor land sales market and construction starts to ensure stable land prices; stricter implementation of HPRs; higher down payment for second homes; provide guidelines on reasonable pricing for developers; speed up approval of pre-sale permits for low-/medium-priced apartments; offer more low-cost housing to ease housing demand from low-income families and new graduates Stricter implementation of HPRs; tighter guidelines on reasonable pricing for developers; increase land supply and speed up pre-sale approvals; increase supply of low-cost housing; monitor property market more closely; non-residents are only allowed to purchase homes in the five main districts of the city if they can prove cumulative tax/insurance payments for two years during a three-year period from the date of the planned purchase Speed up approval of pre-sale permits for low-/medium-priced apartments; 2013 and 2014 land supply to be no less than the five-year average; provide guidelines for reasonable pricing for developers; higher down-payment for second home Land supply in 2013 to be 20% higher than the five-year average; increase supply of low-cost housing; actively monitor land sales to ensure stable prices; speed up approval of pre-sale permits for low/medium-priced apartments; increase down payment for second homes; more strictly implement HPRs; actively monitor property market Increase age limit to 20 from 18 for home purchases by singles; non-residents must prove at least a years tax/insurance payment to obtain approval for home purchases in the city; increase supply and construction of low-priced commodity housing units Increase land supply for social housing and projects with small to medium-sized units; strict implementation of rules for second-home purchases (down payment of 60% and mortgage rate at 1.1x benchmark rate); may increase down payment for second-home purchases if needed.
Beijing
Shanghai
Guangzhou
Xi'an
Xiamen
Nanchang
Shenyang
Wuhan
Nanjing
Fuzhou
Changsha
Hangzhou
Taiyuan
Harbin
Source: Media reports, city government websites, Standard Chartered Research
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Credit analysis Sovereigns
Asia Credit Compendium 2014 China (Aa3/Sta; AA-/Sta; A+/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Li Wei (+86 21 3851 5017)
Credit outlook Stable

We maintain our Stable credit outlook on China. We believe implementation of the reforms announced after the Third Plenum will be credit-positive in the medium term. The authorities are also looking to rebalance the economy towards consumption, and its external balance sheet remains exceptionally strong. That said, Chinas fiscal position appears stretched, if we add the highly indebted LGIVs, MoR and AMCs. LGIVs also pose risks to both the formal and shadow banking systems given their weaker credit quality. While the authorities have allayed near-term concerns by rolling over and restructuring maturing LGIV debt, contingent liabilities may arise in the medium term.
Key credit considerations

Far-reaching reforms: The reform roadmap unveiled following the Third Plenum envisages a greater role for market-based pricing, increased competition, deregulation and mixed ownership. Other reforms include a loosening of the onechild policy, accelerated reform the hukou household registration system, allowing direct land sales by farmers, and requiring SOEs to remit 30% of profits to a social security fund by 2020. We see these measures as credit-positive if implemented. Rebalancing the economy: Chinas investment-led and credit-fuelled growth model has led to diminishing economic returns. While the authorities appear comfortable with a more manageable growth rate of 7-8% and are looking to rebalance the economy towards domestic consumption, the transition will be gradual. For now, investment remains the main driver of GDP growth, contributing a significant 4.1ppt to Chinas 7.6% growth in H1-2013. The imbalance likely widened further in H2-2013, driven by fixed asset investment growth of 20.1% in 10M-2013 following a government-led infrastructure-focused stimulus package and a rebound in the housing market. We forecast GDP growth of 7.6% in 2013 and 7.4% in 2014. Very strong external balance: China is the worlds largest holder of FX reserves (c.USD 3.6tn). While external debt has risen over the years and much of it is shortterm, we are sanguine on the macroeconomic outlook given ample reserves (external debt is only 21% of FX reserves). China is also looking to open its capital account gradually by 2020, and we expect the transition to be smooth. We forecast a current account surplus of 3.7% of GDP in 2014. High government leverage: While China appears to have ample fiscal headroom based on its headline budget deficit of 2.1% and central government debt of 14.5% of GDP, significant quasi-fiscal activity is carried off-budget. According to the IMF, the fiscal deficit surges to 10% of GDP when adjusted for net proceeds from land sales and local government market financing. We estimate that Chinas debt increases to 78% of GDP if the debt of local government investment vehicles (LGIVs, 40% of GDP), the Ministry of Railways (MoR, 6%), and China Development Bank and asset management companies (AMCs, 16%) is included. The central government has initiated reforms such as restricting LGIVs access to credit, carrying out a strict national audit, encouraging LGIVs to pledge commercial collateral to banks, and instructing local governments to deal with their debt problems themselves. That said, we view their debt as contingent liabilities for the sovereign and think sovereign support of some kind will ultimately be necessary. Banking sector: The banking sector, which is funded primarily by deposits, appears robust, with capital adequacy of 12.2% and an NPL ratio of 0.97% as of September 2013. However, it has grown disproportionately in recent years, and banking credit is now at 127% of GDP. We think current NPL ratios do not adequately reflect the reality given c.30% loan book exposure to the risky LGIV and real-estate sectors, high corporate leverage of 117% of GDP, and moderating GDP growth. The authorities are also aiming for interest rate liberalisation in the medium term, which could affect bank profits and lead to a gradual shift in banks business models towards riskier products. These factors could put pressure on the banking system and may lead to contingent liabilities for the sovereign. Shadow banking system poses latent risks: There has been substantial offbalance-sheet bank financing and strong growth. The shadow banking sector now constitutes c.44% of GDP (16% of GDP in 2008). Credit risk in the shadow banking system is hard to estimate given inadequate disclosure, but some products are loosely regulated, offer unregulated interest rates, include mismatched maturities and disguise evergreening of bad loans. Defaults on such products could lead to contingent liabilities for the underwriting banks, with potential contagion across the entire system.
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SOVEREIGNS
Country profile
The Peoples Republic of China is the largest country in East Asia and the most populous in the world, with a population of 1.36bn. It is a socialist republic ruled by the Communist Party of China under a single-party system. China has jurisdiction over 22 provinces, five autonomous regions, four municipalities and two highly autonomous special administrative regions. Since economic liberalisation began in the late 1970s, Chinas investment- and export-led economy has grown 70fold and has overtaken Japans to become the worlds second-largest economy after the US.
Asia Credit Compendium 2014 China (Aa3/Sta; AA-/Sta; A+/Sta)

Summary of economic indicators
%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Monetary and liquidity indicators Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 3.50 15.8 115.9 13.6 14.4 NA 3.00 15.0 121.4 13.8 17.0 NA 3.00 14.0 127.0 14.0 17.5 NA 3.00 11.0 128.1 11.0 18.8 NA -3.0 2010 2011 2012 2013F 2014F -2.5 6.30 136.1 1.8 3.1 0.3 695.0 9.3 72.1 3,181 21.8 6.29 193.1 2.3 2.3 0.6 737.0 8.9 73.4 3,312 22.3 6.12 302.4 3.3 1.7 0.5 781.5 8.5 75.0 3,650 21.4 6.05 376.4 3.7 1.5 0.5 828.8 8.1 77.0 3,950 21.0 -2.0 -1.5 -1.0 Primary balance Fiscal balance -0.5 22.0 (0.7) (1.1) 1,143 15.2 69.4 0.9 22.6 (1.2) (1.7) 1,234 14.9 66.0 1.0 22.5 (1.3) (2.1) 1,332 14.5 64.6 1.1 22.3 (1.5) (2.5) 1,437 14.1 63.4 1.2 0 2010 2011 2012 2013F 2014F 2 7,509 1,347 5,572 9.3 5.4 48.5 48.3 50.9 8,256 1,354 6,097 7.7 2.6 46.8 47.8 50.5 9,164 1,361 6,735 7.6 2.7 45.5 48.5 51.8 10,172 1,368 7,438 7.4 3.3 44.0 47.5 51.2 4 6 8 10 2011 2012 2013F 2014F
Growth and per-capita income (% LHS, USD RHS)

12 Real GDP GDP per capita (RHS) 8,000 7,000 6,000 5,000
SOVEREIGNS
4,000 3,000 2,000 1,000 0
Government balances (% of GDP)

0.0
FX reserves vs. external debt (USD bn)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2010 2011 2012 2013F 2014F External debt FX reserves
Debt dynamics (%)

18 16 14 12 10 8 6 4 2 0 2010 2011 2012 2013F 2014F Govt. debt/ GDP Govt. debt/ Revenue (RHS) 90 80 70 60 50 40 30 20 10 0
Note: Openness of the economy = (Sum of exports and imports of goods and services)/GDP; External Vulnerability Indicator = (ST external debt + Currently maturing LT external debt + Total non-resident deposits over one year)/Official FX reserves; Debt service ratio = (Interest + Current year principal repayment)/Current account receipts; Source: IMF, Peoples Bank of China, Moodys, Standard Chartered Research
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Asia Credit Compendium 2014 India (Baa3/Sta; BBB-/Neg; BBB-/Sta)

Analysts: Bharat Shettigar (+65 6596 8251), Anubhuti Sahay (+91 22 6115 8840)
Credit outlook Negative

Indias key challenges of slow growth, high inflation and large twin deficits were exposed during the period of portfolio outflows and 22% INR depreciation from 2013. Measures May-August undertaken since then should help to narrow the C/A deficit to 2.4% of GDP in FY14, while expenditure cuts are likely to limit the fiscal deficit to c.5% of GDP. Longer-term, however, India will need to undertake structural reforms to restore investment demand, expand the tax net and rationalise subsidy spending. All eyes will be on the national elections in 2014; any signs of policy drift in the initial few months of the new govenrment could put renewed pressure on credit ratings. We maintain our Negative credit outlook on India in the interim.

Public finances are a major challenge: Persistently large government deficits and a high debt-to-GDP ratio of 66% are the key challenges to Indias credit ratings. Large outflows on interest payments (c.25% of expenditure in FY13) and subsidies (c.16%) have led to reduced spending on public infrastructure, health care and education. In 2013, the government has increased diesel prices every month in small steps and plans to fully phase out diesel subsidies (the largest component of fuel subsidies). However, it has also cleared a Food Security Bill that will extend food subsidies to two-thirds of Indias households. In FY14, while revenue growth will be somewhat weak and divestment proceeds may not be as strong as budgeted, we expect sharp spending cuts to limit the fiscal deficit to c.5% of GDP (versus the governments target of 4.8%). We do not see the government facing financing risks given its low dependence on foreign funding, deep and semicaptive local markets and long-tenor borrowings (average maturity of 9.7 years). External vulnerabilities appear manageable: Indias external position has been a source of rating strength on account of the governments low FX debt and high FX reserves. That said, the C/A deficit widened significantly to 4.8% of GDP in FY13, and external borrowings by private-sector entities have risen in recent years. Sharp depreciation in the Indian rupee (INR) in 2013 has led to higher inflation, a rising government subsidy bill, and higher debt-servicing costs for companies. We expect govenrment measures taken in H2-2013 (curbs on gold imports and the relaxation of rules on FX-denominated non-resident Indian deposits) and an export recovery to narrow the C/A deficit to 2.4% of GDP in FY14. Based on this assumption, we forecast a BoP surplus of USD 20bn and expect USD-INR to settle at around 64 by end-FY14. That said, India remains highly dependent on foreign capital, and a major shift in global risk appetite or liquidity conditions would be negative for the BoP. Growth has bottomed, but inflation remains high: Indias strong economic growth (8.4% CAGR from FY07-FY11) was a key source of support for its ratings in the past. Growth has declined as investment activity has stalled on policy issues and private consumption has slowed due to high inflation. That said, growth likely bottomed in Q1-FY14 at 4.4%; we forecast FY14 growth of 4.7% owing to better monsoons, election-related spending and a marginal pick-up in investment activity in H2. However, India is unlikely to reach its potential growth rate of 6% even in FY15. High inflation may persist in FY15 in the absence of supply-side reforms in agriculture and distribution. We expect CPI inflation to average 8% in FY15, versus 9.4% in FY14; reducing inflation will be essential for better transmission of Indias monetary policy. All eyes on the elections: The government has tried to revive business confidence in recent months by approving some stalled initiatives, initiating pension reforms and a legislative framework for land acquisitions. However, it is unlikely to pursue tough policy decisions and contentious reforms before the general elections, which are due no later than May 2014. At present, opinion polls do not indicate a clear victory for any of the parties. The two major parties combined have not gained more than 55% of the votes since the 1980s, and a coalition government is likely to be voted in again in 2014. The extent of its majority and the cohesiveness of its ideology will determine its ability to push through reforms. Key issues for the new government to address will include improving the investment climate, reforming energy pricing policy, overhauling the tax system (via a Direct Tax Code and a uniform GST), and tackling fuel, power and fertiliser subsidies. Any signs of policy drift in the initial months of the new government will put renewed pressure on Indias sovereign ratings.
120
SOVEREIGNS
Country profile
The Republic of India is the seventh-largest country by geographical area, and the worlds second-most populous (population of c.1.23bn, with about 31% below 14 years of age). It is also the largest democracy in the world. Its economy is dynamic and diversified but is relatively closed from a trade perspective. Strong, domestically driven growth and a large and growing middle class have been the primary drivers of inward investment. India is a federal constitutional republic governed under a parliamentary system, and it currently comprises 28 states and seven Union Territories. The next general elections are scheduled for H1-2014.
Asia Credit Compendium 2014 India (Baa3/Sta; BBB-/Neg; BBB-/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (average) * Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP ** Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net Portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 450 400 350 300 250 40 200 150 100 50 0 FY12 FY13 FY14F FY15F 30 20 10 0 FY12 FY13 FY14F FY15F 50 100 150 FX reserves 50 External debt 50.32 (78.2) (4.2) 1.2 0.9 345.5 18.4 22.6 294.4 117.4 8.5 16.8 48.8 13.2 53.4 1.3 54.40 (88.2) (4.8) 1.1 1.5 390.0 21.2 24.8 292.0 133.6 7.5 13.4 49.5 13.8 65.3 1.3 64.00 (45.3) (2.4) 1.1 (0.4) 400.0 22.0 24.0 290.0 137.9 8.0 15.5 51.7 15.0 73.2 NA 61.00 (55.8) (2.8) 1.0 0.4 418.0 21.0 24.4 300.0 139.3 -6 8.0 16.0 53.6 16.0 79.7 NA 80 70 60 200 Govt. debt/GDP -9 FY12 FY13 FY14F FY15F -7 -8 Fiscal balance -2 -3 -4 -5 Primary balance 28.3 (4.0) (8.1) 1,168.6 62.4 220.8 5.5 28.3 (2.7) (7.2) 1,216.3 66.0 233.3 5.0 27.8 (2.8) (7.5) 1,192.0 65.5 235.8 5.0 28.4 (2.6) (6.7) 1,340.0 67.4 237.4 5.5 0 FY12 FY13 FY14F FY15F 1 2 400 200 0 1,872.8 1,202.0 1,558.0 6.2 8.9 54.2 35.0 30.8 1,841.7 1,217.0 1,513.3 5.0 7.4 55.5 34.8 30.0 1,818.5 1,232.1 1,475.9 4.7 6.0 52.9 32.4 30.0 1,987.3 1,246.9 1,593.9 5.3 6.0 49.2 33.8 31.0 4 3 5 1,200 1,000 6 FY12 FY13 FY14F FY15F

7 Real GDP GDP per capita (RHS) 1,800 1,600 1,400
SOVEREIGNS
800 600

0 -1
Monetary and liquidity indicators
Debt dynamics (%)

Govt. debt/ Revenue (RHS) 300
250
* Indicates WPI; ** includes fiscal balance of state governments; Note: Fiscal year ends 31 March; Source: RBI, budget documents, Moodys, Standard Chartered Research
121
Asia Credit Compendium 2014 Indonesia (Baa3/Sta; BB+/Sta; BBB-/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Eric Sugandi (+62 21 2555 0596)

Indonesia faces the challenges of lower growth, high inflation and twin deficits. While the prudent policy stance of the central bank and finance ministry has eased macro pressure from higher inflation and portfolio outflows, some of the structural issue could pose risks. We expect Indonesias fiscal and current account deficits to narrow in 2014; however, funding them could again be arduous if Indonesia is unable to attract large FDI and portfolio inflows. Political noise could also increase ahead of the presidential elections. That said, we see no downside risk to Indonesias credit ratings in the near term. Its fiscal position is comfortable, and its external position can withstand further stress. We therefore maintain our Stable credit view on Indonesia.

Slower but steadier growth: Indonesias economic growth is likely to slow to 5.6% in 2013 from 6.2% in 2012, before recovering to 5.8% in 2014 on election-related spending. Lower commodity prices (almost 60% of exports) have resulted in sluggish exports, while tighter financing conditions have led to subdued investment. We expect Bank Indonesia (BI) to continue to prioritise macroeconomic stability over growth; BI has hiked rates by 175bps in 2013, and we expect a further 75bps of hikes by endH1-2014. Real interest rates are likely to turn positive in 2014 as the inflationary effects of fuel price hikes fade, and the government is unlikely to hike subsidised fuel prices or basic electricity tariffs. We expect inflation to slow to 5.0% by end-2014 (average of 6.4%) from 8.5% at end-2013 (average of 7.0%). Still-wide current account deficit: Indonesias current account deficit is structural. Imports have outpaced exports due to strong domestic demand, and the current account is likely to remain in deficit at 3.1% of GDP (USD 26.9bn) in 2014, versus 3.6% (USD 32.3bn) in 2013. We expect only a modest improvement in the current account, as strong credit growth (23.4% in September 2013) could sustain demand for capital-goods imports (c.90% of total imports). That said, transmission of BIs tight monetary policy and measures such as tax hikes on imported finalconsumption and luxury goods should ultimately lead to lower import demand. Conservative fiscal policy: The government has ample fiscal headroom due to its previously conservative fiscal policy and a low debt/GDP ratio of 23%. It has typically underspent its budget, while robust GDP growth has led to sustained tax revenue growth. That said, the low revenue base (16.2% of GDP in 2012) and heavy subsidy payouts are structural weaknesses. The 2014 budget is non-expansionary, and we expect a moderate fiscal deficit of 1.5% of GDP. Dependence on external funding: Financing Indonesias twin deficits may remain challenging given shallow domestic markets and the countrys reliance on external debt funding. Based on our fiscal deficit forecast, Indonesia will need to issue USD 6bn in global markets (it uses external borrowing to fund c.20% of its gross funding needs). Based on our current account forecast, Indonesia will need to attract at least USD 12bn of portfolio inflows in 2014 to avoid a deterioration in the BoP position; we expect net FDI of USD 17bn in 2014. While Indonesias funding needs are substantial, its FX reserves of USD 97bn as of October 2013 are comfortable against short-term external debt of USD 45bn, and provide more than five months of import cover. Indonesia also has USD 40bn of bilateral swap agreements with other Asian central banks. That said, its FX reserves remain susceptible to capital outflows in a risk-off environment given heavy offshore holdings in the domestic bond (32% of the total) and equity markets. Policy issues: While Indonesia undertook some fiscal reforms in 2013 (such as reducing fuel and electricity subsidies), it made little progress in improving the investment climate, removing infrastructure bottlenecks, eliminating graft, and addressing the longstanding structural weakness of low GDP per capita. Banking system: The banking systems LDR has risen to 89% from 84% at end2012 as loan growth outpaced deposit growth. The scarcity of deposits, along with BIs rate-hiking cycle, could lead to tighter liquidity in the banking system. Moreover, asset quality in rate-sensitive sectors could come under pressure due to tight liquidity and slower growth. While some regional banks may be negatively affected, the bigger banks positions are comfortable (the systems Tier 1 ratio is 16.3%). Political stability: General elections are due in April 2014 and presidential elections in July 2014. Opinion polls show two leading potential candidates: retired LieutenantGeneral Prabowo Subianto (leader of the Gerindra party and son-in-law of former President Suharto) and Governor of Jakarta Joko Widodo. We see a low risk of policy discontinuity following the elections.
122
SOVEREIGNS
Country profile
The Republic of Indonesia is the worlds fourth most populous country (population of c.248mn). The country comprises 13,466 islands spread over the Indian and Pacific Oceans. Indonesia is a republic with an elected legislature and president; the current head of state is President Susilo Bambang Yudhoyono. It is a dynamic economy and a member of the G20 major economies. However, economic growth is impeded by poor infrastructure and weak governance, and is below its potential. The country is rich in natural resources and produces commodities including oil, gas, coal, palm oil, cocoa and tin.
Asia Credit Compendium 2014 Indonesia (Baa3/Sta; BB+/Sta; BBB-/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 9,069 1.7 0.2 225.4 26.4 16.9 110.1 204.9 6.00 24.6 29.6 16.4 50.3 13.6 9,793 (24.4) (2.8) 252.4 28.7 17.5 112.8 223.4 5.75 23.1 32.9 15.0 46.6 14.0 11,700 (32.3) (3.6) 270.0 30.3 18.2 99.0 272.7 7.75 22.0 35.6 14.0 53.1 NA 11,400 (26.9) (3.1) 290.0 33.4 19.0 105.0 252.2 8.25 18.0 37.4 13.0 54.9 NA -2.5 2010 2011 2012 2013F 2014F -2.0 -1.0 -1.5 -0.5 Fiscal balance 0.0 16.3 0.1 (1.1) 199.5 24.4 149.7 56.4 16.2 (0.6) (1.9) 204.5 24.0 148.2 56.3 16.2 (0.1) (2.0) 202.0 23.4 144.5 56.4 16.0 (0.1) (1.5) 200.0 23.0 144.0 56.4 5.2 5.0 2010 1.0 0.5 2011 2012 2013F 2014F 500 0 5.4 1,000 846 241 3,510 6.5 3.8 50.2 32.9 33.1 879 245 3,594 6.2 4.3 48.8 35.3 32.6 890 248 3,600 5.6 8.5 47.0 34.5 32.0 865 251 3,450 5.8 5.0 47.5 34.0 33.0 6.2 6.0 5.8 5.6 3,000 2,500 6.4 2011 2012 2013F 2014F

6.6 Real GDP GDP per capita (RHS) 4,000 3,500
SOVEREIGNS
2,000 1,500

Primary balance

350 300 250 200 External debt
Debt dynamics (%)

30 Govt. debt/ Revenue (RHS) 180 160 140 20 Govt. debt/ GDP 120 100 80 10 60 40
25
15 150 100 50 0 2010 2011 2012 2013 2014 FX reserves
5 20 0 2010 2011 2012 2013 2014 0
Source: Bank Indonesia, Debt Management Office of the Ministry of Finance, IMF, Moodys, Standard Chartered Research
123
Asia Credit Compendium 2014 Malaysia (A3/Pos; A-/Sta; A-/Neg)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Edward Lee (+65 6596 8252)

We maintain a Stable credit outlook on Malaysia. While its large current account surpluses (a source of strength) are diminishing, this is balanced by moderating fiscal deficits (a source of weakness). Pursuing fiscal consolidation is key to the countrys credit ratings, in our view. We think reform measures outlined in the 2014 budget, such as GST implementation and subsidy rationalisation, are a step in the right direction. A positive rating action will depend on the government demonstrating consistent progress on these reforms. Some implementation risk is likely, as the majority position of the ruling party declined in the 2013 general elections.

Economy is becoming domestically driven: Malaysia is undergoing a structural shift from an export-oriented economy to one supported by domestic demand. Private consumption increased 7.7% and investment increased 9.0% in 9M-2013, versus overall GDP growth of 4.5%. If this trend is sustained in the long term, it will provide resilience against external growth risks, a credit-positive factor for Malaysia. While high household leverage, subsidy cuts and rising inflation may moderate consumption in 2014, key infrastructure projects under the Economic Transformation Programme (ETP) will continue to support investment. We also expect a gradual pick-up in external demand to provide additional support. We forecast GDP growth of 5.3% in 2014, versus 4.7% in 2013. All eyes on fiscal consolidation: Malaysias fiscal weakness arises from a narrow personal tax base (11% of revenue), large subsidies (21% of expenditure) and heavy reliance on petroleum-related revenue (31% of total revenue). This has led to persistent fiscal deficits since 1998 and a high debt-to-GDP ratio of 54% (including off-balance-sheet guaranteed debt: 76%). That said, Malaysias deficits have narrowed since 2009; the 2014 budget envisages a further consolidation to 3.5% of GDP in 2014 from 4.0% of GDP in 2013 on the back of subsidy rationalisation. The government also plans to introduce a GST from 2015, which will enhance the tax base over the medium term. We also think the government is likely to reject Petronas proposal to change its dividend policy, which would have lowered Petronas payouts by MYR 12bn. While these measures are credit-positive, execution will be tough. Also, the government has not introduced a clear roadmap for subsidy rationalisation, and could potentially boost cash handouts to the poor to offset the impact of subsidy cuts. Moodys and Fitch differ in their opinion of the governments ability to execute fiscal consolidation, and therefore assign different outlooks to the sovereign rating. Strong financing position: Malaysia has financed its deficit using non-inflationary domestic borrowings, given its high savings rate of 31% of GDP and liquid domestic capital markets. As a result, only 3% of government debt is denominated in foreign currency. The Employees Provident Fund holds 27% of government debt, providing a stable source of funding. While the decline in foreign holdings of government securities to 43% from a peak of 48% in May 2013 has caused concern, the impact on financial markets has been broadly manageable. The government also has the flexibility to finance itself domestically with the involvement of local investors only and with longer-term debt; in 2013, it issued 30Y paper with only local participation. External position is still strong: Malaysia is an open and well-diversified economy and has consistently generated current account surpluses due to a healthy trade balance. The surplus is likely to moderate to 3.6% of GDP in 2013 from 11.0% in 2011 as weaker commodity prices affect exports and as the ETP leads to strong demand for capital goods. We expect the trend of low surpluses to continue in the coming years, although we do not expect the current account to turn to a deficit. On the capital account front, Malaysia is a strong net external creditor and has been an exporter of capital since 2008; however, net FDI outflows are likely to narrow due to the ETP. Malaysias FX reserves of USD 137bn as of October 2013 are comfortable against external debt of c.USD 99bn. Leveraged households: Household leverage has increased in recent years and is among the highest in Asia, at 80.5% of GDP. Borrowers debt-servicing ability is stretched (debt/disposable income of 140%). While the government has introduced stricter regulations to curb debt, a rise in interest rates or a correction in property prices could lead to higher household NPLs, although banks remain well capitalised. Politics: Pushing through reforms is likely to be tough for PM Najib, as the majority position of the ruling party declined in the 2013 general elections. Any populist policies ahead of the next general election (due in 2018) will be credit-negative.
124
SOVEREIGNS
Country profile
Malaysia is a Southeast Asian country comprising 13 states and three Federal Territories (the capital city of Kuala Lumpur, Putrajaya and Labuan). The country covers a total land mass of 329,845 sq km and has a population of around 30mn. Malaysia is a federal constitutional elective monarchy. However, executive power rests with the prime minister, currently Najib Tun Razak. Malaysia is a key member of ASEAN and a highly open and diversified economy, and benefits from its strong position in the commodity sector.
Asia Credit Compendium 2014 Malaysia (A3/Pos; A-/Sta; A-/Neg)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Monetary and liquidity indicators Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 160 140 120 100 80 60 40 20 0 2010 2011 2012 2013F 2014F
125
Source: IMF, Bank Negara Malaysia, Moodys, Standard Chartered Research

2012 308 29 10,447 5.6 1.7 181.5 25.8 31.9 22.2 (2.4) (4.5) 164.6 53.5 241.0 3.4 3.06 19.7 6.4 (2.3) 6.2 83.7 27.2 36.8 139.9 66.2 3.00 11.1 133.6 9.7 47.6 NA 2013F 337 30 11,239 4.7 2.3 176.8 27.1 30.6 21.0 (1.8) (4.0) 180.1 53.5 254.8 3.0 3.08 12.1 3.6 (1.2) 0.6 99.0 29.4 41.2 138.0 79.8 3.00 NA NA NA 47.3 NA 2014F 366 30 12,012 5.3 3.9 175.2 27.7 31.4 20.8 (1.3) (3.5) 195.8 53.5 257.2 2.7 3.08 14.6 4.0 (0.7) 0.2 120.0 32.8 42.9 140.0 93.8 3.25 NA NA NA 52.4 NA 60 Govt. debt/ GDP 50 -7 2010 2011 2012 2013F 2014F -6 -3 -4 -5 Fiscal balance -2 Primary balance -1 8 Real GDP 7 6 5 8,000 GDP per capita (RHS) 14,000 12,000 10,000
2011 289 29 9,978 5.1 3.2 187.8 23.3 34.9 21.0 (2.8) (4.8) 149.7 51.8 246.7 4.0 3.18 31.8 11.0 (1.1) 3.0 81.2 28.1 40.4 134.8 67.6 3.00 11.8 128.0 14.7 53.2 NA
SOVEREIGNS
4 6,000 3 2 1 0 2010 2011 2012 2013F 2014F 4,000 2,000 0

0
Debt dynamics (%)

Govt. debt/ Revenue (RHS) 300
250
FX reserves External debt
40
200
30
150
20
100
10
50
0 2010 2011 2012 2013F 2014F
Asia Credit Compendium 2014 Mongolia (B1/Sta; BB-/Neg; B+/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251)

Commencement of production at the Oyu Tolgoi (OT) mine will sustain Mongolias GDP growth and underpins our brighter current account outlook. That said, in the absence of a significant pick-up in FDI or portfolio inflows, the BoP financing gap is likely to remain large and FX reserves will be under pressure. Mongolia also needs to rein in fiscal spending, including off-balance-sheet items, to ensure macroeconomic stability and lower inflation. The regulatory environment is evolving, and investment policies need to be monitored. Contingent liabilities have emerged from the banking system following strong credit growth and an increase in the LDR. We therefore maintain our outlook on the Negative Mongolian sovereign.

Commodity-driven economy: Mongolias economy is commodity-driven the mining sector contributes 20% of GDP, 90% of exports and one-third of government revenue. Mining output is likely to rise at a CAGR of 20% over the next five years, led by the development of large copper deposits at the OT mine and coking coal deposits at the Tavan Tolgoi (TT) mine. Commercial production at OT began in H22013; it will be among the worlds top five copper projects upon full ramp-up, and output will average 540kt until 2020. While medium-term growth potential is high, the government has adopted expansionary fiscal and monetary policies to support growth as coal exports and FDI inflows slowed in 2013. This led to high inflation of 10.9% as of October 2013 and a 25% depreciation in the Mongolian tugrik (MNT) in 11M-2013. The economy also faces downside risks from a potential slowdown in Chinas economy, Mongolias biggest export destination, with a 90% share. Pressure on BoP position emerges: Mongolia faced a BoP crisis in 2008 and required IMF assistance. The current account has remained in deep deficit due to demand for capital goods for mining projects and lower commodity prices. The deficit is likely to narrow to 23% of GDP in 2013 (31% in 2012), as commencement of operations at the OT mine will result in lower demand for capital goods and higher exports. However, FDI inflows declined sharply to USD 1.9bn in 9M-2013 from USD 3.2bn in 9M-2012. This led to a USD 1.2bn financing gap and has pressured the FX reserves. While FX reserves of USD 2.4bn (USD 3.9bn in 2012) provide four months of import cover, the current account will likely post an 18% deficit in 2014 (USD 2.9bn). Risks may emerge unless the government attracts significant FDI or raises external debt (directly or indirectly). Fiscal discipline is required: Mongolias fiscal policy is pro-cyclical, and the budget deficit has widened since the IMFs Stand-By Arrangement ended in 2010. The headline fiscal balance turned to a deficit of 7.7% of GDP in 2012 from a surplus of 0.5% in 2010. While the government has adopted a Fiscal Stability Law and is likely to keep the headline deficit within 2% of GDP in 2013, consolidation is likely to be achieved by limiting expenditure, particularly capital spending. Spending from the USD 1.5bn sovereign bond and the Development Bank of Mongolias (DBMs) USD 580mn bond is off-balance sheet; adjusting for this, the World Bank estimates the fiscal deficit at 12% of GDP in 2013. While the outlook for 2014 is brighter as the government is looking to defer some projects, the deficit is likely to remain sizeable at 6% of GDP (including off-balance-sheet items), according to the World Bank. Parliament has rejected a proposal to raise the debt ceiling to 60% of GDP from 40%, although it is unclear how the government will reduce its debt stock (52% of GDP in NPV terms in 2012) to below 40% of GDP in 2014. Debt dynamics: Mongolias interest burden on its debt stock (59% of GDP) was low at 1% of GDP until 2012. However, the issuance of global bonds at commercial rates and MNT depreciation will increase interest expenses to 2.1% of GDP in 2013. While external debt/GDP looks high at 134% of GDP, inter-company loans make up most of it, and there are no big external public-debt maturities before 2017. Weak banking system: Mongolias banking system is weak (NPL ratio: 5.3%), with a high dollarisation ratio. Rapid credit growth of 45% in 9M-2013 outpaced deposit growth of 12% and caused the systems LDR to rise to 128% from 99% in 2012. Strong loan growth was driven by lending to the rate-sensitive construction and mortgage sectors. We believe the sovereign could face contingent liabilities from the banking system. In 2013, the government bailed out Savings Bank at a fiscal cost of USD 70mn (0.6% of GDP). The bank failed following a default on a shareholder loan. Investment and political risk: The government has repeatedly attempted to renegotiate existing mining contracts, a worrying trend. This has led to uncertainty among investors and, subsequently, lower FDI. While the government has passed a new investment law providing more clarity to investors, its effectiveness in attracting FDI is untested. We see government policy continuity in 2014-15, as the next parliamentary election is due only in 2016. That said, given the coalition nature of the government, it is likely to maintain a slightly populist stance.
SOVEREIGNS
Country profile
Mongolia is a landlocked country bordered by China and Russia. It is among the worlds most sparsely populated nations it has a population of 2.8mn, of which c.45% lives in the capital city, Ulaanbaatar. Mongolia faces extremely cold weather for most of the year, with average temperatures in the capital below zero degrees. The country is rich in minerals and has estimated copper reserves of 84mt and coal reserves of 18,473mt. Mongolia has slowly transitioned to a marketoriented economy in the past 20 years and was the worlds fifth fastest-growing economy in 2012. It follows a parliamentary system of government, and the 2012 elections resulted in the formation of a coalition government led by the Democratic Party.
126
Asia Credit Compendium 2014 Mongolia (B1/Sta; BB-/Neg; B+/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Headline fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 18 16 14 12 10 8 6 4 2 0 2009 2010 2011 2012 2013F
127

2011 8.8 2.8 3,143 17.4 9.4 160.6 62.1 37.7 40.0 (5.5) (5.8) 4.5 50.6 126.5 48.2 1,396 (2.8) (31.3) 52.4 0.8 9.6 109.1 17.7 2.2 434.4 12.3 76.9 31.3 37.0 36.7 46.4 2012 10.8 2.8 3,857 12.2 14.2 123.2 60.6 29.6 33.9 (6.7) (7.7) 6.4 59.2 174.6 62.7 1,392 (3.3) (30.9) 35.8 23.5 14.5 133.8 12.9 3.9 374.4 13.3 28.0 35.9 18.8 50.2 37.0 2013F 13.0 2.8 4,643 13.0 10.0 99.6 58.6 35.2 33.7 0.1 (2.0) 7.6 58.7 174.2 59.2 1,400 (3.0) (23.4) 20.0 NA 15.9 122.4 11.2 2.2 723.3 NA NA NA NA 48.9 NA 70 60 50 40 30 20 FX reserves 10 0 2009 2010 2011 2012 2013F Govt. debt/ GDP Govt. debt/ Revenue (RHS) -5 2009 2010 2011 2012 2013F 500 0 0 5 10 15 20 Real GDP GDP per capita (RHS) 5,000 4,500 4,000 3,500 3,000
2010 6.2 2.8 2,214 6.5 14.3 116.4 40.6 33.0 36.9 1.0 0.5 2.4 38.5 104.3 69.0 1,256 (0.9) (14.2) 26.1 1.8 5.9 95.1 12.8 2.1 278.1 11.0 28.7 27.3 62.5 45.4 35.4
SOVEREIGNS
2,500 2,000 1,500 1,000

2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 2009 2010 2011 2012 2013F Fiscal balance Primary balance

External debt
Debt dynamics (%)

200 180 160 140 120 100 80 60 40 20 0
Note: Headline fiscal balance includes only on-balance sheet items; Source: Bank of Mongolia, IMF, Moodys, Standard Chartered Research
Asia Credit Compendium 2014 Pakistan (Caa1/Neg; B-/Sta; NR)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Sayem Ali (+92 21 32457839)

The USD 6.7bn IMF programme will support Pakistans BoP position. Pakistan is subject to tough performance targets and has raised taxes, cut subsidies and hiked policy rates in line with IMF conditions. The IMF programme will also enable Pakistan to receive support from other multilateral agencies to meet its funding gap and support its external position. However, fiscal targets will get progressively tougher, and its large external funding needs of USD 10.3bn in FY14 will keep the FX reserves under pressure. While we acknowledge the positive steps taken in 2013, significant execution risks persist and Pakistans credit profile is likely to improve only gradually. We therefore maintain our Negative credit outlook.

IMF backstop: The IMF approved a USD 6.7bn, three-year Extended Fund Facility (EFF) in September 2013 to support Pakistans BoP position. The EFF loan has an interest charge of 3% and a repayment period of up to 10 years. The IMF will disburse USD 550mn every quarter, subject to tough performance and structural benchmarks; the first tranche was released in September 2013. While the previous arrangement with the IMF was suspended midway due to delays in reform implementation, the government has so far met most of the targets under the current EFF. It has achieved strong fiscal performance and adjusted electricity prices, and is lowering subsidies. The authorities have also hiked rates aggressively to combat inflation and shore up the FX reserves. We think these measures are credit-positive. Fiscal correction is underway: The primary challenges to the Pakistan credit are high public debt (66% of GDP in FY13) and a low revenue base (13.1% of GDP in FY13). Moreover, 34% of government revenues are used to service debt, leaving little fiscal room for social spending and investment. That said, the IMF programme envisages a sharp decline in the budget deficit to 5.8% of GDP in FY14 from 8.5% in FY13. To achieve this, the government has taken measures including increasing the GST by 1ppt and cutting energy subsidies by 30% for households and 50% for commercial users. The government also plans a new tax on gas consumption and has shortlisted 31 SOEs for privatisation in 2014. Debt dynamics are challenging: The maturity profile of Pakistans domestic debt has changed unfavourably as the authorities have issued more short-term debt due to high interest rates. This has resulted in a gross funding requirement of over 30% of GDP and could lead to rollover pressures. Financing the deficit has also been challenging with a heavy reliance on the banking system, which provides 52% of the funding. The government has also resorted to money printing, and net central bank claims on the government were 81% of the monetary base as of May 2013. Current account deficit to widen: Growth is likely to bottom in H1-FY14. We expect a pick-up in H2-FY14 due to improved energy supply and higher private-sector investment spending. However, with increased economic activity, imports are likely to outpace exports, leading to a larger trade deficit. On the other hand, while coalition support funding will decline to USD 1.2bn from USD 1.8bn in FY13 as US and NATO troops withdraw from Afghanistan, remittances are likely to increase by USD 1.0bn to c.USD 15bn. We forecast that the current account deficit will widen to USD 4.0bn (1.8% of GDP) in FY14 from USD 2.4bn (1% of GDP) in FY13. BoP position supported by EFF but remains vulnerable: Pakistans external liquidity is poor. FX reserves were USD 3.6bn as of November 2013, providing only three weeks of import cover. In FY14, the expected current account deficit of USD 4.0bn and external debt maturities of USD 5.8bn will lead to large BoP funding needs of USD 10.3bn. Net FDI inflows have been low (albeit rising), at USD 1.4bn in FY13, and are inadequate to cover this gap. That said, apart from financial inflows from the IMFs EFF (USD 2.2bn), Pakistan may receive budgetary aid from other multilaterals (USD 2.5bn), assistance from the IDB and other international lenders (USD 1.5bn), and proceeds from a possible eurobond (USD 1.0bn) and 3G licence auctions (USD1.2bn) in FY14. This could help the FX reserves stabilise at USD 7bn (two months of import cover). Import cover will remain below the threemonth benchmark, and future FX inflows will be subject to adherence to EFF targets. Politics: The transition following the 2013 election was smooth. PM Sharifs strong mandate will help him push through tough tax and energy reforms and privatisation. Pakistans economic relations with the US are improving, and the government negotiated a preferential trade agreement with the EU in 2013.
128
SOVEREIGNS
Country profile
Pakistan, officially known as the Islamic Republic of Pakistan, is a country in South Asia with a land area of 796,095 sq km. It is the worlds sixth-most populous country, with around 180mn people. Since independence in 1947, its history has been characterised by periods of military rule, political instability and conflicts with neighbouring India. Pakistan is a federal parliamentary republic consisting of four provinces and four federal territories. The country last held parliamentary elections in May 2013, and Nawaz Sharif of the Pakistan Muslim League (Nawaz) was elected prime minister.
Asia Credit Compendium 2014 Pakistan (Caa1/Neg; B-/Sta; NR)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio Monetary and liquidity indicators 14.0 13.2 37.8 15.9 32.6 7.2 12.0 20.3 39.5 14.1 32.3 7.4 9.0 20.7 40.6 15.9 52.0 7.9 10.5 16.3 39.5 14.0 100.3 8.4 86.0 0.2 0.1 0.2 0.0 66.3 31.0 1.9 14.8 448.6 94.6 (4.5) (2.0) 0.2 0.0 65.6 29.1 2.5 10.8 607.4 99.5 (2.4) (1.0) 0.3 0.0 64.0 27.0 2.7 6.0 1,066.7 110.0 (4.0) (1.8) 0.3 0.1 62.0 27.6 2.8 7.0 885.7 -6 -7 -8 -9 FY10 FY11 FY12 FY13 FY14F Fiscal balance -2 -3 -4 -5 Primary balance 12.6 (3.3) (6.3) 127.2 59.5 472.2 52.1 13.1 (4.3) (8.6) 143.9 63.8 487.0 45.6 13.2 (4.2) (8.5) 156.9 66.2 501.5 40.8 13.8 (2.0) (6.5) 153.0 68.0 492.8 40.5 0 FY10 FY11 FY12 FY13 FY14F 0 1 200 400 214 177 1,209 3.0 13.3 33.4 14.1 14.2 226 180 1,254 4.4 11.3 33.1 14.9 12.9 237 183 1,294 3.6 7.5 32.3 14.2 13.3 225 187 1,204 3.5 10.0 31.8 14.9 12.9 2 600 3 4 Real GDP 1,000 800 FY11 FY12 FY13 FY14F

5 GDP per capita (RHS) 1,400 1,200
SOVEREIGNS

0 -1

70 60 50 40 External debt
Debt dynamics (%)

80 70 60 50 40 Govt. debt/GDP Govt. debt/ Revenue (RHS) 600
500
400
300
30 30 20 10 0 FY10 FY11 FY12 FY13 FY14F

Note: Fiscal year ends 30 June; Source: IMF, Moodys, Standard Chartered Research
200
FX reserves
20 10 0 FY10 FY11 FY12 FY13 FY14F 100
129
Asia Credit Compendium 2014 Philippines (Baa3/Pos; BBB-/Sta; BBB-/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Jeff Ng (+65 6596 8075)
Credit outlook Positive

The Philippines domestic marketoriented economy has been resilient to soft external demand. The Aquino administration has addressed structural issues by increasing infrastructure-related spending and improving governance, which has boosted growth. In addition, overseas workers remittances and BPOrelated FX earnings have led to steady consumption. These earnings have also offset the trade deficit and led to a strong accumulation of FX reserves. The authorities have made progress on fiscal consolidation, lowering public-sector indebtedness and reducing debt-servicing costs. We growth believe medium-term prospects remain strong, which supports fiscal sustainability. We therefore maintain our Positive credit outlook.

Strong growth momentum: The Philippine economy is likely to register strong growth of 7.2% in 2013 and 6.7% in 2014, underpinned by robust consumption and investment spending, even as external demand remains subdued. Domestic demand has held up due to strong remittance inflows and growing household income. The pick-up in investment activity is led by the construction and manufacturing sectors, given the governments push to increase infrastructure investment to 5% of GDP by 2016 from 2.4% in 2012. While progress on Public-Private Partnership (PPP) infrastructure projects was slow until 2012, two projects were awarded in 2013, and four more projects are in the bidding stage. Strong growth has not led to macroeconomic imbalances, and the Philippines has maintained positive real interest rates and stable inflation. Better fiscal management: The government has focused on improving tax compliance and collection to boost revenue, given structural weaknesses on the revenue side (the tax base was only 12.9% of GDP in 2012). On the expenditure side, the zero-based budgeting approach has led to prudent spending by government agencies. As a result, the fiscal deficit narrowed to 2.3% of GDP in 2012 from 3.9% in 2009, and the government targets a deficit of 2.0% of GDP in 2013-16. While increased spending on infrastructure projects will lead to increased government expenditure, revenue is also likely to pick up due to strong GDP growth and implementation of the sin tax and the proposed fiscal incentive rationalisation bill. We believe this will keep the deficit in check. Improving debt dynamics: While government debt was high at 51.4% of GDP in 2012 (44.9% of GDP, net of the bond sinking fund), the outlook is benign due to high GDP growth and consistent primary balance surpluses. Moreover, the government has undertaken a liability management exercise since 2010, with bond swaps, issuance of PHP-denominated global bonds, issuance of USD bonds in domestic markets and the buyback of global USD bonds. This has lowered debt-servicing costs, increased funding sources and extended the debt maturity profile. Also, given flush domestic liquidity, the government has used local markets to fund all of its 2013 funding needs. We think going forward foreign-currency financing will form less than 15% (16% in 2012) of its funding requirements, against the policy target of 25%. Robust external position: FX inflows from remittances and BPO services account for c.15% of GDP and offset the Philippines trade deficit (USD 5.6bn in 8M-2013). Remittances totalled USD 16.6bn and services inflows (primarily BPO) were USD 13.9bn in 8M-2013. We think these inflows are structural, as more than 10% of Filipinos live or work overseas, supporting strong remittances. The Philippines also has the potential to graduate to value-added services from voice services in the outsourcing sector, which will drive growth in BPO services. FX earnings from tourism are also rising. Foreign participation in local debt markets is low compared with other ASEAN countries; this reduces the risk posed by portfolio outflows. All of these factors result in favourable BoP dynamics. FX reserves of USD 83bn provide 16 months of import cover and are equal to 4.2 times short-term external debt. Structural issues: The country has a large infrastructure deficit, and the business climate is constrained by regulatory and corruption issues. Hence, net FDI inflows were just 0.1% of GDP in 2012. That said, the government has improved governance in recent years the Philippines jumped 30 notches to rank 108th in the World Banks Ease of Doing Business Index and net FDI rose 25% in 10M-2013. The country also faces the challenge of raising revenue to fund higher social and capital spending. Low event risk: The domestic political setting is stable and the risk of policy discontinuity in the near term is low, as elections are not due until 2016. The banking system is healthy, with a manageable NPL ratio of 1.8%, a capital adequacy ratio of 18.4% and moderate credit growth of 12.3% y/y as of June 2013.
130
SOVEREIGNS
Country profile
The Republic of the Philippines is located in Southeast Asia in the western Pacific Ocean. The country is an archipelago comprising 7,107 islands. With a population of 97mn, the Philippines in the worlds 12th most populous country. More than 10% of its population lives overseas, and overseas workers remittances are a strong and steady source of income. The Philippines has a presidential, unitary form of government in which the president functions as head of state and head of government. The president is elected by popular vote for a single six-year term. Following elections in May 2010, President Benigno Aquino was elected for a six-year term starting in June 2010.
Asia Credit Compendium 2014 Philippines (Baa3/Pos; BBB-/Sta; BBB-/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (average) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio Monetary and liquidity indicators 4.5 14.7 50.8 6.5 28.7 19.8 3.5 7.8 50.4 10.9 24.0 18.0 3.5 NA NA NA 28.7 NA 4.0 NA NA NA 32.7 NA 60 FX reserves External debt Govt. debt/ GDP 50 Govt. debt/ Revenue (RHS) -4 2010 2011 2012 2013F 2014F -3 43.93 7.2 3.2 0.7 (2.0) 76.6 34.2 16.0 75.3 101.7 41.19 7.0 2.8 0.1 (1.4) 80.8 32.3 20.5 83.8 96.4 42.00 11.9 4.3 0.2 (1.4) 87.7 31.7 22.2 92.0 95.3 41.50 11.0 3.6 0.5 (1.6) 93.3 30.5 22.7 99.5 93.7 -2 Fiscal balance -1 0 14.0 0.8 (2.0) 114.0 50.9 363.6 NA 14.4 0.6 (2.3) 128.6 51.4 356.9 NA 15.0 0.7 (2.4) 135.3 48.9 326.0 NA 15.2 0.4 (2.1) 142.5 46.6 306.6 NA 224 94 2,378 3.6 4.8 67.6 20.5 23.6 250 96 2,612 6.8 3.1 64.8 18.5 21.3 277 97 2,838 7.2 2.9 61.8 18.6 21.1 306 99 3,075 6.7 3.9 61.0 18.2 20.4 7 6 5 2,000 GDP per capita (RHS) 3,000 2,500 2011 2012 2013F 2014F

8 Real GDP 3,500
SOVEREIGNS
4 1,500 3 2 1 0 2010 2011 2012 2013F 2014F 1,000 500 0

1 Primary balance

120
Debt dynamics (%)

450 400 350 40 300 250
100
80
60
30 200 20 150 100
40
20
10 50 0 2010 2011 2012 2013F 2014F 2010 2011 2012 2013F 2014F 0
0
Source: IMF, Bangko Sentral ng Pilipinas, Moodys, Standard Chartered Research
131
Asia Credit Compendium 2014 South Korea (Aa3/Sta; A+/Sta; AA-/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Chong Hoon Park (+82 2 3702 5011)

We have a Stable view of Korea as a credit. Korea derives its economic strength from a track record of moderate growth, manageable public debt, and consistent fiscal and current account surpluses. The economy has remained resilient in 2013, and the current account surplus has improved, in contrast to many other Asian economies. The government has bolstered its external balance sheet by building its foreign reserves and improving its liquidity profile. That said, we see potential risks associated with contingent liabilities in the SOE space and highly leveraged households. Geopolitical issues on the Korean peninsula also need to be monitored.

Stronger growth in 2014: We expect Koreas economy to grow 3.8% in 2014 (up from 2.7% in 2013), driven by net exports and corporate capex. Exports are likely to increase as the economies of the US and China, two major trading partners, improve and global trade recovers. Koreas exports are supported by a competitive manufacturing sector and have remained resilient in 2013, even though competing exports from Japan benefited from a weaker yen. Stronger exports will also gradually drive corporate capital investment. While stretched household debt is cause for concern, we expect the strong labour market (the unemployment rate was only 2.8% in October 2013), stable inflation at around 2.3% (average in 2014F), and higher welfare spending to support domestic consumption in 2014. Counter-cyclical fiscal policy: Koreas fiscal policy is counter-cyclical. In 2010, Korea was one of the few sovereigns globally to return to a fiscal surplus after fiscal loosening (including tax cuts and increased spending) led to a deficit in 2009; it has since maintained this position. We expect a budget surplus of 1.0% of GDP in 2014, up from 0.5% in 2013, on the culmination of the fiscal stimulus package introduced in May 2013. The government is likely to scale back tax exemptions and exert tighter control on expenditure given prospects of an economic recovery in 2014. Excluding social-security funds, a positive contributor, we believe Korea will post a 1.5% deficit in 2014. Prudent fiscal management historically and low government debt/GDP at 36% give the government ample fiscal headroom. Strong external position: Korea experienced substantial foreign capital outflows during the 1997-98 and 2008 crises. It has since built up its reserves, improved its liquidity profile, taken measures to prevent excessive foreign capital inflows and arranged currency-swap agreements with China. Korea's net international investment position shrank to a liability of USD 15bn in June 2013 from USD 103bn in 2012 and USD 229bn in 2007. Korea has imposed a levy to curb banks offshore issuance and has disallowed SOEs with domestic operations from issuing offshore debt. The FX reserves have risen to USD 343bn from USD 327bn in 2012 and USD 262bn in 2007 thanks to persistent current account surpluses. The surplus reached USD 48.7bn in 9M-2013, compared with USD 43.2bn in 2012. The level of FX reserves looks comfortable against short-term external debt of USD 120bn. Banking system: The risk profile of the banking system is broadly stable, with a modest NPL ratio of 1.8% for domestic banks as of September 2013. In terms of reliance on wholesale funding, the KRW LDR was little changed at 109% at endJune 2013 versus 108% in 2012, but down considerably from 137% in 2007. However, the USD LDR ratio has been rising and stood at 207% at end-June 2013, after reaching a low of 177% in September 2012. Levered SOEs: SOE debt has risen to 31% of GDP from 20% of GDP in 2008, as many Korean SOEs, especially those involved in the infrastructure and energy sectors, do not operate on a commercial basis and implemented large governmentmandated projects. We believe this creates contingent liabilities for the sovereign. The government has raised tariffs for some SOEs and scaled back their investment plans, which should stabilise their credit profiles going forward. Leveraged households: Household debt/disposable income in was high at 137% as of June 2013. Household debt constitutes 43% of bank loans, and given the low household savings rate of 3%, we see risks to financial stability and contingent liabilities for the sovereign. However, recent measures such as lowering the mortgage interest rate should stabilise the level of household debt. Event risks: Geopolitical issues require close monitoring, even though the leadership transition to Kim Jong-un in North Korea has been smooth. North Korea conducted a nuclear test in 2013, which led to heightened military tensions with South Korea.
132
SOVEREIGNS
Country profile
The Republic of Korea is located in the southern half of the Korean Peninsula. Its population of 50mn makes it one of the most densely populated countries in the world. At the end of the Second World War, the nation was divided into North and South Korea, and South Korea was established as a republic. The split was formalised following the armistice signed in 1953, after the three-year Korean war. South Korea returned to civilian rule in 1993 after 32 years of military rule and has been a fully functioning democracy since then. The South Korean economy has grown significantly over the past 50 years, transforming itself into a major economy with GDP in excess of USD 1.2tn. The country operates as a presidential republic with 16 administrative divisions.
Asia Credit Compendium 2014 South Korea (Aa3/Sta; A+/Sta; AA-/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 500 450 400 350 300 250 200 150 100 50 0 2010 2011 2012 2013F 2014F
Source: IMF, Bank of Korea, Moodys, Standard Chartered Research

2012 1,130 50.0 22,592 2.0 1.4 109.9 27.5 30.9 24.5 2.9 1.5 394.2 34.9 142.4 NA 1,071 42.9 3.8 (1.6) 0.9 413.4 36.6 30.6 327.0 126.4 2.75 3.7 169.7 4.8 60.7 NA 2013F 1,225 50.2 24,402 2.7 1.3 108.1 27.3 31.5 24.7 3.6 0.5 441.0 36.0 145.7 NA 1,055 64.9 5.3 (1.3) NA 445.9 36.4 29.6 348.0 128.1 2.50 4.2 168.4 5.5 53.9 NA 2014F 1,374 50.4 27,262 3.8 3.4 105.8 28.0 30.8 24.5 3.6 1.0 487.8 35.5 144.9 NA 1,020 38.5 2.8 (1.2) NA 487.8 35.5 28.6 370.0 131.8 2.75 5.0 166.8 6.5 51.6 NA 0 2010 2011 2012 2013F 2014F 1 2 Fiscal balance 3 Primary balance 0 2010 2011 2012 2013F 2014F 0 1 5,000 3 10,000 2 4 5 20,000 7 Real GDP 6 GDP per capita (RHS) 30,000
2011 1,115 49.8 22,380 3.7 4.2 110.1 29.5 31.6 23.7 2.7 1.5 378.9 34.0 143.5 NA 1,152 25.6 2.3 (1.5) 1.2 399.0 35.8 34.5 306.4 130.2 3.25 6.8 168.6 5.5 63.6 NA
25,000
SOVEREIGNS
15,000

4
Debt dynamics (%)

40 Govt. debt/ Revenue (RHS) Govt. debt/ GDP 160 140 120 100 80 60 40 20 0 2010 2011 2012 2013F 2014F
External debt FX reserves
35 30 25 20 15 10 5 0
133
Asia Credit Compendium 2014 Sri Lanka (B1/Sta; B+/Sta; BB-/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Samantha Amerasinghe (+44 2078 856 625)

Sri Lanka has a weak funding profile owing to large twin deficits and its reliance on external markets for over 20% of its borrowing needs. Foreigners hold c.13% of its local-currency debt, which leaves it slightly exposed to capital flight. USD 1.9bn of Sri Lankas external debt is due every year from 2013 to 2015. It will need to roll over/refinance its maturing external debt, as FX proceeds from worker remittances and tourism and FDI inflows, while rising, are insufficient to cover the large trade deficit. While rollover risks may arise in the medium term, we expect market conditions to remain conducive in the near term. We therefore maintain our Stable credit outlook.

Pro-growth bias: The end of two-and-a half decades of civil conflict in 2009 put Sri Lanka on a higher growth trajectory. As a result, private consumption fuelled by rising incomes and foreign remittance inflows and public spending on infrastructure remain the main growth engines. As peace dividends have started to diminish, the government has adopted an accommodative monetary policy and targets 8% growth in 2014. However, if the government pursues its growth target aggressively and maintains a pro-growth monetary bias, this could lead to macroeconomic imbalances, with a wider current account deficit and a depletion of FX reserves. We forecast more sustainable growth of 7% in 2014. Current account gap is narrowing: Sri Lankas imports have declined faster than its exports in 2013 as GDP growth slowed and the Sri Lankan rupee (LKR) held up well against the currencies of some of its main trading partners. As a result, the trade deficit contracted by USD 384mn to USD 6.0bn in 8M-2013. While imports should pick up gradually on the back of higher growth, exports are also likely to regain momentum due to the economic recovery in the EU and the US. On the other hand, remittances (USD 4.4bn, up 10.9% y/y) and tourism receipts (USD 784mn, up 22.1% y/y) remained buoyant in 8M-2013. We are therefore cautiously optimistic about the current account, and forecast narrower deficits of 5.5% of GDP in 2013 and 5.0% of GDP in 2014, versus 6.6% in 2012. BoP position remains vulnerable: Sri Lankas FDI flows have remained below potential, and it therefore relies heavily on external borrowings. External debt is likely to reach USD 39.7bn (58% of GDP) by end-2013. While the current account gap is narrowing, Sri Lankas external funding requirements remain significant due to heavy redemptions in the near term; Fitch estimates that USD 1.9bn of sovereign external debt is due every year from 2013 to 2015. This is likely to keep the FX reserves of USD 6.9bn (as of 9M-2013) under pressure, and Sri Lankas External Vulnerability Indicator will likely reach 181% by end-2013, according to Moodys. That said, we think the proposed USD 1.5bn eurobond and the central banks continued restraint in FX sterilisation operations will keep the FX reserves at c.USD 7.5bn by end-2014. The strategy of rolling over maturing external debt could come under pressure if global risk appetite worsens. Furthermore, foreigners hold 12.8% of Sri Lankas LKR-denominated liabilities, which account for c.USD 3bn. This leaves the country exposed to capital flights and sharp currency fluctuations. Fiscal deficit remains high: Sri Lanka faces fiscal challenges due to high government debt (79% of GDP), a narrow tax base (11.2%), large interest payments (26% of expenditure), extensive subsidies (17%) and a bloated public sector. While the government targets reducing the fiscal deficit to 5.8% in 2013 and 5.2% in 2014 from 6.4% in 2012, its revenue assumptions appear optimistic. We see a risk of fiscal slippage, and forecast a larger deficit of 6.0% of GDP in 2014. Domestic funding of the deficit is largely captive, as local banks and contractual savings institutions are required to invest in government securities. However, the country relies on external financing for over 20% of its funding needs. It therefore faces a tough situation, as the cost of external borrowings is likely to rise in the medium term, while higher use of domestic financing could crowd out the private sector. Contingent liabilities: Explicitly guaranteed government debt is c.4% of GDP. However, sovereign support would be forthcoming if any of the banks that have issued external debt at the governments behest face difficulties in servicing their obligations. Fiscal liabilities from loss-making SOEs may also materialise; Sri Lanka has budgeted USD 200mn for investment in its two airlines in the 2014 budget. Political stability: The government enjoys widespread popularity. It performed strongly in provincial council elections in 2011-13, winning eight of nine provinces.
SOVEREIGNS
Country profile
The Democratic Socialist Republic of Sri Lanka is an island country in South Asia, just off the coast of India, with a population of about 21.3mn. Sri Lanka is a republic and a unitary state governed by a mixed presidential and parliamentary system. Sri Lankas president (also the head of state) is popularly elected for a six-year term. In May 2009, the government brought an end to two-and-a-half decades of civil war by defeating the Liberation Tigers of Tamil Eelam (LTTE). Following this, the United Peoples Freedom Party (UPFA) won a twothirds majority in parliament and Mahinda Rajapaksa was re-elected president in January 2010. The next elections are due by January 2016.
134
Asia Credit Compendium 2014 Sri Lanka (B1/Sta; B+/Sta; BB-/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio Monetary and liquidity indicators 7.00 33.2 46.2 19.1 102.6 14.3 7.50 18.0 47.0 17.5 158.1 13.3 6.50 NA NA NA 180.5 NA 6.75 NA NA NA 181.6 NA 113.9 (4.6) (7.8) 1.5 5.4 29.4 49.7 28.3 6.2 476.9 127.1 (3.9) (6.6) 1.3 6.3 33.7 56.7 29.9 6.4 526.2 131.0 (3.8) (5.5) 1.3 NA 39.7 58.0 29.0 7.2 551.8 128.0 (3.9) (5.0) 1.9 NA 45.7 58.6 26.9 7.5 609.4 -6 -7 -8 -9 -10 2010 2011 2012 2013F 2014F Fiscal balance 14.5 (1.4) (6.9) 46.4 78.4 540.7 45.4 13.2 (1.1) (6.4) 47.0 79.1 599.2 46.1 13.1 (0.7) (5.8) 54.0 79.0 603.1 46.4 13.0 (0.9) (6.0) 60.8 78.0 600.0 46.2 2 1 0 2010 0 -1 -2 -3 -4 -5 Primary balance 2011 2012 2013F 2014F 59.2 21.0 2,819 8.2 4.9 60.7 30.0 15.4 59.4 21.1 2,815 6.4 9.2 59.3 30.6 17.0 68.4 21.3 3,211 6.8 7.3 58.2 31.6 17.7 78.0 21.5 3,628 7.0 6.8 57.5 32.7 17.8 6 5 2011 2012 2013F 2014F

9 Real GDP 8 7 GDP per capita (RHS) 4,000 3,500 3,000 2,500
SOVEREIGNS
2,000 4 3 1,500 1,000 500 0

50 45 40 35 30 25 20 15 10 5 0 2010 2011 2012 2013F 2014F
Source: Central Bank of Sri Lanka, IMF, Moodys, Standard Chartered Research
Debt dynamics (%)

90 80 70 Govt. debt/GDP Govt. debt/ Revenue (RHS) 700 600 500 400 300 200 100 0 2010 2011 2012 2013F 2014F
External debt
60 50 40 30
FX reserves
20 10 0
135
Asia Credit Compendium 2014 Thailand (Baa1/Sta; BBB+/Sta; BBB+/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Usara Wilaipich (+668 724 8878)

We expect public infrastructure projects to drive GDP growth of 4.7% in 2014. Public debt/GDP is likely to rise to c.50% in the medium term from 45% currently, and the current account may turn to a deficit due to the implementation of infrastructure projects. That said, we think Thailand has ample fiscal headroom and its external position remains sound given its net external creditor status and ample reserves. While execution risks remain, infrastructure spending should translate into higher growth and employment in the medium term. SFIs and leveraged households pose moderate risk. Domestic politics remain challenging, and political noise could increase ahead of the 2015 elections. We maintain our Stable outlook on Thailand.

Capex cycle to drive GDP growth: We expect Thailand to register stronger growth of 4.7% in 2014, versus 3.0% in 2013, driven by public investment and increasing FDI. The government plans to carry out projects under the THB 250bn flood relief programme in 2014 and is also looking to pass a THB 2.0tn (USD 63bn) infrastructure investment bill, which will be implemented from 2014-20. According to government estimates, public investment in infrastructure is likely to increase Thailands real GDP growth by 1ppt during the construction phase. While the infrastructure projects are likely to lead to higher CPI inflation, we expect inflation to remain manageable at 2.4% (end-period) in 2014. Fiscal position will moderate: Thailand maintained an expansionary fiscal policy in 2012-13 to support the economy in the aftermath of the 2011 floods. It reduced the corporate income tax rate to 20% in 2013 (from 30% in 2011), provided tax relief for first-time car buyers and undertook a rice pledge scheme. While the government has scaled back some of these measures, we think its fiscal stance will remain expansionary as it implements an infrastructure investment programme worth 20% of GDP (to be carried off-budget). It intends to create fiscal room by balancing the headline fiscal deficit by 2017, so that the sum of the headline and off-budget deficits is less than 2.5% of GDP. While there could be some downside to this consolidation plan, we believe Thailand has adequate fiscal headroom from a rating perspective to implement these measures, given its low central government debt/GDP ratio of 31%. That said, public debt/GDP is likely to rise to c.50% in the medium term from 45% in 2012. Strong external position: Thailand has a strong net external creditor position. Its FX reserves of USD 171bn as of November 2013 are comfortable against external debt of USD 138bn (39% of GDP as of October 2013). That said, its large current account surplus (2.8% of GDP in 2003-12) has declined and is likely to turn to a deficit of 0.4% of GDP in 2013 due to the moderating trade balance. Weak global demand and the rice pledge scheme have negatively affected Thai exports, and strong demand for gold has buoyed imports. We believe the massive infrastructure push will lead to high demand for capital goods. This could further weaken the current account to a deficit of 1.9% of GDP by 2017, according to government estimates. That said, we think the level of deficit is manageable given strong FDI and portfolio inflows, and expect the current account to normalise once investment-related expenditure projects are completed. Moderate risk from SFIs: The government implements informal debt refinancing programmes through eight state-owned specialised financial institutions (SFIs) and supports them through capital injections. Outstanding SFI loans accounted for 27% of total banking credit as of June 2013, following rapid loan growth of 15%. Their NPL ratios are high, at over 5%, and they meet 30% of their funding needs through interbank markets, creating contagion risk and contingent liabilities for the sovereign. Healthy banking system: The banking system is healthy, with a capital adequacy ratio of 16.3% and an NPL ratio of 2.4%. Although reliance on wholesale foreigncurrency funding is a concern, foreign-currency loans constitute only 5% of total lending. Household leverage of 77.5% of GDP is relatively high and has increased rapidly in recent years. This poses a slight risk of asset-quality weakness in the consumer loan segment, which makes up c.35% of total lending. Political risk: Thailands path to sustained political stability is difficult because of the deep-rooted political conflict between opponents and supporters of exiled former PM Thaksin Shinawatra. The governments attempt to pass a bill to grant amnesty to Thaksin has led to political noise and triggered anti-government protests. PM Yinglucks administration also faces a legal challenge related to the amendment of the constitution and the THB 2tn borrowing bill.
136
SOVEREIGNS
Country profile
Thailand is the worlds 50th-largest country in terms of total area and the 20th most populous country, with a population of 68mn. About 75% of the population is ethnically Thai, and 95% practise Theravada Buddhism, the national religion. Thailand is a highly open economy; consequently, its economic outlook is closely linked to external demand conditions. Thailand is a constitutional monarchy, with King Bhumibol Adulyadej as the ruling monarch. The king has reigned for more than 67 years and is revered by the masses. The day-to-day running of the government, however, is the responsibility of the elected prime minister and the cabinet of ministers. Elections are due by July 2015.
Asia Credit Compendium 2014 Thailand (Baa1/Sta; BBB+/Sta; BBB+/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP* Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Monetary and liquidity indicators Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 200 FX reserves 160 25 120 External debt 20 15 10 40 5 0 2010 2011 2012 2013F 2014F
*For fiscal year ending 30 September; Source: BoT, IMF, Moodys, Standard Chartered Research

2012 371 67.5 5,496 6.4 3.0 148.9 29.8 31.0 18.3 (2.0) (3.2) 114.6 30.9 168.9 1.3 30.63 2.7 0.6 2.9 1.6 130.0 38.0 45.4 181.0 71.8 2.75 15.2 129.5 10.4 35.0 1.9 2013F 380 67.6 5,614 3.0 2.2 147.7 30.7 32.1 18.3 (1.7) (2.6) 117.6 31.0 169.4 1.3 32.00 (1.6) (0.4) 2.8 (0.8) 149.0 39.3 47.0 175.0 85.1 2.25 8.0 129.8 9.5 42.0 NA 2014F 400 67.7 5,910 4.7 2.4 149.8 30.9 32.3 18.6 (1.0) (2.0) 122.4 30.6 164.5 1.2 32.25 (2.4) (0.6) 3.5 0.5 155.0 38.7 58.0 180.0 86.1 2.75 10.0 130.0 12.0 39.4 NA 35 30 -4 2010 2011 2012 2013F 2014F -3 -2 Fiscal balance -1 Primary balance 2 1 0 2010 2011 2012 2013F 2014F 1,000 0 5 4 3 6 4,000 9 8 7 5,000 Real GDP GDP per capita (RHS) 7,000 6,000
2011 334 67.4 4,957 0.1 3.8 149.4 26.6 32.3 18.0 (2.4) (3.6) 97.9 29.3 162.8 1.5 31.69 5.9 3.7 2.7 1.2 104.0 33.7 45.2 175.0 59.4 3.25 16.0 121.2 15.1 35.4 2.2
SOVEREIGNS
3,000 2,000

0
Debt dynamics (%)

Govt. debt/ Revenue (RHS) Govt. debt/ GDP 200 180 160 140 120 100 80 60 40 20 0 2010 2011 2012 2013F 2014F
80
137
Asia Credit Compendium 2014 Vietnam (B2/Sta; BB-/Sta; B+/Sta)

Analysts: Jaiparan Khurana (+65 6596 7251), Bharat Shettigar (+65 6596 8251), Betty Rui Wang (+852 3983 8564)

Vietnam has maintained macroeconomic stability since 2012 in an environment of low inflation and GDP growth. Its external position has improved due to double-digit export growth, non-debt-creating FDI inflows and remittances, and an increase in FX reserves to USD 30bn. While we expect the fiscal deficit to remain wide, the debt burden is comfortable due to concessional funding. However, the banking sectors large NPLs and highly leveraged SOEs create contingent liabilities for the sovereign. These contingent liabilities may materialise in the medium term in the absence of structural reforms. We maintain our Stable credit outlook on Vietnam.

A two-speed economy: The authorities have maintained a prudent policy environment since 2011 to manage the multiple challenges of high inflation, currency pressure and high money supply growth. Economic rebalancing has come at the cost of subdued growth GDP growth was 5.1% in 9M-2013, versus an average 7.0% in 2003-12. Slower growth has increased bank NPLs, which has led to subdued credit growth and pressured the domestic sector, particularly SMEs. Foreign-investment-driven sectors, which are primarily export-oriented, have been the main growth driver. In 10M-2013, disbursed FDI rose 6.4% to USD 9.6bn and exports rose 16.7%. We expect a moderate growth rebound to 5.5% in 2014, with average inflation steady at 6.8% and real interest rates staying positive. External position has strengthened: Given moderating import demand and tight local credit conditions, Vietnam posted a current account surplus in 2012 after a decade of large deficits. We expect this trend to continue in 2013, with a likely surplus of 3% of GDP. Vietnams export profile is also shifting from traditional lowend products to higher-end products such as electronics, which bodes well for the medium-term outlook. The current account surplus, along with healthy remittances (over USD 10bn in 2012) and increasing FDI inflows, has strengthened the BoP position. The authorities have also taken measures to curb USD hoarding and dollar demand in the formal sectors of the economy. As a result, FX reserves have risen to c.USD 30bn (USD 12bn in 2010), and the VND has stabilised. That said, the FX reserves cover only around three months of imports and are susceptible to potential capital flight. Fiscal deficit to remain wide: Vietnams fiscal deficit has been 3-5% of GDP in recent years, versus less than 2% before 2008. The deficit has widened as tax breaks and slower growth have affected revenue. However, current expenditure has remained steady; 80% of Vietnams expenditure is current expenditure on wages, subsidies, interest payments, and health and education. We expect the fiscal deficit to remain relatively wide in 2014 as growth remains anaemic, the expenditure base remains sticky and the government plans further tax cuts for large corporates. We expect deficits of 5.5% of GDP in 2013 and 2014. Debt dynamics: While headline government debt is 44% of GDP, Vietnams interest burden is low. Loans from multilateral and bilateral lenders make up 47% of total loans and are under concessional rates with long maturities. While localcurrency debt (48% of total) has a higher interest cost, local banks hold c.80-85% of it. Banking system poses a tail risk: The banking system is weak, with a high NPL ratio of 4.5% (market estimates are as high as 15%) and thin capitalisation. While the establishment of an asset management company is a step in the right direction, we believe it is primarily a liquidity-enhancing mechanism and will not engage in bank recapitalisation. Therefore, it does not fully eliminate contingent liabilities for the sovereign or spillover risks to the broader economy. That said, the government is in the process of merging weaker banks with stronger ones and attracting foreign investment in banks, which, if successful, will be positive. Also, loans to SOEs and real estate and property developers have declined, according to the World Bank. Contingent liabilities from SOEs: Vietnams SOEs have used capital inefficiently, are heavily indebted and have diversified into non-core businesses. SOE bad debts have increased as the economy has slowed and credit growth has moderated; significant reforms are needed to reduce spillover risks to the financial sector and public finances. Progress on SOE reforms has been slow so far; the World Bank estimates that only 12 companies were equitised in 2012 (target: 93). The government guaranteed the USD 626mn debt issued to repay Vinashin debt holders in 2013; the total guaranteed debt of SOEs accounts for 10.5% of GDP.
SOVEREIGNS
Country profile
The Socialist Republic of Vietnam is the easternmost country on the Indochina peninsula in Southeast Asia. Its population of 90mn is the worlds 13th largest. Vietnam is a single-party state controlled by the Communist Party of Vietnam. The country is divided into 58 provinces and five centrally controlled municipalities. Since the enactment of Vietnam's doi moi (renovation) policy in 1986, the authorities have committed to increased economic liberalisation and enacted structural reforms to modernise the economy. The countrys low- to middle-income economy is becoming more diversified and increasingly marketoriented. Vietnam is one of Asias most open economies, with trade representing close to 176% of GDP in 2012.
138
Asia Credit Compendium 2014 Vietnam (B2/Sta; BB-/Sta; B+/Sta)

%, unless otherwise stated Economic indicators Nominal GDP (USD bn) Population (mn) GDP per capita (USD) Real GDP, change Inflation (end-period) Openness of the economy Gross investment/GDP Gross domestic savings/GDP Government finances Govt. revenue/GDP Primary balance/GDP Fiscal balance/GDP Govt. debt (USD bn) Govt. debt/GDP Govt. debt/revenue Govt. FX debt/govt. debt External indicators Exchange rate (end-period) Current account bal. (USD bn) Current account bal./GDP Net FDI/GDP Net portfolio inflows/GDP External debt (USD bn) External debt/GDP ST ext. debt/ext. debt Official FX reserves (USD bn) External debt/FX reserves Policy rate Domestic credit growth Domestic credit/GDP M2 change External Vulnerability Indicator Dollarisation ratio 70 60 50 40 30 20 10 0 2010 2011 2012 2013F 2014F
Source: State Bank of Vietnam, IMF, Moodys, Standard Chartered Research

2012 156 89 1,757 5.3 6.8 175.5 30.5 39.4 22.8 (3.6) (4.8) 67.1 43.0 188.2 55.0 20,843 9.0 6.4 6.5 NA 59.6 38.2 19.0 22.0 270.9 9.0 9.0 102.0 22.4 89.3 NA 2013F 174 90 1,944 5.3 5.8 182.8 31.6 35.5 21.7 (3.8) (5.5) 77.6 44.5 204.6 50.7 21,100 5.2 3.0 6.7 NA 61.2 35.1 16.4 31.0 197.4 7.0 11.5 102.0 14.0 50.6 NA 2014F 196 91 2,161 5.5 7.0 185.0 33.2 33.0 20.7 (3.8) (5.5) 87.3 44.6 215.3 46.5 21,300 8.8 4.5 7.0 NA 63.6 32.5 16.0 35.0 181.8 -4 7.0 13.0 104.0 16.0 37.5 NA 50 -6 2010 2011 2012 2013F 2014F -5 Fiscal balance -3 Primary balance -2 -1 8 7 6 5 4 3 2 500 1 0 2010 2011 2012 2013F 2014F 0 1,000 Real GDP GDP per capita (RHS) 2,000 2,500
2011 136 88 1,543 6.2 18.1 173.8 33.3 32.8 25.3 (2.7) (4.2) 58.7 43.3 170.9 60.9 21,034 (7.5) (5.5) 8.3 (1.6) 57.2 42.2 19.1 13.1 435.5 15.0 13.9 110.0 11.9 77.6 16.8
1,500
SOVEREIGNS

0
Debt dynamics (%)

Govt. debt/ GDP Govt. debt/ Revenue (RHS) 250
External debt
45 40 35 30 25 20
200
150
100
FX reserves
15 10 5 0 2010 2011 2012 2013F 2014F 0 50
139
SOVEREIGNS
140
Credit analysis Banks
Asia Credit Compendium 2014 Agricultural Bank of China Ltd. (A1/Sta; A/Sta; A/Sta)
Analyst: Victor Lohle (+65 6596 8263)

Thanks to its extensive distribution network in rural areas, ABC has one of the strongest funding franchises among Chinas big four banks. ABCs reported credit metrics are slightly weaker than peers because of lower (albeit improving) earnings generation capacity, worse-than-average asset-quality indicators and below-average capital adequacy. Our Negative outlook on ABC reflects concerns that the banks aggressive loan growth in 200910 which was the second fastest among the big four banks could lead to assetquality deterioration.

Strong government support: China has a track record of providing support to its large financial institutions. ABC was the last of the countrys large banks to be restructured, and its IPO was in mid-2010. In 2008, as part of the clean-up exercise in preparation for the IPO, ABC received CNY 130bn of capital injections from the government. CNY 816bn of non-performing assets (including CNY 767bn of loans, or c.28% of its total end-2007 loans) were removed and transferred to the MoF. ABCs investment in MoF receivables and special China Government Bonds related to the restructuring amounted to CNY 486bn at end-June 2013 (61% of equity). Given its position as one of the largest state-owned banks, ABC enjoys strong implicit support, in our view. Stronger funding base than peers: ABC is the main commercial bank in rural areas, and it therefore has a particularly strong and stable deposit base. Customer deposits accounted for 88% of total funding at end-June 2013, with customer deposits sourced from rural areas accounting for c.42% of customer deposits. Also, the bank has a slightly higher percentage of low-cost CASA deposits (52% at endJune 2013) than peers, while its deposit base is more geared towards retail deposits (59% at end-June 2013) than corporate deposits. This has historically led to a lower cost of funding than for the other large banks. In an environment of strong competition for deposits, this benefits ABC, as there is less competition in rural areas. Also, it enables the bank to rely less on wealth management products. ABC also has the lowest LDR among the big four banks (60% at end -September 2013, versus an average of 65% for the other three). Asset quality deteriorating: As a state-owned bank, ABC needs to balance its commercial interests with the governments broader development objectives, particularly in rural areas. County loans accounted for 32% of total loans at endSeptember 2013, up from 27% at end-2008. Rapid loan growth during the credit boom in 2009-10, coupled with high exposure to potentially troublesome sectors, could lead to asset-quality deterioration, in our view. On paper, ABCs asset -quality indicators are worse than those of the other three large banks. However, the gap has narrowed in recent years, and there is little difference now between the big four banks. However, the information available is limited, making it difficult to make an accurate assessment or meaningful asset-quality comparisons between the big four banks. Despite an uptick in NPLs in 2013, ABCs disclosed NPL ratio remains low and stood at 1.2% at end-September 2013, with loan-loss coverage of 348%. As with the other large Chinese banks, we are concerned that ABCs reported asset-quality indicators may not reflect the reality on the ground. Profitability is likely to decline: Among Chinas big four banks, ABC is the most dependent on net interest income as a revenue source (78% in 9M-2013 compared with an average of 73% for the other three banks). However, its low cost of funding gives it a competitive advantage, and its NIM is the highest among the big four. Although ABCs profitability has improved in recent years thanks to strong loan growth, it is still slightly below the peer average. This is partly due to belowaverage efficiency (reflecting its larger network) and a historically higher cost of risk. The banks ROA for 9M-2013 was 1.3%. We expect ABCs and other Chinese banks profitability to decline as a result of slower loan growth, margin compression and higher loan-loss provisions. Weaker capital base than peers: ABCs Tier 1 capital ratio stood at 9.3% at end September 2013, with an equity-to-assets ratio of 5.7%, which is below the peer average.
BANKS
Company profile
Agricultural Bank of China Ltd. (ABC) is Chinas third-largest bank, with total assets of CNY 14.6tn (USD 2.4tn) at end-September 2013 and an estimated deposit market share of c.12%. ABC is the only commercial bank in China specialising in agricultural-sector lending, and it is particularly strong in rural areas. Because of this, it has been a key implementation arm for Chinas economic policies in rural areas. With over 23,500 domestic branches, ABC has the countrys most extensive distribution network. The banks IPO was in mid-2010, and as of end-September 2013, it was 82% owned by the Chinese central government through Central Huijin Investment (40%), the Ministry of Finance (MoF, 39%) and the National Council for Social Security Fund (3%).
142
Asia Credit Compendium 2014 Agricultural Bank of China Ltd. (A1/Sta; A/Sta; A/Sta)
Summary financials
2010 Balance sheet (CNY bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.6 15.8 43.8 1.3 26.4 21.4 1.0 2.0 168.1 55.8 5.2 9.8 11.6 2.9 18.1 41.4 1.4 28.9 20.5 1.1 1.5 263.1 58.6 5.6 9.5 11.9 Loan-loss coverage (RHS) 2.8 17.6 43.0 1.5 22.4 20.7 1.2 1.3 326.1 59.2 5.7 9.7 12.6 2.7 19.1 40.5 1.4 15.0 23.3 1.3 1.2 347.6 60.2 5.7 9.3 12.0 1,564,614 1,855,056 2,101,900 2,385,175 10,337 11,678 13,244 14,599 4,788 5,410 6,153 6,802 3,053 3,157 3,666 4,022 9,795 11,028 12,493 13,771 8,888 9,622 10,863 11,803 618 933 1,093 1,336 62 119 193 236 542 650 751 829 242 50 292 (128) 164 (43) 121 95 307 73 380 (157) 222 (64) 158 122 342 83 425 (183) 242 (54) 188 145 276 77 353 (143) 210 (31) 178 138
Overseas and others Personal Corporate
Loans by type, Jun-13 (CNY bn)

2011 2012 9M-13
Discounted bills
2% 4% 28% 66% 0 1,000 2,000 3,000 4,000 Debt 5,000
Funding mix
100% 80% 60% 40% 20% Customer deposits Interbank Repos
Income statement (CNY bn)
BANKS
0% Dec-09 5 4 3 Net interest margin 2 1 2009 2010 2011 2012 9M-13 Dec-10 Dec-11 Dec-12 Sep-13
NIM and average interest earned (%)

Average interest earned
Asset quality (%)

3.5 Impaired-loans ratio 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 400 350 300 250 200 150 100 50 0
Revenue by business segment, H1-13 (CNY bn)

Others Treasury Personal banking Corporate banking 0 50 100 2% 6% 36% 55% 150
Capital adequacy and ROE (%)

20 ROE (RHS) 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13
Source: Company reports, Standard Chartered Research
Corporate loans by sector, Jun-13 (CNY bn)

25 20 15 Wholesale, retail, lodging Transportation and logistics Utilities Construction & real estate Other Manufacturing 0 0 500 1,000 11% 12% 15% 15% 17% 30% 1,500
Tier 2 Tier 1 capital ratio
10 5
143
Asia Credit Compendium 2014 Axis Bank Ltd. (Baa2/Sta; BBB-/Neg; BBB-/Sta)
Analyst: Simrin Sandhu (+65 6596 6281)

A strong deposit base, healthy profitability, a low-cost funding profile, and an improved capital base underpin Axis Banks credit profile. After many years of aggressive network expansion the pace of growth has moderated, although it is likely to remain above the system average. Following equity issuance in early 2013, the banks capital ratios are now among the best in the system. Reported asset quality metrics are stronger than most peers. Given aggressive growth and relatively high exposure to stressed sectors like infrastructure and power, we anticipate some deterioration in asset quality going forward. We therefore maintain our Negative outlook on the credit.

Emerging from an aggressive growth phase: Axis Banks growth rates have historically been more aggressive than those of peers in the Indian banking sector. Its loan book expanded at a CAGR of 48% between FY05-FY11, in line with its network expansion. However, growth has recently moderated to the 16-19% p.a. range. Going forward, the bank aims to keep loan growth above the industry average but less aggressive than in the past decade. Strong corporate banking franchise: Axis Banks core strength is its strong expertise in corporate banking (especially in the large and mid-size corporate segments) and local-currency debt capital markets. It is a dominant player in the placement and syndication of local-currency debt. The large and mid-sized corporate segment makes up c.48% of the banks loans, and SMEs make up another 15% (as of September 2013). Its international business caters to the needs of Indian corporates overseas and is relatively small (less than 15% of loans, versus 27% for ICICI). The bank views its overseas operations as mostly demanddriven and does not anticipate material growth in the share of the overseas book. Focus on strengthening retail franchise: Increasing its market share in the retail segment is a strategic focus for the bank. Retail loans have grown strongly in the past few years and accounted for 30% of loans as of September 2013 (compared to 53% for HDFC Bank and 36% for ICICI). Housing and auto loans dominate the retail loan book, accounting for 64% and 11%, respectively. Secured loans as a whole account for 86% of the retail portfolio. Strong deposit franchise keeps funding costs low: Axis CASA deposit share is strong, at 43% of total deposits as of September 2013 (comparable to ICICI and slightly lower than HDFC Bank). The bank has worked on increasing its share of retail term deposits in the past two years; they now account for 50% of term deposits. Depositor concentration is moderate (the 20 largest depositors made up c.14% of total deposits at end-March 2013) but is higher than for private-sector peers. Deposit competition is likely to increase, but we do not expect much deterioration in the banks funding profile. Asset quality could weaken: Axis reported asset quality is stronger than tha t of most peers (except HDFC Bank). While still at a moderate level, the NPL ratio has been trending up, as has the restructured loan portfolio (together c.3.4% of loans as of September 2013). Loan-loss coverage has also declined (69% at endSeptember 2013). We see risks arising from loan growth well above the system average from FY05-FY11 and higher infrastructure and power-sector exposure than private-sector peers. These sectors accounted for c.18% of total exposure (including non-funded exposure) as of September 2013. Only c.39% of the power portfolio comprises operational assets, all of which are performing. Healthy profitability: A combination of low-cost funding and healthy fee income support the banks profitability. NIMs have improved in the past 18 months and are above the sector average. Fee income is diversified and accounted for 29% of operating revenue in H1-FY14. Despite continuing investments in branch infrastructure its branch network has almost quadrupled since March 2007 Axis has contained costs. However, we see limited upside to profitability due to pressures from higher credit costs. Improved capital base: Axis Banks Tier 1 capital ratio of 11.7% (as of September 2013) is among the best in the sector; the bank raised INR 55.37bn of equity in February 2013. However, weakening asset quality in light of stressed sector exposures could negatively affect capital buffers.
BANKS
Company profile
With assets of INR 3.5tn (USD 56.1bn) as of September 2013, Axis Bank (formerly UTI Bank) is Indias third-largest private bank and the eighth-largest in the system. It has a market share of c.3% of loans. It has a pan-Indian presence, with a network of 2,225 branches and the largest ATM network in the private sector. About half of its loans are to large and mid-sized corporates. Its international presence is small compared to peers like ICICI. Axis Bank is c.34% owned by government-related institutions (including stakes held by SUUTI and LIC, both founders of the bank in 1994). Foreign international investors held 43.4% as of September 2013. The bank bought the equities and investment banking businesses of financial services firm Enam Securities in 2012.
144
Asia Credit Compendium 2014 Axis Bank Ltd. (Baa2/Sta; BBB-/Neg; BBB-/Sta)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.2 30.0 42.7 2.3 20.0 19.3 1.6 1.1 74.3 75.9 7.8 9.4 12.7 3.1 32.3 44.7 2.3 15.4 20.3 1.6 1.1 73.8 77.7 8.0 9.5 13.7 3.2 31.0 42.6 2.2 18.8 18.5 1.7 1.2 67.0 78.6 9.7 12.2 17.0 3.5 29.4 40.2 2.2 25.0 16.0 1.6 1.3 69.3 79.6 10.3 11.7 15.9 65,630 46,321 111,951 (47,794) 64,157 (12,800) 51,357 33,885 80,177 54,202 134,380 (60,071) 74,309 (11,430) 62,878 42,422 96,663 65,511 162,174 (69,142) 93,031 (17,504) 75,527 51,795 58,019 35,474 93,493 (37,559) 55,934 (13,997) 41,936 27,712 54,438 2,427 1,424 720 2,237 1,892 105 263 190 56,142 2,856 1,698 932 2,628 2,201 126 341 228 62,741 3,406 1,970 1,137 3,075 2,526 203 440 331 56,079 3,514 2,013 1,184 3,151 2,554 NA 479 362 FY12 FY13 H1-FY14
Loans by borrower type, Sep-13 (INR bn)

Agriculture SME Retail Large and mid-sized corporate 0 6% 15% 30% 48% 100 200 300 400 500 600 700 800 900 1,000
Funding mix
100% 80% 60% 40% 20% 0% Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Current deposits Savings deposits Time deposits Debt
BANKS

10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14 Net interest margin Average interest earned
Asset quality (%)

2.5 2.0 1.5 1.0 0.5 0.0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Loan-loss coverage (RHS) Std. restructured loans-to-loans* NPL ratio 76 74 72 70 68 66 64 62
Gross revenue by business segment, H1-FY14 (INR mn) **

Other Retail Corporate/wholesale Treasury 0 50,000 1% 24% 24% 52% 100,000 150,000 200,000 250,000

20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Tier 1 capital ratio 10 5 0 Tier 2 capital 25 ROE (RHS) 20 15
Revenue by type of income, H1-FY14 (INR mn)

Others 9%
Fees/commissions
29%
Net interest income 0
62% 10,000 20,000 30,000 40,000 50,000 60,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013; *comparable data not available for FY10-FY11; **before inter-segment adjustment; Source: Company reports, Standard Chartered Research
145
Asia Credit Compendium 2014 Bangkok Bank PCL (Baa1/Sta; BBB+/Sta; BBB+/Sta)
Analyst: Nikolai Jenkins (+65 6596 8259)

BBL benefits from its dominant size (though it has lost market share in lending) and conservative management. It has a cautious approach to growth (mainly organic) and a stable performance record. Assetquality strains should remain benign given its more measured pace of lending relative to peers and healthy reserves. Although its loans are more geographically diverse than peers, its domestic loans are concentrated among large corporates, resulting in the weakest NIM among peers and concentration risks. Although its funding profile is sound, backed by low-cost retail deposits, its funding foreign-currency sensitivity is the highest among peers. A strong Tier 1 ratio (the best among its peers) is a key supportive factor.

Dominant bank: BBL is the largest bank in Thailand by assets and deposits, though it competes closely with the other big four banks . Similar to KTB and SCB, it has a c.16% loan-market share. The bank has relinquished its dominant share of the loan market as its close peers have pursued faster credit growth (primarily to the consumer segment). BBL is the market leader among Thai banks in international lending (15% of its loans), primarily serving the ongoing overseas expansion of Thai corporate customers. Even with no government ownership, BBL is systemically critical, in our view. Despite risks associated with rising household leverage and domestic politics, we expect BBLs credit profile to remain stable due to Thailands underlying economic health. Focus on large corporates and SMEs: In Thailand, BBL focuses on large corporates, which comprise almost half of its total loans. As a result, concentration risks (which may lead to lumpiness in loan-loss provisions) are higher than peers. Loans to SMEs represent 28% of total loans, and could potentially be the first to experience stress during an economic slowdown. Loans to the manufacturing segment, 49% of total loans, could also be subject to deterioration. The bank has a relatively weak market share in the consumer segment, a reflection of peers recent strong growth. Its consumer lending is primarily in the form of lower-risk mortgage loans, which comprise 81% of loans to the sector. Stable asset quality: BBL has historically reported marginally higher NPL ratios than its peers (mainly due to slow resolution of legacy NPLs), but significantly higher reserve coverage. Although NPL formation turned positive in the three through September 2013 (a trend experienced across the sector), its NPL ratio and ratio of provisions to pre-provision profits have remained stable at historically low levels. The banks more conservative pace of lending compared to peers is also positive for asset quality. Profitability to remain under pressure: Since its lending is predominantly to lower-yielding corporates, BBLs NIM trails that of peers. Although BBL has consistently reported the lowest LDR among peers (90.2% at end-September 2013), its low-cost deposit base is also the lowest, at 43% of total deposits. Further NIM compression is expected as competition for deposits continues to intensify. BBL has successfully supplemented its NII with stable fee income, though its overall proportion of pre-provision profits has remained largely unchanged. Above-average reliance on foreign-currency wholesale funding: As a result of its above-average international presence, BBLs foreign-currency loans comprise a substantial 22% of total loans (versus 7% for each of its peers), bringing its foreigncurrency LDR to 204%. While more stable medium- to long-term foreign currencydenominated bonds meet a third of its foreign-currency lending needs, nearly a fifth of BBLs foreign-currency loans appear to be funded via more confidence-sensitive interbank sources or other means. Superior capital adequacy: BBL has the strongest capitalisation among the big four banks, with a Tier 1 ratio of 15.0% at end-September 2013 (versus 10-13% for the other three). BBL benefited more than its peers from the shift to Basel III earlier in 2013, primarily due to the inclusion in reserves of unrealised gains on available-for-sale securities, now included as part of core Tier 1 capital. Its equity/assets ratio also improved (albeit more modestly) and is the highest among the big four, at 11.6% at end-September 2013.
BANKS
Company profile
Established in 1944 by the Sophonpanich family, Bangkok Bank (BBL) is Thailands largest commercial bank by assets. At endSeptember 2013, it had assets of THB 2.5tn (USD 79bn) and a c.16% loan-market share. It has a domestic network of over 1,100 branches, and 25 offshore branches/offices in 13 countries, mainly in Asia, including a China subsidiary (foreign loans comprise 22% of loans, of which 70% are in USD). BBL is a full-service bank, but its mainstay is lending to large domestic corporates (46% of loans). The banks shares are widely held, and it has subsidiaries engaged in asset management and securities. The founding familys shareholding fell after the 1997 crisis, but it maintains management influence.
146
Asia Credit Compendium 2014 Bangkok Bank PCL (Baa1/Sta; BBB+/Sta; BBB+/Sta)
Summary financials
2010 Balance sheet (THB bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (THB bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.9 21.7 47.5 2.0 18.2 11.7 1.3 3.6 158.9 90.3 11.9 12.5 16.1 2.7 22.0 43.8 1.8 26.0 11.6 1.4 2.9 198.9 92.9 11.6 12.2 15.4 2.5 22.4 44.3 1.7 15.2 12.8 1.5 2.6 206.9 87.7 11.2 12.8 17.2 Loan-loss coverage (RHS) 2.4 23.2 39.5 1.5 16.3 13.8 1.6 2.8 200.7 90.2 11.6 15.0 17.6 52.4 26.7 79.0 (37.5) 41.5 (7.6) 36.3 24.8 52.7 29.5 82.2 (36.1) 46.2 (12.0) 34.1 27.7 55.0 30.5 85.4 (37.9) 47.6 (7.2) 40.3 33.1 42.0 27.4 69.4 (27.4) 42.0 (6.9) 35.2 28.3 100% 80% 60% 40% 20% 64,817 1,950 1,186 300 1,718 1,394 132 130 231 66,801 2,107 1,390 338 1,862 1,588 91 117 245 79,140 2,421 1,521 424 2,149 1,835 127 109 272 79,140 2,472 1,595 385 2,186 1,872 124 103 287 Housing/mortgage International SME Corporates 0 100 200 300 Debt 400 500 600 Other 700 9% 15% 28% 46% 800 2011 2012 9M-13
Loans by borrower type, Dec-12 (THB bn)

Others 2%
Funding mix
Deposits Interbank
BANKS
0% Dec-09 5 4 3 2 1 0 2009 2010 2011 2012 9M-13 Net interest margin Dec-10 Dec-11 Dec-12 Sep-13

Asset quality (%)

7 6 5 4 3 2 1 0 Dec-09 20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13
Revenue by type of income, 9M-13 (THB bn)

250 200 150 100 Trading Fees/commissions Net interest 0 100 200 300 400 10% 23% 61% 500 Other 6%
'special mention' NPL ratio
NPL ratio
50 0
Dec-10
Dec-11
Dec-12
Sep-13 16 14 12 10 8 15 10 5 0 -5 Dec-09 20

ROE (RHS) Tier 2 capital
Loan growth and LDR (y/y, %)

Loan-todeposit (RHS) 94 92 90 88 86 84 82 Loan growth Dec-10 Dec-11 Dec-12 Sep-13 80 78
Tier 1 capital ratio
6 4 2 0
147
Asia Credit Compendium 2014 Bank Negara Indonesia PT (Baa3/Sta; BB/Sta; BBB-/Sta)

BNI is a leading Indonesian commercial bank and is majority government-owned. Although its fundamental credit metrics are weaker than peers, partly reflecting its former role as a development bank, its profile has improved markedly in recent years. Problematic legacy assetquality issues remain on its books, but these have improved in the past several years. Its loan growth has generally been lower than the overall banking system. While asset quality will remain under pressure, the bank should be able to absorb near-term stress through its ample earnings base. A large low-cost deposit base and healthy liquidity also underpin our Stable outlook, with which we initiate coverage of BNI.

Good market position and government ownership: BNI is Indonesias fourthlargest bank by assets, holding 8% of system assets and deposits. Although primarily a corporate-focused lender (44% of end-September 2013 loans), it also has a sizeable SME lending franchise (28% of loans), which provides diversification benefits. The Republic of Indonesia is its 60% shareholder given its legacy role as a development bank and its government-led recapitalisation in the wake of the Asian financial crisis. In light of its size and partial government ownership, the bank is systemically important, in our view. Asset quality is weaker than its peers, but has improved: BNIs loan asset quality is weaker than its peers, primarily due to legacy exposures linked to its former policy role. Including performing restructured loans, the distressed loan ratio stood at 4.7% at end-September 2013. This is a considerable improvement from 12.7% at end-2009, although much of the improvement is attributable to loan growth. Loan growth has been lower than the banking system average since 2008, with the exception of 2012. BNI intends to exceed banking-system loan growth in 2013. The banks existing asset-quality stress appears within its SME lending exposures, which reported an overall NPL ratio of 5.1% at end-September 2013. Nevertheless, the banks exposure to other vulnerable economic sectors is manageable, in our view. Foreign-currency loans declined to 14% of total loans at end-September 2013, down from 21% at end-2008. Although we expect asset quality to remain under pressure due to challenges facing the domestic operating environment, the banks adequate profitability and reserve buffers should allow it to absorb any near-term stresses through earnings rather than capital. Robust funding and liquidity profile: BNI benefits from ample customer deposits, which provided 90% of total funding at end-September 2013. Low-cost current and savings accounts represent 68% of total deposits, which helps offset BNIs comparatively weaker operating efficiency. As a result of loan growth in recent years, the banks LDR crept up to 83% at end -September 2013 from a very low 60% at end-2009. This falls below the central banks upper band of 92% and appears healthy on a global basis. The banks liquidity is very good, with liquid balances and government securities comprising a sizeable 36% of total deposits. The foreign currency LDR was a conservative 64% at end-September 2013. Robust earnings, but structurally weaker than peers: BNIs profitability has improved substantially in recent years, primarily due to declining provisions and some NIM improvements. In 9M-2013, the NIM was 5.5% and ROA was 2.5% compared with 5.1% and 1.2%, respectively, in 2009. Nevertheless, profitability has historically trailed that of its peers as a result of high provisions and a lending tilt towards lower-yielding corporate borrowers. Additionally, the banks cost base is also higher than peers, and its fee-earning ability (primarily via traditional banking fees and modest insurance-related income) is fairly limited. Nevertheless, the banks growth in the higher-yielding consumer and SME businesses should gradually improve margins. Capital could be pressured by loan growth: The banks rights issue in 2010 significantly boosted its capitalisation metrics. However, its metrics remain on a downward trajectory as the bank pursues its expansionary objectives (the Tier 1 ratio declined to 14.3% at end-September 2013 from 15.2% at end-2012). Nevertheless, capitalisation is adequate and, in our view, could be bolstered by the banks dominant shareholder, the Republic of Indonesia.
BANKS
Company profile
Bank Negara Indonesia (BNI) is Indonesias fourth-largest bank, holding 8% of system deposits and assets (IDR 362tn/USD 33bn at end-September 2013). It had 1,080 domestic branches and subbranches as of end-September 2013, and six overseas offices. Established in 1946 as the nations central bank, BNI was converted to a development bank soon thereafter, and to a commercial bank in the mid-1990s. Since its recapitalisation by the government during the Asian financial crisis, the government has a 60% ownership stake. Primarily a corporate lender, BNI also has a sizeable SME lending franchise. It plans to grow its mortgage and credit card lending, where it holds an 11-12% domestic market share.
148
Asia Credit Compendium 2014 Bank Negara Indonesia PT (Baa3/Sta; BB/Sta; BBB-/Sta)
Summary financials
2010 Balance sheet (IDR bn) Total assets (USD bn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROA ROE Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 5.1 19.8 38.7 3.1 31.5 1.7 15.7 4.2 121.0 67.0 13.3 16.6 18.6 5.0 17.8 44.1 3.3 20.8 2.1 16.4 3.6 119.0 68.0 12.7 15.9 17.6 5.0 18.2 44.0 3.3 18.9 2.2 17.3 2.8 123.0 75.0 13.1 15.2 16.7 5.5 19.1 40.1 2.4 19.5 2.5 19.5 2.4 123.0 83.0 12.6 14.3 15.7 130 Loan-loss coverage (RHS) 110 90 70 NPL ratio Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 50 30 27 248,581 129,400 45,762 215,431 194,375 7,309 5,473 33,150 11,738 7,061 18,799 (7,278) 11,521 (3,629) 5,485 4,102 33 299,058 156,505 44,610 261,215 231,296 13,659 8,726 37,843 13,196 7,601 20,797 (9,172) 11,626 (2,421) 7,461 5,808 33 333,304 193,835 48,386 289,778 257,661 10,595 13,519 43,525 15,459 8,446 23,905 (10,521) 13,384 (2,525) 8,900 7,048 33 362,422 227,856 52,570 316,730 275,632 13,943 17,768 45,693 13,821 7,146 20,967 (8,402) 12,565 (2,447) 8,113 6,539 Subsidiaries Consumer SMEs Corporate 0 5% 21% 28% 44% 20,000 40,000 60,000 80,000 100,000 120,000 Interbank Debt 2011 2012 Sep-13
Loans by borrower type, Sep-13 (IDR bn)

International 3%
Funding mix
100% 80% 60% 40% 20% Customer deposits
Income statement (IDR bn)
BANKS
0% Dec-09 10 8 6 4 2 0 2009 2010 2011 2012 9M-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Sep-13
Asset quality (%)

14 12 10 8 6 4 2 0 Distressed ratio*
Revenue contribution, 9M-13 (IDR bn)

Investment gains/losses Other Fee income (net) Net interest income 0 5,000 10,000 5% 10% 19% 66% 15,000

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 1 capital ratio 10.0 5.0 0.0 Tier 2 ROE (RHS) 25.0 20.0 15.0
Loans by economic sector, Sep-13 (IDR bn)

Mining Construction Utilities Agriculture Logistics Business services Commerce Manufacturing Others 0 5% 5% 5% 8% 8% 9% 16% 18% 26% 20,000 40,000 60,000 80,000
*Note: Includes performing and special-mention restructured loans; Source: Company reports, Standard Chartered Research
149
Asia Credit Compendium 2014 Bank of Baroda (Baa3/Sta; NR; BBB-/Sta)


Bank of Barodas credit profile is underpinned by its strong franchise, particularly in western India. The bank is more diversified than a number of peers and has a substantial international presence. Its funding profile is sound, supported by a low-cost deposit base. BOBs profitability, while better than public-sector peers, has weakened and we do not foresee significant improvement amid lower NIMs and rising credit costs. Asset quality has also deteriorated in the current economic down-cycle and is likely to remain under pressure. Accordingly, we maintain our Negative outlook on the credit. That said, we expect the bank to continue to receive capital support given its size and government ownership.

Strong corporate franchise; focus is now on retail: BOB has a strong franchise given its position as Indias third-largest bank and its countrywide presence. Its branch network has grown more than 50% in the past five years and is biased towards western India (Gujarat, Maharashtra and Rajasthan together account for about 42% of its branches). The bank has historically been a corporate lender but is now focusing on increasing its retail market share. The retail book (c.17% of domestic loans as of September 2013) is small compared to public-sector peers like SBI, although it grew 20% y/y in Q2-FY14. The SME segment has also grown strongly and accounts for c.22% of domestic loans. The bank has cut lending rates to attract customers in this segment, which we believe could pose some risks going forward. Despite the pick-up in the retail and SME segments, overall loan growth has moderated (16% y/y in Q2-FY14) amid muted corporate lending. Looking ahead, the bank seeks to maintain growth slightly above system levels. Large overseas book: BOB, like state-owned peers SBI and BOI, has sizeable international operations; its international business accounted for 32% of loans and 25% of gross profit in H1-FY14. The bank focuses on India-linked trade finance (46% of overseas loans) and loans to fund Indian corporates' foreign-currency borrowing needs (c.29% of foreign loans). While international banking typically generates lower NIMs than the domestic business, better cost efficiency and strong fee income make this business quite profitable. BOBs foreign -currency loan-todeposit ratio is better than peers (70% versus 223% for SBI as of Q2 -FY14). Asset-quality pressure likely to persist: As with other Indian public-sector banks, BOBs asset quality has deteriorated amid the ongoing economic down cycle. NPL ratios (3.2% gross NPL ratio as of September 2013) have been increasing in both the domestic (3.8%) and the international (1.8%) books. The large/mid-sized corporate segment, which accounts for c.32% of domestic loans, has seen a sharp deterioration in asset quality the gross NPL ratio has risen almost 4ppt in the past year to 5.6%. The banks exposure to the iron and steel sector in particular is weighing on NPLs. Restructured loans are also rising and were 6.3% of gross loans as of September 2013. Against a backdrop of weakening asset quality, loan-loss coverage has declined steadily and is low compared to peers (42% as of September 2013). While management expects asset-quality stress to have peaked in Q2-FY14, we are more cautious given the large restructuring pipeline (INR 15-20bn) and the still-weak operating environment. Profitability to remain muted: NIM has been under pressure in recent quarters, with declining yields on both domestic and international advances. While BOB suffers from lower income diversity and weaker fee-based income than privatesector banks, its fee-based income grew strongly in H1-FY14, driven by the international business. We expect profitability to remain muted amid intensifying loan competition and higher credit and operating costs. Stable funding profile: Deposits account for over 90% of BOBs funding mix. Managements focus on reducing bulk deposits has supported the banks funding profile, as has the improvement in the domestic CASA ratio (c.33% as of September 2013). With easing domestic loan growth, the banks loan -to-deposit ratio has moderated to c.70% from c.75% in FY11-FY12. Moderate capitalisation: BOBs Tier 1 ratio (9.3% as of September 2013) is better than many state-owned peers but low compared to private-sector banks (and by international standards). Given its size and state ownership, we expect the bank to receive capital support from the government, as it has in the past (the government approved an INR 5.5bn equity infusion for BOB in October 2013).
150
BANKS
Company profile
With assets of INR 5.6tn (USD 90bn) as of September 2013, Bank of Baroda (BOB) is Indias thirdlargest bank, with a c.6% share of loans. It has a nationwide network of 4,483 branches, with a bias towards western and northern India, and 35% of its branches are in rural areas. It is predominantly a corporate-sector lender; 32% of its domestic loans are to large and medium-sized corporates and 22% are to SMEs. The bank also has a large international presence (101 offices in 24 countries), accounting for 32% of loans as of September 2013. The government owns 55.4% of the bank (statutory requirement of minimum 51% government ownership). Founded in 1908 in Baroda as a private bank, BOB was nationalised in 1969 with 13 other banks.
Asia Credit Compendium 2014 Bank of Baroda (Baa3/Sta; NR; BBB-/Sta)

Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.8 8.8 39.9 1.5 19.1 23.5 1.3 1.4 74.9 75.6 5.9 10.0 14.5 2.6 8.9 37.5 1.3 29.8 20.6 1.2 1.5 65.4 75.4 6.1 10.8 14.7 2.3 8.4 39.8 1.2 46.3 15.1 0.9 2.4 47.5 70.1 5.8 10.1 13.3 2.1 8.7 43.1 1.2 41.3 13.8 0.8 3.2 42.0 71.0 6.3 9.3 12.1 88,023 28,092 116,114 (46,298) 69,816 (13,313) 56,503 42,417 103,170 34,223 137,393 (51,587) 85,806 (25,548) 60,258 50,070 113,153 36,306 149,459 (59,467) 89,992 (41,679) 48,312 44,807 57,839 22,044 79,883 (34,432) 45,451 (18,787) 26,664 23,360 100% 80% 60% 40% 20% 80,385 3,584 2,287 714 3,374 3,054 420 223 210 87,923 4,473 2,874 832 4,198 3,849 542 236 275 100,799 5,471 3,282 1,214 5,152 4,739 742 266 320 89,862 5,630 3,399 1,118 5,275 4,849 NA 286 355 Retail SME Overseas Domestic corp. 0 200 400 600 800 1,000 12% 15% 32% 34% 1,200 FY12 FY13 H1-FY14

Agriculture 8%
Funding mix
Current deposits Savings deposits Time deposits Debt
BANKS
0% Mar-10 Mar-11 Mar-12 Mar-13 Sep-13
NIM and average interest earned

10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14 Net interest margin Average interest earned
Asset quality (%)

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Mar-10 20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Tier 2 capital Tier 1 capital ratio Mar-11 ROE(RHS) Mar-12 Mar-13 Sep-13 25 20 15 NPL ratio Loan-loss coverage (RHS) Std. restructured loans-to-loans* 80 70 60 50 40 30 20 10 0
Gross revenue by business segment, H1-FY14 (INR mn)

Other Retail Treasury Wholesale 0 12% 24% 27% 37% 14,000 28,000 42,000 56,000 70,000 84,000

Fees/commissions 9%
Other 10 5 0 0 Net interest income
19%
72% 10,000 20,000 30,000 40,000 50,000 60,000
Note: Financial year ends 31-March, H1-FY14 ended 30 September 2013;*Comparable data not available for FY10-FY11; Source: Company reports, Standard Chartered Research
151
Asia Credit Compendium 2014 Bank of China (Hong Kong) Ltd. (Aa3/Sta; A+/Sta; A/Sta)

BOCHKs credit profile benefits from its large size, its strong position in the Hong Kong banking market and linkages with its mainland Chinese parent, BOC (A1/Sta; A/Sta; A/Sta). BOCHKs fundamentals are underpinned by reasonable earnings-generation capacity, a strong retail funding base and robust capital adequacy. However, asset quality in the mainland is deteriorating and is likely to deteriorate in Hong Kong as growth slows and interest rates eventually increase. As a result, we are changing our outlook to Negative from Stable. However, we expect the banks fundamentals to deteriorate only moderately and less than peers.

Strong market position in Hong Kong: With a domestic loan market share of 14%, BOCHK is the second-largest bank in Hong Kong. It is also the dominant residential mortgage lender, with a market share of residential mortgages of c.20% at end-June 2013. On account of its size and role, the bank is systemically important to the Hong Kong banking system, in our view. Also, because of its role and position in Hong Kong, BOCHK is critically important to its mainland Chinese parent, BOC (A1/Sta; A/Sta; A/Sta). Mainland-China exposure: Like some of the other Hong Kong banks, BOCHKs exposure to the mainland increased rapidly after 2009, partly driven by strong demand. However, the rate of loan growth in the mainland has slowed and, as a percentage of total loans, has remained relatively stable at around 17% since 2011. This is considerably lower than that of smaller peers such as Bank of East Asia (BEA) or ICBC Asia. Unlike competitors such as BEAs, BOCHKs mainland growth strategy complements its parents overall business strategy, as i ts mainland customer base is dominated by domestic mainland accounts (as opposed to Hong Kong customers). High real estate exposure: Property-related loans represented almost 55% of BOCHKs Hong Kong loan portfolio at end-June 2013. Of this, approximately 63% was in the form of residential mortgages and the remainder in the form of property development and investment loans. Owing to rising home prices since 2009, the Hong Kong regulator has taken steps to control consumer leverage, and the property market has begun to cool down. We believe that higher interest rates, coupled with slower growth in Hong Kong, could lead to a further softening of the property market. Although household debt to GDP has reached record highs (62% at end-June 2013), loan-to-value ratios on mortgages tend to be manageable (5060%). This provides a buffer in case of a stronger-than-expected property market downturn. Asset quality at cyclical lows: BOCHKs asset-quality indicators have historically been better than the peer average. The banks NPL ratio stood at 0.2%, with loan loss cover of 194% at end-June 2013. Although asset-quality indicators of Hong Kong banks are currently strong, the asset-quality cycle in China has turned, in our view. In Hong Kong, slower economic growth and eventually higher interest rates are likely to be the catalysts for asset-quality deterioration. Strong funding base: Its large branch network in Hong Kong provides BOCHK a stronger retail funding base than peers. This translates into lower -than-average funding costs and relatively more stable NIMs during periods of tight liquidity. BOCHKs LDR is among the lowest of Hong Kong banks and stood at 70% at end June 2013. Above-average profitability: Hong Kong banks NIMs are narrow, owing to strong competition, which in turn has affected profitability. BOCHKs NIMs have remained in line with the average, despite its slightly more corporate slant than peers, thanks to its lower-than-average funding costs. This, coupled with better-than-average cost efficiency and lower-than-average provisions, has enabled the bank to report better-than-average profitability indicators in recent years. The banks ROE for H1 2013 was 15%, with an ROA of 1.3%. However, the likelihood of higher credit costs may cap profitability improvements. Robust capital adequacy: BOCHKs capital adequacy has consistently been strong. Its Tier 1 capital ratio stood at 11% at end-June 2013. The slight decline versus end-2012 was driven mainly by higher-risk-weighted assets following the implementation of Basel III.
152
BANKS
Company profile
Bank of China (Hong Kong) (BOCHK) is Hong Kongs secondlargest bank, with total assets of HKD 1.8tn (USD 237bn) and a 14% market share of loans at end-June 2013. It is one of Hong Kongs three note-issuing banks and the designated clearing bank for CNY trade settlement. Although the bank provides a broad range of products, its loan book is geared more towards corporate customers (70% of the banks overall loan portfolio at end-June 2013). The bank was created in 2001 through a merger of 12 Hong Kong banks belonging to Bank of China (BOC) and is 66% owned by BOC. BOCHK operates through over 260 branches in Hong Kong and over 30 branches on the mainland.
Asia Credit Compendium 2014 Bank of China (Hong Kong) Ltd. (Aa3/Sta; A+/Sta; A/Sta)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.4 19.1 33.0 0.7 (1.6) 14.9 1.2 0.1 266.6 62.8 7.1 11.3 16.1 1.4 20.1 23.8* 0.5* 2.0 16.6 1.2 0.1 398.6 65.9 7.7 12.5 16.9 1.5 15.5 30.3 0.6 3.3 14.9 1.2 0.3 180.4 66.8 8.5 12.3 16.8 1.6 25.6 28.5 0.6 2.6 15.0 1.3 0.2 194.3 70.3 8.5 11.2 16.4 213,441 223,821 236,185 236,532 1,661,040 1,738,510 1,830,763 1,834,661 645,424 755,229 819,739 885,267 464,256 464,828 577,399 532,238 1,542,751 1,605,327 1,675,689 1,678,959 1,027,033 1,145,951 1,226,290 1,259,756 313,784 236,694 179,206 144,667 26,877 34,641 34,678 26,343 118,289 133,183 155,074 155,702 18,734 10,283 29,017 (9,584) 19,433 315 19,742 16,690 21,979 11,103 33,082 (7,862)* 25,220 (506) 24,680 20,813 24,708 12,968 37,676 (11,402) 26,274 (859) 25,521 21,547 13,331 6,676 20,007 (5,692) 14,315 (371) 13,948 11,657 2011 2012 H1-13
Loans by borrower type, Jun-13 (HKD bn)

Credit card Other consumer Others Corporate (property) Resi. mortgage Corporate (others) For use outside HK 0 50 100 Debt 150 200 Interbank 1.2% 2.6% 6.6% 13.2% 22.7% 25.8% 28.0% 250 300
Funding mix
100% 80% 60% 40% 20% Deposits
Income statement (HKD mn)
BANKS
0% Dec-09 2.5 2.0 1.5 1.0 0.5 0.0 2009 2010 2011 2012 H1-13 Net interest margin Dec-10 Dec-11 Dec-12 Jun-13

Asset quality (%)

0.4 0.3 0.2 0.1 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Restructured loans/loans Impaired loans ratio Loan-loss coverage (RHS) 400
Loans by risk domicile, Jun-13 (HKD bn)

Others 300 200 100 0 0 200 400 600 800 Mainland 17% 5%
Hong Kong
78%

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Tier 1 capital ratio Tier 2 capital ROE (RHS) 20
Revenue by type of income, H1-13 (HKD bn)

Other income 15 Trading 10 Fees/commissions 5 Net interest income 0 0 2 4 6 8 10 12 14 67% 26% 6% 2%
*Lehman minibond collateral recoveries worth HKD 2.8bn subtracted from operating expenses; Source: Company reports, Standard Chartered Research
153
Asia Credit Compendium 2014 Bank of China Ltd. (A1/Sta; A/Sta; A/Sta)

BOCs credit profile is underpinned by its position as one of Chinas big four stateowned banks. Along with ICBC, it is also considered to be globally systemically important. BOC has the most diversified franchise among its peers, both by product and geography. Its reported credit metrics are sound, with high profitability, good assetquality indicators and strong capital adequacy. Our Negative outlook reflects concerns that rapid loan growth in 2009-10 which was more aggressive than its peers coupled with its exposure to potentially troublesome sectors, could lead to asset-quality deterioration.

Strong government support: Given BOCs position as one of the largest state owned banks, it enjoys strong implicit support, in our view. In 1998-99, BOC received USD 5.1bn of capital injections from the government and transferred USD 32.3bn of NPLs to Orient Asset Management (Orient). In 2003-04, in preparation for its 2006 IPO, the bank received a further capital injection of USD 22.5bn and transferred USD 11bn of NPLs to asset-management companies. BOCs investment in debt securities issued by Orient to fund the purchase of NPLs from BOC amounted to CNY 160bn at end-June 2013 (18% of equity). Along with ICBC, BOC is classified by the Basel Committee as being globally systemically important. Increasing domestic focus: BOC has historically been the most international of Chinas large state-owned banks. Its Hong Kong subsidiary is the second-largest bank there, and as recently as 2004, Hong Kong and Macau accounted for over 49% of pre-tax profits and over 21% of total assets. However, since the mid-2000s, BOCs growth has been focused on the mainland. Mainland operations accounted for 82% of pre-tax profits in H1-2013 and 80% of loans at end-June 2013. Asset-quality deterioration: Compared to 2009, when the banks loan p ortfolio grew by 50%, the rate of loan growth in recent years has been more moderate (8% in 2012 and 10% in 9M-2013) and in line with the peer group average. Rapid loan growth during the credit boom, coupled with high exposure to potentially troublesome sectors, is likely to eventually lead to asset-quality deterioration, in our view. Although NPLs have increased recently, BOCs asset -quality indicators are optically good and broadly in line with the peer average. The banks disclosed NPL ratio stood at 1% at end-September 2013, with loan-loss coverage of 233%. As with the other Chinese banks, we are concerned that BOCs reported asset -quality indicators might not fully reflect the reality on the ground. Also, the information available is limited, making it difficult to make either an accurate assessment or meaningful comparisons between the big four banks. Weaker funding base than peers: BOCs cost of funding is slightly higher than its peers, as customer deposits account for a smaller percentage of its funding base (82% at end-September 2013). BOC also has a higher percentage of more expensive corporate time deposits. Although the banks LDR is reasonable by international standards, it is the highest among the big four banks (75% versus an average of 64% for the other three). Higher deposit competition is forcing banks to use wealth-management products (WMPs) as a source of funding, which could add to deposit volatility and mask underlying funding trends. We estimate that WMPs represent c.7% of BOCs deposit base, in line with the peer average. Profitability is likely to decline: As is the case with Chinas other banks, net interest income is BOCs main source of revenue (68% in 9M-2013). However, thanks to its greater product diversification, this is lower than the average 75%% for its peers. Higher non-interest income helps to offset the banks historically lower NIM and above-average cost base. We believe profitability will likely decline as a result of higher loan-loss provisions. Also, interest-rate liberalisation in the domestic market is likely to lead to margin compression for all Chinese banks. However, because of its larger overseas business, BOC is likely to experience less margin compression than peers. Capital adequacy: BOCs capital adequacy has declined slightly in 2013 as a result of strong loan growth and the introduction of Basel III. The banks Tier 1 capital ratio stood at 9.5% at end-September 2013, which is slightly below the peer group average, while its equity/assets ratio stood at 6.8%.
BANKS
Company profile
Bank of China (BOC) is Chinas fourth-largest bank, with total assets of CNY 13.6tn (USD 2.2tn) at endSeptember 2013 and an estimated domestic market share of c.10% of loans and deposits. BOC is the most international of Chinas banks and one of the most diversified by revenue. Since the mid-2000s, the banks growth focus has been the domestic market. It offers a full range of financial services, including retail, corporate and investment banking; asset management; and insurance services. BOC is the market leader in foreign exchange and trade finance, with market shares in excess of 20%. It has a network of c.11,400 domestic and c.623 overseas branches. At endSeptember 2013, BOC was 68% owned by the central government through Central Huijin Investment.
154
Asia Credit Compendium 2014 Bank of China Ltd. (A1/Sta; A/Sta; A/Sta)
Summary financials
2010 Balance sheet (CNY bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.1 19.6 44.1 1.3 8.4 18.0 1.1 1.1 196.7 75.6 6.5 10.1 12.6 2.1 19.7 42.8 1.3 10.3 18.2 1.2 1.0 220.7 71.9 6.4 10.1 13.0 2.2 19.1 43.6 1.3 9.4 18.0 1.2 1.0 236.3 74.8 6.8 11.0 13.6 2.2 21.3 40.9 1.3 10.2 18.7 1.3 1.0 232.9 75.0 6.8 9.5 12.4 250 Impaired loans ratio Loan-loss coverage (RHS) Others 200 150 1.0 100 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 50 0 0 50 100 150 200 Hong Kong Mainland 10% 83% Macau/Taiwan 4% 3% 1,583,149 1,879,236 2,012,435 2,225,946 10,460 11,830 12,681 13,625 5,538 6,203 6,710 7,368 2,055 2,001 2,211 2,225 9,784 11,073 11,819 12,699 7,483 8,818 9,174 10,046 1,721 1,718 1,996 1,962 175 197 233 247 676 757 862 926 194 84 278 (122) 155 (13) 142 110 228 101 329 (141) 188 (19) 169 130 257 110 367 (160) 207 (19) 187 146 208 98 306 (125) 181 (18) 162 126
Corporate overseas Personal mainland Corporate mainland

2011 2012 9M-13
Personal overseas
4% 16% 24% 56% 0 1,000 2,000 3,000 4,000 Debt 5,000
Funding mix
BANKS

Asset quality (%)

2.0 1.5
Revenue by region, H1-13 (CNY bn)

20 ROE (RHS) 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

20 15
Utilities Transportation and logistics Construction/ Real estate Others Commerce and services Manufacturing
11% 13% 13% 14% 21% 29% 0 500 1,000 1,500 2,000
10 5 0
155
Asia Credit Compendium 2014 Bank of Communications Co. Ltd. (A3/Sta; A-/Sta; A/Sta)

We initiate coverage of BoCom with a Negative outlook. BoComs overall reported fundamentals are sound, with moderate profitability, low reported NPLs and strong capital adequacy. Our Negative outlook reflects concerns about tightening liquidity conditions and a potential deterioration in asset quality as a result of strong loan growth in recent years and exposure to potentially troublesome sectors. Given the banks slightly weaker funding base, increasing competition for deposits could affect BoCom more than some larger banks.

Systemically important bank: China has a track record of providing support (in 1999 and in the mid-2000s) to its large financial institutions. Given its size and the governments stake, BoCom is a systemically important bank, in our view. In 2004, CNY 41bn of the banks NPLs (equivalent to 6% of its end-2004 total loans) were removed from its balance sheet and sold to Cinda Asset Management Company at 50% of their book value in exchange for Peoples Bank of China bills. BoCom also received a CNY 19.1bn capital injection. Strong loan growth: Like other state-owned banks, BoCom needs to balance its commercial interests with the governments broader development objectives. During the boom period of 2009-10, BoComs loan portfolio grew very fast 38% and 22%, respectively. Although the rate of loan growth has slowed since then, the bank has more than doubled its loan portfolio since 2008. Asset quality deteriorating: Strong loan growth has enabled BoComs and the larger Chinese banks reported asset -quality indicators to improve steadily in recent years. Despite an uptick in NPLs since 2012, BoComs reported NPL ratio remained very low on an absolute basis at 1% at end-September 2013, with loanloss coverage of 218%. However, we are concerned that reported asset-quality indicators may not fully reflect the economic reality on the ground. Given BoComs rapid loan growth in 2009-10 and exposure to potentially troublesome sectors, asset-quality indicators are likely to deteriorate, in our view. However, the information available is limited, making it difficult to make an accurate assessment or meaningful asset-quality comparisons between the large banks. Weaker funding base than the larger banks: Customer deposits are the main source of BoComs funding, accounting for 78% of its total funding at endSeptember 2013. However, this is lower than the average 86% for the large four banks, as BoCom is more reliant on the interbank market. Also, while the large four banks customer deposit mix is split evenly between corporate and retail deposits, BoComs customer deposits are skewed towards corporates (67% of overall customer deposits at end-June 2013). As a result, its cost of funding is higher than for the larger four banks. BoComs LDR is among the highest for the large Chinese banks and stood at 79% at end-September 2013, compared with an average 67% for the large four Chinese banks. Also, on a relative basis, the bank makes greater use of wealth management products (WMPs) as a source of funding than the larger banks. This may add to deposit volatility and mask underlying funding trends. We estimate that WMPs represent c.15-20% of BoComs deposits. Profitability is likely to decline: BoCom is more dependent on interest income than the larger banks (c.80% of revenue versus 74% for the larger banks). In recent years, its profitability has been lower than that of the larger banks, because of slightly narrower margins reflecting a higher cost of funding and higher costs of risk. The banks ROA for 9M-2013 was 1.2%, versus an average of 1.4% for the large four banks. We expect BoComs profitability to deteriorate as a result of slower loan growth, margin compression and higher loan-loss provisions. Strong capital adequacy: Despite steady loan growth, the banks capitaladequacy ratios have remained strong. The banks Tier 1 capital ratio stood at 10.8% at end-September 2013, with an equity-to-assets ratio of 7.1%. This is in line with the average for the large banks. The decline versus end-2012 was mainly the result of Basel III implementation.
BANKS
Company profile
Bank of Communications Co. Ltd. (BoCom) is Chinas fifth-largest bank, with total assets at endSeptember 2013 of CNY 5.8tn (USD 942bn) and an estimated market share of loans and deposits of c.4%. The bank was created in 1908 and is one of Chinas oldest banks. BoCom operates through a network of 2,691 domestic branches and outlets. It is predominantly a corporate bank (c.79% of end-June 2013 loans and 86% of H1-2013 revenue) and has a strong presence in urban areas. In 2004, HSBC became a strategic investor, acquiring a 19.9% stake in BoCom. In 2005, BoCom was listed on the HKSE, making it the first mainland bank to list on a foreign stock exchange. BoCom is 39% owned by the Ministry of Finance and 18.7% by HSBC.
156
Asia Credit Compendium 2014 Bank of Communications Co. Ltd. (A3/Sta; A-/Sta; A/Sta)
Summary financials
2010 Balance sheet (CNY bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (CNY bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.4 13.9 40.0 1.1 20.1 20.2 1.1 1.1 185.8 78.0 5.7 9.6 12.6 2.5 14.7 38.6 1.1 16.2 20.5 1.2 0.9 256.4 78.0 5.9 9.4 12.6 2.5 14.2 38.7 1.2 16.8 17.9 1.2 0.9 250.7 79.0 7.2 11.6 14.5 Loan-loss coverage (RHS) 2.4 15.8 38.6 1.2 17.6 16.4 1.2 1.0 217.5 79.1 7.1 10.8 13.3 300 250 200 150 100 50 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 0 10 20 30 Treasury Corporate banking 28% 58% Others Personal banking 2% 12% 85 19 104 (42) 63 (13) 50 39 103 24 127 (49) 78 (13) 65 51 120 27 148 (57) 90 (15) 75 58 98 26 124 (48) 76 (13) 63 49 100% 80% 60% 40% 20% 598,092 3,952 2,190 815 3,728 2,868 731 0 224 732,514 4,611 2,505 806 4,338 3,283 873 82 273 836,894 5,273 2,880 886 4,892 3,728 966 80 381 942,352 5,768 3,147 1,009 5,357 4,070 1,073 95 411 2011 2012 9M-13
Personal
Loans by type, Sep-13 (CNY bn)
22%
Corporate
78%
500
1,000
1,500
2,000
2,500 Repos
3,000 Debt
Funding mix
Customer deposits Interbank
BANKS
0% Dec-09 6 5 4 3 2 1 0 2009 2010 2011 2012 9M-13 Net interest margin Dec-10 Dec-11 Dec-12 Sep-13

Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Impaired loans ratio

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13
Corporate loans by sector, Sep-13 (CNY bn)

10 ROE (RHS) Tier 2 Tier 1 capital ratio 8 6 4 2 0 Services Utilities Construction & real estate Other Transportation and logistics Wholesale, retail, lodging Manufacturing 0 200,000 400,000 8% 11% 12% 13% 15% 16% 25% 600,000 800,000
157
Asia Credit Compendium 2014 Bank of East Asia Ltd. (A2/Neg; A/Sta; NR)

Our Negative credit view on BEA is underpinned by increasing asset-quality risks. Although profitability is slightly below average, BEAs current financial metrics are sound, supported by sound asset-quality and capitaladequacy indicators. BEA is also one of the longest-standing foreign banks in mainland China, and it has a large presence there. However, it competes with the larger and well-entrenched Chinese banks, which do not always operate on a purely commercial basis. Despite being the largest independent bank in Hong Kong, BEA is a mid-sized player in a saturated and highly competitive market. The potential acquisition of two small Hong Kong independent banks by mainland institutions could exacerbate competitive pressure.

Mid-sized player in Hong Kong; focused on large corporates: BEAs Hong Kong loan portfolio accounted for 43% of total loans at end-June 2013. BEA has the most geographically diversified portfolio among the Hong Kong banks under our coverage. Its Hong Kong loan book (excluding trade finance) is around onethird the size of Bank of China (Hong Kong)s (BOCHKs) Hong Kong book and slightly larger than ICBC Asias. BEAs Hong Kong business is geared towards the corporate sector, which accounted for around two-thirds of its Hong Kong total loans (excluding trade finance) at end-June 2013. Property-related loans represented more than half its Hong Kong corporate loan book, and approximately 55% of total loans in its Hong Kong retail book were residential mortgages. Growing presence in mainland China: Mainland loans made up 46% of BEAs loan book at end-June 2013, up from around 38% at end-2009. China accounted for 40% of H1-2013 revenue and 27% of PBT. BEA has a long operating history in the mainland, having started its business there in 1920. BEAs mainland -China presence today, with 120 outlets, is one of the largest among Hong Kong banks (rivalled only by HSBCs). However, BEA is forced to compete with larger local Chinese banks, which do not always operate on a purely commercial basis. Its mainland book is also geared towards the corporate sector. Property loans accounted for c.36% of mainland loans at end-June 2013. Management plans to mitigate risks in the mainland book by focusing on the more affluent/bigger mainland cities. Asset-quality deterioration: Like the other Hong Kong banks, BEAs asset quality indicators are at cyclical lows. The banks impaired loan ratio stood at 0.3% at end-June 2013, with loan-loss coverage of almost 72%, which is below average. Given the banks large exposure to the mainland and the ongoing asset -quality deterioration there, we believe BEAs asset-quality indicators will deteriorate in the medium term. In Hong Kong, higher interest rates, coupled with slower economic growth, could lead to further softening of the property market and asset-quality deterioration, given BEAs sizeable exposure to property. Above-average cost base affects profitability: The banks profitability indicators are slightly below the Hong Kong average (ROE of 11% and ROA of 1% for H12013). This is mainly due to worse-than-average efficiency ratios, reflecting the cost of expansion into the mainland. However, efficiency measures have improved in recent years. Although the banks cost of funding is higher than average, average interest earned is also higher than average thanks to its sizeable mainland portfolio. As a result, BEAs NIM is broadly in line with the peer average. Like the other Hong Kong banks, BEAs profitability measures have been bolstered by low risk charges in recent years. Rising risk provisions in the medium term are likely affect the banks profitability negatively. Above-average funding costs: BEA has a relatively high-cost deposit base (71% of its deposits at end-June 2013 were more expensive fixed deposits, compared with BOCHKs 48%). Strong loan growth led to a deterioration in the banks LDR in H1-2013, but at 85%, it remains broadly in line with the Hong Kong average. Improved capital adequacy: Historically, BEAs capital has been slightly weaker than most peers. However, thanks to the issuance of shares to Japans Sumitomo Mitsui Banking Corp. in late 2012 (whose stake doubled to 9%), BEAs capital adequacy ratio is now in with the Hong Kong average. Its Tier 1 capital ratio stood at 11% at end-June 2013.
BANKS
Company profile
Bank of East Asia (BEA) is the largest of the mid-sized banks in Hong Kong, with total assets of HKD 697bn (USD 90bn) and a 4% market share of loans at end-June 2013. The bank was set up in 1918 by the grandfather of current Chairman David Li. BEA operates through a network of 88 branches and focuses on large corporates (the majority of whom are in the property business). BEA also has one of the largest branch networks among Hong Kong banks in mainland China (120 outlets). Mainland loans accounted for 46% of total loans at end-June 2013. The banks main shareholders are Spains CaixaBank (16% stake), Malaysias Guoco Group (15%), Japans Sumitomo Mitsui Financial Group (9%) and Hong Kongs Li family (7.5%).
158
Asia Credit Compendium 2014 Bank of East Asia Ltd. (A2/Neg; A/Sta; NR)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (HKD mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.6 26.7 56.9 1.4 5.9 9.7 0.9 0.5 71.7 76.2 9.1 9.8 13.2 1.7 26.6 58.7 1.4 2.4 8.8 0.8 0.5 72.1 74.5 8.5 9.4 13.7 1.5 22.9 53.9 1.3 3.6 10.8 0.9 0.3 83.8 77.6 8.9 10.7 14.3 1.7 23.9 49.7 1.3 4.0 10.8 1.0 0.3 71.7 85.1 9.3 11.1 14.8 90 75 Impaired loans ratio Restructured loans/loans Loan-loss coverage (RHS) 60 45 30 15 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 0 50 100 150 200 Mainland 46% Hong Kong 43% Others 11% 7,543 4,584 12,127 (6,904) 5,223 (306) 5,150 4,303 9,263 4,350 13,613 (7,992) 5,621 (135) 5,751 4,451 9,724 6,454 16,178 (8,725) 7,453 (265) 7,565 6,154 5,664 3,412 9,076 (4,507) 4,569 (183) 4,386 3,430 100% 80% 60% 40% 20% 68,648 534,193 320,040 89,652 485,550 419,833 9,994 23,229 48,643 78,714 611,402 347,950 111,523 559,358 467,354 15,923 34,617 52,044 89,289 692,114 387,273 150,398 630,475 498,770 30,597 50,290 61,639 89,916 697,433 423,823 149,517 632,512 498,026 18,054 59,233 64,921 2011 2012 H1-13

Credit card Other consumer Resi. mortgage Others Corporate (property) Corporate (others) For use outside HK 0 50 Debt 100 150 200 0.9% 4.1% 6.3% 9.8% 12.8% 13.3% 53.0% 250
Funding mix
Deposits Interbank
BANKS
0% Dec-09 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009 2010 2011 2012 H1-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Jun-13
Asset quality (%)

1.2 1.0 0.8 0.6 0.4 0.2 0.0

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13

20 Other 15 Trading 10 Fees/commissions 24% 62% 0 2 4 6 8% 6%
5 Net interest income 0
159
Asia Credit Compendium 2014 Bank of India (Baa3/Sta; BBB-/Neg; NR)


BOI has a well-established franchise with a nationwide presence. It has a stable funding profile, supported by its low-cost deposit base. The banks government ownership and track record of capital injections are supportive. Our Negative outlook reflects concerns about asset quality and weak capitalisation. With relatively high exposure to stressed sectors and low loanloss coverage, we see ongoing headwinds to asset quality. Higher credit costs and intensifying retail loan competition will likely pressure the banks profitability and keep internal capital generation subdued. Given BOIs weak capitalisation in light of Basel III requirements, we anticipate ongoing reliance on capital support from the government.

Strong domestic franchise, significant international operations: As Indias third-largest public-sector bank (after SBI and Bank of Baroda), BOI has a wellestablished nationwide presence. It is largely corporate-focused, with retail loans making up only 11% of domestic loans, versus 17-24% for BOB and SBI. In line with the banks strategy of increasing its retail share, growth in this segment has been strong (24% y/y in Q2-FY14), and home loans account for about half of its retail portfolio. BOI is also among the handful of Indian banks with sizeable international operations (31% of loans as of September 2013). The international business largely focuses on India-linked trade-related products and the foreigncurrency borrowing needs of Indian corporates, and accounted for c.16% of the banks FY13 operating profit. BOIs foreign-currency loan-to-deposit ratio (94%) is weaker than BOBs but better than those of SBI and ICICI. While the banks overall loan growth exceeded most public- and private-sectors peers in Q2-FY14 (29% y/y and 9% q/q), we are sceptical about the sustainability of this growth in light of the weak macro backdrop and potential future asset-quality risks. Management guidance is for loan growth to be at least 3ppt above the system level. Asset quality and loan-loss coverage are concerns: While BOIs gross stressed loan ratio has declined slightly on strong loan growth and recoveries, it remains high at c.8.2% (NPLs plus restructured loans). Furthermore, loan-loss coverage is low at c.38% and is weak relative to peers like SBI and BOB. The bank has substantial exposure to the infrastructure segment, which grew 18% y/y and accounted for 16% of domestic loans as of September 2013. Power-sector loans make up nearly two-thirds of the infrastructure book. Infrastructure also accounts for about 40% of the domestic restructured book and NPLs in this segment are still quite low (under 1%), indicating potential for further stress. Other problematic sectors include aviation (c.15% of domestic restructured loans), textiles, chemicals and metals, where NPL ratios are well above 5%. That said, BOIs overall loan concentration is lower than many peers the top 20 borrowers accounted for c.7% of total exposure as of March 2013. Good funding profile: Deposits account for c.90% of BOIs funding mix, broadly in line with peers. However, its CASA share is only c.30% (versus 43-45% for SBI and the private-sector banks), and increasing this ratio is a management priority. Dependence on bulk deposits is low (c.6% of domestic deposits) and depositor concentration is lower than peers (the top 20 depositors contribute 6.3%). With loan growth outstripping deposit growth in H1-FY14, the banks loan-to-deposit ratio has increased slightly but remains moderate at 72% (domestic). Profitability to remain under pressure: BOIs profitability has historically been slightly weaker than that of other large public-sector banks (average ROA of 0.7% in FY11-FY13, versus 0.9-1.2% for BOB and SBI). While its domestic NIM has been broadly stable over the past few quarters, international NIM has fallen steadily as the yield on advances has declined. Like most public-sector peers, BOI is heavily dependent on interest income, reducing income diversity. We expect profitability to remain muted against a backdrop of intensifying retail competition and high credit costs, resulting in limited internal capital generation. Weak capitalisation: BOIs capitalisation is weak, with a Tier 1 capital ratio of 8.1% (reported under Basel II and after including the INR 10bn capital injection announced by the government in October 2013). This is low even in the Indian context especially in light of weaker internal capital accretion, asset-quality headwinds and Basel III implementation. While we expect the bank to receive ongoing government support, its pressured capital buffer is credit-negative.
160
BANKS
Company profile
With an asset base of INR 5.1tn (USD 81.9bn) as of September 2013, Bank of India (BOI) is Indias fourth-largest bank, with a c.5% market share of loans. It has a nationwide distribution network of over 4,479 branches, c.37% of which are in rural areas. BOI earned 44% and 28% of its FY13 revenue from the wholesale and retail segments, respectively. It has a significant international presence across 20 countries, accounting for c.31% of its loan book as of September 2013. BOI is publicly traded, with 64.1% government ownership (statutory requirement of minimum 51% government ownership). Founded as a privately owned bank in 1906, BOI was nationalised in 1969 along with 13 other banks.
Asia Credit Compendium 2014 Bank of India (Baa3/Sta; BBB-/Neg; NR)

Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.6 11.3 48.5 1.6 35.1 15.8 0.8 2.2 59.6 72.3 4.9 8.3 12.2 2.4 10.9 42.5 1.3 46.6 14.0 0.7 2.3 38.0 78.9 5.5 8.6 12.0 2.2 9.9 41.7 1.3 59.7 12.3 0.7 3.0 32.2 76.5 5.3 8.2 11.0 2.2 9.1 41.7 1.3 45.0 12.6 0.7 2.9 37.7 77.7 5.1 8.1* 10.8 78,107 26,418 104,525 (50,682) 53,842 (18,888) 34,954 24,887 83,134 33,212 116,346 (49,407) 66,939 (31,164) 35,775 26,775 90,240 37,660 127,900 (53,315) 74,585 (44,508) 30,077 27,493 50,642 22,810 73,452 (30,623) 42,829 (19,268) 23,560 15,860 100% 80% 60% 40% 20% 78,765 3,512 2,131 859 3,339 2,989 194 220 173 75,582 3,845 2,488 868 3,636 3,182 386 321 210 83,383 4,526 2,894 946 4,287 3,818 422 354 239 81,883 5,130 3,322 1,074 4,868 4,323 NA 418 263 FY12 FY13 H1-FY14

Home loans Other retail Agriculture MSME Overseas Domestic corp. 0 200 400 600 3% 4% 9% 12% 31% 41% 800 1,000 1,200 1,400 1,600 Time deposits Debt
Funding mix
Current deposits Savings deposits
BANKS
0% Mar-10 10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14 Net interest margin Average interest earned Mar-11 Mar-12 Mar-13 Sep-13
Asset quality (%)

7 6 5 4 3 2 1 0 Mar-10 15 Mar-11 Mar-12 Mar-13 Sep-13 20 0 NPL ratio 20 Loan-loss coverage (RHS) Std. restructured loans-toloans** 80 60

Other Retail 40 Treasury Wholesale 0 20,000 40,000 60,000 80,000 29% 46% 100,000 0% 25%


Fees/commissions 15 10 Other 22% 9%
10 Tier 1 capital ratio Mar-10 Mar-11 Mar-12 Mar-13 Sep-13
5 0
Net interest income 0
69% 10,000 20,000 30,000 40,000 50,000 60,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013;* reported under Basel II and after including the INR 10bn capital injection announced by the government in October 2013; **comparable data not available for FY10-FY11; Source: Company reports, Standard Chartered Research
161
Asia Credit Compendium 2014 Bank Rakyat Indonesia PT (Baa3/Sta; BB+/Sta; BBB-/Sta)

BRI is the most profitable large Indonesian bank, underpinned by its high-margin micro, consumer and SME lending businesses. Its funding profile is strong, benefiting from a vast network of rural and suburban outlets. Although much of its lending is fairly new, its predominant lending segments have been remarkably resilient in terms of asset quality in the past five years. While NPLs appear to be at cyclical lows, BRIs limited exposure to cyclical and exportsensitive sectors provides comfort during the current phase of the credit cycle. Also, its strong earnings accretion and capitalisation metrics (the strongest among peers) underscore our Stable outlook, with which we initiate coverage of BRI.

Dominant market position in micro lending: BRI is the second-largest bank in Indonesia, holding 14% of banking-system deposits and 12% of system loans. The bank has a dominant market share in micro finance (31% of end-September 2013 loans) and is a formidable lender to the consumer and SME segments. In view of the governments 57% ownership stake and BRIs strong domestic presence, we view the bank as systemically important. Highly profitable consumer and micro-lending franchise: BRI is the most profitable large Indonesian bank thanks to the preponderance of higher-yielding micro, SME and consumer loans among its lending exposures (ROE of 29.7% in 9M-2013). Customer deposits (of which 58% are low-cost CASAs) contributed to a strong NIM of 7-9% during each of the past five years. Nevertheless, its stable fee income-earning ability is weak, and its widespread distribution network results in an elevated cost base relative to peers. Resilient asset quality: Despite the banks lending focus towards consumers, SMEs, rural and micro borrowers, asset quality has remained resilient over the past 5+ years. Although strong loan growth has cushioned asset-quality figures (fiveyear CAGR of 23%), loan growth has broadly mirrored that of the broader banking sector. The gross NPL ratio peaked at 3.5% in 2009, although stress was apparent mainly in the corporate and small and medium-sized segments. Consumer and micro lending, which comprised the bulk of BRIs loan book (48% of end September 2013 loans), have maintained NPLs below 2.0% since end-2008. The solid performance of its consumer and micro lending exposures may be partly attributable to BRIs wide distribution network that caters to borrowers, which would otherwise lack access to traditional banking services. Within its consumer loan book, salary-based repayment loans constitute c.80% of loans, while 15% are mortgage loans. Low exposure to cyclical and export-sensitive sectors: BRIs lending exposure to borrowers susceptible to the weakening IDR, declining commodity prices and weaker external demand is fairly low. Manufacturing, mining, and infrastructure loans collectively constitute less than 18% of total loans, a far lower share than peers. BRIs foreign currency loans represent 11% of total loans, below the system average of c.15%. These are fully funded by foreign currency deposits, bringing the foreign currency LDR to 80% at end-September 2013. Loan-loss reserve coverage, at 200% at end-September 2013, also appears sufficient to absorb near-term deterioration in asset quality. Healthy funding and liquidity profile: As a result of its strong distribution network, BRI sources 94% of its total funding needs through customer deposits. Its investment portfolio is fairly small compared with domestic and global peers, accounting for just 7% of total assets, although liquid assets, comprising cash and due from banks, accounted for 20% of customer deposits at end-September 2013. Capitalisation bolstered by strong earnings and conservative dividend policy: BRIs capitalisation is the strongest in Indonesia. It reported Tier 1 a nd total capitalisation ratios of 16.2% and 17.1%, respectively, at end-September 2013. Although loan growth has been strong over the past five years, BRIs wide margins have enabled it to accrete capital to permit continued credit expansion. Its dividend policy is also conservative compared with some of its peers, and has been adjusted over the years to ensure adequate capitalisation. The dividend payout ratio was 20% in FY12, versus 75% in FY03.
BANKS
Company profile
Founded in 1895, Bank Rakyat Indonesia PT (BRI) is the secondlargest bank in Indonesia and the dominant provider of micro-financial services. It holds a domestic market share of 12-14% of system loans, deposits and assets. With over 9,000 outlets, of which 7,000 are micro and rural micro-lending offices, the bank has a wide reach in rural and suburban Indonesia. As a result, its deposit-gathering franchise is very strong. Its focus on the consumer, small, medium-sized and micro lending segments (which together accounted for 73% of endSeptember 2013 loans) make it the most profitable bank in Indonesia. The government of Indonesia owns 57% of BRI, while the remainder is publicly held, primarily via foreign shareholders (c.80%).
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Asia Credit Compendium 2014 Bank Rakyat Indonesia PT (Baa3/Sta; BB+/Sta; BBB-/Sta)
Summary financials
2010 Balance sheet (IDR bn) Total assets (USD bn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (IDR bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/total income Costs/income Costs/average assets Provisions/PPP ROA ROE Impaired loans/loans Loan loss cover Loans/deposits Equity/assets Tier 1 capital ratio Total capital ratio 9.4% 7.1% 40.7% 4.3% 34.8% 3.2% 35.9% 2.8% 204% 70% 9.1% 12.0% 13.8% 8.0% 8.0% 41.1% 3.8% 23.5% 3.5% 34.9% 2.3% 242% 70% 10.6% 13.7% 15.0% 7.3% 8.3% 42.0% 3.7% 10.4% 3.7% 32.6% 1.8% 233% 75% 11.8% 15.9% 11.8% 7.5% 8.8% 43.1% 2.8% 11.1% 3.6% 29.7% 1.8% 200% 85% 12.6% 16.2% 17.1% 32,889 5,461 38,350 (15,590) 22,760 (7,917) 14,908 11,472 34,427 5,611 40,038 (16,462) 23,577 (5,533) 18,756 15,088 36,484 8,145 44,629 (18,742) 25,887 (2,700) 23,860 18,687 31,195 5,512 36,707 (15,828) 20,880 (2,326) 18,968 15,454 100% 80% 60% 40% 20% 44 404,286 232,973 36,275 367,612 333,652 9,951 9,455 36,673 52 469,899 269,455 43,078 420,079 384,264 9,678 13,098 49,820 61 551,337 336,081 45,649 486,455 450,166 12,477 13,005 64,882 65 587,549 401,844 43,515 513,963 471,154 15,200 16,697 73,743 2011 2012 Sep-13
Loans by borrower type, Sep-13 (IDR tn)

Medium Corporate non-SoE SoE Consumer Small commercial Micro 0 50 Interbank 100 Repos Debt 5% 11% 16% 17% 20% 31% 150
Funding mix
Customer deposits
BANKS
0% Dec-09 14% 12% 10% 8% 6% 4% 2% 0% 2009 2010 2011 2012 9M-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Sep-13
Asset quality (%)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 Dec-10 Dec-11 Dec-12 Sep-13 Impairedloans ratio Loan-loss coverage 300 250 200 150 100 50 0

Investment gains/losses Other Fee and commission income (net) Net interest income 0 10,000 20,000 30,000 1% 6% 9% 85% 40,000

18 16 14 12 10 8 6 4 2 0 Dec-09 ROE (RHS) Tier 2 40 35 30 25 Tier 1 capital ratio 20 15 10 5 0 Dec-10 Dec-11 Dec-12 Sep-13

Mining Construction Logistics Utilities Business services Agriculture Manufacturing Others Commerce 0 50,000 100,000 1% 3% 3% 3% 5% 9% 11% 31% 34% 150,000
163
Asia Credit Compendium 2014 BDO Unibank Inc. (Baa3/Pos; NR; BB+/Sta)

BDO is the dominant bank in the Philippines, and it holds leading market shares in several key segments. We believe its domestic market share of c.18% of loans makes it systemically important. Although it has grown rapidly through acquisitions over the past decade, its asset-quality metrics have gradually improved. Given the benign operating environment, we expect asset quality to continue to improve. Following its 2012 rights issue, capitalisation also improved markedly, and will provide some headroom for organic growth or potential bolt-on acquisitions. Its membership in the diversified SM Investments Corporation is credit-positive, although related lending exposures are relatively high.

Largest bank in the Philippines: BDO Unibank is the dominant bank in the Philippines, holding domestic market shares of 18% of loans and 16% of deposits. It also holds a dominant market share of domestic trust assets under management (26%) and is a leading credit card issuer. Outside of the Philippines, it has 15 overseas remittance and representative offices that bolster the banks fee -earning power and funding profile. Given its size and reach within the domestic economy, we consider the bank to be systemically important. Acquisitive stance is likely to continue: BDO has grown inorganically in the past decade through a series of acquisitions Dao Heng Bank in 2000, First e-Bank Corp. in 2002 (provincial business), Banco Santander Philippines in 2003 (highnet-worth business), UOB Philippines in 2003, Equitable PCI Bank in 2007 (commercial, consumer and fee-based businesses), American Express Savings Bank Philippines in 2007, and GE Money Bank in 2009. Since then, BDO has made small acquisitions in consumer banking and rural lending. As a result, the banks assets have grown at a CAGR of 26% over the past decade, versus c.9% for the banking system. While BDO has demonstrated a strong ability to integrate acquisitions over the years, its appetite for acquisitions has pressured asset quality and capital adequacy. Nevertheless, the banks 2012 rights issuance and recent improvements in asset-quality indicators should enable it to pursue its growth objectives responsibly. Ownership by SM Investments Corp.: The banks majority shareholder, SM Investments Corp., is a diversified conglomerate. It is a market leader in retailing and is growing in the real-estate, tourism and entertainment segments. The bank is a key subsidiary of the group, contributing 33% of the groups net income in 9M2013. While the Sy family maintains representation on the board, the bank is independently managed, and corporate governance appears to be sound. Loans and other exposures to related entities totalled a meaningful 8% of total loans at end-2012 (38% of equity), which is relatively high. Legacy asset-quality issues: As a result of past acquisitions, BDOs asset quality has tended to be weak compared with the broader banking systems. The bank has also been reticent to write off legacy exposures, which have also contributed to its historically high NPL ratios. Nevertheless, BDOs asset quality has improved in recent years, reflected in the NPL ratio, which stood at 2.7%, and loan-loss coverage, which was 146% at end-September 2013. Given the strength and favourable prospects facing the Philippines domestic economy and expected loan growth, asset quality should continue to improve in 2014. Good earnings generation, healthy liquidity and funding: BDOs profitability has improved as a result of the decline in provisioning to 21% of pre-provision profits in 9M-2013 (having peaked at 59% of pre-provision profits in 2008). As a result, ROA improved to 1.8% in 9M-2013, while its NIM remained solid at 3.2%. Nevertheless, profitability has tended to lag that of its peers, due to its relatively higher cost base, provisioning, and corporate lending tilt. BDOs funding base is particularly strong; it reported a 71% LDR at end-September 2013 as a 31% y/y increase in demand and savings deposits (60% of total deposits) outpaced 17% y/y loan growth. Its strength in the overseas remittance business is borne out in its very good foreign-currency LDR, which was 50% at end-2012. Capital strengthened after 2012 rights issue: BDOs Tier 1 capital strengthened significantly to 15.4% at end-September 2013 from 10.2% at end-2011 following its July 2012 rights issue. The bank is adequately capitalised ahead of Basel III implementation, which becomes fully effective (no phase-in) on 1 January 2014.
164
BANKS
Company profile
BDO Unibank Inc. (BDO) is the Philippines largest universal bank, with an asset base of PHP 1.5tn (USD 36bn) and 829 branches as of end-September 2013. It has 15 international offices to capture overseas Filipino remittance business. It has a long history of inorganic growth, including the acquisition of Equitable PCI Bank in May 2007, which made BDO the largest bank in the sector. In addition to being a full-service bank with a tilt towards corporate and middle-market loans, BDO has leading market shares in trust asset management and credit cards. Its largest shareholder since 1976, the Sy family-owned SM Investments Corporation (47% stake), is a large diversified Philippine conglomerate, though family members are not active in management.
Asia Credit Compendium 2014 BDO Unibank Inc. (Baa3/Pos; NR; BB+/Sta)
Summary financials
2010 Balance sheet (PHP mn) Total assets (USD mn) Total assets Total loans Investment securities Total liabilities Customer deposits Sub-debt Other debt Equity Net interest income Other income Total income Overheads Pre-provision profits Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/total income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan loss cover Loans/deposits Equity/assets Tier 1 capital ratio Total capital ratio 3.8 20.0 66.9 3.7 38.9 11.3 1.0 4.7 93.7 72.3 8.9 10.0 13.8 3.3 22.4 66.4 3.5 33.5 11.4 1.0 3.6 106.7 78.5 8.8 10.2 15.8 3.2 22.2 65.7 3.4 23.8 11.3 1.2 2.7 137.0 81.6 12.6 15.3 19.2 3.2 19.9 56.5 3.2 20.7 15.4 1.8 2.7 145.5 70.5 10.8 15.4 17.1 22,807 25,030 30,348 36,070 1,000,869 1,097,349 1,244,408 1,508,078 566,021 673,927 760,500 848,185 209,266 198,555 246,383 223,592 912,137 1,000,387 1,087,156 1,345,456 782,635 858,569 931,641 1,202,783 23,152 38,255 28,180 9,603 65,861 59,474 72,179 68,024 88,732 96,962 157,252 162,622 34,158 17,841 51,999 (34,789) 17,210 (6,698) 10,512 8,881 33,779 20,899 54,678 (36,316) 18,362 (6,144) 12,218 10,588 36,198 24,427 60,625 (39,857) 20,768 (4,941) 15,827 14,342 31,032 25,796 56,828 (32,090) 24,738 (5,119) 19,619 18,227 2011 2012 9M-13
Others
Loans by borrower type, Jun-13 (PHP mn)

4%
Consumer
20%
Corporate
76% 0 200,000 400,000 Other 600,000 Debt 800,000
Funding mix
Income statement (PHP mn)
BANKS
0% Dec-09 7 6 5 4 3 2 1 2009 2010 2011 2012 9M-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Sep-13
Asset quality (%)

9 8 7 6 5 4 3 2 1 0 NPA ratio (incl. ROPA)* NPL ratio Loan-loss coverage (RHS) 160 140 120 100 80 60 40 20 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13
Deposits by type, Sep-13 (PHP mn)

Demand 6%
Time
40%
Savings 0 200,000 400,000 600,000
54% 800,000

20 ROE 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 2 Tier 1 capital ratio 18 16 14 12 10 8 6 4 2 0
Revenue by type of income, 9M-13 (PHP mn)

Other non-interest income Trading income Fee and commission income Net interest income 0 10,000 20,000 10% 16% 20% 55% 30,000 40,000
*Note: ROPA NPA ratio includes foreclosed assets (real and other property acquired); Source: Company reports, Standard Chartered Research
165
Asia Credit Compendium 2014 Busan Bank (A2/Sta; NR; BBB+/Sta)


Despite being a small bank by national standards, Busan Bank has a dominant franchise in the Korean city of Busan. This provides it a strong funding base, which underpins its aboveaverage earnings generation capacity. Because of the banks high exposure to the SME sector, its NPL formation tends to be higher than that of the commercial banks. Also, Busan Bank has been growing faster than its peers since 2009. However, its asset-quality indicators and capital adequacy are sound. Our Stable outlook reflects our expectation that the banks fundamentals will remain stable in 2014, and takes into account some moderate M&A risk.

Strong franchise in the city of Busan: The bank has a dominant position in Busan, Koreas second-largest city and largest port, where it serves over 3mn customers and has close links to various local and municipal bodies. Busan accounts for c.5% of Koreas GDP and 7% of its population. Busan Bank is the institution of choice for deposits from local government offices, and its estimated market shares of deposits and loans in Busan are 33% and 28%, respectively. Geographic concentration: Although Busan Bank has gradually expanded into neighbouring Gyeongnam province, Busan accounts for around 70% of the banks loans and deposits. Because the city has high exposure to foreign trade, the banks fortunes could be more volatile than those of the large four Korean banks. Small size and limited national market share: While the bank has a dominant market share in Busan, it is relatively small on a national basis. At end-September 2013, its national market share of loans and deposits was around 2%. This limits the banks ability to offer as broad a product offering as its national competitors, and affects its efficiency ratios (measured as costs to average assets). Rapid loan growth and high SME exposure drive asset-quality trends: As a regional bank, Busan Bank is required to extend 60% of its loans to SMEs. As a result, it has high exposure to the SME sector (64% of its KRW loans at endSeptember 2013, compared with around 36% for the big four banks). Since 2009, Busan has been growing its loan portfolio faster than the (larger) commercial banks (c.12% p.a., compared with less than 5% on average for the large commercial banks). Rapid loan growth and high SME exposure have led to higher NPL formation than the average for the four largest Korean banks. However, Busan Banks reported asset-quality indicators are in line with the average for the large banks thanks to above-average write-offs and asset sales. The banks NPL ratio stood at 1.4% at end-September 2013, which is better than the average for the four large banks. Loan loan-loss cover was 104%. Given weakness in sectors such as construction, shipbuilding and shipping, an improvement in asset quality is unlikely in the near term, in our view. Strong funding franchise: The banks strong franchise in Busan, where competition is less intense than in Seoul, results in a low cost of funding. Its LDR stood at 104% at end-September 2013. Although this is in line with the average for the Korean commercial banks, it is high by Asian standards. We believe that strong loan growth, coupled with fierce competition for deposits, will make a meaningful reduction in the banks LDR hard to achieve. Above-average earnings generation capacity: Busan Bank is more dependent than its peers on net interest income, which accounts for around 90% of its revenue. Like the other Korean banks, the bank has seen its NIM compress due to lower rates and fierce competition. However, its NIM is higher than the average for Koreas commercial banks, due to Busans lower cost of funding and higher interest income due to its SME focus (2.6% in 9M-2013, compared with an average of 1.95% for the big four banks). This has allowed Busan Bank to report a more respectable bottom line than some of its larger peers (9M-2013 ROA of 0.9%). Sound capital: Despite relatively high loan growth since 2010, the banks capital adequacy has remained broadly unchanged, though it is slightly below the average for the big commercial banks. The banks Tier 1 capital ratio stood at 10.8% at end September 2013, with an equity-to-assets ratio of 7.7%. Moderate M&A risk: We believe Busan would be interested in acquiring Kyongnam Bank, a regional bank owned by Woori Finance Holding. Depending on the terms of the transactions, this could be credit-negative in the near term.
166
BANKS
Company profile
Busan Bank is the largest of Koreas independent regional banks, with total assets of KRW 42tn (USD 39bn) at end-September 2013. Its operations are concentrated in the city of Busan, Koreas second-largest city, where it has a dominant market share. The bank was set up in 1967 to promote regional economic development and serve local SMEs. Although it caters to a broad customer base of individuals and corporates, SMEs remain the banks main customer base, representing two-thirds of its loan portfolio. Busan Bank has a network of over 260 domestic branches. It is owned by BS Financial Group and is the key entity in the group, accounting for the bulk of assets and profits.
Asia Credit Compendium 2014 Busan Bank (A2/Sta; NR; BBB+/Sta)

Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.2 9.3 40.2 1.2 26.5 14.6 1.0 1.1 139.4 102.7 7.1 10.8 15.3 3.0 8.6 40.8 1.2 19.2 15.3 1.1 1.0 152.2 101.0 7.2 10.7 15.0 2.9 8.3 45.1 1.3 21.3 12.4 0.9 1.1 102.0 100.6 7.5 10.5 14.9 2.6 6.3 43.5 1.1 17.7 11.7 0.9 1.4 104.4 103.3 7.7 10.8 15.0 200 Loan-loss coverage (RHS) NPL ratio 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 100 50 Customer loans 0 0 10,000 20,000 72% 30,000 40,000 150 905 103 1,009 (406) 603 (160) 443 334 987 119 1,106 (452) 654 (126) 528 398 1,026 52 1,078 (487) 592 (126) 465 355 742 26 768 (334) 434 (77) 357 275 100% 80% 60% 40% 20% 30,840 34,726 22,079 6,231 32,268 21,490 3,747 2,632 2,458 32,963 37,989 25,266 7,010 35,251 25,024 4,316 2,890 2,737 37,425 39,835 28,014 7,175 36,836 27,844 3,746 2,731 2,999 39,346 42,283 30,629 6,897 39,013 29,640 3,697 2,454 3,270 Large corporations Resi mortgages Households SMEs 0 5,000 Deposits 10,000 Borrowings 15,000 Debt 8.4% 12.0% 12.1% 63.7% 20,000 2011 2012 9M-13
KRW loans by borrower type, Sep-13 (KRW bn)

Other 3.7%
Funding mix
BANKS
Asset quality (%)

2.0 1.5
Asset mix, Sep-13 (KRW bn)

Cash and due from banks Other Investment securities 4% 8% 16%

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 1 capital ratio Tier 2 capital ROE (RHS) 20
Revenue by type of income, 9M-13 (KRW bn)

Other 15 10 5 0 -50 150 350 550 750 Fees/ commissions Net interest income 6% -3%
97%
GAAP until end-2010, IFRS thereafter; Source: Company reports, Standard Chartered Research
167
Asia Credit Compendium 2014 Canara Bank (Baa3/Sta; NR; BBB-/Sta)


One of Indias larger publicsector banks, Canara benefits from a stable franchise and majority government ownership. After a period of muted growth, loan growth has resumed and is likely to remain above system levels in the medium term. The bank is also aggressively expanding its branch network, and this has helped to reduce its dependence on bulk deposits. Asset quality has weakened, and we see further headwinds given strong loan growth and high exposure to stressed sectors like power. Additionally, the banks loan-loss coverage is extremely low. While Canara has historically reported better capitalisation than peers, strong growth and lower internal capital generation have weakened the banks capital buffers.

Stable franchise with a corporate lending bias: Canara is Indias fifth-largest public-sector bank. It has a well-established nationwide distribution network, biased towards southern India. Similar to peers, its loan book is skewed towards the corporate sector, with retail assets making up only c.11% of loans. Management has indicated an increased focus on the retail, agri and SME segments. While the banks international loan book is currently small at c.6% of loans, it is looking to increase its overseas franchise. Aggressive growth: After a period of muted, below-system growth in FY12-FY13, Canaras loan growth picked up strongly in H1 -FY14 (30% y/y) despite the weak macro backdrop. Above-system growth is likely to continue, with management targeting an annual growth rate of 20% over the next five years. The bank is also expanding its distribution network and plans to increase its branches by almost 50% in FY14-FY15. With loan growth outstripping deposit growth, Canaras loan to-deposit ratio has increased to 72%, although this is still lower than most peers. On the deposit side, a wider network has allowed the bank to sharply reduce its dependence on bulk deposits to c.13% from c.45% a few years ago. That said, its low-cost deposit mix is weaker than the larger state-owned banks CASA deposits accounted for 26% of total deposits as of September 2013, down from c.30% in FY11. Low coverage exacerbates asset-quality concerns: Canaras stressed loan ratio (NPLs plus restructured loans) of c.9% is broadly in line with larger publicsector peers. While slippage was elevated in H1-FY14, strong credit growth, recoveries and write-offs have kept the NPL ratio broadly stable at 2.6% (unlike peers like SBI and BOB, which have seen marked asset-quality deterioration in recent quarters). Specific loan-loss coverage is inadequate at 14%, the lowest among peers. The banks restructured loan book is concentrated in the power, iron and steel, and textile sectors (together accounting for 60% of restructured loans). Power-sector loans increased by c.60% y/y in H1-FY14, taking power-sector exposure to 13% of loans; the bulk of this is to State Electricity Boards. Strong growth, particularly in the infrastructure segment (19% of loans), and low loan-loss coverage make us cautious on the banks asset -quality outlook. Management indicates a restructuring pipeline of INR 30-35bn. Profitability to remain weak: While shedding bulk deposits has allowed Canara to reduce its funding costs, its yield on advances has also fallen, leading to declining and below-peer NIMs over the past year. Reflecting weaker profitability, net interest income grew only 10% y/y in H1-FY14, despite strong loan growth. Canara also suffers from low income diversity, and while fee income has grown strongly recently, it remains lower than peers. Operating expenses have increased (cost-toincome ratio of 52% in Q2-FY14) and will likely remain elevated given the large branch expansion programme underway. We expect these factors to dampen profitability, along with higher provisioning costs arising from weaker asset quality and pressure to improve low provisioning cover. Capital buffer has weakened: Canaras capitalisation, while historically a strength, has weakened on strong growth and low internal capital generation. The bank reported a Tier 1 capital ratio of 8.5% as of Q2-FY14, below peers like SBI and BOB. While Canara, unlike peers, has not received equity injections from the government in recent years, INR 5bn has been approved for FY14. Going forward, Basel III requirements, asset-quality headwinds and low loan-loss coverage will increase the banks reliance on equity support from the government, in our view.
BANKS
Company profile
With an asset base of INR 4.5tn (USD 71.9bn) as of September 2013, Canara is Indias sixth-largest bank, with a c.4% market share of loans. It has a well-distributed nationwide network, with a bias towards southern India. It has 4,211 branches in India (30% in rural areas) and a relatively small international footprint of five branches. International advances accounted for about 6% of loans as of March 2013. Canara is predominantly a corporate-sector lender. It is publicly traded, with 67.7% government ownership (statutory requirement of minimum 51% government ownership). Founded in 1906, the bank was privately owned until 1969, when it was nationalised along with 13 other banks.
168
Asia Credit Compendium 2014 Canara Bank (Baa3/Sta; NR; BBB-/Sta)

Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.6 7.2 42.0 1.5 17.5 23.2 1.3 1.5 25.7 72.3 6.0 10.9 15.4 2.2 7.5 44.0 1.3 31.3 15.4 0.9 1.7 16.0 71.3 6.1 10.4 13.8 2.1 7.2 46.6 1.3 37.7 12.1 0.7 2.6 15.7 68.3 6.0 9.8 12.4 Std. restructured loans-to-loans* 2.0 7.6 46.3 1.3 47.9 11.1 0.7 2.6 13.6 72.0 5.8 8.5 10.6 35 30 25 20 15 NPL ratio 10 5 0 Mar-10 Mar-11 ROE (RHS) Mar-12 Mar-13 Sep-13 0 30,000 60,000 90,000 120,000 Retail Treasury Wholesale 24% 27% 47% Other 2% 76,993 28,115 105,108 (44,193) 60,915 (10,656) 50,259 40,259 76,893 29,276 106,169 (46,737) 59,432 (18,605) 40,827 32,827 78,790 31,530 110,320 (51,420) 58,900 (22,179) 36,721 28,721 41,823 20,113 61,936 (28,703) 33,232 (15,902) 17,330 14,180 100% 80% 60% 40% 20% 75,349 3,359 2,113 836 3,159 2,934 157 143 200 73,543 3,742 2,325 1,021 3,515 3,271 156 155 227 75,966 4,123 2,422 1,211 3,875 3,559 204 203 249 71,856 4,502 2,811 1,195 4,239 3,916 NA 227 263 Housing MSME Agriculture Corp 0 500 1,000 1,500 Time deposits 7% 15% 16% 58% 2,000 Debt FY12 FY13 H1-FY14

Other retail 4%
Funding mix
Current deposits Savings deposits
BANKS
Asset quality (%)

8 7 6 5 4 3 2 1 0 Loan-loss coverage (RHS)

20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Tier 2 capital Tier 1 capital ratio 25 20 15

Fees/commissions 8%
Others 10 5 0 0 10,000 Net interest income
25%
68% 20,000 30,000 40,000 50,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013;*Comparable data not available for FY10-11; Source: Company reports, Standard Chartered Research
169
Asia Credit Compendium 2014 China CITIC Bank International Ltd. (Baa2/Sta; NR; BBB/Sta)

We have a Negative outlook on CNCBI as we do on all Hong Kong banks. Given its strong loan growth in recent years, particularly in the mainland, we believe potential, latent risks are not accounted for in its reported figures. CNCBI has historically had the weakest asset quality and the highest risk appetite among peers. Although its risk management has been revamped, we believe CNCBI could underperform its peers. Also, it is more reliant on wholesale funding than peers. However, the bank benefits from good capitalisation and demonstrated evidence of support from its parent, China CITIC Bank Corporation.

Moderate position in Hong Kong: Hong Kong is a highly competitive and saturated market, and smaller banks are at a competitive disadvantage because of their relative lack of pricing power. With a market share of c.2%, CNCBI is a relatively small bank by Hong Kong standards. However, unlike independent banks, CNCBI can capitalise on the support of and linkages with its parent. In Hong Kong, CNCBIs loan book is geared towards the corporate sector (c.70% of total loans). Propertyrelated loans accounted for 44% of the banks Hong Kong loan portfolio at end June 2013 (excluding trade finance), 26% in the form of property development and investment and 18% in residential mortgages. Approximately 85% of its Hong Kong loans were backed by collateral. Increasingly integrated with its China parent: CNCBIs strategy is to become increasingly integrated with its Chinese parent to capture cross-border opportunities. The bank changed its name to CNCBI and is benefiting increasingly from referrals by its parent and the CITIC Group. Although CNCBI accounts for only c.5% of its parents total assets, we believe it is strategically important to its parent. For example, in 2011, CNCBI entered into a credit default swap with its parent, where the parent was responsible for losses in CNCBIs notional exposure of USD 456mn in a CDO (Farmington). Growing exposure in the mainland and beyond: Like many peers, CNCBI has expanded in mainland China, where NIMs are higher and therefore offset the impact of margin compression in Hong Kong. CNCBIs mainland exposure has been increasing steadily and is currently higher than the peer average (36% of total loans at end-June 2013, up from 18% at end-2009). This is likely to continue growing thanks to customer referrals from its parent. We understand that CNCBI lends more to SOEs than private corporates and that a large part of CNCBIs mainland exposure is to banks. CNCBIs strategy is to gradually grow its presence in other Asian markets (e.g., Singapore and Australia) as well. Asset quality at cyclical lows: Like other Hong Kong banks, CNCBIs assetquality indicators are at cyclical lows. Its impaired loan ratio was 0.5%, with loanloss coverage of 93%, at end-June 2013. This is broadly in line with peer assetquality indicators. Asset quality in the mainland is deteriorating and is likely to continue to deteriorate in the medium term and affect CNCBIs results. Asset quality in Hong Kong could also deteriorate on the back of higher interest rates and slower economic growth. CNCBI has historically had a higher risk appetite than some of its peers, and its asset quality could therefore deteriorate more than its peers. Moderate earnings-generation capacity: CNCBIs profitability has been slightly below the peer average in recent years because of relatively narrow NIMs. Like the other small Hong Kong banks, CNCBIs funding position is weaker than large peers, owing to its greater reliance on wholesale funding sources. It also tends to be slightly more reliant on trading income, which could introduce some earnings volatility. It benefited from a decline in funding costs in H1-2013, which led to higher margins and an overall improvement in the banks bottom li ne (ROA of 1.2% and ROE of almost 14%). Given the outlook for credit costs, profitability measures have probably reached their peak for the foreseeable future, in our view. Good capital adequacy: CNCBI has a strong capital position, with a Tier 1 capital ratio of almost 11% at end-June 2013. The slight deterioration versus end-2012 was due to the implementation of Basel III and an increase in risk assets. Overall, we are comfortable with the banks current capital position, particularly because of its large Chinese parent.
170
BANKS
Company profile
China CITIC Bank International (CNCBI) is a small Hong Kong bank, with total assets of HKD 186bn (USD 24bn) and a domestic loan market share of c.2% at endJune 2013. CNCBI is 70% owned by China CITIC Bank Corporation (Baa2/Sta; NR; BBB/Sta), a midsized Chinese bank. Spains BBVA (Baa3/Neg; BBB-/Neg; BBB+/Neg) is a strategic shareholder with a 30% stake. CNCBI operates through 33 branches in Hong Kong and seven branches overseas. Like other Hong Kong banks owned by Chinese entities, CNCBI has been actively increasing its exposure to mainland China. Mainland exposure accounted for 36% of total loans at end-June 2013. The banks loan book is slightly more focused on the corporate sector. In Hong Kong, 70% of CNCBIs loans are to corporates.
Asia Credit Compendium 2014 China CITIC Bank International Ltd. (Baa2/Sta; NR; BBB/Sta)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (HKD mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.4 22.9 48.1 1.1 16.7 8.3 0.8 1.4 53.4 79.9 9.0 11.2 19.0 1.2 17.1 47.9 1.0 5.7 10.7 0.9 0.7 77.4 75.9 7.6 10.4 18.3 1.3 17.0 48.0 1.0 4.7 11.1 0.9 0.5 114.8 82.2 8.5 11.8 18.2 1.6 15.0 44.2 1.1 2.3 13.6 1.2 0.5 93.2 89.6 8.6 10.7 16.1 1,813 1,208 3,021 (1,452) 1,569 (262) 1,160 1,057 1,862 1,585 3,447 (1,652) 1,795 (103) 1,692 1,410 2,339 1,427 3,766 (1,808) 1,958 (91) 1,866 1,557 1,461 783 2,244 (991) 1,253 (28) 1,245 1,053 100% 80% 60% 40% 20% 19,045 148,209 90,715 23,297 134,857 113,466 1,850 14,981 13,352 22,070 171,426 96,365 25,528 158,321 127,040 5,121 20,714 13,105 22,858 177,181 107,475 20,210 162,130 130,720 3,686 22,115 15,052 24,005 186,196 120,140 21,514 170,224 134,025 5,891 7,571 15,972 2011 2012 H1-13

Credit card Others Other consumer Resi. mortgage Corporate (property) Corporate (others) For use outside HK 0 20 Deposits Debt/CDs 40 Interbank 0.3% 3.8% 5.1% 8.1% 11.7% 32.4% 38.7% 60
Funding mix
BANKS
0% Dec-09 4 3 2 1 0 2009 2010 2011 2012 H1-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Jun-13
Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Impaired loans ratio Loan-loss coverage (RHS) 140 120 100 Restructured loans/loans 80 60 40 20 0

Others 8%
Mainland
36%
Hong Kong 0 10 20 30 40 50 60
56% 70


16 Other 1% 15% 19% 65% 0.0 0.5 1.0 1.5 2.0 12 Fees/commissions 8 Trading 4 Net interest income 0
171
Asia Credit Compendium 2014 China Construction Bank Corp. (A1/Sta; A/Sta; A/Sta)

CCB is one of the strongest banks in China and one of four major state-owned banks. Its profile is underpinned by its indirect majority government ownership, sound franchise and extensive distribution network. One of the banks competitive advantages is its strong funding base, which underpins its aboveaverage profitability. Although CCBs reported asset quality is sound, our Negative outlook reflects concerns about likely asset-quality deterioration given (1) its rapid loan growth since 2009 and (2) its exposure to potentially troublesome sectors such as local-government financing vehicles and real estate, given CCBs traditional focus on infrastructure and real estate.

Strong government support: China has a track record of supporting key financial institutions, having transferred NPLs from banks to asset-management companies in 1999 and the mid-2000s. Given its size, its importance to the Chinese economy and the governments stake, CCB enjoys stro ng implicit support, in our view. In 2003, it received a capital injection of USD 22.5bn for recapitalisation prior to its 2005 IPO. Also, CNY 129bn of its non-performing assets (equivalent to 6% of end2003 total loans) were sold to Cinda Asset Management Company (Cinda). CCBs CNY 247bn investment in debt securities issued by Cinda to fund the purchase of NPLs has been declining since 2010 and stood at CNY 53bn at end-June 2013. Slower loan growth: Like other state-owned banks, CCB needs to balance its commercial interests with the governments broader development objectives. During the boom period of 2009-10, CCBs loan portfolio grew 27% and 18%, respectively. Since 2011, its annual rate of loan growth has been around 15%. While this is broadly in line with the peer average, it is still fairly high, in our view. Infrastructure and property lending have traditionally been CCBs strongholds. Infrastructure loans accounted for 27% of total loans at end-June 2013. To capitalise on its expertise in property lending, the bank has expanded into the residential mortgage sector (21% of total loans at end-June 2013). Asset quality deteriorating: CCBs reported asset-quality indicators have been steadily improving in recent years. The banks reported NPL ratio stoo d at 1% at end-September 2013, with loan-loss coverage of 268%. However, we are concerned that CCBs and other Chinese banks reported asset -quality indicators may not fully reflect the economic reality on the ground. Given its rapid loan growth in 2009-10 and its exposure to potentially troublesome sectors, asset-quality indicators are likely to deteriorate, in our view. However, the information available is limited, making it difficult to make an accurate assessment or meaningful assetquality comparisons between the big four banks. Increasing competition for deposits: CCB has a strong deposit base and has historically had lower funding costs than some of its peers, giving it a competitive advantage (CASA deposits accounted for 51% of end-June 2013 deposits). Customer deposits accounted for 89% of CCBs total funding at end -September 2013, the highest for Chinas big four banks. The deposit base is slightly skewed towards corporate deposits (53% of overall customer deposits). However, as with its peers, deposit growth has not kept pace with loan growth in recent years, due to increasing competition for deposits. As a result, CCBs LDR has deteriorated slightly, although it remains low by international standards (69% at end-September 2013). Increasing deposit competition is also forcing banks to use wealth management products (WMPs) as a source of funding. This can add to deposit volatility and mask underlying funding trends. We estimate that WMPs represent less than 10% of CCBs deposits, in line with th e average for the large four banks. Above-average profitability: Below-average funding costs, combined with healthy margins on the asset side and good cost controls, have made CCB slightly more profitable than its big four peers in recent years. As is t he case with the other Chinese banks, net interest income is CCBs main source of revenue, accounting for 78% in 9M-2013. We believe profitability is likely to decline, driven by margin compression, slower loan growth and higher loan-loss provisions. Better-than-average capital adequacy: CCBs capital-adequacy ratios have remained stable despite continued loan growth thanks to capital-raising exercises and earnings retention. The slight decline in the Tier 1 capital ratio (to 10.9% at end-September 2013) was driven partly by the implementation of Basel III.
172
BANKS
Company profile
China Construction Bank Corp. (CCB) is Chinas second-largest bank, with total assets of CNY 15tn (USD 2.4tn) at end-September 2013 and an estimated 12% market share of deposits. Historically, CCB has focused on infrastructure financing, but it has been broadening its product suite since the 1990s. The bank operates through a network of 14,295 domestic branches. CCB is primarily a domestic player, with c.93% of its loans in China, and domestic operations accounting for the bulk of revenue. At endSeptember 2013, CCB was 57% owned by the central government through Central Huijin Investment. Singapores Temasek owned 7.2%.
Asia Credit Compendium 2014 China Construction Bank Corp. (A1/Sta; A/Sta; A/Sta)
Summary financials
2010 Balance sheet (CNY bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.5 20.3 37.3 1.2 14.3 21.4 1.3 1.1 221.1 62.5 6.5 10.4 12.7 Loan-loss coverage (RHS) 2.7 21.8 36.2 1.3 14.0 22.3 1.5 1.1 241.4 65.0 6.6 11.0 13.7 2.7 20.2 37.0 1.3 13.7 21.9 1.5 1.0 271.3 66.2 6.8 11.3 14.3 2.7 21.1 32.9 1.1 10.1 23.6 1.6 1.0 267.9 69.1 7.0 10.9 13.5 1,636,191 1,951,046 2,217,511 2,449,929 10,810 12,282 13,973 14,996 5,526 6,325 7,310 8,157 3,086 2,942 3,183 3,341 10,109 11,465 13,023 13,946 9,075 9,987 11,343 12,116 767 1,081 1,141 1,191 93 168 263 331 701 817 950 1,050 252 74 326 (121) 204 (29) 175 135 305 95 399 (145) 255 (36) 219 169 353 109 463 (171) 291 (40) 251 194 287 92 379 (125) 254 (26) 229 177 2011 2012 9M-13
Loans by type, Sep-13 (CNY bn)

Discounted bils Overseas and others Personal Corporate 0 2,000 Interbank 4,000 Repos Debt 2% 7% 28% 63% 6,000
Funding mix
BANKS
0% Dec-09 5 4 3 2 1 2009 2010 2011 2012 9M-13 Net interest margin Dec-10 Dec-11 Dec-12 Sep-13

Asset quality (%)

1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 300 Impaired-loans ratio 250 200 150 100 50 0
PBT by business segment, H1-13 (CNY bn)

Others Personal banking Treasury Corporate banking 0 50 100 2% 21% 30% 47% 150

Domestic corporate loans by sector, Jun-13 (CNY bn)

ROE (RHS) 25 20 Commerce and services Construction and real estate Utilities Transportation and logistics Other Manufacturing 0 0 500 1,000 8% 14% 16% 18% 19% 25% 1,500
15 10 5
173
Asia Credit Compendium 2014 China Development Bank (Aa3/Sta; AA-/Sta; A+/Sta)

In our view, CDB is the benchmark quasi-sovereign credit among Chinas policy banks. Its quasi-sovereign status is underpinned by (1) its ownership by the government, (2) its policy role in infrastructure financing and (3) its ministerial status. The banks reported fundamentals are moderate, with good earnings generation capacity and sound asset-quality indicators. However, loan growth has been strong, and the bank has significant concentration in infrastructure projects and is heavily reliant on the domestic bond markets for funding. Disclosure and transparency are limited. Our Negative outlook primarily reflects concerns about asset-quality deterioration.

Important policy role: CDB plays a pivotal role in providing financing to key public infrastructure development projects. CDB is Chinas only bank with ministerial status, placing it above the other two policy banks. Although CDBs obligations have no explicit guarantee, its ratings are directly linked to those of the sovereign. Strong support: Given its position as the leading policy bank, CDB enjoys strong implicit support, in our view. In 1999, CNY 100bn of NPLs were removed from its balance sheet and transferred to China Cinda Asset Management (Cinda); in 2007, CDB received a USD 20bn capital injection from Huijin. In 2008, CDBs CNY 100bn investment in debt securities issued by Cinda to fund the purchase of NPLs from CDB was converted into an explicit MoF receivable. According to the Special Decree of the State Council of 1994, the central bank is obligated to provide shortterm liquidity support to CDB if required. Reliance on the local bond market: CDB is mainly reliant on the domestic bond market for funding, which provided 77% of total funding at end-2012. Although CDB is not permitted to take retail deposits, the bank made progress in developing a corporate deposit base, which accounted for 9% of total funding at end-2012, compared with 5% at end-2006. One of CDBs key competitive advantages is that a 0% risk weighting is currently applied to banks holdings of bonds issued by CDB. In the domestic bond market, CDB is the second-largest bond issuer after the government, and the largest FI issuer. Commercialisation: Since 2007, the bank has focused on becoming more commercial. As a result, it has expanded into new areas such as investment banking and leasing. Although this commercialisation could eventually lead to an IPO, this is unlikely to happen in the near term, in our view. We expect CDB to continue to expand its commercial banking activities over the next few years. Concentrated loan portfolio: Because of its remit, much of CDBs loan portfol io is concentrated on infrastructure-related projects. A substantial portion of these are likely to be related to local governments with weak finances, and might not be cash-generative. Also, like Chinas other banks, CDB has experienced strong growth in loans and off-balance sheet commitments since 2008, in line with the governments stimulus programme. Possible asset-quality deterioration: CDBs reported asset-quality indicators are better than those of the commercial banks and have been steadily improving, though it is worth bearing in mind that the banks loan portfolio has more than doubled since end-2008. Its NPL ratio stood at 0.3% at end-2012. However, its special-mention loans (11%) are higher than some of the other policy banks, and the reported asset-quality indicators might not provide a full picture of the economic situation. Rapid loan growth, coupled with CDBs high exposure to infrastructure projects, is likely to lead to asset-quality deterioration, in our view. Good earnings generation capacity: Although CDBs cost of funding is considerably higher than the commercial banks, this is partly offset by very good cost efficiency driven by its small 40-branch network. As a result, the banks profitability is almost as good as that of some of the commercial banks and better than that of a traditional policy bank. The banks ROA for 2012 was 0.9%. Deteriorating capital adequacy: On the back of strong loan growth, the banks capital adequacy has been gradually declining in recent years. In April 2011, the National Council for Social Security Fund injected CNY 10bn (USD 1.6bn) into CDB, making it the third shareholder in the bank. CDBs Tier 1 capital ratio stood at 6.9% at end-2012, and its equity-to-assets ratio was 6.6%.
BANKS
Company profile
China Development Bank (CDB) is the largest of Chinas three policy banks and the only one to hold ministry-level status (the other two hold vice-ministry status). CDB was set up in 1994 with the specific remit of providing long-term financing for infrastructure projects. At end-2012, CDB had total assets of CNY 7.5tn (USD 1.2tn) and a domestic market share of loans of c.10%. In 2008, the bank was converted from a policy-oriented financial institution to a joint-stock company. However, the government and government-related entities remain the sole shareholders through the Ministry of Finance (MoF, 50.18%), Central Huijin Investment (Huijin, 47.63%) and the National Council for Social Security Fund (2.19%). CDB is unlikely to launch an IPO in the near future.
174
Asia Credit Compendium 2014 China Development Bank (Aa3/Sta; AA-/Sta; A+/Sta)
Summary financials
2009 Balance sheet (CNY bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (CNY bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.8 5.1 21.4 0.4 32.6 9.2 0.8 0.9 215.1 957.7 8.3 8.8 11.8 1.8 6.2 20.8 0.4 28.0 9.6 0.8 0.7 307.0 1,106.4 7.9 7.9 10.9 2.1 5.8 20.7 0.4 33.2 10.9 0.8 0.4 552.3 1,237.2 7.1 7.4 10.8 2.3 5.8 17.4 0.4 41.1 13.4 0.9 0.3 932.4 1,054.9 6.6 6.9 10.9 1,000 Other 800 600 400 0.5 0.0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 200 0 Investment securities Cash and due from banks Customer loans 0 2,000 4,000 6,000 7% 8% 83% 2% 74 5 79 (17) 62 (20) 42 33 88 4 92 (19) 73 (20) 52 37 116 (1) 115 (24) 92 (30) 61 46 154 17 171 (30) 141 (58) 83 63 100% 80% 60% 40% 20% 664,976 4,540 3,642 494 4,161 388 427 3,309 379 773,587 5,111 4,416 278 4,710 408 479 3,774 401 993,091 1,193,372 6,252 7,520 5,403 6,237 314 498 5,807 7,022 447 608 757 927 4,476 5,302 445 498 2010 2011 2012
Loans by industry, Dec-12 (CNY bn)

Railways Petrochemicals Electric power Public highways Public infrastructure Others 0 10 Deposits Interbank 20 Repos 30 Debt 7% 7% 11% 17% 21% 36% 40
Funding mix
BANKS
0% Dec-08 7 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 Net interest margin Average interest earned Dec-09 Dec-10 Dec-11 Dec-12
Asset quality (%)

2.0 1.5 1.0 Impaired-loans ratio Loan-loss coverage (RHS)
Asset mix, Dec-12 (CNY bn)

15 12 9 6 3 0 Dec-08 Dec-09 Dec-10 Dec-11
Pre-tax profit by segment, 2012 (CNY bn)

ROE (RHS) 12 10 Tier 2 capital Tier 1 capital ratio 8 6 4 2 0 Equity investments Banking 0 20 40 60 80 2% 95% Securities Leasing 1% 2%
175
Asia Credit Compendium 2014 Chong Hing Bank Ltd. (Baa2/RFD; NR; BBB+/RWN)

CHB is a small, conservatively run community bank. It has a niche position in Hong Kong and strong capitalisation. It targets remote areas of Hong Kong and therefore has a stable low-cost deposit base. However, the banks earnings-generation capacity is lower than average because of tighter NIMs and a higher-than-average cost base. We believe the banks assetquality indicators will deteriorate less than its peers on account of its slower loan growth in recent years and low exposure to mainland China. However, the change of ownership is likely to lead to a change in its business model and, potentially, a sharp increase in mainland lending over the medium term. Accordingly, we change our outlook to Negative from Stable.

Ownership change: Hong Kongs small, independent banks are at a competitive disadvantage because of their balance-sheet constraints. In October 2013, Yue Xiu Group the trading arm of China's Guangzhou city government announced the acquisition of CHB. We believe that the change of ownership will lead to a change in CHBs business model and, potentially, a sharp increase in mainland lending over the medium term. Niche position in Hong Kong: CHB is a small Hong Kong bank, with a loan market share of 1%. It operates primarily in the far-flung areas of Hong Kong and has a niche market of customers who may have limited access to other banks. Since 2011, it has focused on wealth management for individuals and project lending to small businesses. CHBs business model has resulted in a strong franchise but somewhat higher concentration risks than its peers. CHB has grown its balance sheet at a more measured pace than peers in recent years. Although it has a diversified loan book, it has traditionally lent to mid-market corporates and SMEs. Retail loans represented 27% of Hong Kong loans at end-June 2013. However, like other Hong Kong banks, its exposure to the property segment is high. Exposure to property development and investment accounted for 30% of Hong Kong loans and residential mortgages for a further 21%. Limited geographic diversification: CHB has limited geographical diversification, with less than 4% of its loans outside Hong Kong. The bank withdrew from the mainland market in the late 1990s following bad-loan problems. Since then, it has tentatively resumed growth in the mainland, although its presence remains limited compared with peers. Instead, it has focused on lending to its Hong Kon g customers who are expanding in the mainland. Strong asset quality but with some concentration: CHBs asset-quality ratios have historically been strong and better than average. Its NPL ratio was less than 0.1% at end-June 2013. Even though the banks as set-quality indicators are at a cyclical low, we believe that its asset quality is likely to deteriorate less than its peers in the medium term, owing to its more conservative stance. Stable deposit base: CHB targets remote areas of Hong Kong and, therefore, has a stable low-cost deposit base, albeit with some concentration risk . The banks reliance on wholesale markets is limited, with customer deposits providing 94% of the banks total funding at end-June 2013. Its more moderate pace of loan growth has enabled the bank to maintain one of the lowest LDRs among the Hong Kong banks under our coverage (64% at end-June 2013, compared with an average of 82% for the banks under our coverage). Below-average profitability: Historically, CHBs profitability has been lower than peers because of its tighter NIMs and higher-than-average cost base. The banks ROA stood at 0.7% in H1-2013, among the lowest for Hong Kong banks under our coverage. CHBs margins are among the weakest in its peer group. This partly reflects its limited exposure to the mainland where margins are higher and strong completion for deposits in Hong Kong. Given the outlook for credit costs, profitability measures have probably reached their peak for the foreseeable future, in our view. Adequate capitalisation: The banks capital-adequacy ratios are in line with the average for other mid-sized Hong Kong banks. The banks Tier 1 capital ratio stood at 10.8% at end-June 2013, with an equity-to-assets ratio of 9%. Unlike some of its peers, CHBs capital-adequacy ratios remained relatively stable following the implementation of Basel III in 2013.
BANKS
Company profile
Chong Hing Bank (CHB) is a small Hong Kong bank, with total assets of HKD 82bn (USD 11bn) and a 1% domestic loan market share at endJune 2013. It operates through 52 branches in Hong Kong, one in Macau and one in mainland China. Exposure to the mainland is limited, representing less than 1% of total loans, following CHBs withdrawal from the mainland market due to problem loans there in the 1990s. In Hong Kong, it focuses on corporate/SME lending. It operates in under-banked outlying areas of Hong Kong and has a communitybanking approach. It also has insurance- and securities-dealing subsidiaries. The Liu family founded and managed the bank (c.50% shareholding prior to the change of ownership).
176
Asia Credit Compendium 2014 Chong Hing Bank Ltd. (Baa2/RFD; NR; BBB+/RWN)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (HKD mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.1 24.9 54.7 1.0 3.5 7.5 0.7 0.1 411.8 61.2 8.9 11.2 17.9 1.1 22.7 57.6 1.0 (18.0) 8.3 0.7 0.2 271.9 66.7 8.9 10.6 15.4 1.1 21.0 57.5 1.0 (11.2) 7.6 0.7 0.1 779.4 62.4 9.1 10.6 15.3 1.2 22.7 50.7 0.9 5.1 7.5 0.7 0.1 637.4 63.5 9.1 10.8 14.6 900 800 700 600 500 400 300 200 100 0 Jun-13 816 485 1,301 (712) 589 (21) 568 476 815 527 1,343 (774) 569 103 668 559 837 535 1,372 (789) 583 65 646 543 476 230 706 (358) 348 (18) 329 276 100% 80% 60% 40% 20% 9,586 74,289 38,836 14,002 67,711 63,500 1,040 2,401 6,578 9,994 77,456 43,248 12,237 70,583 64,816 1,087 3,398 6,873 10,420 80,755 42,109 15,359 73,381 67,509 1,843 2,567 7,374 10,537 81,664 43,665 17,237 74,216 68,756 2,080 1,972 7,447 2011 2012 H1-13

Credit card Banks Others Other consumer For use outside HK Resi. mortgage Corporate (property) Corporate (others) 0 5 Deposits 10 Debt/CDs 15 Interbank 0.2% 1.0% 1.9% 4.3% 12.8% 17.0% 24.3% 38.6% 20
Funding mix
BANKS
0% Dec-09 Dec-10 Dec-11 Dec-12 Jun-13

2.5 2.0 1.5 1.0 0.5 0.0 2009 2010 2011 2012 H1-13 Net interest margin Average interest earned
Asset quality (%)

1.0 0.8 0.6 0.4 0.2 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Impaired loans ratio Restructured loans/loans Loan-loss coverage (RHS)

Others 2.0%
Mainland & Macau
1.8%
Hong Kong 0 10 20 30 40
96.2% 50

20 ROE (RHS) 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13

10 Other 8 Tier 2 capital Tier 1 capital ratio 6 4 2 0 0.0 0.1 0.2 0.3 0.4 0.5 Trading Fees/commissions Net interest income 7% 23% 67% 3%
177
Asia Credit Compendium 2014 CIMB Bank Bhd. (A3/Pos; A-/Sta; NR)

CIMB Banks credit profile benefits from its status as the third-largest bank in Malaysia and indirect government ownership. The bank has leveraged its strong investment banking and financial-markets capability to gain market share in corporate banking. At the same time, it has developed its retail franchise. We expect the banks credit profile to remain unchanged in 2014, which underpins our Stable outlook. Our view also takes into account potential M&A risk as it continues to expand its footprint in the region, and its potentially more volatile investment banking earnings stream.

A pan-ASEAN universal banking group: CIMB Bank is a pivotal entity within CIMB Group. The bank generated c.60% of the groups pre -tax profit in 9M-2013 and represented around 80% of the groups loan portfolio at end-September 2013. The Indonesian subsidiary (Bank CIMB Niaga), the groups second most important operation (31% of group pre-tax profit), is consolidated at the CIMB Group Holdings level. However, CIMB Thai is consolidated at the CIMB Bank level. Strong investment banking franchise: CIMB Bank has used its strong position as a domestic market-focused investment bank as a platform for expansion. The group is the leading stockbroker in Malaysia and tops the league tables in Malaysian debt and equity capital markets, syndications and M&A advisory. Corporate and investment banking accounted for 32% of 9M-2013 revenue. Sizeable retail franchise: The banks retail franchise improved following the acquisition of retail-oriented bank Southern Bank in 2006. The weight of retail loans in the banks portfolio steadily increased to 54% at end -September 2012 from 47% at end-2007. However, lending growth has been skewed towards large corporate and overseas borrowers since 2012, bringing the proportion of retail loans lower, to 52% of end-September 2013 loans. Although this is higher than Maybanks, it is lower than some of the more retail-oriented banks, such as Public Bank and Hong Leong Bank. Regional ambitions lead to higher M&A risk: CIMB Group has relatively large and growing international operations, primarily in Southeast Asia, as it aims to become a pan-ASEAN universal bank. Foreign acquisitions have provided a good platform for group growth in new markets and an opportunity to replicate its strong investment banking platform in these markets. Since 2008, the group has acquired stakes in banks in Thailand, China and the Philippines, and Royal Bank of Scotlands Asian cash equity business. However, Malaysia is the groups key market, accounting for 62% of 9M-2013 pre-tax profit. Asset quality is weaker than peers: The banks NPL ratio is higher than the industry average, partly as it still carries legacy bad loans from earlier acquisitions, such as the 2005 merger with Bumiputra Commercial Bank. Although the bank has had some success in reducing NPLs and improving coverage, its NPL ratio remains higher than the industry average. The banks NPL ratio stood at 2.5% at end-September 2013, with loan-loss coverage of 82%. Although consumer leverage in Malaysia is high, macro-prudential measures announced in the 2014 Malaysian budget should help mitigate asset-quality deterioration. Improving funding base: The bank has historically had a strong corporate deposit base. It has been steadily increasing its market share of retail deposits, bringing it into equilibrium with its overall market share, which is currently c.14%. Customer deposits provided 83% of total funding at end-September 2013, slightly below the average for its peers, while its LDR stood at 83%. Sound profitability: The bank has maintained good profitability, supported by healthy margins and strong non-interest income (including investment banking fee income). This helps to offset its above-average cost base, which is partly the result of recent acquisitions. Like the other Malaysian banks, CIMB Banks profitability has been further boosted since 2010 by lower provisioning costs, which may be difficult to sustain over the longer term. Capitalisation remains adequate: The bank is sufficiently capitalised, with a Tier 1 capital ratio of 9.2% at end-September 2013, which is below the peer average. Although the banks RWA growth has resulted in capital pressures, capitalisation should continue to be prudently managed.
178
BANKS
Company profile
On a standalone basis, CIMB Bank Bhd. is the third-largest bank in Malaysia, with total assets of MYR 299bn (USD 94bn) at endSeptember 2013 and a market share of c.14%. The bank is the commercial banking arm of CIMB Group Holdings, the countrys second-largest banking group and the leading investment bank in Malaysia. CIMB Bank has used its strong position as a domestic market-focused investment bank to expand its franchise with the aim of becoming a pan-ASEAN universal bank. The bank operates through a network of 312 branches in Malaysia. CIMB Group is owned by government entities Khazanah Nasional (30%) and the Employees' Provident Fund (15%). The CEO is the brother of Malaysias current prime minister.
Asia Credit Compendium 2014 CIMB Bank Bhd. (A3/Pos; A-/Sta; NR)
Summary financials
2010 Balance sheet (MYR mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/total income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan loss cover Loans/deposits Equity/assets Tier 1 capital ratio Total capital ratio 2.7 11.8 54.6 1.9 10.0 13.7 1.2 3.9 84.2 80.5 8.4 11.8 15.3 2.5 10.9 50.4 1.7 10.4 14.7 1.2 3.6 83.4 81.2 8.2 11.9 16.8 2.4 11.4 52.4 1.8 3.1 15.5 1.2 2.9 82.4 79.3 7.9 10.5 16.2 2.4 12.0 55.7 1.7 7.5 13.3 1.0 2.5 81.9 82.9 7.3 9.2 12.5 120 100 80 60 40 20 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 69,172 211,909 124,252 40,395 194,061 159,641 14,652 8,154 17,848 5,185 2,092 7,277 (3,975) 3,302 (330) 2,973 2,379 74,060 234,623 139,510 42,492 215,332 176,478 13,873 9,448 19,291 5,248 2,400 7,649 (3,856) 3,793 (395) 3,398 2,735 87,118 266,407 155,692 63,533 245,415 200,558 17,987 13,051 20,991 5,676 2,743 8,419 (4,414) 4,005 (123) 3,882 3,116 93,966 299,282 177,749 67,791 277,538 218,600 21,378 14,664 21,745 4,694 1,781 6,476 (3,605) 2,870 (215) 2,655 2,098 2011 2012 9M-13
Loans by borrower type, Sep-13 (MYR mn)

Others SMEs Government Foreign Large corporates Retail
3% 7% 7% 12% 19% 52% 0 20,000 40,000 60,000 80,000 100,000 Debt
Funding mix
Income statement (MYR mn)
BANKS
Asset quality (%)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Impaired loans ratio Loan-loss coverage (RHS)
Revenue by business segment, 9M-13 (MYR mn)

Investments International Commercial banking Corporate and investment banking Retail banking 0 1,000 2,000 6% 11% 12% 32% 39% 3,000

20 15 10 5 0 Dec-10 Dec-11 Dec-12 Sep-13
Revenue by type of income, 9M-13 (MYR mn)

20 Fee and commission income 12%
Tier 2
ROE (RHS)
15 10
Other
15%
5 0
Net interest income 0 1,000 2,000 3,000 4,000
72% 5,000
179
Asia Credit Compendium 2014 Daegu Bank (A2/Sta; BBB+/Sta; NR)


We initiate coverage of Daegu Bank with a Stable outlook. Our outlook reflects our expectation that the banks sound fundamentals will remain stable in 2014, and takes into account the potential for some M&A. Despite being a small bank by national standards, Daegu Bank has a dominant franchise in the Korean city of Daegu and the surrounding Gyeongbuk province. This provides it a lower cost funding base and underpins its reasonable earnings generation capacity. Although the bank has high exposure to the SME sector, its asset quality compares favourably with that of the larger banks, because of its lower exposure to troubled sectors.

Strong franchise in Daegu: The bank has a dominant position in Daegu, Korea s fourth-largest city, where it serves 3.8mn customers or over 70% of the population and has close links to the city government. The banks estimated market shares of deposits and loans in Daegu are 35% and 47%, respectively. In the surrounding province of Gyeongbuk, the banks market shares of deposits and loans are 21% and 20%, respectively. However, the banks operations are geographically concentrated in a single region. Small size and limited national market share: While the bank has a dominant market share in Daegu, it is relatively small on a national basis. At end-September 2013, its national market share of loans and deposits was less than 2%. In our view, this somewhat limits the banks ability to offer as broa d a product offering as its national competitors, and affects its efficiency ratios (measured as costs to average assets). Strong funding franchise: The banks strong franchise in Daegu and Gyeongbuk province where competition is less intense than in Seoul provides the bank a low cost of funding. The banks LDR has been relatively unchanged in the past five years, hovering at c.100%, and it stood at 99% at end-September 2013. Although this is in line with the average for the Korean commercial banks, it is high by Asian standards. High SME exposure: As a regional bank, Daegu Bank is required to extend at least 60% of its loans to SMEs. Exposure to the SME sector was 63% of its KRW loans at end-September 2013, compared with around 36% for the big four banks. Unlike the major commercial banks, whose loan growth has been c.5% p.a., Daegus loan portfolio has been growing at c.8.5% p.a. since 2009. Sound asset-quality indicators: Because of the nature of the regions economy, the banks loan portfolio is skewed towards the manufacturing sector (33% of total loans at end-September 2013). However, despite its high exposure to the SME sector, Daegu Banks asset-quality indicators are better than average. This is mainly due to its lower exposure to large, troubled corporate sectors such as construction, shipbuilding and shipping. The banks NPL ratio stood at 1.2% at end-September 2013, with loan-loss coverage at 120%. Reasonable earnings generation capacity: Despite the banks small size and concentration, its earnings have been more stable than those of its peers. Also, because of its lower funding cost and focus on the SME sector, the banks NIM is higher than the average for the major Korean commercial banks (2.7% in 9M-2013, compared with an average 1.95% for the big four banks). This has allowed it to report reasonable profits (9M-2013 ROA of 0.8%). However, like the other Korean banks, Daegu Banks NIM has compressed in recent years due to lower rates and strong competition. Also, Daegu Bank is more dependent than its peers on net interest income, which accounts for around 90% of its revenue. Sound capital: Despite steady loan growth, the banks capital adequacy has remained relatively unchanged in recent years, with its Tier 1 capital ratio hovering at c.11%. The banks Tier 1 capital ratio stood at 11.5% at end -September 2013, with an equity-to-assets ratio of 7.8%. This is broadly in line with the average for the large Korean banks. Moderate M&A risk: We believe that Daegu Bank, like some of the other regional banks, is likely to be interested in acquiring Kyongnam Bank, a regional bank owned by Woori Finance Holding. While this would be positive from an earningsdiversity point of view in the medium term, it could be credit-negative in the near term, depending on the terms of the transaction.
180
BANKS
Company profile
Daegu Bank is the second-largest regional bank in Korea, with total assets of KRW 36.9tn (USD 34bn) at end-September 2013. The bank is the leading player in Daegu, Koreas fourth-largest city, where it has market shares of loans and deposits of 35% and 46%, respectively. Although it caters to a broad customer base of individuals and corporates, SMEs remain the banks main customer base, representing 63% of its loan portfolio. Daegu Bank has a network of 252 domestic branches. The bank was set up in 1967 as Koreas first regional bank. The bank is owned by DGB Financial Group and is the key entity in the group, accounting for the bulk of assets and profits. The Saudi Arabian Monetary Agency is DGBs main shareholder (8% stake).
Asia Credit Compendium 2014 Daegu Bank (A2/Sta; BBB+/Sta; NR)

Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.3 6.4 41.1 1.4 47.4 12.0 0.8 1.4 115.6 102.0 6.7 11.0 14.8 3.3 7.3 45.2 1.5 25.2 14.6 1.0 1.1 154.7 99.4 7.1 10.8 14.2 3.0 7.3 47.5 1.5 30.6 12.0 0.9 1.0 141.8 97.1 7.2 10.9 14.6 2.7 7.4 46.9 1.3 24.9 10.9 0.8 1.2 120.5 99.3 7.8 11.5 15.4 200 NPL ratio Loan-loss coverage (RHS) 150 100 50 Customer loans 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 0 0 10,000 20,000 71% 30,000 867 101 968 (398) 570 (270) 300 227 947 73 1,021 (461) 560 (141) 419 310 918 91 1,010 (479) 530 (162) 368 281 683 34 717 (336) 381 (95) 286 218 100% 80% 60% 40% 20% 26,718 30,084 19,480 5,796 28,071 19,095 3,681 2,530 2,013 27,150 31,289 21,898 6,214 29,063 22,033 3,329 2,138 2,226 32,066 34,131 24,162 6,807 31,673 24,892 2,900 2,048 2,458 34,355 36,920 26,057 7,266 34,054 26,242 3,314 2,372 2,866 2011 2012 9M-13

Other Large corporations Households SMEs 0 5,000 Deposits 10,000 Borrowings 2.1% 8.0% 27.1% 62.8% 15,000 Debt 20,000
Funding mix
BANKS
Asset quality (%)

2.0 1.5 1.0 0.5

Cash and due from banks Other Investment securities 4% 6% 20%

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 1 capital ratio Tier 2 capital ROE (RHS) 20

Other 15 10 5 0 -200 0 200 400 600 800 Fees/ commissions Net interest income 6% -3%
97%
181
Asia Credit Compendium 2014 Dah Sing Bank Ltd. (A3/Neg; NR; BBB+/Sta)

Our Negative credit outlook on DSB reflects increasing assetquality risks for most Hong Kong banks. DSB holds a modest position in the saturated and highly competitive Hong Kong market due to its small size. Like other small Hong Kong banks, it has been increasing its exposure to the mainland, albeit more slowly. However, from an earnings perspective, the bank is still vulnerable to a downturn in the mainland through its stake in Bank of Chongqing. To defend its margins, DSB has started to grow its unsecured lending business, which we believe risks. poses asset-quality However, its funding base is strong, and we think its good capital base will provide support.

Size constrains its credit profile: DSB is a small bank, with a loan market share of less than 2% in Hong Kong. Its home market is over-banked, and intense competition has resulted in limited pricing power and a relatively high-cost deposit base. Competition in the sector is likely to remain intense. Two other small independent Hong Kong banks (Wing Hang Bank and Chong Hing Bank) were in discussions as of late 2013 about a sale to larger non-Hong Kong institutions. Hong Kong loan book is geared towards SMEs and individuals: The banks Hong Kong loan portfolio is well balanced between corporates (55% of total loans) and individuals (45%). However, because of its size, its corporate focus is on the SME sector, which accounts for c.70% of total Hong Kong corporate loans and could be more vulnerable during an economic downturn. Like other Hong Kong banks, its exposure to the property segment is high. Property development and investment accounts for 28% of its Hong Kong loan book, and residential mortgages for 31%. Over 82% of DSBs Hong Kong loan portfolio is covered by collateral; this is slightly higher than the peer average and reflects the banks high real estate exposure. In Hong Kong, the bank has started to gradually focus on higher-yielding segments through an unsecured consumer lending subsidiary, OK Finance. Small but growing presence in mainland China and Macau: Like many of its peers, DSB has expanded into mainland China through Dah Sing Bank (China) where NIMs are higher. Loan growth in the mainland and Macau has been contributing to DSBs growth since end-2009. However, the banks growth in the mainland appears to have been less aggressive than some of its peers. Loans to the mainland accounted for 16% of total loans at end-June 2013 (up from c.3% at end-2009). Mainland lending is concentrated in southern China and primarily serves the needs of its Hong Kong customers, though exposure to mainland entities has been increasing. In Macau, the bank now caters to all segments after acquiring Banco Comercial de Macau in 2005. Below-average profitability: DSBs profitability has been below the peer average in recent years. Like other Hong Kong banks, its NIMs have faced downward pressure since 2009, owing to low rates and intense loan competition. The banks cost base is also higher than average, resulting in lower-than-average profitability. Its 20%-owned Bank of Chongqing contributes a high c.25% to profit. Excluding this, DSBs bottom line profitability would likely be even lower. Given the deterioration in asset quality in China and the potential for rising provisions there, we expect Bank of Chongqings contribution to DSBs profit to decline. Asset-quality cycle is turning negative: Despite a slight deterioration in its NPL ratio in H1-2013, DBSs asset-quality indicators like those of other Hong Kong banks are currently at cyclical lows. The banks impaired loan ratio stood at 0.4% at end-June 2013, with loan-loss coverage of almost 88%. Despite the banks below-average exposure to the mainland, we expect asset-quality indicators to deteriorate as the credit cycle continues to turn. Like other Hong Kong banks, DSB is particularly vulnerable to a downturn in the property market. Good funding base: DSBs main source of funding is customer deposits (c.88% of total funding). However, unlike some of the larger banks, low-cost deposits accounted for only 30% of total deposits at end-June 2013. DSBs LDR, at 88% at end-June 2013, is in line with the peer average. Adequate capitalisation: The bank had a strong capital position, with a Tier 1 capital ratio of 10%, at end-June 2013. This is broadly in line with the peer average.
BANKS
Company profile
Dah Sing Bank (DSB) is a small bank in Hong Kong, with total assets of HKD 161bn (USD 21bn) and a c. 2% market share at endJune 2013. It has 45 branches in Hong Kong and through subsidiaries 14 branches in Macau and eight in mainland China. DSB also has a 20% stake in Bank of Chongqing, a fast-growing bank in western China. Hong Kong loans account for 73% of DSBs total loans, with the mainland and Macau accounting for a further 16% and 10%, respectively. Its Hong Kong loan book is balanced between corporates (55% of total loans) and individuals (45%). DSB has a strong focus on SMEs in its corporate segment. It is 100% owned by Dah Sing Financial Holdings, which is 40% owned by the Wong family and c.15% by Bank of Tokyo-MUFJ.
182
Asia Credit Compendium 2014 Dah Sing Bank Ltd. (A3/Neg; NR; BBB+/Sta)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (HKD mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.7 14.9 46.3 1.0 6.6 8.8 0.9 0.3 216.9 84.4 10.3 10.2 16.3 1.4 15.3 52.0 1.1 12.8 7.6 0.8 0.5 99.8 80.9 10.2 10.5 15.2 1.5 16.0 51.8 1.2 8.4 9.3 0.9 0.3 87.2 82.5 9.9 10.3 14.9 1.8 17.6 46.0 1.1 12.9 10.4 1.0 0.4 88.3 87.7 9.9 10.0 14.2 1,956 808 2,763 (1,278) 1,485 (98) 1,268 1,074 1,919 1,017 2,936 (1,527) 1,409 (181) 1,227 1,092 2,204 1,337 3,541 (1,833) 1,708 (144) 1,565 1,411 1,344 630 1,974 (908) 1,065 (138) 926 813 100% 80% 60% 40% 20% 17,011 131,839 82,095 32,810 118,293 97,281 1,524 11,374 13,546 18,997 147,229 91,760 32,262 132,211 113,369 2,385 9,580 15,018 20,108 155,839 97,309 36,205 140,420 117,936 2,646 12,445 15,419 20,795 161,159 104,259 39,160 145,272 118,935 2,593 15,420 15,887 2011 2012 H1-13

Others Credit card Other consumer Corporate (property) Resi. mortgage Corporate (others) Outside HK 0 10 Deposits Debt/CDs 20 Interbank 1.8% 3.9% 6.1% 16.1% 19.0% 23.6% 29.4% 30
Funding mix
BANKS

3 Average interest earned
2 Net interest margin
0 2009 2010 2011 2012 H1-13
Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Restructured loans/loans Impaired loans ratio Loan-loss coverage (RHS) 250

Others 200 150 100 50 0 0 20 40 60 80 Macau Mainland Hong Kong 10% 16% 73% 1%


ROE (RHS) 12 10 8 6 Trading Other Fees/commissions Net interest income 0.0 0.5 1.0 2% 12% 18% 68% 1.5 2.0
Tier 2 capital
4 2 0
183
Asia Credit Compendium 2014 DBS Bank Ltd. (Aa1/Sta; AA-/Sta; AA-/Sta)

We view DBS as a strong name among Asian banks. Our Stable view reflects DBS dominant franchise in Singapore, partial government ownership and good financial fundamentals. The bank benefits from its large exposure to the low-risk markets of Singapore and Hong Kong, and from Singapores strong regulatory framework. In our view, the banks decision to drop its bid for Bank Danamon Indonesia is credit-positive. However, we consider the banks risk appetite to be higher than its peers, which will shape DBS expansion in its target markets. Our view also takes into account the potential for higher reliance on foreign-currency funding from the wholesale markets to meet its regional growth ambitions.

Dominant franchise in Singapore: DBS is the largest bank in Singapore. Its position strengthened considerably following the acquisition of government-owned savings bank POSBank in 1998, which gave DBS access to a large pool of lowcost deposits. As the largest bank in Singapore, DBS enjoys strong implicit support due to its systemic importance, in our view. Regional growth ambitions stymied, but not eliminated: Unlike United Overseas Bank Ltd. (UOB) and Oversea-Chinese Banking Corp. Ltd. (OCBC), which derive c.30% of their revenue from emerging markets in South and Southeast Asia, DBS derives only around 7% from these markets. DBS exposure to emerging Asia is concentrated in Indonesia, Taiwan, China and India. Although DBS proposed acquisition of Temaseks 67% stake in Bank Danamon Indone sia (Danamon) in April 2012 was thwarted by the local regulator, DBS has not ruled out further acquisitions that would meet its strategic targets. Nevertheless, a similar-sized acquisition is unlikely, as the proposed acquisition was made feasible by Danamons and DBS joint owner, Temasek. As a result, DBS abandonment of a partial or full acquisition of Danamon is credit-positive, in our view. Exposure to Greater China exceeds peers: DBS lending presence in Greater China (Taiwan, Hong Kong and China) was 35% of gross loans, the highest among domestic peers (UOB had 6%, OCBC had 15%). Similarly, loan growth to the region has been rapid, growing 33% y/y in 9M-2013, versus 22% for UOB and 47% for OCBC. Excluding Hong Kong, growth to Greater China was 69% y/y. Although increased China exposure should improve the diversity of its loan book, we believe it could pose risks to asset quality if pursued too aggressively. Strong funding base: Customer deposits provided 83% of total funding, with lowcost deposits representing 58% of customer deposits at end-September 2013. This has resulted in a lower cost of funding compared with its peers. However, as a result of its regional growth ambitions, the bank is more reliant on wholesale markets for foreign currency funding than peers. This is borne out in fluctuations in the banks USD LDR, which increased to 165% at end -March 2013 and 171% at end-September 2011, as a significant portion of loan growth was in USD and focused in Greater China. Nevertheless, the bank successfully reduced its USD LDR to 133% and non-SGD LDR to 109% at end-September 2013, having built up its USD deposits, primarily via higher-cost fixed deposits. The overall LDR was 91% at end-September 2013. Real-estate exposure: Like the two other Singapore banks, DBS has significant exposure to the property market. Residential loans represented 20% of the banks total loans at end-September 2013, and construction loans another 17%. Additional exposure is likely to be classified under investment and holding companies. Strong credit metrics: DBS fundamentals are sound in the regional context and are comparable to those of its two Singaporean peers. Despite its lower cost of funding, the banks NIM has tended to be slightly lower than those of UOB and OCBC, which have historically had a larger presence in the SME and consumer segments. Additionally, DBS increasing usage of fixed deposits and wholesale market funding will weaken its NIM in the rising rate environment more than peers. Nevertheless, the bank reported an annualised ROA of 1.0% for 9M-2013 as a healthy increase in fee income helped offset an uptick in provisions. However, asset-quality indicators have continued to improve and remain at cyclical lows. Its NPL ratio stood at 1.2% at end-September 2013, with loan-loss coverage of 121%. Capital ratios are strong, with Tier 1 and common-equity Tier 1 ratios of 13.3% at end-September 2013.
184
BANKS
Company profile
DBS Bank Ltd. (DBS) is the largest of Singapores three local banks, with total assets of SGD 401bn (USD 320bn) at end-September 2013 and estimated market shares of 23% of domestic loans and 26% of deposits. The bank was set up in 1968 as a development bank but has transformed itself into a fully fledged universal bank. DBS has a strong franchise in corporate banking but also offers a broad range of retail, commercial, and Islamic banking and capital-markets services. Of the three Singapore banks, DBS is the only one with government ownership (29%, through Temasek). It is also the sixth-largest bank in Hong Kong, with a 3% market share of deposits.
Asia Credit Compendium 2014 DBS Bank Ltd. (Aa1/Sta; AA-/Sta; AA-/Sta)
Summary financials
2010 Balance sheet (SGD mn) Total assets (USD mn) Total assets Total loans Investments Total liabilities Customer deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net Income Key ratios (%) Net interest margin Fee income/total income Cost/income Cost/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.8% 19.5% 40.8% 1.1% 28.2% 5.9% 0.7% 1.9% 93.4% 82.4% 11.7% 15.1% 18.4% 1.7% 19.9% 42.6% 1.1% 16.2% 9.9% 1.1% 1.3% 117.7% 90.3% 9.7% 12.9% 15.8% 1.7% 18.3% 41.8% 1.0% 8.3% 11.6% 1.2% 1.2% 126.0% 88.7% 10.2% 14.0% 17.1% 1.6% 21.1% 42.2% 1.0% 15.7% 10.6% 1.0% 1.2% 121.1% 91.3% 9.2% 13.3% 15.9% 140 Loan-loss coverage (RHS) 120 100 80 60 40 20 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Others Treasury Consumer banking Institutional banking 0 1,000 2,000 3,000 8% 12% 28% 52% 4,000 221,061 283,710 151,698 48,275 250,608 187,695 18,811 8,558 33,102 4,318 2,850 7,168 (2,925) 3,225 (911) 2,314 1,860 262,878 340,847 194,275 54,921 307,778 218,992 27,601 15,658 33,069 4,825 2,933 7,758 (3,303) 4,455 (722) 3,733 3,290 288,536 353,033 209,395 59,199 317,035 241,165 25,162 15,741 35,998 5,285 3,353 8,638 (3,614) 5,024 (417) 4,607 4,019 319,615 401,373 240,339 61,308 364,484 268,656 27,837 27,870 36,889 4,115 2,727 6,842 (2,888) 3,954 (619) 3,335 2,854 2011 2012 9M-13
Loans by geography, Sep-13 (SGD mn)

Other South and SE Asia HK Rest of Greater China Singapore 0 50,000 100,000 8% 9% 16% 19% 47% 150,000
Loans by industry, Sep-13 (SGD mn)

FI/inv. companies Individuals Manufacturing Construction Others Housing loans Commerce 0 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009 2010 2011 2012 9M-13 Net interest margin 20,000 40,000 4% 7% 12% 17% 18% 20%
Income statement (SGD mn)
BANKS
21% 60,000

Asset quality (%)

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Impaired loans ratio
Revenue by business segment, 9M-2013 (SGD mn)

Revenue by geography, 9M-2013 (SGD mn)

14 12 Others South and South East Asia Greater China (ex-HK) Hong Kong Singapore 0 1,000 2,000 3,000 4,000 3% 7% 8% 21% 60% 5,000
ROE (RHS) Tier 2
10 8
6 4 2 0
185
Asia Credit Compendium 2014 Export-Import Bank of China (Aa3/Sta; AA-/Sta; A+/Sta)

China EXIMs quasi-sovereign status is underpinned by (1) its full ownership by the Chinese government, (2) its policy role in promoting domestic and international trade and (3) its increasing role as a key conduit for the implementation of the governments economic and foreign policy. Despite the banks important policy role and integral links with the government, our Negative outlook reflects the banks weak fundamentals on the back of low earnings generation capacity, high dependence on wholesale markets for funding, above-average leverage and below-average disclosure and transparency.

Important policy role: China EXIM is the Chinese governments export credit agency. However, the bank is broadening its remit beyond that of a traditional export credit agency. It aims to transform itself into an international economic cooperation bank and play a more prominent role in the implementation of Chinas economic and foreign policy. This includes facilitating the export and import of Chinese goods; providing financing for the offshore establishment of manufacturing facilities and the construction of large projects by Chinese companies; supporting the offshore exploration and development of natural resources by Chinese companies; and providing development aid to developing countries in line with the governments foreign policy. China EXIM supplements the role of commercial banks by providing financing that commercial banks cannot provide, or by absorbing risks that commercial banks are unable to take on. Full government ownership and strong support: China EXIM is 100% owned by the government through the MoF. The MoF, in conjunction with central government agencies, determines the amount of financial resources to be made available to China EXIM each year, based on the banks funding requirements. These resources include capital contributions from the central government, fiscal subsidies from the MoF and short-term loans from the central bank. The most recent capital injection (CNY 3.6bn) was received in 2007. According to the Special Decree of the State Council of March 1994, the central bank is obligated to provide short-term liquidity support to China EXIM if required. Although there is no explicit guarantee for China EXIMs obligations, its ratings are directly linked to those of the sovereign; any upgrades or downgrades of Chinas sovereign ratings would result in upgrades or downgrades for China EXIM. Limited disclosure and transparency: In 2009, the bank adopted Chinas updated accounting rules and restated its 2008 numbers accordingly. However, the accounts are not audited, and financial disclosure and transparency are limited compared with both credit export agencies in other countries and the banks peers in China. High leverage: Although China EXIM does not publish capital-adequacy ratios in line with Basel guidelines, its leverage is high. The equity-to-assets ratio stood at 1.3% at end-2012 (equivalent to liabilities to equity of 77x). This does not take into account off-balance sheet commitments of CNY 524bn (44% of loans). Rapid loan growth: In line with the governments economic stimulus programme, China EXIM like Chinas commercial banks and the other policy banks has been reporting strong loan growth. The banks loan portfolio has doubled since end-2009, and in 2012 alone, it grew by 29%. As with the other Chinese banks, rapid loan growth could mask ongoing deterioration and lead to asset-quality deterioration as exposures season. The banks reported NPL ratio stood at 0.75% at end-2012. Low profitability: China EXIMs profitability is low, as the bank is a vehicle for the implementation of the governments policy objectives and earnings maximisation is not its overriding goal. The ROA for 2012 was 0.3% on net income of CNY 3.8bn. The bank aims to generate moderate profitability, while preserving its capital. Dependence on wholesale funding: China EXIM is mainly reliant on the domestic wholesale markets for funding. Debt financing provided 76% of funding at end-2012, with interbank funding providing a further 19%. The remainder was made up mostly of customer deposits (not retail).
BANKS
Company profile
The Export-Import Bank of China (China EXIM) is the smallest of Chinas three policy banks. It was set up in 1994 as the countrys export credit agency and had total assets of CNY 1.6tn (USD 247bn) at end-2012. However, the bank is extending its remit beyond that of a traditional export credit agency. It aims to transform itself into an international economic co-operation bank and play a more prominent role in implementing Chinas economic and foreign policy. The bank is 100% owned by the government through the Ministry of Finance (MoF) and operates under the direct authority of the State Council, the governments highest administrative body. The bank operates through 21 branches and three representative offices.
186
Asia Credit Compendium 2014 Export-Import Bank of China (Aa3/Sta; AA-/Sta; A+/Sta)
Summary financials
2009 Balance sheet (CNY mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (CNY mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 0.5 30.8 35.2 0.3 15.2 28.4 0.4 1.1 134.9 NM 1.3 NA NA 0.7 27.8 33.3 0.3 25.9 24.3 0.3 0.9 NA NM 1.4 NA NA 1.0 28.9 32.8 0.3 42.8 21.6 0.3 0.6 NA NM 1.3 NA NA 1.0 16.0 23.3 0.3 67.4 21.0 0.3 0.8 NA NM 1.3 NA NA 3,498 2,850 6,348 (2,237) 4,111 (625) 3,486 2,521 6,006 1,958 7,964 (2,652) 5,312 (1,375) 3,938 2,804 10,435 631 11,067 (3,629) 7,437 (3,183) 4,255 3,135 13,054 7,520 20,575 (4,795) 15,780 (10,630) 5,150 3,793 100% 80% 60% 40% 20% 116,028 792,138 591,885 52,293 781,949 51,277 222,918 488,589 10,189 134,263 190,478 247,405 887,077 1,199,057 1,558,933 707,563 914,301 1,183,032 41,771 71,171 126,254 874,230 1,182,924 1,538,864 55,235 57,706 70,266 207,489 232,513 291,112 583,682 866,187 1,150,221 12,847 16,133 20,069 2010 2011 2012
Export credit disbursement by segment, 2012 (CNY bn)

Agricultural products Other Equipment Overseas investment projects Shipping Overseas construction Mechanical/Electronic products High-tech exports 0 10 Interbank 20 Repos 30 Debt 4% 7% 7% 7% 11% 15% 15% 35% 40
Funding mix
Deposits
BANKS
0% Dec-09 5 4 3 2 1 0 2009 2010 2011 2012 Net interest margin Dec-10 Dec-11 Dec-12

Asset quality (%)

1.5 NPL ratio 1.0
Asset mix, Dec-12 (CNY mn)

Other Investment securities Cash and due from banks Customer loans 2% 8% 14% 76% 0 500,000 1,000,000 1,500,000
0.5
0.0 Dec-09 Dec-10 Dec-11 Dec-12

2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12
Source: Company reports, Moodys, Standard Chartered Research
Revenue by type of income, 2012 (CNY mn)

30 Fees/commissions 16%
Equity/assets ratio
ROE (RHS)
25 20 15 10 5 0
Other
21%
Net interest income 0 5,000 10,000
63% 15,000
187
Asia Credit Compendium 2014 Export Import Bank of India (Baa3/Sta; BBB-/Neg; BBB-/Sta)

India EXIMs strong links to the government are underpinned by its important policy role. The bank has a good track record of consistent and timely support from the government in the form of capital injections and loan guarantees. Metrics are healthy, with adequate capitalisation and stable (albeit low) profitability. While asset quality has come under pressure recently, the banks potentially stressed loan portfolio is still comfortably smaller than that of Indias public-sector banks. We expect asset-quality weakness to persist; however, ongoing government support should prevent a material deterioration in metrics. Our Negative outlook on the credit reflects our Negative outlook on the sovereign.

Important policy role: Mandated to provide financial assistance to Indian exporters and importers with a view to promoting Indias international trade, India EXIM plays an important policy role. Its key focus areas are export finance and export capability creation. The former includes loan disbursals to finance export transactions, and the latter aims to meet the financing needs of exporting companies over various stages of their business cycle including the provision of project finance, working-capital requirements and advisory services. In addition to facilitating exports, the bank engages in financing infrastructure projects for export development. India EXIM plays an important role in promoting bilateral ties with other sovereigns by providing lines of credit at the behest of the government. These lines are extended to finance exports from India and to fund projects, and are generally government-guaranteed. The banks foreign policy role has gained importance in the past couple of years, with direct assistance to governments increasing to c.28% of its loans as of end-March 2013. The bank has in place 167 lines of credit covering 75 countries. Full government ownership and record of support: India EXIM is wholly owned by the government and has received consistent capital support from its parent in the past few years (INR 3bn each year from FY09-FY12 and INR 2bn in FY13; INR 5.6bn of Tier 1 bonds issued to the government were converted into equity in FY13). The government has also helped India EXIM by compensating it for losses on certain credit exposures taken at the government's behest and by guaranteeing its foreign government exposures. Diversified funding sources: India EXIMs funding base is primarily made up of borrowings. Foreign-currency exposure is fairly balanced; foreign-currency liabilities account for 51% of total liabilities and foreign-currency assets account for 48% of total assets. The bank is increasingly accessing foreign-currency bond markets in addition to tapping the USD bond market (it issued Indias first EMBI index-eligible bond in FY12), it has tapped the AUD, JPY, CHF and SGD markets. Low ALM mismatches and liquidity lines with the central bank keep India EXIM liquid. Asset quality has deteriorated but remains better than peers: India EXIMs NPL ratio increased to 2.3% in FY13. Its portfolio of restructured loans rose to 4.1% of gross loans, taking potentially stressed loans to 6.4%. Despite this deterioration, its asset-quality and coverage metrics are still much better than those of Indian public-sector banks; loan-loss coverage has remained stable in the 80% range. The bank is vulnerable to concentration risks given the nature of its business its top three industry exposures are to ferrous metals (10%), EPC (9%) and textiles (8%), while its top 10 borrower groups accounted for 190% of capital (or 10.8% of total exposure) as of March 2013. However, securities/government guarantees on part of its book mitigate risks. Stable but modest profitability: Reflecting the banks policy role and its dependence on wholesale funding, margins are lower than banking-sector peers. That said, NIM was broadly stable in the 2.1-2.2% range in FY12-FY13 and overall profitability is comfortable (ROE of c.11% and ROA of c.1.1%), supported by low operating costs. Provisioning costs have been rising and could continue to be a drag on earnings as asset-quality pressures persist. Comfortable capitalisation: While capital ratios have declined, they remain comfortable, with Tier 1 and total capital ratios of 13.7% and 15.3%, respectively. Given India EXIMs policy role, we expect ongoing support from the government to keep capital at adequate levels.
BANKS
Company profile
The Export-Import Bank of India (India EXIM) is 100% government owned and was established in 1982 under the Export-Import Bank of India Act, 1981. India EXIM started off as a pure provider of export credit. However, in the late 1980s and early 1990s, it changed its business focus to the provision of term finance to export-oriented companies. It has recently developed a more balanced business model, with a mix of trade finance and term finance to meet exporters needs. It had an overall asset base of INR 761bn (USD 14bn) as of 31 March 2013. India EXIM had 10 domestic offices, six international representative offices, and one overseas branch (London) as of March 2013. Its top management is largely appointed by the government.
188
Asia Credit Compendium 2014 Export Import Bank of India (Baa3/Sta; BBB-/Neg; BBB-/Sta)
Summary financials
FY10 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Bonds Loans Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.8 7.2 11.2 0.2 2.7 12.2 1.1 1.0 81.1 NA 9.6 16.9 19.0 2.0 11.4 6.4 0.2 22.6 11.7 1.1 1.0 80.5 NA 9.9 15.1 17.0 2.2 12.9 5.2 0.1 32.2 11.6 1.1 1.5 80.4 NA 9.7 14.6 16.4 2.1 11.8 5.9 0.2 36.1 10.8 1.1 2.3 79.9 NA 9.9 13.7 15.3 7,616 1,322 8,938 (998) 7,940 (216) 7,724 5,135 9,671 2,318 11,989 (771) 11,218 (2,541) 8,677 5,836 12,248 3,499 15,746 (820) 14,926 (4,800) 10,126 6,751 14,392 3,724 18,116 (1,078) 17,038 (6,151) 10,888 7,423 100% 80% 60% 40% 20% 10,480 471 390 24 425 29 243 133 45 12,280 548 457 28 493 32 272 167 54 12,515 637 539 32 575 32 331 184 62 14,023 761 644 25 686 31 451 163 75 FY11 FY12 FY13
Loans breakdown, Mar-13 (INR bn)

FIs outside India Banks in India Foreign governments Others 0 100 200 Bonds 300 Loans 3% 14% 28% 55% 400
Funding mix
Deposits
BANKS
0% Mar-09 10 Average interest earned 8 6 4 2 0 FY09 FY10 FY11 FY12 FY13 Net interest margin Mar-10 Mar-11 Mar-12 Mar-13
Asset quality (%)

2.5 2.0 1.5 1.0 0.5 0.0 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Loan-loss coverage (RHS) NPL ratio 85 82 79 76 73 70
Exposure by sector, Mar-2013 (%)

Renewable energy Capital goods Petroleum products Chemicals Auto Pharmaceuticals Textiles EPC Services Metals Others 0 10 20 30 40 50

20 15 10 5 0 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Tier 1 capital ratio 6 3 0 ROE (RHS) 15 Tier 2 capital 12 9
Revenue by type of income, FY13 (INR mn)

Other 9%
Fees/commissions
12%
79% 15,000
Note: Financial year ends 31 March; Source: Company reports, Standard Chartered Research
189
Asia Credit Compendium 2014 Export-Import Bank of Korea (Aa3/Sta; A+/Sta; AA-/Sta)

We view KEXIM as the benchmark credit in the Korean policy bank space. The banks quasi-sovereign status is underpinned by (1) an implicit guarantee from the Korean government through Article 37 of the KEXIM Act, (2) its full ownership by the government and (3) its role as a key conduit for the implementation of government economic policy. However, some of the banks fundamentals are not particularly robust. Profitability is low, as profit generation is not the banks remit; concentration to some weak sectors is high; and the bank relies on the wholesale markets for funding.

Implicit guarantee: Under Article 37 of the KEXIM Act, the Korean government has a legal obligation to maintain KEXIMs solvency and replenish any deficit in excess of reserves. In our view, this provides an implicit guarantee for the banks debt. Although the KEXIM Act can be amended by the National Assembly, we believe KEXIM will remain a key instrument of government policy. Important policy role: KEXIM plays a key role in implementing the governments economic policy. In addition to its function as the countrys official export-import agency, it provides credit for overseas investment, financing for the development of overseas natural resources (e.g., oil and gas) and advisory services on business opportunities overseas. KEXIM is also responsible for the operation of the Economic Development Cooperation Fund (an official development assistance programme) and the Inter-Korean Cooperation Fund (an economic co-operation programme with North Korea). In 2008 and 2009, KEXIM served as a conduit for implementing government measures to support the Korean financial system by providing liquidity through on-lending facilities. Unlike some of the other policy banks (e.g., KDB and IBK), KEXIM does not compete with commercial banks. As part of the re-merger of KDB and KoFC, c.KRW 2tn of foreign assets will be transferred from KoFC to KEXIM. Fully government-owned: KEXIM is 100% owned by the Korean government through the Ministry of Strategy and Finance (68% at end-June 2013), the Bank of Korea (16%) and the Korea Finance Corporation (KoFC , 16%). KEXIMs ratings are linked directly to those of the sovereign, and the bank has been upgraded in line with the upgrades of the sovereign. Finally, KEXIM is regulated by the Ministry of Strategy and Finance rather than the Financial Services Commission, the traditional regulator for banks.
BANKS
Company profile
The Export-Import Bank of Korea (KEXIM) was created in 1976 as the countrys export credit agency, and is one of Koreas key policy banks. KEXIM is a non-profit institution, and its main function is to provide financing to Korean exporters and importers. It was also used as a conduit for government measures to support the financial system in 2008 and 2009. KEXIM had total assets of KRW 63tn (USD 55bn) at endJune 2013. It is, indirectly, 100% owned by the government. Article 37 of the KEXIM Act ensures its solvency by requiring the government to cover KEXIMs losses if they cannot be covered by the banks reserves. Unlike with some of the other Korean policy banks, a privatisation of KEXIM has not been considered.
Continuing government support: Although KEXIM has never incurred losses, the government has demonstrated its support through several capital injections to support the banks growth. The bank has received regular ca pital injections, totalling KRW 3.8tn since 2009, to support its business. Further capital injections from the government are expected. Moderate fundamentals: Given that KEXIM is a policy bank, profit generation is not its overriding goal; this explains why its profitability is considerably lower than that of commercial banks (ROA of 0.2% in H1-2013). The banks NPL ratio stood at 1.3% (according to our calculations) at end-June 2013, with loan-loss coverage of 338%. However, precautionary loans amounted to a further 6.9% of the portfolio, which is higher than average. Also, its concentration in some weak sectors (e.g., shipbuilding) is high. The banks Tier 1 capital ratio declined in H1 -2013 on the back of strong loan growth during the period and stood at 8.7% at end-June 2013. Potentially vulnerable funding base: KEXIM is not a deposit-taking institution and, as a result, it is reliant on the wholesale markets particularly offshore for funding. Although the implicit guarantee from the Korean government enables KEXIM to tap the wholesale markets at a better rate than its commercial peers, the bank is still exposed to dislocations in the international wholesale markets. External liabilities: The bulk of the banks funding is in foreign currency (81% of total funding at end-June 2013, according to our calculations), as it aims to match the currencies of its assets and liabilities. Following the global financial crisis in 2008, the bank diversified its funding base to include a broader spectrum of currencies in order to reduce its reliance on USD funding. At end-June 2013, 46% of the banks funding was in USD.
190
Asia Credit Compendium 2014 Export-Import Bank of Korea (Aa3/Sta; A+/Sta; AA-/Sta)
Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Interbank Borrowings Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 0.8 24.2 10.6 0.3 90.0 1.0 0.2 1.2 303.0 NM 14.0 9.3 10.8 0.7 33.1 17.1 0.3 77.7 2.1 0.3 1.0 394.0 NM 13.6 9.3 10.6 0.7 29.2 15.9 0.3 55.2 1.9 0.3 0.9 450.7 NM 15.7 10.3 11.6 0.8 34.4 18.2 0.3 84.9 1.1 0.2 1.3 338.3 NM 14.4 8.7 10.2 342 759 1,101 (117) 984 (886) 98 67 330 504 834 (142) 691 (537) 154 147 342 669 1,011 (161) 850 (469) 187 149 236 286 522 (95) 427 (362) 65 48 100% 80% 60% 40% 20% 41,465 46,689 39,908 3,205 40,167 2,600 1,684 32,932 6,523 47,840 55,133 46,118 3,949 47,624 2,870 2,482 39,204 7,509 51,285 54,588 45,859 4,493 46,023 1,604 1,153 40,020 8,566 55,195 63,220 53,200 4,736 54,090 5,549 0 44,873 9,130 2011 2012 H1-13* SMEs 6%
Loans by borrower type, Jun-13 (KRW bn)
Large corporations Public sector and others 0 10,000 Banks Borrowings
41%
53% 20,000 Debt 30,000
Funding mix
BANKS
0% Dec-09 5 4 3 2 1 0 2009 2010 2011 2012 H1-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Jun-13
Asset quality (%)

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Impaired loans ratio Loan-loss coverage (RHS) 1,500 1,200 900 600 300 0
Loans by region, Jun-13 (KRW bn)

Africa Americas Europe Asia 0 10,000 20,000 30,000 5% 11% 11% 73% 40,000 50,000

15 Tier 2 capital 10 Tier 1 capital ratio ROE (RHS) 10 8 6
Revenue by type of income, Jun-13 (KRW bn)

Other 20%
Fees/commissions 4 2 Net interest income 0 50 100 150
34%
45% 200 250
0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13

*IFRS; Source: Company reports, Standard Chartered Research
191
Asia Credit Compendium 2014 Export-Import Bank of Malaysia (A3/Pos; NR; A-/Neg)

MEXIMs quasi-sovereign status is underpinned by (1) its full ownership by the Malaysian government, (2) its role as the countrys export credit agency and in facilitating the development of sectors deemed to be of strategic importance to the country, and (3) its track record of government support, when required. However, the banks fundamentals are weak. Although capital adequacy is strong, asset quality has been very weak, and the bank is wholly reliant on the wholesale markets for funding. Given the nature of its business and its client base, it is also vulnerable to swings in global trade. The banks quasi-sovereign status and important developmentoriented role underpin its Stable outlook.

Important policy role: MEXIM is one of six DFIs prescribed unde r Malaysias DFI Act. DFIs are entities created by the government with the aim of developing sectors deemed to be of strategic importance to the countrys development. Although MEXIM is relatively small compared with the commercial banks, it offers financing to sectors and companies with which commercial banks would typically not get involved. For example, in addition to trade financing, the bank provides longer-term project finance for SMEs. Government ownership: The bank is wholly owned by the government. Despite the absence of explicit sovereign support language, the banks ratings match those of the Malaysian sovereign because of its policy role and history of government support. Like the other DFIs, MEXIM is regulated and supervised by Bank Negara Malaysia. History of government support: The Malaysian government has demonstrated its support for MEXIM. In 2007, for the first time in its history, the bank reported a loss of MYR 50mn as a result of high loan-loss provisioning. The government provided liquidity support at the time, and in June 2008, MEXIM received a capital injection of MYR 1.98bn from the government through the conversion of loans into equity. On the back of this, a new management team was appointed and the banks credit process revamped. Weak asset quality: The banks asset-quality indicators have been improving since 2009, owing to a decline in NPLs and higher loan growth. In 2012, NPL formation turned negative for the first time in several years, although overall assetquality indicators remain weak. The majority of MEXIMs borrowers are dependent on international trade, making them vulnerable to a slowdown in the global economy. In addition, the bank has had a fairly concentrated loan portfolio in the past, though it has sought to add balance to the portfolio by increasing loans to SMEs. Its NPL ratio stood at 19.2% at end-2012, with loan-loss coverage of 63%. If loans related to the Export Credit Refinancing (ECR) scheme are excluded, its NPL ratio would have been 22%. (Under the ECR scheme, MEXIM provides loans at competitive rates to participating banks for on-lending to exporters.) Volatile earnings: Given its role as a DFI, profit generation is not MEXIMs overriding goal. Although the bank has a low cost base, its profitability has been severely affected in recent years by the cost of risk. The bank reported losses in both 2007 and 2010 as a result of high loan-loss provisions. Although cost of risk declined in 2012, consuming just 8.5% of pre-provision profits, versus 21% in 2011, provisioning will remain volatile due to the banks risk profile, in our view. Potentially vulnerable funding base: MEXIM is not a deposit-taking institution. It is reliant on the government or the wholesale markets for funding. To mitigate vulnerability to wholesale risks, the bank has become more active in diversifying its funding sources and extending the maturity of its funding profile (at end-2012, 68% of its borrowings were to mature in over five years, versus 36% at end-2011). At end-2012, 72% of its funding was in foreign currency, mainly USD. Because of its close links with the government and its high ratings, MEXIM is able to obtain financing at better levels than the commercial banks. Very strong capital adequacy: The banks capital adequacy was significantly bolstered in 2008 following the capital injection through the loans-for-equity conversion. As a result, its equity-to-assets ratio increased to almost 52% at end2008 from 15% at end-2007. At end-2012, its Tier 1 capital ratio stood at 41%, with an equity-to-assets ratio of 39%, a decline from 44% at end-2011 as loan growth outpaced earnings accretion.
192
BANKS
Company profile
Export-Import Bank of Malaysia Bhd. (MEXIM) was created in 1995 as a government-owned development finance institution (DFI). The bank is not a profitmaximising institution, and as Malaysias export credit agency, its mandate is to provide financing and credit insurance to Malaysian exporters and importers, and to assist Malaysian companies enter new markets. As a result, in addition to trade financing, the bank provides longer-term project finance. The banks client base encompasses foreign and local governments, large corporates and SMEs. MEXIM had total assets of MYR 7.2bn (USD 2.4bn) at end2012. The bank is a wholly owned subsidiary of the Ministry of Finance.
Asia Credit Compendium 2014 Export-Import Bank of Malaysia (A3/Pos; NR; A-/Neg)
Summary financials
2009 Balance sheet (MYR mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (MYR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.8 8.1 25.2 0.9 63.9 0.9 0.5 31.8 46.9 NA 50.4 NA NA 2.6 11.7 30.5 0.8 390.1 (10.9) (5.3) 27.5 74.7 NA 46.2 67.7 66.8 3.2 7.8 19.0 0.7 20.7 7.6 3.4 25.5 59.6 NA 43.6 63.8 64.5 Loan-loss coverage (RHS) 2.6 9.0 24.4 0.9 8.5 4.4 1.8 19.2 63.0 NA 39.1 41.3 42.1 152 42 194 (49) 145 (93) 53 27 145 3 148 (45) 103 (402) (299) (300) 180 48 228 (43) 184 (38) 146 200 170 74 245 (60) 185 (16) 169 123 Africa South Asia Europe Middle East Rest of world East Asia 0 5% 4% 3% 2% 1% 0% 2008 2009 2010 2011 2012 Net interest margin Average interest earned 500 1,000 4% 5% 7% 9% 10% 35% 1,500 1,670 5,723 1,809 370 2,839 0 0 2,691 2,885 1,829 5,603 1,304 430 3,016 0 0 2,803 2,587 1,969 6,238 1,944 449 3,515 0 0 3,360 2,722 2,373 7,256 3,151 248 4,419 0 0 4,218 2,838 2010 2011 2012
Loans by borrower type, Dec-12 (MYR mn)

Other Overseas contract financing Supplier credit ECR debtors Buyer credit Overseas project financing 0 1,000 2,000 1% 7% 9% 14% 18% 52% 3,000
Loan exposure by region, Dec-12 (MYR mn)
BANKS
Asset quality (%)

35 30 25 20 15 10 5 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 NPL ratio 80 70 60 50 40 30 20 10 0
Borrowings by currency, Dec-12 (MYR mn)

SGD GBP EUR MYR USD 0 500 1,000 1,500 2,000 0.2% 5% 7% 28% 59% 2,500 3,000

60 50 40 30 20 10 0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12
Revenue by type of income, 2012 (MYR mn)

10 ROE (RHS) 5 0 -5 -10 -15 0 50 100 150 200 Net interest income 70% Fees/commissions 9%
Equity to assets
Other
21%
193
Asia Credit Compendium 2014 Fubon Bank Hong Kong Ltd. (NR; BBB+/Sta; NR)

Fubon HK was affected more than some of its peers during the global credit crisis. Partly as a result of this, loan growth has been limited since then. Also, its exposure outside Hong Kong is limited, as the banks business is primarily domestic in nature. This reduces risks from weaker asset quality going forward. The banks importance to its Taiwanese parent, Fubon FHC, for growth in Hong Kong and China is also likely to lend support. However, the bank is a very small player in a very competitive market, and its earnings generation capacity is below average. Also, we expect asset quality in Hong Kong to deteriorate over the medium term. We therefore maintain a Negative credit outlook on Fubon HK.

Strong links with Taiwanese parent: Fubon FHC is a leading Taiwanese financial services holding company active in banking, insurance and asset management. The group conducts its banking activities in Taiwan through Taipei Fubon Bank. Expansion in mainland China, particularly to serve Taiwanese clients there, is a key element of Fubon FHCs Greater China growth strategy. Stronger ties between Taiwan and China have increased growth opportunities for Fubon FHC on the mainland. Fubon HK owns 19.99% of Xiamen Bank, a city commercial bank in China, and in late 2012, Fubon FHC announced its intention to acquire an 80% stake in First Sino Bank, a Shanghai-based bank. We believe Fubon HK remains critical to its parents strategy of growing in the rest of Asia, with a focus on Hong Kong and Taiwanese corporates in mainland China.Asset-quality metrics at cyclical lows: Fubon HKs asset quality, especially its SME loans and its exposure to Taiwanese corporates operating in China, was affected more than average during the 2008-09 crisis. This caused its impaired loan ratio to jump from below the industry average to above it (1.7% as of end-June 2010, versus the sector average of c.1.2%). The ratio has since improved significantly, falling to negligible levels at end-June 2013. Unlike some of its peers, Fubon HKs assetquality indicators have not been flattered by strong loan growth. The banks balance sheet shrank until 2010 as the bank rationalised its exposure to Taiwanese and Hong Kong corporates on the mainland. Loan growth resumed in 2011, but compared with other Hong Kong banks, it has remained lacklustre (1.1x times since 2009 versus an average of 1.6x for the other Hong Kong banks under our coverage). Above-average exposure to real estate: More moderate loan growth and limited exposure to the mainland place Fubon HK in a better position than its peers to weather a downturn in the credit cycle. However, because of its small size, the bank is exposed to concentration risks. Also, its exposure to real estate is higher than average. Property development and investment accounted for 40% of Hong Kong loans at end-June 2013 and residential mortgages for a further 30%. Weaker-than-average funding position: The banks funding position is weaker than that of its peers, because of its smaller branch network. Also, because of its size, it has limited pricing power compared with larger peers. More expensive time deposits accounted for 71% of total deposits at end-June 2013. Below-average profitability: The banks profitability is among the lowest in the sector, owing to narrow margins and a cost base considerably higher than average. ROE stood at 5.5%, with an ROA of 0.7%, in H1-2013. Since 2011, Fubon HKs results have been flattered by provision write-backs and the contribution from Xiamen Bank. (Xiamen Bank accounted for 25% of PBT in H1-2013.) Given the deterioration in asset quality in China and the potential for rising provisions there, we expect the contribution from Xiamen Bank to decline. Fubon HKs profitability is also unlikely to improve in the near term, as further provisioning write-backs are unlikely. Adequate capitalisation: The banks Tier 1 capital ratio stood at 10.6% at end June 2013, with an equity-to-assets ratio of 11.4%. Both ratios are higher than the average for smaller Hong Kong banks. We also believe its large Taiwanese parent will provide capital support if necessary.
BANKS
Company profile
Fubon Bank Hong Kong (Fubon HK) is a small bank, with total assets of HKD 68bn (USD 9bn) and a market share of domestic loans of less than 1% at end-June 2013. The banks operations are almost entirely domestic in nature. NonHong Kong loans make up only 5% of its loans. However, Fubon HK owns 20% of Xiamen Bank in China. Fubon HK has 24 branches/outlets in Hong Kong and lends to all segments, although its loan book has a corporate (SME) skew. Fubon HK is a wholly owned subsidiary of Taiwanese financial group Fubon Financial Holding Co. (Fubon FHC, Baa1/Sta; BBB+/Sta; NR), one of Taiwans leading financial services groups, with reported total assets of TWD 4.1tn (USD 140bn) at end-2012.
194
Asia Credit Compendium 2014 Fubon Bank Hong Kong Ltd. (NR; BBB+/Sta; NR)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (HKD mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 7,972 61,780 32,414 22,883 56,685 46,038 3,383 3,977 5,094 853 368 1,220 (856) 364 (47) 313 266 1.4 21.1 70.2 1.4 12.8 5.3 0.4 0.4 268.4 70.4 8.2 10.0 18.2 7,775 60,256 34,331 18,179 55,204 43,788 4,019 3,166 5,052 636 567 1,187 (933) 255 68 314 280 1.1 18.6 78.6 1.5 (26.6) 5.5 0.5 0.3 154.2 78.4 8.4 8.5 15.9 8,101 62,785 33,293 19,176 55,096 45,841 3,161 2,763 7,689 657 447 1,105 (788) 316 35 351 309 1.1 19.8 71.4 1.3 (11.2) 4.8 0.5 0.1 330.1 72.6 12.2 12.1 16.7 8,778 68,029 35,571 22,061 60,283 46,877 5,047 3,251 7,746 369 285 654 (408) 246 1 247 214 1.2 21.9 62.4 1.2 (0.5) 5.5 0.7 0.0 352.3 75.9 11.4 10.6 16.8 400 300 200 Restructured loans/loans 100 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 ROE (RHS) 0 5 10 15 20 25 30 35 Hong Kong 96% Others 4% 2011 2012 H1-13

Credit card Other consumer Outside HK Others Corporate (others) Resi. mortgage Corporate (property) 0 5 Deposits 100% 80% 60% 40% 20% Debt/CDs 10 Interbank 2% 4% 4% 12% 23% 23% 31% 15
Funding mix
BANKS

3 Average interest earned 2
Net interest margin
0 2009 2010 2011 2012 H1-13
Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Impaired loans ratio Loan-loss coverage (RHS)


6 5 Trading Other Fees/commissions Net interest income 0.0 0.1 0.2 0.3 10% 12% 22% 56% 0.4
Tier 2 capital Tier 1 capital ratio
4 3 2 1 0
195
Asia Credit Compendium 2014 Hana Bank (A1/Sta; A/Sta; NR)


Our Stable outlook on Hana is predicated on our expectation that the banks fundamentals will remain broadly unchanged in 2014. Hanas credit profile is underpinned by its strong franchise in the retail and SME markets, better-than-average asset-quality indicators and moderate earnings generation capacity and capital. The acquisition of KEB is complementary for Hana and transformational, as it should help it narrow the gap with its larger rivals. Hanas expertise in integrating acquisitions should also stand the group in good stead as it gradually brings KEB into the HFG fold.

The acquisition of KEB is complementary: Hana has been one of the more acquisitive Korean banks over the past 15 years, and its management has a reputation for being commercially minded. Its growth has been aided considerably by the successful integration of multiple banks since the 1990s. Although there are no plans at this stage to merge Hana with KEB, the acquisition is complementary and allows HFG to consolidate its position in the Korean banking sector. On a combined basis (i.e. Hana plus KEB), Hana is slightly larger than Shinhan Bank by total assets and would be the countrys second -largest bank by total assets and total loans, with a c.15% market share of deposits. Hanas expertise in integrating acquisitions should stand the group in good stead as it gradually brings KEB into the HFG fold. Solid franchise in the consumer and SME sectors: On a standalone basis, Hana is particularly strong in the SME and high-net-worth-individual sectors. At end-September 2013, 31% of its KRW loan portfolio was in residential mortgages one of the highest levels among the large commercial banks with a further 21% in other consumer loans. Despite concerns about the Korean housing market, mortgages have performed strongly and, in our view, the risk/return on mortgages remains attractive given that loan-to-value ratios hover around 50%. Hanas loan growth since 2010 has been geared towards the large corporate and retail sectors, and as a result, the banks exposure to the SME sector was below average at 30% of KRW loans at end-September 2013. Better-than-average asset quality: In recent years, Hanas asset-quality indicators have been better and more stable than those of some of its peers. The high percentage of residential mortgages in Hanas loan portfolio which performed strongly helped to compensate for the high percentage of SME loans. Although reported asset-quality indicators have deteriorated slightly during 2013 due to reclassification of non-performing corporate loans, they remain better than average. The banks NPL ratio stood at 1.2% at end-September 2013 the lowest among the big four banks with loan-loss coverage of 142%. We do not expect a meaningful improvement in asset quality in 2014. Above-average funding costs: Hanas funding costs have tended to be higher than those of its peers because of its lower percentage of low-cost core deposits (28% of end-September 2013 customer deposits) and higher percentage of more rate-sensitive deposits from high-net-worth individuals, on account of the banks smaller branch network. Hanas LDR has been fairl y stable over the past two years and stood at 108% at end-September 2013; this is in line with the peer average, but still high by regional standards. Hanas gross foreign -currency funding requirements represented 10% of total funding at end-June 2013, in line with the 9% average for the big four Korean banks. Moderate earnings generation capacity: Hanas bottom-line profitability is comparable to that of its peers, as Hana has managed to offset its slightly lower NIM stemming mainly from higher funding costs with good cost efficiency and below-average risk costs. However, like the other major Korean commercial banks, Hanas bottom-line profitability is hampered by stagnant loan growth, relatively high loan-loss provisions, tightening margins amid a low interest rate environment, and regulatory-driven costs. This is unlikely to improve in 2014. The banks annualised ROA for 9M-2013 was 0.5% on net income of KRW 0.6bn. Reasonable capital base: Hana is well capitalised, with a Tier 1 capital ratio of 9.9% at end-September 2013, which is slightly below the peer average, and an equity-to-assets ratio of 7.1%. Also, double leverage at HFG was elevated at 126% at end-September 2013.
BANKS
Company profile
Hana Bank (Hana) was Koreas fourth-largest commercial bank at end-September 2013, with total assets of KRW 156tn (USD 146bn) and a market share of loans and deposits of 9%. It was set up in 1971 as a short-term finance company and became a bank in 1991. It is 100% owned by Hana Financial Group (HFG), which also owns 100% of Korea Exchange Bank (KEB). If Hana were to combine KEB with its own operations, it would be slightly larger than Woori Bank by total assets. Hana accounted for c.53% of the groups assets at endSeptember 2013 and c.65% of 9M2013 profits. It offers a full suite of products but is slightly more geared towards the high-net-worthindividual and SME segments. It operates through a network of 657 branches.
196
Asia Credit Compendium 2014 Hana Bank (A1/Sta; A/Sta; NR)

Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.0 14.1 39.2 0.9 31.7 11.2 0.7 1.5 106.2 111.0 6.0 10.7 14.0 2.0 10.9 42.4 1.0 24.1 12.9 0.8 1.0 153.2 110.9 6.9 9.6 13.4 1.9 12.9 53.4 1.0 47.1 5.8 0.4 1.1 169.9 106.3 7.2 9.6 13.9 1.9 12.8 48.1 0.9 34.7 7.6 0.5 1.2 142.4 107.9 7.1 9.9 13.8 2,619 547 3,166 (1,242) 1,924 (596) 1,314 985 2,800 769 3,570 (1,512) 2,058 (496) 1,562 1,212 2,675 289 2,964 (1,584) 1,380 (650) 730 615 2,036 235 2,272 (1,092) 1,180 (410) 770 631 100% 80% 60% 40% 20% 123,415 138,966 103,631 21,279 130,624 93,389 8,671 16,050 8,341 130,818 150,761 115,301 22,261 140,378 104,012 9,987 16,637 10,383 142,365 151,533 112,976 23,818 140,659 106,254 9,884 14,772 10,874 145,607 156,475 118,446 21,689 145,312 109,738 8,901 13,823 11,163 Large corporates Consumer SMEs Residential mortgages 0 10,000 20,000 30,000 16% 21% 30% 31% 40,000 2011 2012 9M-13

Other 2%
Funding mix
Deposits Borrowings Debt
BANKS
0% Dec-09 6 Dec-10 Dec-11 Dec-12 Sep-13
Net interest margin
0 2009 2010 2011 2012 9M-13
Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Loan-loss coverage (RHS) Impaired-loans ratio 180 150 120 90 60 30 0

Cash & banks Other Investment securities Customer loans 0 4% 7% 14% 76% 20,000 40,000 60,000 80,000 100,000 120,000

16 12 8 4 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 2 capital Tier 1 capital ratio ROE (RHS) 20

Other 15 10 5 0 Fees/ commissions Net interest income -500 0 500 1,000 1,500 13% -2%
90% 2,000 2,500
GAAP until end-2010, IFRS thereafter; Source: Company reports, FSS, Standard Chartered Research
197
Asia Credit Compendium 2014 HDFC Bank Ltd (Baa2/Sta; BBB-/Neg; NR)

Despite our Negative outlook on the Indian sovereign and the Indian banking sector, we maintain a Stable outlook on HDFC Bank. This view is based on the banks strong franchise and superior metrics to other Indian banks. HDFC Banks strengths include its strong market position in the retail segment, technology platform, conservative risk appetite, robust profitability, and solid funding and capital bases. Its asset quality is much stronger than sector peers, with very low NPL levels despite the challenging operating environment. While asset quality could deteriorate modestly amid the economic down-cycle, we expect the bank to maintain a broadly stable credit profile.

Superior metrics to other Indian banks: HDFC Banks credit profile is considerably stronger than those of the other Indian banks under our coverage. On numerous metrics including profitability, asset quality and funding its numbers are among the best and most stable in the sector, largely due to its greater retail focus. Its investment in a strong technology platform is a competitive advantage and has allowed the bank to build multiple distribution channels and enhance its cross-selling capabilities. Retail-focused franchise: HDFCs loan book is dominated by retail (53% of loans, by far the highest among the banks under our coverage), reducing its exposure to more stressed sectors of the economy. Within retail, vehicle loans and business banking dominate, although exposure to unsecured products personal loans and credit cards has been increasing. The bank has limited exposure to real estaterelated loans, which are the remit of its founder, Housing Development Finance Corporation. However, it uses its branch network to originate housing loans for HDFC. Retail banking accounted for 45% of the banks profit (before tax) in H1 FY14. The wholesale loan book is a mix of working-capital financing and term loans, principally extended to large and emerging corporates. The bank has been cautious in expanding in the infrastructure financing segment. While overall loan growth has slowed recently, the bank expects it to remain a few percentage points ahead of the system level. Robust asset quality: Unlike a number of Indian banks that have experienced significant asset-quality pressure in the past few quarters (particularly public-sector banks), HDFC Bank has maintained broadly stable asset quality, with a gross NPL ratio of 1.1% and a restructured loan portfolio of 0.2% (as of September 2013). This outperformance is attributable to its strong underwriting standards and greater focus on retail lending (and consequently lower exposure to stressed sectors like power). Loan-loss coverage, at 74%, is also better than peers, alth ough it has declined slightly. The growing unsecured retail loan portfolio could pose risks given the sluggish economic backdrop; however, delinquencies on this portfolio are currently very small. Low-cost funding profile: Deposits account for about 90% of HDFCs funding base. The banks high proportion of low-cost deposits is a key competitive advantage (CASA deposits are 45%, considerably higher than peers). Reliance on wholesale deposits is low, lending further stability to the deposit base. Concentration of deposits is also low the top 20 depositors account for only c.8% of total deposits. Given the banks limited international presence, foreign borrowing accounts for a small proportion of its funding profile, at 4%. Strong profitability: HDFC Banks NIM is one of the highest and most stable among peers thanks to its strong funding structure and higher-return consumer loan mix. That said, margins compressed moderately in Q2-FY14 on higher cost of funds following Reserve Bank of India measures. Given limited pricing power in a sluggish economic environment, we see little upside to profitability from here (management expects NIM to remain in the 4.1-4.5% range). Lower provisioning has also aided profitability in recent years. In light of the macro backdrop, the banks greater focus on cost controls (particularly after a period of significant investment in branch infrastructure) should support profitability. Well capitalised: With a Tier 1 capital ratio of 9.9% and a total capital ratio of 14.6%, HDFC Bank is among Indias best capitalised banks (although Tier 1 capital is relatively low by international standards). We think the banks capital buffer is strong enough support growth and weather a moderate worsening of asset quality.
198
BANKS
Company profile
With an asset base of INR 4.3tn (USD 68.8bn) as of September 2013, HDFC Bank is India seventhlargest bank and second-largest privately owned bank (after ICICI Bank). It has a market share of c.4% of loans. The bank had a nationwide network of 3,251 branches as of September 2013. It is predominantly retail-focused, with a limited international presence, and has small subsidiaries in securities and non-bank financial services. HDFC Bank is publicly traded, with a largely institutional shareholding. It is 22.7% owned by Housing Development Finance Corporation Ltd., Indias largest housing finance company (which founded HDFC Bank in 1994). It acquired a privatesector bank, Centurion Bank of Punjab, in 2008.
Asia Credit Compendium 2014 HDFC Bank Ltd (Baa2/Sta; BBB-/Neg; NR)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 4.4 24.2 48.1 2.9 24.7 16.7 1.6 1.0 82.5 77.4 9.2 12.2 16.2 4.5 23.1 49.7 3.0 20.0 18.7 1.7 1.0 82.4 79.9 8.9 11.6 16.5 4.6 22.8 49.6 3.0 14.7 20.3 1.8 1.0 79.9 81.5 9.0 11.1 16.8 4.6 20.8 47.2 2.9 13.6 20.0 1.8 1.1 73.9 86.5 9.4 9.9 14.6 105,431 43,352 148,783 (71,529) 77,254 (19,067) 58,187 39,264 128,846 158,111 57,836 68,526 186,682 226,637 (92,776) (112,361) 93,906 114,276 (18,774) (16,770) 75,132 97,506 51,671 67,263 88,952 37,700 126,652 (59,724) 66,928 (9,131) 57,797 38,262 62,208 2,774 1,600 709 2,520 2,086 32 144 254 66,418 3,379 1,954 975 3,080 2,467 32 238 299 73,753 4,003 2,397 1,116 3,641 2,962 32 330 362 68,815 4,312 2,686 1,019 3,907 3,130 NA 393 405 FY12 FY13 H1-FY14 Wholesale 47%
Retail
53%
600
800
1,000
1,200
1,400
1,600
Funding mix
100% 80% 60% 40% 20% Current deposits Savings deposits Time deposits Debt
BANKS
0% Mar-10 12 10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14 Net interest margin Mar-11 Mar-12 Mar-13 Sep-13

Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Mar-10 20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Tier 1 capital ratio 10 5 0 Tier 2 capital Mar-11 Mar-12 Mar-13 Sep 13 25 20 15 Std. restructured loans-to-loans* Loan-loss coverage (RHS) NPL ratio 84 82 80 78 76 74 72 70 68

Other Treasury Wholesale Retail 0 50,000 100,000 150,000 6% 16% 25% 52% 200,000

ROE (RHS)

Others 9%
Fees/commissions
21%
70% 90,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013; *Comparable data not available for FY10-FY11; Source: Company reports, Standard Chartered Research
199
Asia Credit Compendium 2014 Hong Leong Bank Bhd. (A3/Pos; NR; BBB+/Sta)

HLB is a predominantly domestic market-focused retail bank. Following its May 2011 acquisition of EON Capital, HLB has broadened its domestic retail franchise and solidified its position as a leading Malaysian bank. Despite initial deterioration in its asset quality and profitability, the banks enlarged franchise has displayed improving fundamentals. More importantly, the acquisition provided HLB a more wellrounded business mix, increased its systemic importance and gave it a stronger foothold in the competitive Malaysian banking system. Our Stable credit outlook on HLB reflects our view that the banks fundamentals should remain little changed in 2014.

Strong domestic franchise: Hong Leong Bank has defined itself as a well-run, domestic market-focused retail bank, holding an 8% market share of Malaysian loans, deposits and assets. It is the fifth-largest bank in Malaysia by assets and deposits, though it is very similar in size to RHB Bank, the fourth-largest. While HLB has ventured into China, through a 20% shareholding in Bank of Chengdu, and through a wholly owned subsidiary into Vietnam, its expansion into overseas markets has been more measured than peers. Although HLB lacks substantial direct and indirect sovereign ownership, unlike some of its peers, we view HLB as systemically important, given its strong domestic retail presence. A more well-rounded business mix: HLBs current market position was solidified through its May 2011 takeover of EON Capital, Malaysias seventh -largest bank at the time. While HLB had a strong retail franchise prior to the acquisition, particularly in the mass affluent segment, its market share of loans and deposits was only around 5%. The acquisition allowed it to leapfrog AmBank and supplement its already strong deposit-gathering ability. The acquisition was complementary to HLBs existing product offerings, as it added a strong vehicle financing business to HLBs mortgage business and a more devel oped SME franchise. While HLB previously targeted more affluent retail customers and SMEs, EON Capitals focus was the more profitable, although higher -risk, mass market. Strong asset quality: HLBs asset quality is among the strongest in the Malaysian bank space, with a low NPL ratio and a high loan-loss coverage ratio. Although asset-quality indicators weakened temporarily following the acquisition, HLB appears to have successfully integrated the acquired loan book and harmonised its underwriting standards and risk management framework. HLBs NPL ratio stood at 1.4% at end-September 2013, with loan-loss coverage of 130%. Above-average exposure to the property sector: Among the five largest banks, HLBs property exposure is among the highest, representing 47% of end September 2013 total loans. This is worth monitoring, given the rapid appreciation of house prices in Malaysia since 2010 and the less stringent approach taken by local regulators versus neighbouring jurisdictions. Nevertheless, given the banks measured pace of lending to the segment and conservative approach to risk management, we expect asset quality to remain strong. Robust funding base: HLB is funded primarily by customer deposits (87% of total funding at end-September 2013). Individuals accounted for 53% of deposits, which is the strongest among its peers (the peer average is 37%). The banks strong deposit base is driven by its franchise among the ethnic Chinese community in Malaysia. The bank has maintained healthy liquidity and has one of the lowest LDRs in the Malaysian banking system (78% as of end-September 2013). Improving profitability: The banks NIM has traditionally been lower than peers due to the lower proportion of loans on its balance sheet and the higher proportion of lower-yielding securities. It has also reported some of the lowest provisioning levels among its peers. Since the merger, the banks profitability has improved as a result of the addition of higher-margin auto and SME businesses, despite some deterioration in cost efficiency. While its efficiency has continued to improve, its fee income will remain weaker than its larger peers due to its limited investment banking franchise. Good capital adequacy: HLB has maintained healthy capitalisation and reported Tier 1 and total capital-adequacy ratios of 12.0% and 14.7%, respectively at endSeptember 2013. Capitalisation metrics have remained strong following the acquisition thanks to more gradual loan growth and good earnings accretion.
200
BANKS
Company profile
Hong Leong Bank Bhd. (HLB) is Malaysias fifth-largest bank, with total assets of MYR 162bn (USD 50bn) at end-September 2013 and a market share of loans and deposits of 8%. HLB is predominantly a domestic retail bank, with a small presence in Hong Kong, Singapore and Vietnam. It also has a 20% stake in a commercial bank in western China. HLB is a listed company and is part of Hong Leong Financial Group (HLFG), a diversified financial services conglomerate. The bank operates through a network of over 300 branches, of which 288 are in Malaysia. HLFG owns 64% of the bank, while Malaysias Employees Provident Fund owns a further 14%.
Asia Credit Compendium 2014 Hong Leong Bank Bhd. (A3/Pos; NR; BBB+/Sta)
Summary financials
FY11 Balance sheet (MYR mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.7 14.1 43.9 1.1 8.7 16.3 1.0 2.3 134.9 73.2 5.1 8.5 14.3 2.0 14.6 47.0 1.3 (3.0) 18.2 1.1 1.7 133.4 73.6 7.4 12.0 15.7 1.9 13.9 43.2 1.1 1.4 15.0 1.2 1.4 131.3 78.6 8.0 11.4 15.1 1.9 15.8 44.2 1.1 (5.8) 14.0 1.1 1.4 130.4 78.4 8.4 12.0 14.7 48,182 145,499 81,455 19,818 138,031 114,857 10,698 8,132 7,468 1,883 879 2,762 (1,212) 1,550 (135) 1,415 1,137 49,782 158,167 88,573 35,942 146,463 123,096 9,791 8,280 11,704 3,049 1,047 4,096 (1,925) 2,171 65 2,236 1,744 51,763 163,586 95,431 34,209 150,549 123,637 11,567 8,250 13,037 2,969 1,305 4,274 (1,847) 2,427 (34) 2,393 1,856 50,350 162,424 96,581 35,286 148,801 125,451 5,783 8,339 13,623 764 266 1,029 (455) 574 33 608 453 Foreign SMEs Large corporations Retail 0 20,000 Interbank 40,000 Repos 4% 15% 19% 61% 60,000 Debt FY12 FY13 Q1-FY14

Others 1%
Funding mix
BANKS
0% Jun-10 5 Average interest earned 4 3 2 1 FY10 FY11 FY12 FY13 Q1-14 Net interest margin Jun-11 Jun-12 Jun-13 Sep-13
Asset quality (%)

3 Loan-loss coverage (RHS) Impaired-loans ratio 140 135 130 125 120 1 115 110 0 Jun-10 Jun-11 Jun-12 Jun-13 Sep-13 105
Revenue by business segment, Q1-FY14 (MYR mn)

Global markets/IB 14%
Business banking
24%
Consumer banking 0 200 400 600
61% 800

20 15 10 5 0 Jun-10 Jun-11 Jun-12 Jun-13 Sep-13 Tier 2 capital Tier 1 capital ratio ROE (RHS) 20
Revenue by type of income, Q1-FY14 (MYR mn)

Fees/commissions 15 10 5 0 0 500 1,000 1,500 2,000 2,500 Other 17% 14%
Net interest income
70%
Note: Financial year ends 30 June; Source: Company reports, Standard Chartered Research
201
Asia Credit Compendium 2014 ICICI Bank Ltd. (Baa2/Sta; BBB-/Neg; BBB-/Sta)

As Indias second-largest bank, ICICI enjoys a strong market position. After a challenging period during the 2008-09 crisis, the bank has adopted a more conservative stance in recent years. It has expanded its secured retail lending business following losses on its unsecured retail portfolio in 2008-09. On the liabilities side, it has ramped up its low-cost deposit base; this, together with healthy fee income, has supported profitability. Capitalisation levels are currently among the strongest in the sector. ICICIs restructured loan portfolio has been growing, and we see further risks to asset quality amid the ongoing economic down-cycle. We therefore maintain our Negative credit outlook.

Solid domestic franchise, likely to receive support: ICICI Bank enjoys strong market positions across a diversified range of products and customer segments in the Indian banking sector. It was a pioneer in building Indias retail finance business, has a robust corporate banking platform, and has built a large overseas presence over the years. In addition, ICICI Group has built strong competencies in investment banking, insurance and asset management. The banks systemic importance and the high incidence of government support for the sector suggest that it would receive support if needed, despite being privately owned. Focus on growing the retail lending book: ICICI adopted a cautious stance following the 2008 credit crisis, leading to a tightening of lending standards and a contraction in its loan book. Growth resumed in FY11 and has more recently been focussed on the retail segment (the retail loan book grew c.20% y/y as of endSeptember 2013). The unsecured portion of the retail book has fallen substantially in the past few years and currently accounts for only 1.7% of the portfolio. In contrast to the retail book, growth in the corporate loan book has been more modest (11% y/y as of end-September 2013) as the bank has become more selective in extending credit in a weak macro environment. Management guides that it seeks to achieve loan growth 2-3ppt above system levels (which it projects at 15% p.a.). The banks international book caters to the financing needs of Indian corporates and NRIs and is largely wholesale funded; management sees growth in the high-single-digit range, mostly driven by funding opportunities. Asset quality faces headwinds: Rapid growth in retail loans, especially to firsttime unsecured personal borrowers, caused high delinquencies in 2008. While legacy NPLs from this book have kept the gross NPL ratio elevated, they have declined steadily. High recoveries and write-offs have also supported the NPL ratio, which stood at 3.1% as of September 2013. In recent quarters, NPL formation has come primarily from the mid-sized corporate and SME portfolio. The banks restructured loan portfolio has been rising and stood at 2.1% as of September 2013. Management expects restructuring to intensify in FY14 the restructuring pipeline at the end of Q2-FY14 stood at INR 20bn, versus a current outstanding restructured portfolio of c.INR 68bn. Going forward, exposure to leveraged large corporate groups raises asset-quality concerns. The banks exposure to power, roads, telecom and other infrastructure was c.14% of loans as of March 2013, lower than Axis Bank but higher than HDFC Bank. Concentration of loans is also higher than private-sector peers the 20 largest borrowers accounted for c.15% of advances at end-FY13. In light of the weak operating environment, the bank expects credit costs to increase but not to exceed 90100bps of average loans in FY14 (c.82bps in H1-FY14). Profitability has improved but further gains are unlikely: Aggressive growth and wholesale funding dependence in 2008 forced the bank to shift to a strategy of building retail liabilities. As a result, its low-cost deposit share rose to 43% as of September 2013 from 26% in March 2008. The combination of a lower-cost domestic funding profile, higher NIM from international operations, strong fee income and contained costs has supported profitability. We see limited upside from here, with higher credit costs likely to weigh on earnings. Strong capitalisation is supportive: ICICI is one of Indias best-capitalised banks, with a Tier 1 capital ratio of 11.3% as of September 2013 (12% including H1-FY14 profits). We expect the bank to comfortably meet Basel III requirements near-term, though equity/Tier 1 issuance to support loan growth cannot be ruled out over the medium term.
202
BANKS
Company profile
With assets of INR 5.6tn (USD 90bn) as of September 2013, ICICI Bank is the second-largest bank in India after SBI. It has a nationwide presence (3,507 branches) and a strong position in transaction banking and remittances. Although the bank had a retail bias until 2008-09, it has since diversified its loan book (33% corporate, 36% retail and 5% SME). It also has a large overseas presence (27% of loans). ICICI Group, of which ICICI Bank comprises c.80% of group assets, is strong in domestic investment banking, asset management and insurance. It was founded in 1994 by ICICI Limited, an industrial development finance bank. ICICI Bank was reversemerged with its parent in 2001. The bank has a largely institutional shareholding.
Asia Credit Compendium 2014 ICICI Bank Ltd. (Baa2/Sta; BBB-/Neg; BBB-/Sta)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.5 35.2 42.2 1.7 25.3 9.7 1.3 4.5 75.7 99.3 13.6 13.2 19.5 2.6 29.8 43.0 1.8 15.2 11.2 1.4 3.6 80.2 102.3 12.4 12.7 18.5 2.9 24.6 40.6 1.8 13.7 13.1 1.6 3.2 76.8 101.7 12.4 12.8 18.7 Loan-loss coverage (RHS) 3.1 NA 38.5 1.7 15.8 13.2 1.7 3.1 73.1 105.2 13.0 11.3 16.5 90,169 66,479 156,648 (66,172) 90,475 (22,868) 67,607 51,514 107,342 75,028 182,369 (78,504) 103,865 (15,830) 88,034 64,653 138,664 83,457 222,121 (90,129) 131,992 (18,025) 113,967 83,255 78,640 46,508 125,148 (48,127) 77,020 (12,180) 64,841 46,263 100% 80% 60% 40% 20% 91,114 4,062 2,164 1,347 3,511 2,256 211 1,096 551 96,129 4,891 2,537 1,596 4,287 2,555 137 1,402 604 98,894 5,368 2,902 1,714 4,701 2,926 157 1,453 667 89,937 5,635 3,178 1,688 4,904 3,090 NA 1,454 731 Other retail Home loans Overseas Domestic corp. 0 200 400 600 800 1,000 16% 20% 27% 33% 1,200 Debt FY12 FY13 H1-FY14

SME 5%
Funding mix
Current deposits Savings deposits Time deposits
BANKS
0% Mar-10 10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14 Net interest margin Mar-11 Mar-12 Mar-13 Sep-13

Asset quality (%)

6 5 4 3 2 1 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 NPL ratio Std. restructured loans-to-loans* 90 80 70 60 50 40 30 20 10 0

Other Retail Wholesale Treasury 0 50,000 100,000 150,000 1% 27% 33% 39% 200,000

25 20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Tier 1 capital ratio Tier 2 capital 10 ROE (RHS) 15

Others 13%
Fees/commissions 5 Net interest income 0 0 40,000
25%
62% 80,000 120,000 160,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013; *comparable data not available for FY10-FY11; Source: Company reports, Standard Chartered Research
203
Asia Credit Compendium 2014 IDBI Bank Ltd. (Baa3/Sta; BB+/Neg; BBB-/Sta)

Asset-quality woes are pressuring IDBI Banks credit profile. Its stressed asset ratio is among the highest in its peer group. Rising credit costs have dented the banks profitability, constraining internal capital generation. Concentrated exposure to borrowers and to stressed sectors suggests that asset quality could weaken further. These factors underpin our Negative view of the credit. That said, we take comfort from the governments majority ownership of the bank and its track record of strong support including capital injections and regulatory forbearance to enable IDBIs transition to a fullservice bank.

Asset-quality deterioration: IDBI has seen a marked deterioration in asset quality in the past few quarters; its gross NPL ratio rose c.150bps y/y to 5% in Q2-FY14. In line with the increase in restructured loans, the stressed asset ratio has climbed to 13%, among the highest of the Indian banks we cover. Infrastructure (including power), textiles, metals and aviation account for about half of the restructured book. Given the banks history, its exposure to the infrastructure segment is high, and we accordingly see further asset-quality stress. Management has indicated that another two to three large corporates are being considered for restructuring, failing which they might slip into the NPL category. Single-name exposure is also high, with the top 20 borrowers accounting for c.17% of the banks exposure in FY13. In addition to infrastructure, the bank is seeing stress on its agri exposure, where NPLs are c.7%. With the sharp jump in NPLs, loan-loss coverage declined to 45% in Q2-FY14, broadly in line with public-sector peers. Subdued loan growth: After growing aggressively in FY08-FY10, IDBI is now on a slower growth trajectory (sub-15% annually over the past few years) as it focuses on improving profitability metrics and building out its deposit franchise. The banks loan book has traditionally been dominated by corporate lending given its legacy profile; it is experienced in lead-financing corporate projects and evaluating infrastructure projects. It seeks to increase its share of retail lending to improve NIM. It is also increasing priority-sector loans to meet regulatory guidelines. Funding profile is weaker than peers: IDBI is more reliant on bulk deposits and on borrowings than peers due to its legacy as a development finance institution. Its loan-to-deposit ratio stood at 93% in Q2-FY14, compared to 70-80% for most peers. While the bank has expanded its retail branch network and deposit base, its CASA ratio is low at 22% (versus 30-45% for public-sector peers), and its depositor concentration is high the top 20 depositors contributed 21% of deposits in FY13. We expect the bank to narrow the gap with peers over time as it mobilises more low-cost deposits. However, given intense market competition for retail deposits, we expect this to be a challenging process. High credit costs dent profitability: IDBIs corporate-focused book and expensive funding base have resulted in lower (albeit broadly stable) NIMs compared to peers. On the other hand, fee income has historically been stronger than peers due to the banks traditional stren gth in large corporate project loans. Rising credit costs have dented profitability in recent quarters net income fell 45% y/y in H1-FY14, despite a 12% increase in pre-provision profits. While the cost of funds could see some upside as the funding profile improves, we expect profitability to remain weak on higher credit costs and a rising proportion of loweryielding priority-sector loans. Credit profile underpinned by government support: IDBIs majority government ownership and its legacy as Indias industrial development financial institution ensure continuing government support as it transforms into a commercial bank. A government-owned special purpose vehicle took over INR 90bn of its problem loans in FY04 to clean up its books, and injected Tier 1 capital. In the following years, the bank received multiple capital injections from the government (most recently, INR 18bn of capital was approved in October 2013). It has also enjoyed regulatory forbearance in the past with respect to minimum statutory liquidity norms and priority-sector lending requirements. Despite the capital injections, the banks capitalisation remains weak (Tier 1 of 7.5% as of Q2-FY14), particularly in light of asset-quality pressure, weak earnings and Basel III requirements.
BANKS
Company profile
IDBI Bank is a mid-sized Indian th commercial bank (10 -largest) with assets of INR 3.0tn (USD 47bn) as of 30 September 2013. It was set up by the government in 1964 as a policy institution to fund industrial development. In 2004, it was converted into a commercial bank to improve its retail reach. In 2006, IDBI Bank took over United Western Bank, a small bank with a rural presence, to gain scale. As of September 2013, IDBI had 1,158 branches, with one branch in Dubai (and expansion plans in Singapore and Shanghai). It also has interests in the capital markets, asset management, housing finance, infrastructure finance and insurance businesses. IDBI is publicly traded and is 71.72% government owned. The governments stake has increased following capital injections in FY11-FY13.
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Asia Credit Compendium 2014 IDBI Bank Ltd. (Baa3/Sta; BB+/Neg; BBB-/Sta)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.8 24.2 35.2 0.9 45.1 13.3 0.7 1.8 39.7 87.7 5.7 8.0 13.6 1.7 23.0 39.2 1.0 35.1 12.0 0.7 2.5 36.0 86.6 6.7 8.4 14.6 1.8 26.0 36.5 1.0 52.0 9.3 0.6 3.2 51.9 87.9 6.6 7.7 13.1 2.0 19.0 39.1 1.1 65.9 4.7 0.3 5.0 44.8 92.7 7.3 7.5 12.4 42,693 21,432 64,125 (22,547) 41,578 (18,769) 22,810 16,503 45,448 21,122 66,570 (26,075) 40,496 (14,197) 26,298 20,318 53,731 32,195 85,926 (31,344) 54,583 (28,365) 26,218 18,828 29,586 12,957 42,544 (16,630) 25,914 (17,084) 8,830 4,992 100% 80% 60% 40% 20% 56,830 2,534 1,571 683 2,388 1,805 138 516 146 57,063 2,903 1,806 832 2,709 2,105 234 535 194 59,464 3,228 1,963 988 3,015 2,271 277 658 212 47,474 2,975 1,836 913 2,663 2,026 NA 639 217 FY12 FY13 H1-FY14

Others MSME and Agri Retail Corporate 0 500 Savings deposits 1,000 Time deposits 1% 7% 18% 75% 1,500 Debt
Funding mix
Current deposits
BANKS

Asset quality (%)

9 8 7 6 5 4 3 2 1 0 Mar-10 Loan-loss coverage (RHS) Std. restructured 60 loans-to-loans* 50 40 30 NPL ratio 20 10 0 Mar-11 Mar-12 Mar-13 Sep-13

Treasury 1%
Retail
44%
Wholesale 0 40,000 80,000
55% 120,000 160,000

20 15 10 5 0 Tier 2 capital Tier 1 capital ratio Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 ROE (RHS) 14 12 10 8 6 4 2 0

Others 11%
Fees/commissions
19%
70% 30,000 40,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013; *comparable data not available for FY10-FY11; Source: Company reports, Standard Chartered Research
205
Asia Credit Compendium 2014 Indian Overseas Bank (Baa3/Neg; BBB-/Neg; NR)

Weak asset profitability quality, and low weak

Asset quality is weaker than peers: IOBs stressed asset ratio (NPLs plus restructured loans) is among the weakest of the Indian banks we cover, at c.12% as of Q2-FY14. Slippage has remained high in the past few quarters, and gross NPLs increased 38% y/y in H1-FY14 to 4.7% of loans. This deterioration in asset quality is reminiscent of FY10, when the bank reported high stressed asset levels; they subsequently improved in FY11, aided by strong loan growth. The latest bout of asset-quality weakness is driven by IOBs relatively high exposure to stressed sectors such as textiles, other SMEs, and infrastructure, including power. The industrial segment as a whole accounts for 55% of domestic NPLs, while services and agri account for 24% and 15%, respectively. Sectors reporting high NPL ratios include textiles (NPL ratio of 23%), paper (23%), jewellery (16%) and sugar (11%). The power and iron and steel segments dominate restructured loans, together comprising close to one-third of the restructured book. While restructured loans declined in Q2-FY14 on high recoveries, the pace of fresh restructuring remains high. We see further downside risks given the banks elevated exposure to stressed sectors (infrastructure and iron and steel accounted for c.20% of exposure in FY13) and aggressive loan growth in FY10-FY12. Specific loan-loss coverage is also low, having weakened in the past two years to 41%. Low profitability: IOBs profitability ranks below peers (ROA of 0.2% in H1 -FY14, down from 0.5-0.7% in FY11-FY12). In addition to declining NIMs, rising credit costs have eaten into earnings loan-loss provisions accounted for c.65% of preprovision profits in FY12 and H1-FY13. On the positive side, IOB has greater income diversity than similar-sized public-sector peers. We expect the banks profitability to remain weak in the coming quarters on the back of elevated credit costs and margin pressure. Reasonable funding profile: IOB, like many Indian banks, relies primarily on deposits for its funding (c.88% of the funding mix). Increasing the CASA share by leveraging its fairly large branch network is a management priority; its CASA ratio is low compared to peers, at 25%. Depositor concentration is also slightly higher than peers, with the top 20 depositors accounting for 14% of the banks deposits. Strong corporate banking franchise, especially in Tamil Nadu: Although it is a full-service bank, IOB is focused on the higher-yielding mid-corporate and SME sectors. It has a well-entrenched position in its home state of Tamil Nadu. Its distribution network is biased towards southern India, though the bank has increased its focus on growth in northern and western India through branch expansion. Links with the Tamil Nadu state government are strong IOB handles a number of government-related transactions, including payroll transactions and fund transfers for support programmes. Moderation in loan growth: After aggressive loan growth that exceeded the sector average in FY10-FY12 (CAGR of 33%), IOB grew at a more moderate pace in FY13 and H1-FY14 (14-15% y/y). Growth in recent periods has been driven by the retail and SME sectors (63% and 24% y/y in H1-FY14, respectively), and these will continue to be the banks focus areas. IOB is also among the handful of Indian banks with a sizeable international business (13% of loans as of Q2-FY14). Weak capitalisation: Aggressive loan growth and weak internal capital generation reduced IOBs Tier 1 ratio to 7.0% as of Q2 -FY14, the lowest among the Indian banks under our coverage. Capital is particularly weak in light of asset-quality pressures, Basel III implementation and anaemic earnings. Tier 1 has fallen below 8% despite capital injections in FY12-FY13 (another INR 12bn was approved in October 2013). Persistent strain on capital could lead to downward rating pressure.
206
capitalisation are the primary factors underpinning our Negative credit outlook on IOB. The banks asset quality has deteriorated more than many peers, and we see further stress ahead given its high exposure to problem sectors. Credit costs have weighed on earnings, reducing IOBs profitability to among the lowest of the Indian banks we cover. Capitalisation is weak (Tier 1: 7%) in light of asset-quality pressures, Basel III implementation and anaemic earnings. More positively, the bank has a solid franchise in the state of Tamil Nadu and continues to benefit from government support in the form of capital injections.
BANKS
Company profile
With an asset base of INR 2.6tn (USD 42bn) as of September 2013, Indian Overseas Bank (IOB) is a th mid-sized bank (the countrys 12 largest), with a c.3% market share of loans. It has a nationwide network of around 3,000 branches, with an established position in southern India. A large proportion of its branches are in Tamil Nadu, where it has its head office. IOB has seven branches in Asia and a banking joint venture in Malaysia; overseas loans are c.13% of total loans. It is publicly traded, with 73.8% government ownership (statutory requirement of minimum 51% government ownership). Founded in 1937 and specialising in overseas banking for the Indian diaspora, the bank was privately owned until 1969, when it was nationalised.
Asia Credit Compendium 2014 Indian Overseas Bank (Baa3/Neg; BBB-/Neg; NR)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.8 12.7 47.3 1.7 44.3 12.7 0.7 2.7 57.0 78.2 5.2 8.2 14.6 2.6 13.4 47.2 1.6 63.3 9.9 0.5 2.7 51.3 80.0 5.4 8.4 13.3 2.3 12.4 47.2 1.5 80.4 4.5 0.2 4.1 39.1 80.6 5.5 7.8 11.9 2.3 10.9 52.5 1.6 79.3 3.8 0.2 4.7 40.6 82.1 5.2 7.0 10.7 42,080 12,251 54,331 (25,725) 28,606 (12,684) 15,922 10,725 50,162 16,810 66,972 (31,631) 35,341 (22,364) 12,977 10,501 52,519 19,729 72,249 (34,078) 38,170 (30,695) 7,475 5,672 27,680 11,154 38,835 (20,380) 18,454 (14,629) 3,825 2,583 100% 80% 60% 40% 20% 40,100 1,788 1,118 486 1,695 1,452 6 194 93 43,171 2,196 1,407 556 2,077 1,784 9 236 119 45,073 2,447 1,604 614 2,312 2,021 3 233 135 41,910 2,626 1,713 678 2,489 2,127 NA 283 137 FY12 FY13 H1-FY14

Housing Other retail SME Overseas Agriculture Domestic corp. 0 3% 6% 11% 13% 13% 53% 100 200 300 400 500 600 700 800 900 1,000
Funding mix
Current deposits Savings deposits Time deposits Debt
BANKS
Asset quality (%)

10 8 6 4 2 0 Mar-10 20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Tier 2 capital Tier 1 capital ratio Mar-11 Mar-12 Mar-13 Sep-13 14 12 10 8 6 4 2 0 NPL ratio Loan-loss coverage (RHS) Std. restructured loans-to-loans* 60 50 40 30 20 10 0
Revenue by business segment, H1-FY14 (INR mn)

Other Treasury Retail Wholesale 0 20,000 40,000 3% 24% 25% 48% 60,000 80,000

ROE (RHS)

Fees/commissions 11%
Others
18%
71% 30,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013;**comparable data not available for FY10-FY11; Source: Company reports, Standard Chartered Research
207
Asia Credit Compendium 2014 Indonesia Eximbank (Baa3/Sta; BB+/Sta; BBB-/Sta)


LPEI is strategically important to the Republic of Indonesia, and reflecting this, the banks status and solvency are enshrined in law. Although LPEI is wholly reliant on wholesale funding, its strong links to the sovereign ensure continued access to relatively stable, below-marketcost funding. LPEI has grown its loan book rapidly since 2009 (at a CAGR of 41% over four years), which has flattered asset quality. Given the structural and economic headwinds facing Indonesias export sector, credit costs will rise, in our view. Although we expect the downturn in the credit cycle to negatively affect earnings, LPEIs capital should remain adequate, given its legal status, which underpins the Stable outlook with which we initiate coverage.

Strategic role and strong link to the sovereign: LPEI was established under an act of law to support Indonesias national export programme. LPEI does so by providing export financing to local companies and banks, buyers credit, domestic and overseas project and investment financing, and export insurance. Its lending is targeted towards several key commodity export industries, such as crude palm oil, textiles, clothing, construction services, and rubber. It is wholly owned by the government of Indonesia, which is legally precluded from privatising the bank. The government of Indonesia is also legally required to replenish LPEIs capital using funds from the state budget if the banks capital falls below IDR 4tn. Despite its relatively small size (USD 4bn in assets at end-September 2013), given its close links and involvement in achieving the governments economic goals, the bank is strategically important, in our view. Dependence on wholesale market funding: LPEI is not a deposit-taking institution, and derives nearly all its funding through interbank borrowings and debt issuance. As of end-September 2013, 48% of its total funding was sourced through interbank borrowings, of which 73% mature in less than three months. Foreign currency borrowings and debt issuance comprised 62% of total wholesale funding. Nevertheless, as a result of its close links to the sovereign, it is able to obtain short-term financing at favourable rates. The bank has gradually been extending the maturity of its funding profile, increasing the proportion of funding derived from term debt issuance to 52% at end-September 2013 from 38% at end-2011. This improvement was achieved primarily through its 2012 offering of a 5Y USD 500mn issue (34% of its existing debt). The bank also maintains a healthy level of liquidity, with liquid balances comprising 20% of total assets. Asset quality has improved: As a result of brisk loan growth (at a CAGR of 41% over four years), its NPL ratio declined to 3.3% at end-September 2013 from 10.4% at end-2009. However, reserve coverage has remained fairly low (89% at end-September 2013), and the nature of the banks lending makes the bank more susceptible to a deterioration in credit conditions than commercial banks. About 90% of its loans are to large corporate borrowers, which leads to significant concentration risks. Loans to the export-oriented manufacturing, agriculture, and mining sectors, which could be particularly susceptible to weakness in external demand dynamics, comprised 71% of end-September 2013 loans. A relatively small 9% of its loans are to SMEs, while overseas loans comprise less than 2%. The majority of the banks loans are short -term (34% mature in one year or less). Profitability is structurally weak, though it reflects LPEIs policy role: LPEIs profitability is constrained by its lack of a customer deposit funding base and its reliance on more costly wholesale funding. Likewise, its fee-earning ability is very weak, as it derives 90% of its income via net interest income. Provisions, which have fallen to cyclical lows to consume just 0.8% of PPP in 9M-2013 (compared with 64-22% in 2008-11) have also helped flatter profitability. Given the challenging external conditions facing Indonesian exporters, we expect loan-loss provisions to increase from cyclical low levels and erode earnings in the near to medium term. Capitalisation has weakened: LPEIs capitalisation is adequate but has been steadily declining as RWA expansion has outpaced capital accretion. At endSeptember 2013, the bank reported a core capital ratio of 19.3%, which is considerably lower than the 40.9% at end-2009. The banks total capital-adequacy ratio was 20% at end-September 2013. The government is also legally required to replenish the banks capital if it falls below IDR 4tn, and given the banks current size, this implies that its core capital-adequacy ratio would remain above 10%.
208
BANKS
Company profile
Lembaga Pembiayaan Ekspor Indonesia (Indonesia Eximbank, LPEI) is Indonesias export-import bank. LPEIs role is to support Indonesias national export programme through the provision of export financing to local companies in support of several key commodity, services, and export industries. It was established in 2009 under an act of law and is wholly owned through the Ministry of Finance by the Republic of Indonesia. The government of Indonesia is required to replenish the banks capital using funds from the state budget if its capital falls below IDR 4tn. Also, the government is legally precluded from privatising the bank.
Asia Credit Compendium 2014 Indonesia Eximbank (Baa3/Sta; BB+/Sta; BBB-/Sta)

Summary financials
2010 Balance sheet (IDR bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (IDR bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.8% 1.6% 30.4% 1.1% 40.8% 3.0% 1.2% 10.1% 51% NA 31.5% 39.0% 39.9% 4.0% 1.1% 27.0% 1.1% 22.2% 6.8% 2.0% 6.7% 66% NA 26.5% 31.0% 31.8% 3.2% 1.8% 26.2% 0.9% 8.8% 8.1% 2.0% 4.4% 81% NA 22.7% 24.0% 24.9% 3.3% 1.9% 22.0% 0.6% 0.8% 11.1% 2.3% 3.3% 89% NA 18.4% 19.3% 20.0% 618 8 626 (190) 436 (178) 246 196 926 28 954 (257) 696 (155) 544 461 952 59 1,011 (265) 746 (65) 713 586 936 108 1,044 (230) 814 (7) 802 652 100% 80% 60% 40% 20% 2,270 20,639 14,916 439 14,137 NA 8,475 5,331 6,502 2,895 26,322 19,629 288 19,358 NA 11,561 7,178 6,964 3,333 33,333 26,097 310 25,783 NA 11,362 13,898 7,550 3,958 43,977 34,611 346 35,874 NA 16,715 18,331 8,103 2011 2012 9M-13
Loans by maturity, Sep-13 (IDR bn)

1 year to 3 years 3 years to 5 years More than 5 years Up to 1 year 0 5,000 Interbank borrowings 10,000 Debt 18% 24% 24% 34% 15,000
Funding mix
BANKS
0% Dec-09 8 7 6 5 4 3 2 1 0 2010 2011 2012 9M-13 Net interest margin Dec-10 Dec-11 Dec-12 Sep-13

Asset quality (%)

12 10 8 6 4 2 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 40 20 0 Impaired loans ratio Loan-loss coverage (RHS) 100 80 60

Other Fee and commission income (net) Investment gains/losses Net interest income 0 500 1% 2% 7% 90% 1,000

45 40 35 30 25 20 15 10 5 0 Tier 2 ROE (RHS) 12 10 8 Tier 1 capital ratio 6 4 2 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

Others Construction Trading, restaurants and hotels Mining Transportation Business services Agriculture Manufacturing
1% 5% 5% 8% 8% 10% 10% 53% 0 5,000 10,000 15,000 20,000
209
Asia Credit Compendium 2014 Industrial and Commercial Bank of China (Asia) Ltd. (A2/Sta; NR; A/Sta)

Our Negative credit view on ICBC Asia is based primarily on the expectation that the banks asset quality will deteriorate in the medium term. ICBC Asia has been more aggressive than peers at growing its loan portfolio in the mainland in recent years. As a result, it is among the Hong Kong banks most exposed to the mainland. In Hong Kong, the bank is a mid-sized player with a corporate focus, and its funding base is not as strong as that of some of its peers. However, the banks credit profile is supported by its 100% ownership by and support from its parent. Although ICBC Asia is relatively small in relation to its parent, it plays an important role in its parents overall international strategy.

Increased linkages with its Chinese parent: ICBC Asia was taken private in 2010 and has been gradually increasing its business links with its parent. Although it accounts for only around 2% of ICBCs assets, ICBC Asia is ICBCs largest overseas subsidiary, and it plays a strategic role in its parents regional business. As the largest bank in China, ICBC has lending relationships with some of the largest mainland corporates and SOEs, and ICBC Asia meets these entities offshore lending needs. ICBC Asia has received strong support from its parent, demonstrated by capital injections totalling almost HKD 12bn since 2010 to help fund ICBC Asias growth. Aggressive loan growth: ICBC Asia has grown its loan book considerably faster than its Hong Kong peers. (Total loans have more than doubled since end-2009.) This growth was driven by its parents overall strategy and, as a result, a large portion of it was concentrated in the mainland, particularly in the corporate sector thanks to referrals from its parent. While ICBC Asia does not provide a sectoral breakdown of its mainland loan book, we understand that property-sector exposure is relatively moderate. Owing to this strong growth, ICBC Asia is among the Hong Kong banks most exposed to the mainland. Mainland loans accounted for almost two-thirds of total loans at end-June 2013, versus around 43% at end-2009. Mid-size position in Hong Kong: The banks Hong Kong loan portfolio (excluding trade finance) is around 15% smaller than that of Bank of East Asia (BEA), and is geared towards the corporate sector. Retail loans accounted for only 12% of the banks Hong Kongs loan portfolio (excluding trade finance) at end -June 2013. Asset quality likely to deteriorate: Like other Hong Kong banks, ICBC Asias asset-quality indicators are at cyclical lows. The banks impaired loan ratio stood at 0.4% at end-June 2013, with loan-loss coverage of almost 140%. Although asset quality in the mainland is deteriorating, strong loan growth probably helped flatten ICBC Asias asset-quality indicators. Given the banks very rapid loan growth in the mainland in recent years, we believe ICBC Asias asset quality is likely to deteriorate more than its peers in the medium term. High reliance on wholesale funding: Partly because of its strong loan growth and smaller branch network, ICBC Asia is more reliant on wholesale funding than its peers, with customer deposits providing 70% of total funding at end-June 2013. Also, a large percentage of customer deposits (71% at end-June 2013) is more expensive time deposits (versus Bank of China (Hong Kong)s 48%). As a result, the banks cost of funding is higher than average. Also, at 99% at end -June 2013, its LDR is considerably higher than average. Moderate earnings-generation capacity: Hong Kong banks NIMs are narrow, on account of strong competition, and this has affected the banks profitability. ICBC Asias margins are further affected by its corporate focus on the asset side and its higher cost of funding. Also, ICBC Asias income sources are less diversified than peers (fee income accounted for 17% of operating income in H1 -2013, versus 24% for BEA). However, the bank offsets this with better-than-average efficiency levels. Furthermore, low risk costs have supported profitability in recent years: ROA stood at 1% in H1-2013, with an ROE of 12%. However, profitability is likely to decline as credit costs rise. Adequate capitalisation: The banks capital-adequacy ratios are slightly lower than the average for the Hong Kong banks under our coverage. The banks Tier 1 capital ratio stood at 10.6% at end-June 2013. However, because of its very strong loan growth, ICBC Asia has been reliant on capital support from its parent to maintain its capital-adequacy ratios.
BANKS
Company profile
Industrial and Commercial Bank of China (Asia) (ICBC Asia) is a midsized bank in Hong Kong, with a domestic loan market share of 6% and total assets of HKD 524bn (USD 68bn) at end-June 2013. The bank operates through a network of 56 branches in Hong Kong. ICBC Asia is a 100%-owned subsidiary of ICBC, Chinas largest bank (A1/Sta; A/Sta; A/Sta), and represents c.2% of its parents assets. The mainland accounts for around two-thirds of ICBC Asias loan portfolio. On the mainland, it operates through its 100%-owned subsidiary, China Mercantile Bank (CMB), complementing ICBCs banking services to its customers there. In Hong Kong, ICBC Asia has a strong corporate focus and a more limited retail presence.
210
Asia Credit Compendium 2014 Industrial and Commercial Bank of China (Asia) Ltd. (A2/Sta; NR; A/Sta)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) 34,301 Total assets 266,938 Loans 185,058 Investments 73,620 Total liabilities 246,790 Deposits 193,544 Interbank 27,879 Debt 20,375 Equity 20,149 Income statement (HKD mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3,587 1,183 4,770 (1,472) 3,298 (262) 3,654 3,003 1.5 14.8 30.9 0.6 7.9 15.6 1.2 0.5 101.3 95.6 7.5 8.9 14.9 52,136 404,958 237,489 152,415 375,877 262,622 54,371 53,114 29,081 4,907 1,254 6,160 (1,644) 4,516 (514) 4,002 3,153 1.5 15.7 26.7 0.5 11.4 12.8 0.9 0.5 125.3 90.4 7.2 10.0 15.9 54,917 425,681 264,302 138,356 385,780 258,148 72,863 47,174 39,901 5,869 1,887 7,755 (2,016) 5,740 (724) 5,009 4,015 1.4 17.4 26.0 0.5 12.6 11.6 1.0 0.5 146.8 102.4 9.4 12.0 15.5 67,530 523,797 317,426 177,060 482,165 319,874 109,016 43,839 41,632 3,298 997 4,295 (1,072) 3,223 (141) 3,082 2,446 1.4 16.9 25.0 0.5 4.4 12.0 1.0 0.4 138.5 99.2 7.9 10.6 13.5 2011 2012 H1-13

Others Other consumer Resi. mortgage Corporate (property) Outside HK Corporate (others) 0 50 Deposits 100 Debt/CDs 150 Interbank 0.3% 1.1% 4.0% 10.3% 30.4% 53.9% 200
Funding mix
100% 80% 60% 40% 20%
BANKS
0% Dec-09 3 3 2 2 1 1 0 2009 2010 2011 2012 H1-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Jun-13
Asset quality (%)

1.5 1.2 0.9 0.6 0.3 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Impaired loans ratio Loan-loss coverage (RHS) Restructured loans/loans 200

Others 150 100 50 0 0 50 100 150 200 250 Hong Kong 32% 4%
Mainland
64%


25 Other 1% 6% 17% 77% 0.0 1.0 2.0 3.0 4.0 20 15 10 5 0 Trading Fees/commissions Net interest income
ROE (RHS)
Tier 2 capital
211
Asia Credit Compendium 2014 Industrial and Commercial Bank of China Ltd. (A1/Sta; A/Sta; A/Sta)

ICBCs credit profile is underpinned by its dominant size, strong domestic franchise and government ownership. Its reported fundamentals are robust, with high profitability, low reported NPLs and strong capital adequacy. Our Negative outlook reflects concerns about the potential for deterioration in asset quality as a result of rapid loan growth, exposure to potentially troublesome sectors and tightening liquidity conditions. As with the other Chinese banks, reported assetquality indicators might not reflect the reality on the ground.

Strong government support: China has a track record of providing support to its larger financial institutions (in 1999 and 2005). Given its size and the governments stake, ICBC enjoys strong implicit support, in our view. In 2005, USD 85bn of the banks non-performing assets (equivalent to 19% of its end-2004 total loans) were removed from its balance sheet and transferred to China Huarong Asset Management (Huarong). The bank also received a USD 15bn capital injection. ICBCs investment in debt securities issued by Huarong to fund t he purchase of NPLs from ICBC amounted to CNY 260bn at end-June 2013 (22% of equity). Loan growth has decelerated: Because it is a state-owned bank, ICBC needs to balance its commercial interests with the governments broader development objectives. During the loan boom of 2009/10, the banks loan portfolio grew 26% and 19%, respectively. While the rate of loan growth has decelerated since 2010 to 13% in 2012 and 10% in 9M-2013, it is still fairly strong, in our view. Asset quality deteriorating: Rapid loan growth during the credit boom in 2009/10, coupled with high exposure to potentially troublesome sectors such as construction/real estate and local-government financing vehicles, is likely to lead to asset-quality deterioration, in our view. Despite an up tick in NPLs, ICBCs reported asset-quality indicators are strong, with an NPL ratio of 0.9% and loan-loss coverage of 269% at end-September 2013. However, like the other Chinese banks, ICBCs reported asset-quality indicators might not fully reflect the reality on the ground. Also, the information available is limited, making it difficult to make either an accurate assessment or meaningful asset-quality comparisons between the big four banks. However, according to Fitch, the banks exposure to infrastruc ture and local government-related sectors is above average at around 25% of total loans. Increasing competition for deposits: Customer deposits accounted for 86% of ICBCs total funding at end-September 2013 and are slightly skewed towards corporates. As with its peers, deposit growth has not kept pace with loan growth in recent years due to increasing competition for deposits. This has led a rising LDR, although at 65% (at September 2013), it remains low by Chinese and international standards. Increasing deposit competition is also forcing banks to use wealthmanagement products (WMPs) as a source of funding. This can add to deposit volatility and mask underlying funding trends. In the case of ICBC, WMPs represent a larger percentage of its deposit base than its peers, but less than 10%. Profitability likely to decline: ICBC is one of the most profitable of the big four banks thanks to good cost controls, reasonable margins and a hitherto very low cost of risk. The banks revenue is still dependent on ne t interest income, but ICBC is steadily developing its retail banking and fee income-generating businesses. The weight of consumer loans has also been gradually increasing: at end-September 2013, they accounted for c.27% of total loans compared with 17% at end-2007. We believe profitability will likely decline as a result of slower loan growth, margin compression and higher loan-loss provisions. Capital adequacy is in line with the peer average: Capital-adequacy ratios have remained broadly stable, despite continued loan growth thanks to capital-raising exercises and earnings retention. The banks Tier 1 capital ratio stood at 10.6% at end-September 2013, with an equity-to-assets ratio of 6.6%. This is in line with the peer average. Overseas expansion high on the agenda: In recent years, the bank has expanded overseas, both organically and through acquisitions. ICBC aims to increase the contribution from foreign operations to c.10% from the c.5% at present, with acquisitions likely to feature prominently.
212
BANKS
Company profile
Industrial and Commercial Bank of China Ltd. (ICBC) is Chinas largest bank, with total assets at endSeptember 2013 of CNY 18.7tn (USD 3.1tn) and an estimated domestic-deposit market share of c.15%. Its strength has historically been the corporate sector (c.73% of end-June 2013 loans and 67% of H1-2013 revenue), although it offers a full suite of financial services. It operates through a network of over 17,000 domestic branches and outlets, and almost 400 overseas branches and offices in 39 countries. ICBC is primarily a domestic player, with 93% of its loans in China, and domestic operations accounting for 95% of revenue. It is 70.6% owned by the central government through Central Huijin Investment (35.4%) and the Ministry of Finance (35.2%).
Asia Credit Compendium 2014 Industrial and Commercial Bank of China Ltd. (A1/Sta; A/Sta; A/Sta)
Summary financials
2010 Balance sheet (CNY bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.5 19.0 36.4 1.1 11.5 22.1 1.3 1.1 228.2 60.9 6.1 10.0 12.3 Loan-loss coverage (RHS) 2.6 21.5 35.9 1.2 10.3 23.4 1.4 0.9 266.9 63.5 6.2 10.1 13.2 2.6 19.9 35.7 1.2 9.9 22.9 1.4 0.8 295.5 64.5 6.4 10.6 13.7 2.5 22.0 32.4 1.0 9.8 23.2 1.5 0.9 268.9 65.4 6.6 10.6 13.2 350 300 250 200 150 100 50 0 Dec-10 Dec-11 ROE (RHS) Dec-12 Sep-13 Corporate banking 0 50 100 51% 150 Others Treasury Personal banking 1% 15% 33% 2,037,025 2,458,597 2,783,980 3,062,058 13,459 15,477 17,542 18,743 6,623 7,594 8,583 9,410 3,994 4,265 4,628 4,786 12,637 14,519 16,414 17,507 11,146 12,261 13,643 14,693 1,066 1,555 1,846 1,761 100 204 232 247 822 958 1,128 1,235 304 79 383 (139) 243 (28) 215 166 363 110 473 (170) 303 (31) 272 208 418 115 532 (190) 342 (34) 309 239 328 106 434 (141) 293 (29) 265 206 2011 2012 9M-13 Discounted bills 2%
Personal
27%
Corporate 0 2,000 Interbank 4,000 Repos 6,000 Debt
71%
Funding mix
BANKS
0% Dec-09 5 4 3 2 1 2009 2010 2011 2012 9M-13 Net interest margin Dec-10 Dec-11 Dec-12 Sep-13

Asset quality (%)

1.8 Impaired-loans ratio 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Dec-09


25 20 Utilities (management) Utilities (generation) Construction/Real estate Wholesale, retail, lodging Other Transportation and logistics Manufacturing 0 500 1,000 7% 9% 11% 16% 16% 19% 23% 1,500 2,000
15 10 5 0
213
Asia Credit Compendium 2014 Industrial Bank of Korea (Aa3/Sta; A+/Sta; AA-/Sta)

IBKs quasi-sovereign status is underpinned by (1) its implicit guarantee from the Korean government through the solvency obligation, (2) its 72% ownership by the Korean government and (3) its role in implementing the governments economic policies for the SME sector. The abandonment of the privatisation plans in August 2013 indicates that IBK will remain one of Koreas main policy banks. IBK is among the policy banks that actively compete with commercial banks in some sectors in both lending and deposit-taking. Despite its large concentration in the SME sector and its limited ability to diversify its business, the banks fundamentals are moderate, in our view.

Privatisation process stopped: IBK was fully owned by the government until 1993, when the governments direct stake declined to 64.5%. Since then, the governments stake has fluctuated as it has injected capital. The possibility of privatising IBK has arisen from time to time, most recently in 2008 during the government of Lee Myung-Bak. However, in August 2013, the new government of Park Geun-Hye announced that IBKs privatisation would not go ahead, although the government is likely to continue lowering its stake in the bank. A change-ofcontrol clause in some of the bond documentation takes effect if the governments combined direct and indirect ownership falls below 50.1%. Implicit guarantee: Although the Korean government does not explicitly guarantee IBKs obligations, it is obliged to maintain the banks solvency under Article 43 of the IBK Act. As a result, IBKs ratings are directly linked to those of the Korean sovereign. The government has demonstrated its support through several capital injections aimed at enabling IBK to carry out its role. This was evident in 2008 and 2009, when the government injected KRW 500bn and KRW 800bn, respectively. Strong policy role: Because of the importance of the SME sector to the Korean economy, IBK has traditionally played an important role in implementing the governments economic policies. In broad terms, while commercial banks tend to focus on larger and more developed SMEs, IBK concentrates more on smaller SMEs at the development stage. The banks policy role was reiterated during the 2008-09 financial crisis, when it played a pivotal role in providing financing to the SME sector at a time when commercial banks were less active in that space. Concentration in the SME sector: As part of its policy role, at least 70% of IBKs loan portfolio must consist of loans to SMEs. IBKs exposure to the SME sector accounted for 77% of its KRW loan portfolio at end-June 2013. In our view, this requirement curbs the banks ability to diversify its business meaningfully away from this sector. Because SMEs tend to be more affected by economic downturns than large corporates, this creates additional risks, although IBK has a proven track record in lending to the SME sector. Moderate fundamentals: In our view, IBKs financial profile is moderate on a standalone basis. Its profitability is higher than that of the other policy banks, partly because of the commercial activities it undertakes. However, NIMs and profitability have been steadily declining as the bank has been lowering its lending rates to SMEs to help ease their debt burdens. The banks funding base is less diversified than the commercial banks because of its less developed retail base . At 187% as of end-June 2013, its overall LDR is high. However, the banks funding base is arguably stronger than the other policy banks because of its ability to issue Small and Medium Industry Finance (SMIF) bonds. SMIF bonds count as SME loans for the purpose of meeting the central banks requirement on minimum lending to the SME sector. As a result, other banks particularly foreign banks tend to purchase these bonds rather than lend directly to the SME sector. This gives IBK a funding advantage. SMIF bonds accounted for around 35% of the banks funding base at end-June 2013. Despite its concentration in the SME sector, the banks asset-quality indicators have remained reasonable and compare favourably with those of the industry average because of its below-average exposure to troubled sectors. The banks NPL ratio at end-June 2013 stood at 1.3%, with loan-loss coverage of 166%. The bank is adequately capitalised; its Tier 1 capital ratio was 9% at end-June 2013, while its equity-to-assets ratio stood at 7.2%.
BANKS
Company profile
Industrial Bank of Korea (IBK) is one of Koreas main policy banks, with total assets (unconsolidated) of KRW 193tn (USD 169bn) at endJune 2013. IBK was set up in 1961 as a government-owned policy bank to provide financing to SMEs, and has expanded its range of services in recent years. In addition to its policy role, it is now active in corporate, consumer, and investment banking and asset management. The bank has a robust loan market share of c.20% in SMEs, and its overall market share of deposits is around 4%. IBK operates through a network of 629 branches. The bank is 72% owned by the Korean government directly through the Ministry of Strategy and Finance and indirectly through KoFC and KEXIM.
214
Asia Credit Compendium 2014 Industrial Bank of Korea (Aa3/Sta; A+/Sta; AA-/Sta)
Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.9 7.5 29.0 0.9 49.9 13.1 0.8 1.8 127.8 218.5 6.3 8.9 12.2 2.7 16.9 30.8 0.9 40.7 13.0 0.9 1.5 161.6 211.1 7.3 8.9 11.7 2.4 8.6 40.2 0.9 44.1 8.1 0.6 1.4 160.0 192 7.2 8.9 12.4 2.1 7.3 43.5 0.9 48.4 6.6 0.5 1.3 166.1 187.1 7.2 9.0 12.1 180 160 140 120 100 80 60 40 20 0 4,355 454 4,809 (1,395) 3,414 (1,703) 1,711 1,290 4,463 514 4,976 (1,535) 3,442 (1,402) 2,039 1,529 4,177 128 4,305 (1,729) 2,575 (1,135) 1,441 1,083 1,951 82 2,033 (885) 1,148 (556) 592 456 100% 80% 60% 40% 20% 146,959 165,476 127,352 24,770 154,986 58,287 26,107 62,934 10,489 156,142 179,946 138,826 27,506 166,870 65,752 27,290 64,686 13,076 179,220 190,762 143,489 33,106 177,015 74,728 22,270 69,127 13,747 169,460 193,403 147,343 33,416 186,577 78,759 23,976 70,965 13,861 2011 2012 H1-13

Large corporations and Others Households 4%
19%
SMEs 0 50,000 100,000
77% 150,000
Funding mix
BANKS

8 6 4 2 0 2009 2010 2011 2012 Jun-13 Net interest margin Average interest earned
Asset quality (%)

2.5 2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Loan-loss coverage (RHS) Impaired loans ratio
SME loans by industry, Jun-13 (KRW bn)

Construction Real-estate lease Other Wholesale/retail Manufacturing 0 16,000 32,000 48,000 64,000 4% 5% 11% 17%

15 12 9 6 3 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13
Revenue by type of income, H1-13 (KRW bn)

20 Other 15 10 Fees/ commissions Net interest income -500 0 500 1,000 1,500 8% -12%
5 0
104% 2,000 2,500
215
Asia Credit Compendium 2014 Kasikornbank PCL (Baa1/Sta; BBB+/Sta; BBB+/Sta)


Kbank has a strong position in Thailand as the fourth-largest bank. Its fundamentals are optically the strongest among peers. It has the best income diversity and NIM among the big four banks, below-average NPL ratios (thanks to the aggressive write-off of legacy NPLs) and solid capitalisation. However, higher exposure to SMEs makes it more sensitive to cyclicality, although this is offset by its strong pre-provision profitability and conservative loan growth. The loan portfolio, diversified to include higher-yielding segments, is complemented by healthy fee-based income sources, resulting in earnings resilience versus peers. Capitalisation is sound and will benefit from healthy earnings accretion and measured growth.

Strong market position: Kbank is the fourth-largest bank in Thailand, with a 14% market share of loans and deposits. Although the bank has no direct government ownership, it is systemically important as one of Thailands big four banks, in our view. While political risks remain, we think the political scenario poses a much lower risk to the banking sector than in previous years. Business diversification strategy: Kbank is traditionally an SME lending bank (35% of its loans are to SMEs) and the market leader in this sector, with a c.30% market share. In addition to SMEs, lending to corporates (32% of the loan portfolio) and retail lending (26%) provide balance and diversification to the overall portfolio, reducing dependence on a single target segment. Despite its expansion into mortgages in 2010-11, when it held the second-largest market share, it has since fallen to holding the third-largest (c.9%) as peers have ramped up mortgage lending. We view Kbanks below-average mortgage credit growth as creditpositive, as rising housing prices and household debt in Thailand are a growing concern. Retail loans have also exhibited more measured growth of 4.3% YTD through H1-2013, following a more brisk expansion of 16-19% in 2011 and 2012, albeit from a lower base. While NPL ratios may be near cyclical lows (2.4% at endSeptember 2013), reserve levels are good, and Kbank has managed credit costs and impaired loans conservatively through the cycle. Small but growing international business: Kbank plans to expand its Asia (especially China) business. In late May 2013, it opened a branch in Chengdu (its fifth overseas branch) to serve Chinese investors interested in investing in Thailand and Thai SMEs. It plans to open two or three more branches in China over the next two years, though overall, its non-THB loans are still a small part of its overall business (7% versus 22% for BBL). Strong deposit base with lower NIM pressures than peers: Kbank has a strong deposit base, with low-cost deposits accounting for 64% of total deposits (the highest among the big four). Its LDR, at 91% at end -September 2013, is also lower than those of the big four except BBL (90%). As management has guided for continued growth in lending to the higher-yielding SME segment and policy rates are likely to remain stable at least until mid-2014, Kbank should maintain its NIM leadership among the big four. Fee businesses add stability to earnings: Kbank holds a dominant position across several important fee businesses, including asset management (where it is the market leader, with a 23% market share), bancassurance (market leader, with a 27% market share) and credit cards (number two market position). Consequently, its fee income to total income was 33% YTD through 30 September 2013 versus an average of 23% for the remaining three large Thai banks. Nonloan-related fees represent more than three-quarters of fee income, which adds stability to earnings throughout the lending cycle. Offsetting these strengths to an extent is the banks higher-than-average cost base, which has resulted in weakerthan-peer efficiency metrics. Capital position is adequate: The bank reported a solid Basel III-compliant Tier 1 ratio of 13.1% at end-September 2013. Capitalisation metrics have improved YTD through earnings accretion and slower RWA growth, resulting from its moderate pace of growth. The bottom line is likely to remain robust (second-best among peers, at 2.2% ROA), as NIMs remain strong, costs are manageable, and noninterest income is stable, despite slightly higher credit costs. This should result in good internal capital generation.
BANKS
Company profile
Established in 1945 by the Lamsam family as Thai Farmers Bank, Kasikornbank (KBank) is the fourth largest of Thailands big four commercial banks, with endSeptember 2013 assets of THB 2.2tn (USD 72bn) and a c.14% loan-market share. As of 30 June 2013, the bank had 897 branches in Thailand and a growing presence in Asia (five branches and five offices), especially in China. It is traditionally an SME lender, although it is a fullservice bank with subsidiaries engaged in asset management, securities, leasing, and insurance (38% shareholding in Thailands second-largest insurer). Its shares are widely held. The founding familys shareholding fell after the 1997 financial crisis, but it retains management and board positions.
216
Asia Credit Compendium 2014 Kasikornbank PCL (Baa1/Sta; BBB+/Sta; BBB+/Sta)

Summary financials
2010 Balance sheet (THB bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (THB bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.5 27.3 52.7 2.8 18.0 15.6 1.5 3.1 110.5 98.3 9.4 10.2 14.8 3.7 28.8 47.5 2.6 15.5 16.8 1.6 2.6 126.4 97.6 9.7 10.6 14.7 3.5 30.5 45.0 2.5 14.6 20.6 2.0 2.5 131.1 95.5 9.7 10.4 15.6 3.5 32.9 42.2 2.4 16.7 22.0 2.2 2.4 132.2 91.2 10.1 13.1 17.3 140 Loan-loss coverage (RHS) 'specialmention' ratio NPL ratio 120 100 80 60 40 20 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 16% 14% 12% 10% 8% 6% 4% 2% 0% Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Loan growth Loan-todeposit (RHS) 0 20 40 60 100 98 96 94 92 90 88 86 Net interest 60% Other Trading Fees/commissions 2% 6% 33% 48.3 30.1 78.5 (41.3) 37.1 (6.7) 30.4 21.3 56.5 34.0 90.5 (43.0) 47.5 (7.3) 40.1 26.2 63.6 40.7 104.3 (46.9) 57.4 (8.4) 49.0 37.8 53.7 36.5 90.2 (38.0) 52.2 (8.7) 43.5 34.6 100% 80% 60% 40% 20% 51,580 1,552 1,044 280 1,406 1,100 34 97 145 55,099 1,723 1,173 291 1,556 1,242 53 70 167 65,867 2,077 1,285 404 1,877 1,391 174 87 201 71,704 2,240 1,371 486 2,013 1,552 117 88 227 2011 2012 9M-13
Loans by sector, Jun-13 (THB bn)

Other loans Retail loans Corpoates SME loans 0 100 Deposits 200 300 400 Interbank 7% 26% 32% 35% 500
Funding mix
Debt (incl. BE)
BANKS

Asset quality (%)

7 6 5 4 3 2 1 0

Gross loan growth and LDR (y/y, %)

ROE (RHS) 25 20
Tier 2
15 10 5 0
217
Asia Credit Compendium 2014 Kookmin Bank (A1/Sta; A/Sta; A/Sta)


Our Stable outlook is predicated on the expectation that Kookmins fundamentals will remain broadly unchanged in 2014. Kookmin is one of the leading banks in Korea, and its credit profile is underpinned by its dominant franchise in the retail and SME markets, its systemic importance in the Korean banking system and its sound fundamentals. Although the banks reported asset-quality indicators are optically sound, certain corporate sectors remain vulnerable. Hence, asset quality is unlikely to improve in 2014. Also, like the other Korean banks, Kookmins profitability is likely to continue to be hampered by high provisions and tight margins.

Dominant retail franchise: Kookmin is the largest bank in Korea and has the countrys strongest retail franchise, with the biggest branch network and the highest market share of retail local-currency deposits (c.18%). We believe this gives it a competitive advantage over peers from a funding point of view. However, Kookmin has steadily lost market share in recent years as some of its smaller competitors have grown more aggressively, and the size gap with competitors has narrowed. For example, Kookmin was 40% bigger than Woori Bank in terms of total assets in 2005; at end-September 2013, it was only about 13% bigger. Higher exposure to consumer loans, but also higher exposure to SMEs: As a percentage of its portfolio, Kookmin has more exposure than its peers to the consumer and SME sectors and, by default, less exposure to the large corporate sector. As a result, the banks loan portfolio is slightly more granular than its peers. At end-September 2013, 55% of the banks KRW loan portfolio was to consumers (including residential mortgages), with a further 36% to SMEs. The remainder was primarily to large corporates. Asset quality in line with the peer average: Like the other Korean banks, Kookmins reported asset-quality indicators have deteriorated slightly during 2013 due to reclassification of non-performing corporate loans. The banks overall NPL ratio stood at 1.9% at end-September 2013, with loan-loss coverage of 111%. These ratios are better than Woori Banks but slightly worse than those of Shinhan Bank or Hana Bank. In the corporate sector, the banks NPL ratio stood at almost 3% at end-September 2013, while in the household sector, the NPL ratio was 0.9%. Higher write-offs and NPL sales in Q4-2013 should lead to an improvement in the banks end-2013 reported asset-quality indicators. However, vulnerability in sectors such as construction, shipbuilding and shipping is likely to prevent a material improvement in underlying asset quality, in our view. Weaker profitability than its peers: Profitability indicators of all major Korean commercial banks continue to be hampered by stagnant loan growth, relatively high loan-loss provisions, tightening margins amid a low interest rate environment, and regulatory-driven costs. Against this backdrop, Kookmins profitability has historically tended to be below the peer average because of higher loan-loss provisions and a higher cost base. The banks ROA for 9M-1013 was 0.3%, on net income of KRW 683bn. As with the other Korean commerc ial banks, Kookmins profitability indicators are unlikely to improve materially in 2014. Margins are likely to remain tight, and vulnerable sectors are likely to necessitate further provisions, in order for banks to reach regulatory-guided NPL ratios. Improving funding base: Kookmins funding base is good, with customer deposits representing 87% of total funding at end-September 2013. However, like most Korean banks, Kookmin has a high overall LDR. While the ratio trended down to 101% at end-September 2013, it is still high by regional standards. The banks gross foreign-currency funding requirements are lower than the average for Korean banks, partly reflecting its lower exposure to the large corporate sector (7% of total funding at end-June 2013, versus an average of 9% for the big four banks). Strong capital base: Despite their relatively low profits, the lack of loan growth has helped Korean banks gradually boost their capital-adequacy indicators in recent years. Kookmins capital adequacy is in line with the peer average. Its Tier 1 capital ratio was 11.6% at end-September 2013, with an equity-to-assets ratio of 7.5%.
BANKS
Company profile
Kookmin Bank (Kookmin) is Koreas largest commercial bank, with total assets of KRW 271tn (USD 252bn) at end-September 2013 and estimated market shares of 15% of loans and 17% of deposits. The bank was founded in 1963 and is 100% owned by KB Financial Group (KBFG), one of Koreas largest financial-services groups. Kookmin is the key entity in the group, accounting for the bulk of its earnings and assets. Kookmin offers a broad range of banking services and has a dominant franchise in the retail and SME sectors. The bank operates through a network of 1,193 branches in Korea, and its operations are almost entirely domestic in nature.
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Asia Credit Compendium 2014 Kookmin Bank (A1/Sta; A/Sta; A/Sta)

Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.9 8.6 57.2 1.6 102.7 0.1 0.0 1.8 119.9 107.5 7.6 10.9 13.4 2.5 19.7 45.7 1.3 32.1 10.7 0.8 1.4 158.9 104.5 7.4 10.3 13.6 Loan-loss coverage (RHS) 2.4 19.7 51.2 1.3 38.2 7.6 0.6 1.4 161.2 102.5 7.8 10.9 14.4 2.1 18.9 58.0 1.3 44.8 4.5 0.3 1.9 111.4 101.0 7.5 11.6 15.3 6,948 151 7,099 (4,061) 3,038 (3,120) (83) 11 6,150 1,330 7,480 (3,415) 4,065 (1,303) 2,762 2,048 5,895 556 6,451 (3,306) 3,146 (1,200) 1,945 1,488 3,891 485 4,376 (2,539) 1,838 (824) 1,014 683 100% 80% 60% 40% 20% 226,343 254,862 196,179 38,587 235,501 182,519 11,409 28,751 19,361 222,580 256,512 199,584 36,647 237,444 190,949 14,697 18,892 19,068 242,242 257,843 199,241 35,685 237,814 194,290 14,632 15,849 20,029 252,213 271,039 203,689 37,508 250,610 201,604 13,962 15,679 20,429 2011 2012 9M-13

Large corporations (including public sector) Resi mortgages Households SMEs 0 20,000 40,000 Debt 60,000 9% 24% 31% 36% 80,000
Funding mix
Deposits Borrowings
BANKS
0% Dec-09 7 6 5 4 3 2 1 0 2009 2010 2011 2012 9M-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Sep-13
Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Impaired-loans ratio 200 150

Cash and due from banks Other 100 50 Customer loans 0 50,000 100,000 150,000 200,000 250,000 75% Investment securities 5% 6% 14%

18 16 14 12 10 8 6 4 2 0 Dec-09 Tier 2 capital ROE (RHS) 12 10 8 Tier 1 capital ratio 6 4 2 0 Dec-10 Dec-11 Dec-12 Sep-13

Fees/ commissions -8%
Other
19%
Net interest income -1,000 0 1,000 2,000 3,000
89% 4,000 5,000
219
Asia Credit Compendium 2014 Korea Development Bank (Aa3/Sta; A/CW pos; AA-/Sta)

KDBs role as a key policy tool for the government, coupled with the implicit support through a solvency obligation, underpins our Stable credit outlook. Since 2008, KDB has been run on a more commercial basis as it positioned itself for a potential privatisation. However, on a standalone basis, KDBs financial profile remains weak. Historically, the main concerns have been its low recurrent profitability, high dependency on wholesale funding, earnings volatility and high borrower concentrations. As the bank reverts to its policy role, its fundamentals are likely to deteriorate. However, the abandonment of the privatisation plans indicates that KDB will remain one of Koreas main policy banks.

Full-privatisation plans abandoned: In 2008, the government of Lee Myung-Bak initiated a privatisation plan for KDB. This required the government to sell an initial stake in KDB no later than end-May 2014. As part of the plan, a portion of KDBs assets, liabilities and equity was spun off in 2009 to create Korea Finance Corporation (KoFC). However, in August 2013, the new government of Park GeunHye abandoned the privatisation plans. As part of this process, most non-banking subsidiaries of KDBFG will be sold and KDBFG will be merged with KDB. Also, KDB will re-merge with KoFC. This process is expected to take place in mid-2014 and is subject to National Assembly approval. Policy role: KDB played an important role in the Korean economy during the early stages of industrialisation, in the aftermath of the 1997 Asian financial crisis and during the 2008 financial crisis. The abandonment of the privatisation plans indicate that KDB will remain an important tool for the government for policy lending and restructuring of companies in strategica lly important sectors. KDBs ratings will remain linked to those of the Korean government. Implicit government guarantee: There is no explicit guarantee of KDBs obligations, but Article 44 of the KDB Act creates a legal obligation for the Korean government to maintain KDBs solvency as long as the governments stake exceeds 50%. While minority stakes could be sold in the future, the government will retain a 50%-plus-one-share stake in KDB. The KDB Act will be revised to reflect the abandonment of the privatisation plans. Development of a retail funding franchise to slow: Like other Korean policy banks, KDB remains heavily dependent on the wholesale markets for funding. However, to offset its dependence on the wholesale markets and in order to position itself for an eventual privatisation, KDB made a push to expand its branch network and develop a retail franchise, and the results have become apparent. The weight of customer deposits in the banks overall funding base increased to 33% at end-June 2013 from 10% at end-2008. Given that the privatisation will no longer go ahead, KDBs retail presence will be gradually reduced. However, KDB is still less dependent than, for example, KEXIM on the offshore markets; at end-June 2013, 48% of KDBs funding was in KRW, compared with around 19% for KEXIM. Deteriorating asset quality: The banks asset quality has deteriorated over the past 18 months as a result of exposure to weaker sectors. The banks NPL ratio stood at 2.2% at end-June 2013, with loan-loss cover of 125%. As KDB refocuses on its policy role, its exposure to weaker sectors is likely to increase and lead to further deterioration in asset-quality indicators. Earnings volatility: KDBs core profitability has tended to be low, partly due to its low NIM. This is in line with the banks policy function. Improvement in margins due to lower funding costs, coupled with declining loan-loss provisions, led to an improvement in profitability in 2010 and 2011. However, provisions started rising again in 2012 and led to a decline in profits. Also, KDBs earnings have shown significant volatility in recent years due to MTM gains/losses on investments. Higher credit costs related to the restructuring of a large shipbuilder were the main driver of the loss reported in H1-2013. Declining capital adequacy: The banks capital-adequacy ratios were steadily declining owing to asset growth as it aimed to boost profitability in the run-up to an expected privatisation. However, at 11.9% as of end-June 2013, its Tier 1 capital ratio remains adequate.
BANKS
Company profile
Korea Development Bank (KDB) is one of Koreas largest policy banks, with total assets of KRW 146tn (USD 128bn) at end-June 2013. It was established in 1954 to provide medium- and long-term capital to aid Koreas industrial development, and played an important role during the early stages of the countrys industrialisation. Its business model has evolved and, in addition to its policy role, the bank is now active in corporate and investment banking, brokerage and asset management. KDB aims to become a top-20 corporate and investment bank in selected business lines and products in Asia by 2020. At endSeptember 2013, KDB was wholly owned by KDB Financial Group (KDBFG), which is owned 90.3% by KoFC and 9.7% by the government.
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Asia Credit Compendium 2014 Korea Development Bank (Aa3/Sta; A/CW pos; AA-/Sta)
Summary financials*
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.6 17.2 14.4 0.4 39.3 6.7 0.9 2.1 122.1 373.9 14.7 16.3 17.5 1.5 21.7 20.0 0.4 10.4 8.2 1.2 1.6 121.5 318.8 13.8 14.2 15.3 1.5 26.4 23.9 0.4 27.6 5.3 0.7 1.6 132.6 235.5 12.7 13.6 15.0 1.4 41.6 51.6 0.4 256.1 (3.0) (0.4) 2.1 125.1 252.2 12.1 11.9 13.6 1,627 1,242 2,869 (414) 2,455 (966) 1,489 1,073 1,578 916 2,494 (499) 1,994 (208) 1,786 1,412 1,746 424 2,170 (519) 1,650 (455) 1,195 952 866 (333) 533 (275) 258 (661) (403) (266) 100% 80% 60% 40% 20% 101,199 113,950 70,771 27,054 97,217 18,930 22,878 43,235 16,733 110,959 127,874 80,415 28,410 110,216 25,222 25,842 47,197 17,658 134,018 142,998 91,034 26,871 124,779 38,652 21,977 46,902 18,219 128,337 146,470 94,553 27,599 128,779 37,491 24,505 50,786 17,690 Others Foreign currency Working capital Facility development 0 10,000 Deposits 20,000 Borrowings 30,000 Debt 15% 23% 27% 34% 40,000 2011 2012 H1-13
Loans by type of borrower, Jun-13 (KRW bn)

Households 2%
Funding mix
BANKS

5 4 3 2 1 0 2009 2010 2011 2012 H1-13 Net interest margin Average interest earned
Asset quality (%)

3 Impaired loans ratio 2 Loan-loss coverage (RHS) 140 120 100 80 60 1 40 20 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 0
Loans by type, Jun-13 (KRW bn)

Other loan receivables 14%
FCY Loans
23%
LCY loans 0 20,000 40,000
63% 60,000 80,000

20 Tier 2 capital 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13
*Unconsolidated; Source: Company reports, FSS, Standard Chartered Research

ROE (RHS) 20 15 Other -104%
10 5 0 -5
Fees/commissions
42%
Net interest income -1,000 -500 0 500
162% 1,000
221
Asia Credit Compendium 2014 Korea Exchange Bank (A1/Sta; A-/Pos; A-/Sta)

KEBs fundamentals are robust thanks to sound asset quality, good capital adequacy and moderate earnings generation capacity. Also, the bank has a strong franchise in trade finance and foreign exchange. However, its position within the overall Korean banking sector is not so strong, given its relatively small share of a very competitive market. Also, its foreign-currency funding is higher than average. The acquisition by HFG is complementary and brings KEB into a larger and more diversified financial group. Our Stable outlook reflects our expectation that the banks fundamentals will remain broadly unchanged in 2014.

Change of ownership: HFG acquired a controlling stake in KEB in early 2012 and full ownership in April 2013. We believe the acquisition of KEB by a larger, stronger financial institution with a broader geographic network will be positive in the longer term. Although there are no plans at this stage to merge Hana with KEB, HFGs acquisition of KEB is complementary and allows HFG to consolidate its position further in the Korean banking sector. On a combined basis (i.e. Hana plus KEB), Hana is slightly larger than Shinhan Bank by total assets and would be the countrys second-largest bank by total assets and total loans, with a c.15% market share of deposits. Since the change of ownership, KEB has focused its growth on the SME segment, which has been an area of strength for Hana. Leading position in foreign exchange and trade finance: Given its background, KEB has a strong competitive position in foreign exchange and trade finance. This is a key competitive advantage for KEB, given the importance of the export sector to the Korean economy. As a result, KEB has a higher percentage of foreigncurrency loans, larger exposure to large corporates and lower exposure to the consumer sector, compared with system-wide averages. Smaller franchise, particularly in the retail segment: KEB is considerably smaller than the big four commercial banks; by total assets, it is c. 65% the size of Hana Bank, the next largest bank. KEBs retail franchise is also more limited than its peers. The banks market share of retail deposits is below its overa ll 6% market share of deposits. However, since 2010, consumer credit has increased as a percentage of the banks overall loan portfolio. It represented 47% of total loans at end-September 2013, which is slightly below the average for the big four banks. Sound asset-quality indicators: KEBs asset-quality indicators are sound and, over the past few years, have been better than those of the larger banks. In our view, this is due to KEBs more measured pace of loan growth and the banks relatively high exposure to larger corporate clients and the export sector. KEBs NPL ratio stood at 1.3% at end-September 2013, with loan-loss coverage of 125%. Higher-than-average foreign-currency funding: Like the other Korean banks, KEB has a high overall LDR (108% at end-September 2013), although this is in line with the peer average. Because of the nature of its business, KEBs foreign currency funding as a percentage of total funding is also higher than the average for its peers, at c.28% as of end-June 2013 (compared with 9% for the four largest banks). However, almost 68% of KEBs foreign-currency funding at end-June 2013 was sourced from customer deposits rather than wholesale markets, mitigating the banks vulnerability to capital-market volatility. Modest earnings generation capacity: Despite KEBs slightly higher cost base, it enjoys moderate earnings generation capacity thanks to wider-than-average NIMs and a lower-than-average cost of risk. However, KEBs NIM is slightly flattered by the inclusion of its credit card business, which accounts for 5% of total loans. However, like the other major Korean commercial banks, KEBs bottom -line profitability is hampered by stagnant loan growth and regulatory-driven costs. As a result, the banks bottom-line profitability has been low in recent years. The banks annualised ROA for 9M-2013 was 0.4% on net income of KRW 305bn. This is unlikely to improve in the near term, in our view. Reasonable, albeit weakening capital adequacy: KEBs capital adequacy is slightly below the average of its larger peers and has been declining over the past two years. The banks Tier 1 capital ratio stood at 10.5% at end -September 2013 and its equity-to-assets ratio at 8.8%. Also, double leverage at HFG was elevated at 126% at end-September 2013.
222
BANKS
Company profile
Korea Exchange Bank (KEB) is Koreas fifth-largest commercial bank, with total assets of KRW 104tn (USD 97bn) at endSeptember 2013 and estimated market shares of loans and deposits of 5-6%. The bank was set up in 1967 to specialise in foreign exchange and international trade finance. Although KEB offers a broad suite of products, it remains a dominant player in these two areas; as a result, the bank has a more corporate slant. At end-September 2013, KEB was wholly owned by Hana Financial Group (HFG), which also owns 100% of Hana Bank. KEB accounted for c.35% of HFGs assets at end-September 2013 and c.32% of 9M-2013 profits. KEB operates from a relatively modest network of 357 domestic branches, but it has the most extensive network of overseas offices (28) among Korean banks.
Asia Credit Compendium 2014 Korea Exchange Bank (A1/Sta; A-/Pos; A-/Sta)
Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.8 6.3 40.3 1.3 25.8 12.5 1.1 1.3 131.0 102.8 8.8 13.2 16.3 3.0 5.9 35.3 1.5 20.9 19.4 1.7 1.2 145.1 105.5 8.6 12.0 14.5 2.7 5.6 49.5 1.5 42.6 7.4 0.6 1.2 143.5 105.3 8.7 10.5 12.6 2.3 5.8 59.7 1.3 45.4 4.4 0.4 1.3 124.5 107.5 8.8 10.5 12.8 2,317 754 3,071 (1,237) 1,834 (474) 1,360 1,021 2,550 1,672 4,221 (1,491) 2,731 (572) 2,159 1,655 2,466 711 3,177 (1,573) 1,604 (684) 920 659 1,551 211 1,762 (1,052) 710 (322) 388 305 100% 80% 60% 40% 20% 85,182 95,915 62,434 13,163 87,506 60,704 8,357 4,628 8,410 87,203 100,497 67,944 13,067 91,860 64,430 9,330 5,460 8,637 97,709 104,001 70,354 13,669 94,919 66,782 6,926 6,173 9,082 96,783 104,007 70,297 12,382 94,830 65,419 6,992 6,252 9,177 2011 2012 9M-13

Others Large corporations SMEs Households (inc. credit card) 0 10,000 20,000 1% 23% 29% 47% 30,000
Funding mix
BANKS
Asset quality (%)

1.5 Loan-loss coverage (RHS) NPL ratio 155 150 145 140 135 0.5 130 125 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 120

Cash and due from banks Investment securities Other Customer loans 0 20,000 40,000 60,000 8% 12% 13% 68% 80,000
1.0

20 ROE (RHS) 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 1 capital ratio 10 5 0 Tier 2 capital 25 20 15

Fees/ commissions 6%
Other
6%
Net interest income 0 500 1,000 1,500
88% 2,000
GAAP until end-2010, IFRS thereafter; Source: Company reports, FSS, Standard Chartered Research
223
Asia Credit Compendium 2014 Korea Finance Corp. (Aa3/Sta; A+/Sta; AA-/Sta)

On a standalone basis, KoFCs fundamentals are weak, owing to its low profitability and reliance on the wholesale markets for funding. However, KoFCs quasisovereign status is underpinned by an implicit government guarantee, the Korean governments full ownership and KoFCs role as a development bank. As a result of the governments announcement in mid-2013 that KDBs privatisation will be scrapped, KoFC is scheduled to re-merge with KDB sometime in mid-2014. Although the KoFC Act will cease, we expect existing KoFC debt to continue to benefit from an implicit guarantee, more than likely through KDB.

To merge with KDB, as KDBs privatisation plans are scrapped: In 2008, the government of Lee Myung-Bak initiated a privatisation plan for KDB. This required the government to sell an initial stake in KDB no later than end-May 2014. As part of the plan, a portion of KDBs assets, liabilities and equity was s pun off in 2009 to create KoFC. The idea was that KoFC would eventually take over the policy functions of KDB; KoFCs remit is to create jobs by strengthening national competitiveness, and to support the sustainable growth of Koreas economy and its financial industry by managing and supplying necessary funds. However, in August 2013, the new government of Park Geun-Hye abandoned KDBs privatisation plans, as it aims streamline the roles of the various Korean policy banks. As part of this process, KDB will re-merge with KoFC. KDB will take over KoFCs domestic operations, while c.KRW 2tn of foreign assets will be transferred to KEXIM. Subject to National Assembly approval, this process is scheduled to be implemented in mid-2014. Implicit guarantee: KoFC is 100% owned by the Korean government through the Ministry of Strategy and Finance. Although there is no explicit guarantee of KoFCs obligations, Article 31 of the KoFC Act creates a legal obligation for the government to maintain KoFCs solvency. As a result, the banks ratings are linked to those of the Korean government; thus, any rating actions for the sovereign will result in rating actions for KoFC. Cross-guarantee of KDB debt: We understand that under Koreas Commercial Law (Article 530-9), KoFC will remain jointly and severally liable to satisfy any KDB debt that was outstanding prior to the division of KoFC and KDB in October 2009. Following the re-merger with KDB, the KoFC Act will cease to exist, and we expect existing KoFC debt to continue to benefit from an implicit guarantee, more than likely through KDB. Weak fundamentals: Because KoFC is a relatively new entity, historical financial information is limited. In our view, KoFCs financial profile is weak on a standalone basis. As with KDB, the main concerns surrounding KoFC are low profitability and its high dependence on wholesale funding. However, KoFC is not a profitmaximising entity, as it is a policy bank. Despite some growth on an unconsolidated basis, loans represented only 32% of total assets at end-2012. This has implications for the banks ability to generate sufficient net interest income to offset its funding costs. On an unconsolidated basis, the bank continues to report negative net interest income (to the tune of KRW 464bn in 2012), as interest expenses on industrial finance bonds transferred from KDB more than offset interest income. This was the main reason behind the banks net loss of KRW 204tn in 2012 (on an unconsolidated basis). While the banks asset -quality indicators on a consolidated basis tend to mirror those of KDB and are worse than average, asset quality is good on a standalone basis, with minimal NPLs at end2012 (0.63%). In terms of funding, KoFC is entirely dependent on the wholesale markets. Finally, the bank is adequately capitalised, with a Tier 1 capital ratio (unconsolidated) of 13.1% at end-2012, which is higher than the average for Korean banks. Small size: On a consolidated basis, KoFC is Koreas largest policy bank, with total assets of KRW 244tn (USD 229bn) at end-2012. However, its consolidated numbers include KDB, and KDB accounts for the lions share of KoFCs consolidated assets. On an unconsolidated/standalone basis, KoFC is relatively small, with total assets of KRW 66tn (USD 63bn) at end-2012, making it only slightly larger than KEXIM.
224
BANKS
Company profile
Korea Finance Corp. (KoFC) was created in late 2009 as a government-owned policy bank to take over the policy functions of KDB, allowing KDB to focus on developing its commercial operations in anticipation of an eventual privatisation. A portion of KDBs assets, liabilities and equity was spun off into the newly created KoFC. KoFC owns 90% of KDB Financial Group (KDBFG), which in turn owns 100% of KDB. However, with KDBs privatisation being scrapped, KoFC is scheduled to remerge with KDB sometime in mid2014. On a consolidated basis, KoFC had total assets of KRW 244tn (USD 229bn) at end-2012, making it Koreas largest policy bank.
Asia Credit Compendium 2014 Korea Finance Corp. (Aa3/Sta; A+/Sta; AA-/Sta)
Summary financials (consolidated)
2009 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital** Total capital** (0.2) (0.0) (15.5) 0.0 18.6 NM NM 2.8 97.1 496.6 12.7 13.7 15.5 0.9 18.8 34.7 1.0 42.6 5.1 0.7 3.0 107.9 383.5 13.6 13.7 15.2 0.9 25.3 45.0 0.9 26.3 2.9 0.4 1.9 75.3 379.8 13.6 14.5 15.3 0.9 35.0 67.2 0.9 64.5 NM NM 1.8 67.0 293.5 11.8 13.1 14.2 120 Loan-loss coverage (RHS) 110 100 90 80 70 60 50 Dec-09 Dec-10 Dec-11 Dec-12 (136) (1) (137) (21) (159) 29 (129) (68) 1,470 4,144 5,614 (1,947) 3,667 (1,561) 2,105 1,248 1,620 2,551 4,172 (1,879) 2,293 (603) 1,690 796 1,879 1,156 3,035 (2,038) 997 (643) 354 (4) 100% 80% 60% 40% 20% 157,121 182,889 82,792 62,567 159,603 16,673 45,164 71,996 23,286 170,678 192,183 85,362 66,175 166,055 22,256 40,739 72,144 26,128 186,856 215,342 103,428 77,910 185,981 27,231 36,167 85,805 29,362 228,975 243,721 119,820 81,486 214,896 40,820 32,730 96,216 28,825 US China Others Korea 0 20,000 Deposits 40,000 Borrowings 60,000 Debt 1% 3% 11% 84% 80,000 2010 2011 2012
Loans by country, Dec-12 (KRW bn)

Ireland 1%
Funding mix
BANKS
0% Dec-09 Dec-10 Dec-11 Dec-12
Loans by type, Dec-12 (KRW bn)

Public sector Household Foreign currency Others Corporates (KRW) 0 20,000 40,000 60,000 1% 2% 12% 24% 61% 80,000
Asset quality (%)

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 NPL ratio
Loans by industry, Dec-12 (KRW bn)

Construction Utilities Wholesale and retail Transportation Others Financial services Manufacturing 0 10,000 20,000 30,000 0% 2% 4% 5% 16% 28% 45% 40,000 50,000

20 Tier 2 capital 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Tier 1 capital ratio ROE (RHS) 20
Revenue by type of income, 2012 (KRW bn)

Other 15 10 5 0 0 500 1,000 1,500 2,000 Fees/commissions 35% 3%
Net interest income
62%
*Income statement is for the period 28 October 2009 to 31 December 2009; **unconsolidated; Source: Company reports, Standard Chartered Research
225
Asia Credit Compendium 2014 Krung Thai Bank PCL (Baa1/Sta; BBB/Sta; BBB/Sta)

KTB benefits from government ownership (despite a weaker standalone credit profile than peers) and a strong position as Thailands second-largest lender. It has a diversified loan book and a sticky deposit base. KTB has taken meaningful steps to reduce its still-high legacy NPL holdings and build up reserve coverage, which has brought headline asset-quality figures to their strongest levels in more than seven years. Nevertheless, profitability will be pressured by its lower-yielding loan portfolio, limited non-interest income and elevated provisions. KTBs October 2012 capital raising helped improve its capitalisation buffer, though it still lags its peers. However, its strong links to the government help offset capitalisation concerns.

Strong market position: KTB is Thailands third-largest bank by assets (15% market share) and second-largest by loans, although its standing among the large Thai banks has fluctuated in recent years, as it competes closely with the big four commercial banks. Its large size, systemic importance and 55% ownership by the Bank of Thailands FIDF make it a likely beneficiary of government support. We believe this stake is unlikely to decline near-term, as the FIDF participated in the banks rights issue in October 2012. Links t o the government are also strengthened by the banks leading role in the provision of cash -management services for Thai government agencies. Diverse loan base with government-linked lending: The bank has further diversified its loan base in recent years, reducing its lower-yielding government and SOE lending to 8% of overall loans at end-September 2013, while increasing its share of retail loans. Half of its retail portfolio consists of housing loans (15.5% of total loans), while its remaining consumer loans are primarily unsecured personal loans to government employees who use the banks payroll services. The remainder of the portfolio is comprised of lending to corporates and SMEs; the bank has targeted increasing lending to SMEs. Legacy NPL overhang improving: KTBs asset-quality indicators have historically been considerably weaker than those of the big four, as KTB was hit the hardest in the wake of the 1997-98 financial crisis and only gradually reduced legacy exposures. However, as of end-September 2013, the bank has improved its NPL ratio and loan-loss coverage to 3.5% and 110%, respectively, from 4.5% and 69% at end-2011, which is credit-positive. That said, part of the improvement in the NPL ratio can be attributed to the fairly brisk pace of lending over the period, particularly to the housing and automobile segments. These segments have benefitted from the Thai governments first-time-buyer tax rebate schemes, and automotive lending could experience an uptick in impairments. Growth in housing loans was 15% for 2012, matched only by SCB (BBL and Kbank both registered growth of 9%). Loans to the hire-purchase segment also increased 125% y/y, although hire-purchase loans make up just 2% of total loans. Strong deposit base, although costs have increased: KTB has a strong deposit franchise, as most state enterprises and government employees deposit their savings with the bank. Also, since the February 2012 regulation change, which increased deposit guarantee fees and imposed fees on bills of exchange, KTB has improved its LDR to 95% from 111% at end-2011. However, it has also seen its proportion of low-cost deposits fall to 59% at end-2012 from 66% at end-2011. We expect increasing domestic competition for deposits to exert pressure on its NIM. Pressure on profitability: The banks NIM posted a modest improvement in 2013 as a result of increased lending to higher-yielding segments. However, increasing competition for deposits and a less optimistic economic growth outlook should keep the NIM under pressure and lagging most of its peers. KTBs income diversity is also the weakest among peers, and ongoing provisioning is likely to constrain forward-looking profitability. However, given its ties to the government, KTB is well-placed to benefit from the timely implementation of the THB 2tn-worth infrastructure projects, although the timing of these projects is uncertain. Improved capitalisation: Since its October 2012 equity issuance, KTB has maintained a considerably stronger Tier 1 capital ratio than previously (10.7% at end-September 2013). However, capitalisation remains weaker than peers and has remained under pressure due to lending growth.
BANKS
Company profile
Established in 1966 through the merger of Agricultural Bank and Provincial Bank, Krung Thai Bank (KTB) is Thailands third-largest bank by assets and second-largest in loan terms. Its total assets were THB 2.4tn (USD 77bn), market share was 15%, and it had a network of 1,138 branches as of end-September 2013. The bank has eight foreign branches, mainly in Asia. Its loan base is diversified, and it also lends to the government and agricultural sectors. Krung Thai Card is the dominant credit card issuer in Thailand. The bank has a history of bailing out troubled banks (Sayam Bank Ltd. in 1987, Bangkok Bank of Commerce and First Bangkok City Bank in 1998). The Financial Institutions Development Fund (FIDF) holds a 55% stake.
226
Asia Credit Compendium 2014 Krung Thai Bank PCL (Baa1/Sta; BBB/Sta; BBB/Sta)
Summary financials
2010 Balance sheet (THB bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (THB bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.0 16.9 55.9 2.1 22.8 12.7 0.9 6.1 59.2 100.3 7.2 10.0 15.7 2.9 16.4 47.7 1.8 37.3 13.3 0.9 4.5 69.0 111.2 6.6 8.7 13.7 2.9 16.1 43.1 1.7 32.5 15.1 1.1 3.9 92.7 91.8 8.1 10.2 16.3 2.8 17.4 42.9 1.7 23.8 18.7 1.4 3.5 109.9 94.7 8.2 10.7 15.4 120 Loan-loss coverage (RHS) NPL ratio 100 80 60 40 20 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 ROE (RHS) Tier 2 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13
Loans by business type, Sep-13 (THB bn)

2011 62,302 1,965 1,385 249 1,835 1,285 162 309 130 50.4 19.1 69.5 (33.2) 36.3 (13.5) 22.8 17.0 2012 73,779 2,257 1,476 301 2,074 1,667 192 147 183 58.6 23.3 81.9 (35.3) 46.6 (15.2) 31.4 23.6 9M-13 77,296 2,415 1,620 282 2,216 1,778 221 137 198 47.1 20.4 67.5 (29.0) 38.5 (9.2) 29.4 23.9 Government and SOE Other retail Housing/mortgage SME Corporates 0 200 400 Debt 600 Interbank 800 Other 8% 16% 16% 20% 41% 1,000
58,601 1,763 1,207 207 1,637 1,248 143 181 126 46.8 14.1 61.0 (34.1) 26.9 (6.1) 20.7 15.2
Funding mix
BANKS
0% Dec-09 6 Average interest earned 5 4 3 Net interest margin 2 1 2009 2010 2011 2012 9M-13 Dec-10 Dec-11 Dec-12 Sep-13
Asset quality (%)

9 8 7 6 5 4 3 2 1 0 NPL ratio incl. 'special mention'
Loan growth and LDR, 9M-13 (y/y, %)

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Loan-todeposit (RHS) 120 100 80 60 40 Loan growth 20 0

20 20 15
Revenue by type of income, 9M-13 (THB mn)

Trading Other 10 Fees/commissions 5 Net interest 0 0 10,000 20,000 30,000 40,000 70% 50,000 4% 9% 17%
227
Asia Credit Compendium 2014 Malayan Banking Bhd. (A3/Pos; A-/Sta; A-/Neg)

Maybank is one of the strongest banking credits in Malaysia. In its home market, Maybank benefits from a strong deposit franchise and transaction-banking capability, which continue to underpin its large low-cost deposit base. However, Maybanks risk appetite and M&A risk are also higher than peers as it strives to expand its geographic footprint in the region. The bank aims to derive 40% of its pre-tax profits from international operations by 2015. Nevertheless, our Stable view reflects the banks sound fundamental credit profile, its dominant size, strong domestic franchise and indirect majority government ownership.

Dominant position: Maybank is one of the strongest banks in Malaysia, supported by its dominant size and strong domestic franchise, with market shares of 18% of loans and c.16% of deposits. The bank is also the largest Islamic bank in the country (27% market share). In addition, it enjoys the benefits of indirect majority government ownership and is the banker of choice for large government-owned entities. Through Maybank Kim Eng, it also has a strong regional brokerage presence. Despite industry consolidation, which reduced the number of domestic banks to less than 10 from more than 50 in the early 2000s, Maybank is still about 50% larger than its closest peer, CIMB Group. Strong retail franchise: Maybank has a strong retail funding franchise, which ensures a large and stable low-cost deposit base. The deposit base benefits from Maybanks status as the transaction bank of choice for government agencies, ensuring strong float deposits. This ensures that its cost of funds is among the lowest for banks in Malaysia. Although the banks L DR is slightly higher than the peer average, it has remained fairly stable in the 90% range over the past six years. Low-cost CASA deposits made up 35% of total deposits at end-September 2013, compared with c.27% for its peers. On the asset side, retail loans accounted for 45% of end-September 2013 total loans. Regional ambitions introduce M&A risk: M&A risk is a key credit consideration going forward. Maybank aims to become a regional bank and derive 40% of pretax profits by 2015, versus 30% in 9M-2013. The bank now has the largest international operations among Malaysian banks (38% of total loans as of endSeptember 2013). Its other home markets are Singapore (22% of the banks total loans at end-September 2013) and Indonesia, where it is the ninth-largest through its Bank Internasional Indonesia (BII) subsidiary (8% of total loans). Maybank has actively increased its presence across Southeast Asia, and Thailand is the only country in the region where it does not have a significant presence. Improving asset-quality indicators: Maybanks asset-quality indicators have traditionally been weaker than average. However, improvements in its metrics have been driven by a steady decline in NPLs and strong loan growth. In 2010-13, Maybank grew its loan book faster than peers. Nevertheless, the NPL ratio is near cyclical lows, in our view, and we do not expect significant additional improvement. The gross NPL ratio stood at 1.8% as of end-September 2013, with loan-loss coverage of 106%. Despite high consumer leverage in Malaysia and the banks above-average lending exposure to non-bank financial institutions (6% of loans versus 0-3% for peers), we expect asset quality to remain stable. Sound profitability: The banks core profitability is good and broadly in line with that of its peers, with an annualised ROA of 1.3% for 9M-2013. Over the past two years, profitability has been aided by higher NIM (on the back of higher loan volumes) and, like most other Malaysian banks, low loan-loss provisions. Although the banks cost base is slightly higher than some of its peers, this is offset by its slightly wider NIM. Given the benign operating environment and the banks large and diversified earnings profile, we expect profitability to remain stable. Strong capital base: Maybanks capital adequacy is strong, with a Tier 1 capital ratio of 12.6% at end-September 2013. Its capitalisation was boosted in October 2012 by a MYR 3.66bn (USD 1.2bn) equity issuance via a private placement. The banks solid capital base and sound earnings ability should facilitate a gradual organic geographic expansion.
BANKS
Company profile
Malayan Banking Bhd. (Maybank) is Malaysias largest bank, with total assets of MYR 543bn (USD 174bn) at end-September 2013 and a strong distribution network of 401 domestic branches and almost 600 overseas branches (415 in Indonesia). Maybank is the bank of choice for large government-related entities. It also has a strong franchise in both corporate and retail lending. Maybanks international operations are the largest among local banks, and accounted for 37% of its loans at end-September 2013. Maybank is publicly traded; governmentcontrolled entities Permadolan Nasional Berhad and Employees Provident Fund control 46% and 13%, respectively.
228
Asia Credit Compendium 2014 Malayan Banking Bhd. (A3/Pos; A-/Sta; A-/Neg)
Summary financials
FY11* Balance sheet (MYR mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.6 19.7 49.1 1.8 9.2 15.1 1.2 3.4 82.3 92.6 7.9 11.9 15.4 2.3 20.0 49.6 1.7 8.4 15.5 1.2 3.1 79.7 90.0 7.6 11.7 16.5 2.3 21.4 48.7 1.7 8.2 15.1 1.3 2.5 74.3 91.5 8.9 13.7 17.5 2.5 18.7 48.4 1.8 11.1 15.6 1.3 1.8 106.3 90.0 8.6 12.6 15.2 140 120 100 80 60 40 20 0 Jun-10 Jun-11 Dec-11 Dec-12 Sep-13 136,419 411,959 253,976 61,039 379,488 281,976 33,304 22,368 32,470 8,670 4,885 13,555 (6,652) 6,903 (632) 6,270 4,620 149,545 451,595 276,253 86,066 415,584 314,692 36,761 27,460 34,456 9,301 5,738 15,039 (7,458) 7,581 (635) 6,946 5,193 155,770 494,911 311,825 93,618 451,092 347,156 33,887 30,375 43,819 10,211 6,545 16,756 (8,158) 8,598 (703) 7,895 5,917 173,708 543,237 333,478 108,597 496,784 377,917 42,111 32,184 46,453 8,770 5,548 14,318 (6,928) 7,390 (822) 6,568 4,975 2011 2012 9M-13
Loans by geography, Sep-13 (MYR mn)

Hong Kong Other Indonesia Singapore Malaysia 0 50,000 100,000 150,000 200,000 Repos 3% 5% 8% 22% 63% 250,000
Funding mix
100% 80% 60% 40% 20% Customer deposits Interbank Debt
BANKS
0% Jun-10 5 4 3 2 1 0 FY10* FY11* 2011 2012 9M-13 Net interest margin Jun-11 Dec-11 Dec-12 Sep-13

Asset quality (%)

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 NPL ratio Loan-loss coverage (RHS)

Insurance/asset management Business and corporate banking Global markets/ investment banking International Consumer banking group 0 500 1,000 1,500 2,000 8% 17% 19% 24% 31% 2,500

20 15 Tier 2 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 1 capital ratio ROE (RHS) 18 16 14 12 10 8 6 4 2 0

Fee and commission income 19%
Other
20%
61% 10,000
*Because of the change in financial year to December in 2012, data shown for FY10 and FY11 is as of 30 June; Source: Company reports, Standard Chartered Research
229
Asia Credit Compendium 2014 NongHyup Bank (A1/Sta; A/Sta; A/Sta)


NH Banks quasi-sovereign status is underpinned by its important policy role within NACF as the key channel for the implementation of the Korean governments agricultural policy. Unlike the policy banks, NH Bank does not enjoy support in the form of a solvency obligation. Also, the government does not have a stake in either NH Bank or NACF. However, the government subsidises interest payments on some of NH Banks debt. Some of NH Banks key metrics are weak. Profitability is low, as profit generation is not the banks remit, and asset quality is worse than average. However, unlike some of the policy banks, NH Bank has a strong deposit base, making it less reliant on the capital markets.

Pivotal unit within NACF: National Agricultural Cooperative Federation (NACF) is the umbrella organisation for Koreas farmers co -operatives and is charged with providing support to farmers in the form of marketing, distribution and financial services (banking and insurance). NACF is owned by 1,163 agricultural and livestock co-operatives, which are predominantly credit institutions. NACF is a complex organisation engaged in both banking and non-banking businesses. Prior to the reorganisation, NH Bank (as the credit and banking unit) accounted for around two-thirds of NACFs assets and has historically generated the bulk of profits, in effect subsidising other units within NACF. Reorganisation of NACF and emergence of NH Bank: As part of the 2012 reorganisation, NACFs profit-oriented businesses were spun off into two holding companies: one for the groups financial -services companies (NongHyup Financial Group) and one for the non-financial-services companies (NH Agricultural M&S Holdings). The non-profit-oriented businesses remain under NACF. NH Bank is expected to remain the groups main profit centre and is the entity that taps the offshore markets for funding. Foreign-currency bonds issued by NACF prior to the reorganisation have been taken over by NH Bank. New foreign-currency debt issued by NH Bank does not have recourse to NACF. Strong policy role: NACFs mandate includes improving the economic well -being of farmers, strengthening the competitiveness of Koreas agricultural sector and contributing to economic development. In addition to commercial banking through NH Bank, NACF plays a key role in providing supplies, processing and distribution facilities to farmers; operating sales outlets; and conducting farming and farm management research. NH Bank is also the de facto co-operative central bank for co-operatives: it regulates and supervises them and manages their liquidity. No government ownership or solvency obligation: Unlike KEXIM, KoFC, KDB and IBK, NH Bank does not enjoy a solvency obligation from the Korean government. Also, the Korean government does not have a stake in NACF. As part of the restructuring, the government was expected to make a KRW 1tn in-kind capital injection using the shares of other government entities. However, in lieu of the injection, the government has undertaken to subsidise interest payments (KRW 201bn as of H1-2013) on local-currency bonds. Weak fundamentals: For comparison purposes, we refer to the old credit and banking (C&B) division of NACF prior to 2012. However, the accounts up to end2011 are not fully comparable to those at the beginning of 2012. Because of NH Banks policy function, profit generation is not its main goal, which explains why its profitability is lower than commercial banks. Also, in the past, the C&B division has effectively subsidised the other units of NACF to help it fulfil its policy role. As a result, NH Banks profitability trails that of the policy banks. The banks annualised ROA for H1-2013 (profit of KRW 74bn) was less than 0.1%. The banks asset quality is worse than that of the commercial banks, owing to its legacy assets; at end-June 2013, its NPL ratio stood at 2.3%, with loan-loss coverage of 68%, which is considerably below average. In terms of funding, unlike some of the policy banks, NH Bank is a deposit-taking institution and benefits from its vast branch network, primarily in rural areas; this makes it less reliant on the capital markets and foreign-currency funding. However, the banks LDR stood at 104% (according to our calculations) at end-June 2013, which is high by international standards. Its capital adequacy compares favourably with the average for the policy and commercial banks. NH Banks Tier 1 capital ratio stood at 11.4% at end -June 2013, with an equity-to-assets ratio of 6.7%.
230
BANKS
Company profile
NongHyup Bank (NH Bank) is a specialised agricultural financing bank and the largest of Koreas specialised banks. With total assets of KRW 195tn (USD 171bn) at endJune 2013, NH Bank is larger than Hana Bank, the countrys fourthlargest commercial bank, and about 30% bigger than KDB. NH Bank was previously the credit and banking (C&B) division of NACF and was formally created in early 2012 as part of NACFs reorganisation. NH Bank is wholly owned by NACF through NongHyup Financial Group. Unlike those of the commercial banks, NH Banks branches tend to be located in rural areas, where it has a strong brand name and franchise. NH Banks market share of deposits is c.10%, and its network of 1,184 branches is the second largest in the country.
Asia Credit Compendium 2014 NongHyup Bank (A1/Sta; A/Sta; A/Sta)

Summary financials*
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.3 7.9 51.6 1.1 61.1 59.8 0.3 2.6 75.0 107.1 0.6 12.2 16.0 2.4 6.0 54.9 1.2 61.3 64.2 0.3 1.9 92.8 104.1 0.4 12.9 15.7 1.4 9.1 59.9 1.0 59.6 6.1 0.2 1.8 82.1 110.5 6.7 11.3 14.4 2.1 9.5 63.9 1.2 85.5 1.1 0.1 2.3 67.6 103.7 6.7 11.4 14.0 3,872 95 3,967 (2,045) 1,921 (1,174) 747 564 4,174 (51) 4,123 (2,262) 1,861 (1,141) 719 597 2,610 589 3,199 (1,917) 1,281 (764) 517 427 2,055 (255) 1,800 (1,150) 650 (556) 94 74 100% 80% 60% 40% 20% 161,042 181,333 131,968 27,295 180,319 123,243 16,103 18,875 1,015 166,051 191,365 141,289 27,910 190,521 135,674 15,501 14,252 844 182,972 194,756 154,845 27,518 181,704 140,161 13,140 10,171 13,052 171,429 195,650 149,669 31,911 182,566 144,276 15,577 9,731 13,084 2011 2012 H1-13*
Loans by type, Jun-13 (KRW bn)

Integrated Foreign currency Public Others Household Corporate 0 20,000 Deposits 40,000 Borrowings 60,000 Debt 80,000 1% 2% 2% 9% 36% 51% 100,000
Funding mix
BANKS
0% Dec-09 7 6 5 4 3 2 1 2009 2010 2011 2012 H1-13 Average interest earned Dec-10 Dec-11 Dec-12 Jun-13
Net interest margin
Asset quality (%)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 ROE (RHS) Dec-12 Jun-13 Loan-loss coverage (RHS) 140 Impaired-loans 120 ratio 100 80 60 40 20 0
Loans by sector (ex policy loans), H1-13 (KRW bn)

Retail and wholesale Constructuring Finance / insurance Member cooperatives Manufacturing Other 0 70 60 Other -11% 30,000 60,000 90,000 2% 3% 4% 10% 11% 69% 120,000

20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Tier 1 capital ratio
Revenue by type of income, H1-13 (KRW bn)
Tier 2 capital
50 40 30 20 10 0 -500 0 500 1,000 1,500 2,000 2,500 Fees/ commissions Net interest income 8%
102%
*Data up to 2011 is for the credit and banking business of NACF; income statement for 2012 is from 2 March 2012; Source: Company reports, FSS, Standard Chartered Research
231
Asia Credit Compendium 2014 Oversea-Chinese Banking Corp. Ltd. (Aa1/Sta; AA-/Sta; AA-/Sta)

We view OCBC as a strong credit and a defensive play in the Asian banking sector. The groups credit profile is underpinned by sound asset-quality indicators (the best among the Singaporean banks) and good earnings generation capacity. Subsidiaries in insurance, private banking and asset management contribute to its earnings diversity, despite some earnings volatility associated with its insurance subsidiary. OCBCs loan growth has kept pace with peers as it pursues regional expansion (OCBC earns c.41% of pre-tax profits outside of Singapore, the most among domestic peers). Nevertheless, the banks healthy fundamental credit profile and strong regional franchise underpin our Stable outlook.

Robust franchise: On a consolidated basis (i.e., including the insurance business), OCBC is Singapores second -largest banking group by total assets. It is the third-largest bank in Singapore after DBS Bank Ltd. (DBS) and United Overseas Bank Ltd. (UOB), with a significant market share of 16% loans and 18% of deposits. In Malaysia, it has a deposit market share of 4%, while its 85%-owned Indonesian subsidiary holds a 2% deposit market share. Earnings diversity: OCBC owns 87% of GEH, the largest insurer in Singapore and Malaysia. The insurance business contributed 22% of pre-tax profits in 9M2013. Although the performance of the insurance business has been volatile, owing to mark-to-market losses on investments, higher impairment provisions, and one-off charges, we like the earnings diversity introduced by the insurance business. OCBCs subsidiaries in private banking (Bank of Singapore) and asset management (Lion Global Investors) also provide earnings diversity. Regional expansion has led to greater geographical diversification: During the past several years, OCBC has executed on its strategy to deepen its franchise in its existing footprint (primarily in Indonesia, Malaysia and China). For 9M-2013, OCBC reported overall loan growth of 16% y/y (in line with peers 16 -19% y/y), particularly as loans to Greater China grew 47% y/y. Consequently, 50% of its loan portfolio was directed towards borrowers outside of Singapore as of endSeptember 2013 versus 47% at end-September 2012. Likewise, 41% of its pre-tax profits were earned outside of Singapore. Although its presence in Malaysia still accounts for a substantial 15% of loans and 26% of pre-tax profits, its ongoing expansion into Greater China and elsewhere brings it into closer competition with its larger and regionally more diverse peer DBS. Good profitability; asset quality strongest among peers: OCBCs fundamentals are robust. Its profitability is good and in line with that of its peers, underpinned by reasonable NIMs, good efficiency levels and low credit costs. Nevertheless, profitability continues to be sensitive to mark-to-market gains and losses stemming from its insurance subsidiary. Excluding exceptional after-tax gains of SGD 1.17bn from the sale of the groups stakes in Fraser and Neave Ltd. and Asia Pacific Breweries reported in 9M-2012, net income declined 5% in 9M-2013, primarily due to insurance-related mark-to-market losses. Similar to its peers, net interest income increased only marginally in 9M-2013 compared with 9M-2012, as the NIM contracted to 1.6% from 1.7%. Its asset-quality indicators are the best among the three Singaporean banks, though the NPL ratio appears to be near cyclical lows. The banks NPL ratio stood at 0.8% at end -September 2013, with loan-loss coverage of 133%. High exposure to the property market: Like its two domestic competitors, OCBC has significant exposure to the property market. Its exposure to building and construction accounted for 15% of total loans at end-September 2013, and housing loans accounted for another 25%. A meaningful percentage of the banks exposure classified as holding and investment companies (14% of total loans at end September 2013) could also be real estate-related. Improving wholesale foreign-currency funding: OCBCs funding base is strong, with customer deposits accounting for c.80% of total funding. The groups overall LDR has remained below 90%, despite recent loan growth. The group has also reduced its reliance on foreign-currency funding from the wholesale markets: the USD LDR declined to 110% at end-September 2013 (the ratio spiked to 163% at end-2011). The banks Tier 1 capital ratio stood at 14.3% at end -September 2013, the strongest among the three major Singaporean banks.
232
BANKS
Company profile
Oversea-Chinese Banking Corp. Ltd. (OCBC) is the second-largest Singaporean banking group, with total assets of SGD 321bn (USD 256bn) at end-September 2013. OCBC is a universal bank active in commercial, retail and private banking, as well as asset management and through Great Eastern Holdings Ltd. (GEH) life and general insurance. The group is the largest insurer in Singapore and Malaysia. The Lee family controls c.20% of the bank but holds no management positions. Singapore and Malaysia are OCBCs key markets, accounting for 59% and 26% of 9M-2013 pre-tax profit, respectively. The banks strategy is to increase market penetration in the consumer and SME segments in Malaysia, Indonesia and China.
Asia Credit Compendium 2014 Oversea-Chinese Banking Corp. Ltd. (Aa1/Sta; AA-/Sta; AA-/Sta)
Summary financials
2010 Balance sheet (SGD mn) Total assets (USD mn) Total assets Total loans Investments Total liabilities Customer deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net Income Key ratios (%) Net interest margin Fee income/total income Cost/income Cost/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.9% 18.7% 43.4% 1.1% 4.4% 10.8% 1.2% 0.9% 142.9% 86.3% 10.3% 16.3% 17.6% 1.8% 20.1% 43.9% 1.0% 7.0% 10.1% 1.0% 0.9% 129.9% 87.4% 9.1% 14.5% 15.7% 1.7% 15.0% 34.5% 1.0% 5.2% 15.8% 1.5% 0.8% 144.5% 87.2% 9.7% 16.7% 18.6% 1.62% 20.4% 42.7% 0.9% 7.0% 10.7% 1.0% 0.8% 132.5% 89.3% 8.5% 14.3% 16.1% 160% 140% Impaired-loans ratio Loan-loss coverage (RHS) 120% 100% 80% 60% 40% 20% 0% Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 0 500 1,000 1,500 2,000 2,500 Corporate banking 43% Consumer banking 33% Insurance 15% Treasury 9% 178,653 229,283 104,989 31,355 205,638 123,300 16,508 6,854 23,645 2,947 2,376 5,323 (2,309) 3,014 (134) 2,880 2,447 214,220 277,758 133,557 35,728 252,368 154,555 21,653 13,063 25,390 3,410 2,258 5,668 (2,491) 3,177 (221) 2,956 2,479 241,876 295,943 142,376 37,230 267,242 165,139 25,656 11,424 28,701 3,748 4,240 7,988 (2,755) 5,233 (271) 4,962 4,263 255,537 320,903 160,158 40,098 293,579 181,268 25,381 21,990 27,324 2,851 2,110 4,961 (2,116) 2,845 (198) 2,647 2,202 2011 2012 9M 13

Other Asia-Pacific Other ASEAN Rest of world Greater China Malaysia Singapore 0 20,000 40,000 60,000 5% 7% 8% 15% 15% 50% 80,000 100,000

Manufacturing Individuals FI/inv. Companies Commerce Construction Others Housing Loans 0 4% 3% 3% 2% 2% 1% 1% 0% 2009 2010 2011 2012 9M-13 Net interest margin Average interest earned 10,000 20,000 30,000 6% 10% 14% 14% 15% 16%
BANKS
25% 40,000 50,000
Asset quality (%)

1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0%

20% Tier 2 15% 10% 5% 0% Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

ROE (RHS) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Rest of world Greater China Indonesia Malaysia Singapore 0 1,000 2,000 4% 5% 8% 21% 62% 3,000 4,000
233
Asia Credit Compendium 2014 Public Bank Bhd. (A3/Pos; A-/Sta; NR)

We view PBB as Malaysias strongest bank. It has built a solid retail franchise over the years by focusing on its core retail clients and serving their mortgage, auto and personal financing needs. It has maintained sound profitability, supported by robust margins, good cost controls and low provisioning. PBB has the best asset-quality indicators among the Malaysian banks, with the lowest NPL ratio and the highest loan-loss coverage ratio. Although capital adequacy has remained lower than the peer average, the gap has narrowed, and the banks profitability is strong, with a relatively high dividend payout ratio. We expect PBBs fundamentals to remain robust in 2013, which underpins our Stable outlook.

Strongest banking credit in Malaysia: PBB has the strongest fundamentals among Malaysian banks. It is a retail-focused bank with a solid franchise, especially among the local ethnic Chinese community. The bank has built a broad retail deposit franchise over the years by focusing on its core retail clients, and is the market leader in residential mortgages, commercial property loans and auto financing, and the second-largest lender to SMEs after Maybank. At endSeptember 2013, 64% of its loans were to individuals, with a further 21% to the SME segment. The banks operations are mostly domestic. Foreign loans accounted for 7% of total loans and generated 11% of revenue in 9M-2013. Property and construction loan growth has been robust: The bank expanded its loan book faster than peers between 2007 and 2010 (at a CAGR of 16%), growing its market share of domestic loans. However, since 2010, the rate of loan growth has slowed to a pace broadly in line with the industry average. Even so, the banks loan growth to the property and construction sector (57% of total loans) has outpaced its domestic peers over the past 2.5 years ending end -June 2013 (17% versus 13% for peers). This is worth monitoring, given the rapid appreciation of house prices in Malaysia since 2010 and the less stringent approach taken by local regulators versus those in neighbouring jurisdictions. Nevertheless, the banks strong track record of lending to the property and retail segments should help assuage asset-quality concerns. Robust asset quality: PBB has traditionally had the best asset-quality indicators among Malaysian banks. A strict, centralised credit-underwriting process and a strong credit culture have ensured strong asset quality, even as loan growth has exceeded the system average. The NPL ratio stood at 0.7% as of end-September 2013, flat y/y, while NPL formation was 6% y/y, versus loan growth of 12% y/y. Loan-loss coverage was 117% at end-September 2013. Provisions have also remained very low, below 10% of pre-provision profits over the past three years. Retail-oriented funding base: Customer deposits provided 91% of total funding at end-September 2013, and retail deposits accounted for 44% of total deposits. This compares favourably with its peers. However, current and savings accounts contributed 25% of deposits at end-September 2013, which is below the peer average. The LDR has remained stable, at 87% at end-September 2013, since weakening somewhat in 2010, and is marginally higher than the peer average. Strong profitability: PBBs retail deposit base and focus on higher -yielding retail and SME clients, along with healthy loan growth, have ensured strong revenue growth. In terms of overheads, PBB has one of the best efficiency ratios among the domestic banks. The bank has also tended to maintain a relatively low cost of risk. All these factors together have enabled PBB to be one of the most profitable banks in Malaysia. The banks ROA for 9M-2013 stood at 1.4%, higher than the average for its peers. We believe the bank will continue to grow its non-interest income sources (such as its unit trust management business, where it holds a dominant market share) as a means of enhancing profitability. Relatively weak capitalisation: PBB has historically been one of the least capitalised banks in Malaysia, although the gap with its peers has narrowed considerably in recent years. The bank reported a Tier 1 capital ratio of 10.1% and a total capital ratio of 12.8% at end-September 2013, having completed a MYR 1bn issuance of Basel III-compliant Tier 2 notes. Concerns over the banks loss absorption capacity are further assuaged by its healthy profitability and relatively generous dividend payouts.
BANKS
Company profile
Public Bank Bhd. (PBB) is Malaysias second-largest domestic bank by loans (and the third-largest banking group after CIMB), with an asset base of MYR 300bn (USD 94bn) at end-September 2013 and market shares of 18% of loans and 16% of deposits. Although it offers a broad range of services, the banks main focus is on the retail segment. While PBB has retail finance operations in Hong Kong and presence in Cambodia and Vietnam, its operations are mainly domestic in nature. It has a strong distribution network of 255 branches in Malaysia and 122 overseas. PBB is a publicly traded company. Chairman and founder Dr. Piow holds 24.1% of the shares. The other large shareholder is Malaysias Employees Provident Fund, which owns 14%.
234
Asia Credit Compendium 2014 Public Bank Bhd. (A3/Pos; A-/Sta; NR)
Summary financials
2010 Balance sheet (MYR mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (MYR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.5 15.1 30.7 0.9 14.0 24.4 1.4 1.1 143.5 88.5 6.0 10.7 14.4 2.5 15.1 29.8 0.9 6.2 24.7 1.6 0.9 113.8 88.7 6.6 11.2 15.6 2.3 15.0 30.5 0.9 5.3 22.3 1.5 0.7 126.0 87.9 6.8 11.4 14.7 2.3 15.4 30.7 0.9 6.2 21.7 1.4 0.7 117.3 87.2 6.7 10.1 12.8 200 Impaired loans ratio Loan-loss coverage (RHS) 150 100 50 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 0 1,000 2,000 3,000 4,000 5,316 1,536 6,851 (2,100) 4,751 (665) 4,086 3,099 5,712 1,700 7,412 (2,209) 5,203 (325) 4,878 3,725 5,989 1,762 7,751 (2,361) 5,390 (286) 5,104 3,912 4,702 1,396 6,098 (1,873) 4,225 (262) 3,969 3,071 100% 80% 60% 40% 20% 73,879 226,329 153,983 29,808 212,644 176,872 21,327 8,095 13,685 79,091 250,559 175,953 44,293 234,140 200,371 15,807 11,318 16,420 89,870 274,824 196,052 48,235 256,106 225,042 12,849 9,947 18,718 94,200 299,499 213,853 46,240 279,449 247,332 14,694 9,809 20,050
Large corporations SMEs Retail

2011 2012 9M-13
Others
4% 11% 21% 64% 0 50,000 100,000 Interbank Debt 150,000
Funding mix
Customer deposits
BANKS
Asset quality (%)

1.2 1.0 0.8 0.6 0.4 0.2 0.0

Corporate lending Others Global Markets/ Investment banking Fund management Overseas Retail
4% 5% 6% 7% 11% 68% 5,000

18 16 14 12 10 8 6 4 2 0 30 ROE (RHS) Tier 2 25 20 15 Tier 1 capital ratio 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

Other 7%
Fee and commission income
15%
77% 5,000
235
Asia Credit Compendium 2014 RHB Bank Bhd. (A3/Sta; BBB+/Neg; NR)

RHB is in the midst of a transformation programme. It has been increasing its exposure to the retail segment and following in the footsteps of some of its larger peers aims to expand its business outside of Malaysia. The acquisition of OSK Investment Bank and the potential purchase of a controlling stake in Bank Mestika in Indonesia are in line with the banks strategy, but could increase earnings volatility. Like all Malaysian banks, RHBs asset quality has been improving since 2009; however, we believe recent above-average loan growth to the consumer segment and bulky exposure to corporate borrowers will result in asset-quality weakness. As a result, we revise our outlook on the credit to Negative from Stable.

Primarily a domestic player with regional ambitions: RHB Bank is Malaysias fourth-largest bank, though it vies closely for domestic market share with Hong Leong Bank. In order to counteract increasing competition in its domestic market, RHB Capital seeks to expand its geographic footprint outside of Malaysia, similar to the strategies of Maybank and CIMB. This strategy is apparent through its proposed acquisition of the small Indonesian lender Bank Mestika and the completed acquisition of OSK Investment Bank. Nonetheless, RHB Capital remains a domestic market-oriented banking group, to which RHB Bank contributed 96% of net profits and held 91% of end-September 2013 assets. Bank Mestika and OSK acquisitions: In 2009, RHB Capital announced the purchase of an 80% stake in Indonesias Bank Mestika for IDR 3.1bn ( USD 330mn). However, this was revised in January 2013 to a proposed stake of 40% of the bank for IDR 2.1bn. However, consummation has continued to face regulatory delays that could postpone the deal until 2014. In November 2012, RHB Capital acquired OSK Investment Bank, Malaysias fourth-largest broker. The acquisition provides RHB Capital a foothold in seven ASEAN countries and Hong Kong. It has also increased the contribution of capital markets-related revenues (i.e., investment banking, brokerage and asset management) to 28% of the total in 9M-2013. However, capital-markets revenue streams are inherently more volatile. Growing domestic retail franchise: In the past, RHB had been more of a corporate and SME lender, though over the past several years, it has been growing its domestic retail franchise. Retail loans accounted for 45% of its loan portfolio at end-September 2013 (41% at end-2008). At the same time, it has seen its share of SME loans, which tend to be more susceptible to asset-quality deterioration, decline to 10% from 17%. Nevertheless, its lending exposures to corporations and government-related entities remain the highest across the five largest Malaysian banks, at 27% and 9%, respectively. Its exposure to large corporates has led to bulkiness in its impairments, although concentration risks appear manageable. Asset quality is weaker than peers: Like all Malaysian banks, RHBs asset quality has been improving since 2009. However, its headline asset-quality indicators are the worst among peers, and unlike its peers, have begun to show signs of deterioration. The NPL ratio stood at 2.8% at end-September 2013, while loan-loss reserves covered just 63% of impaired loans. Given the challenges facing Malaysias household sector and RHBs above -average loan growth to the consumer segment, asset quality will weaken, in our view. Reasonable earnings generation capacity: Despite having a smaller proportion of retail loans on its books and slightly higher funding costs, the banks pre provision earnings generation capacity is similar to its peers, owing to (1) a higher percentage of loans on the banks balance sheet and (2) a reasonable cost base. However, because of higher costs of risk, its bottom-line profitability is slightly weaker than the peer average. Its annualised ROA for 9M-2013 was 1.0% on net income of MYR 1.3bn. Robust funding base: The bank is well funded, with customer deposits accounting for 89% of total deposits as of end-September 2013. However, its funding costs are higher than average, because of greater reliance than peers on corporate deposits (60% of deposits) and a declining market share of cheaper CASA deposits in recent years (23% of total deposits). Reasonable capital adequacy: The bank is reasonably capitalised, with a Tier 1 capital ratio of 10.6% at end-September 2013, which is broadly in line with the average for its peers.
236
BANKS
Company profile
RHB Bank Bhd. (RHB) is Malaysias fourth-largest bank, with total assets of MYR 171bn (USD 53bn) at endSeptember 2013 and a market share of deposits and loans of 89%. The bank is a wholly owned subsidiary of RHB Capital. RHB is the pivotal entity within the group, accounting for c.91% of the groups consolidated assets at endSeptember 2013 and generating most of the groups pre-tax profit in 9M-2013. The group is 41% owned by Malaysias Employees Provident Fund and 25% by Aabar Investments, an investment vehicle wholly owned by the government of Abu Dhabi. The bank operates through a network of c.200 branches, and its operations are mostly domestic in nature.
Asia Credit Compendium 2014 RHB Bank Bhd. (A3/Sta; BBB+/Neg; NR)
Summary financials
2010 Balance sheet (MYR mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.8 10.0 37.9 1.3 19.9 16.8 1.3 4.4 67.6 90.9 7.7 10.3 14.2 2.6 9.8 40.5 1.3 7.6 17.5 1.3 3.6 68.1 86.0 7.5 12.2 16.4 2.2 10.1 43.5 1.2 5.5 15.9 1.2 2.8 70.5 83.6 7.1 12.3 17.4 2.2 9.6 42.9 1.2 15.8 14.0 1.0 2.8 62.5 89.1 7.7 10.6 14.4 38,993 119,455 81,531 21,233 110,291 92,403 7,680 4,443 9,164 3,033 794 3,827 (1,452) 2,375 (473) 1,901 1,426 45,207 143,216 95,318 22,936 132,485 113,638 7,997 4,634 10,731 3,350 852 4,202 (1,701) 2,501 (191) 2,310 1,745 55,668 170,233 107,738 30,054 158,200 131,542 12,006 6,796 12,033 3,456 1,033 4,489 (1,952) 2,537 (140) 2,397 1,806 53,005 170,990 117,180 33,359 157,835 133,907 9,899 6,910 13,155 2,731 837 3,568 (1,532) 2,036 (322) 1,714 1,300 2011 2012 9M-13

Others Foreign Public sector SMEs Large corporations Retail 0 20,000 Interbank 40,000 Repos Debt 2% 8% 9% 10% 27% 45% 60,000
Funding mix
BANKS
Asset quality (%)

5 4 3 2 1 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Impaired-loans ratio Loan-loss coverage (RHS) 90 80 70 60 50 40 30 20 10 0

Others Global financial banking Islamic banking Treasury Corporate banking Business banking Retail banking 0 500 1,000 1,500 2% 7% 9% 10% 14% 15% 44% 2,000

20 15 Tier 2 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

20 Fees/commissions 15 10 Other income 14% 10%
ROE (RHS)
5 0
77% 3,000
237
Asia Credit Compendium 2014 Rizal Commercial Banking Corp. (Ba2/Sta; NR; BB/Sta)

RCBC has solid capital adequacy, which supports its ongoing expansion. Asset quality has also improved in recent years, though it remains weaker than peers. Although concentration risks remain due to the corporate-lending tilt, RCBCs loan book has become increasingly granular as the bank targets consumers and SMEs. Nevertheless, the banks funding profile has weakened somewhat in recent years. Despite consistent headline profitability and a solid NIM, mark-to-market adjustments and provisions may lead to earnings instability. However, the favourable operating environment should support the bank's credit profile. We have a Stable outlook on the credit.

Small bank, but good market niche: RCBC is the Philippines fifth-largest bank and holds a strong niche among middle-market corporates, especially Japanese corporates. It has been expanding its SME and consumer loan businesses organically and through small acquisitions, adding to loan diversity, which will remain a focus going forward. Loan growth to the consumer, SME and microfinance sectors is likely to continue in the medium term as the bank delivers on its strategic objectives. Ownership by Yuchengco Group: RCBCs controlling shareholder, the Yuchengco Group, is a diversified conglomerate with interests in banking, education, construction, transportation, real estate, information technology, advertising and health care in Southeast Asia. The group owns a large insurance business, and RCBC has a bancassurance tie-up with these companies. As a former ambassador to Japan, Alfonso Yuchengco has been instrumental in building the banks ties with Japanese businesses. Related lending is relatively low, at 10% of end-2012 equity. Legacy asset-quality problems an overhang: RCBCs asset quality has historically been weaker than the system average (its NPL ratio was 5.4% at end2012 compared with 2.6% for the banking system). A few of its large corporate loans defaulted in 2009-10, highlighting concentration risks, and the bank has been slow to resolve legacy bad assets following the Asian financial crisis. The bank disposed of a block of impaired assets in 9M-2013, further reducing its NPL ratio to 4.4%, according to Fitch. Nevertheless, the banks reported net NPL ratio (net of allowances) of 1.14% at end-September 2013 remained higher than the banking system average of 0.84%. Loan-loss reserves continue to fall short of impaired loans (reserve coverage was 91% at end-2012), and could be strengthened. Given the overall strength of the domestic economy and the banks continued growth and efforts to reduce bad assets, asset quality will improve, in our view. Funding and liquidity have weakened: RCBCs funding profile benefits from its medium-sized branch network, extension offices and overseas remittance business. However, loan growth has outpaced deposit growth, resulting in a deteriorating LDR and increased usage of short-term funding. At end-September 2013, deposits provided 78% of funding, down from 89% at end-2009 (the LDR increased to 83% from 75%). However, on a positive note, the banks low-cost CASA ratio has improved (64% at end-September 2013, versus 48% at end-2009), despite increasing domestic competition for deposits. We beli eve that RCBCs funding profile will continue to weaken in the near term as it pursues expansion. Healthy profitability offsets some earnings instability: RCBC has reported healthy and consistent headline profitability in recent years. Its higher-yielding securities portfolio and growing consumer loan base provide it a healthy NIM (3.7% in 9M-2013). However, its cost base is fairly high, and loan-loss provisions have historically consumed a larger proportion of pre-provision profits compared with its larger peers, although asset quality has improved. Earnings have also been subject to swings due to mark-to-market fluctuations and one-off impacts, which we believe are likely to continue. Adequate capitalisation supports credit profile: As of end-September 2013, RCBC had a robust capital position: it reported a Tier 1 capital ratio of 16.2% and a total capital ratio of 18.1%. These figures reflect a substantial improvement from year-end metrics (13.2% and 17.6%, respectively) as a result of the banks sale of non-core real estate associates and share issues. Its capital adequacy should support gradual organic expansion.
238
BANKS
Company profile
Rizal Commercial Banking Corp. (RCBC) is the Philippines fifthlargest bank, with assets of PHP 391bn (USD 8.9bn) as of September 2013 and domestic market shares of 5% of system assets and loans, and 4% of deposits. It has 420 branches and presence in 25 countries to tap remittances of Filipino workers overseas. In the Philippines, RCBC has a strong presence among middle-market corporates and Japanese multinationals. It has subsidiaries in the credit card, savings bank, and investment and securities businesses. The Yuchengco Group (a FilipinoChinese family business) has held RCBCs shares since 1962 and owns a controlling 50.5% stake. The family has board representation but is not active in management.
Asia Credit Compendium 2014 Rizal Commercial Banking Corp. (Ba2/Sta; NR; BB/Sta)
Summary financials
2010 Balance sheet (PHP mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (PHP mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 4.0 20.7 56.5 3.6 37.4 13.5 1.4 7.5 75.9 69.3 10.1 12.6 17.8 3.6 22.4 59.4 3.7 29.8 14.4 1.5 5.1 94.6 72.9 11.0 13.8 18.5 3.5 17.8 58.6 3.8 26.3 15.4 1.8 5.4 90.7 77.3 11.8 13.2 17.6 3.7 29.8 58.5 3.7 20.9 14.0 1.7 NA NA 83.0 11.9 16.2 18.1 100 Loan-loss coverage (RHS) 80 60 40 20 0 Dec-09 Dec-10 ROE (RHS) Tier 2 Dec-11 Dec-12 0 50,000 100,000 150,000 Savings 56% Demand 8% 10,884 8,410 19,294 (10,895) 8,399 (3,142) 5,257 4,258 10,832 10,130 20,962 (12,454) 8,508 (2,538) 5,970 5,055 11,399 11,425 22,824 (13,366) 9,458 (2,486) 6,972 6,227 9,592 8,250 17,842 (10,442) 7,400 (1,547) 5,853 4,717 100% 80% 60% 40% 20% 7,292 319,992 163,982 89,473 287,580 236,779 10,946 28,044 32,412 7,868 345,267 186,192 87,728 307,421 255,283 10,966 28,942 37,846 8,297 364,095 190,808 95,179 321,122 246,757 10,987 47,940 42,973 8,915 391,012 214,896 102,097 344,657 258,901 3,995 65,743 46,354 2011 2012 9M-13
Loans by category, Sep-13 (PHP mn)

Logistics Credit cards Trade Utilities Manufacturing Consumer loans Real estate and construction Others
6% 6% 8% 12% 15% 16% 17% 20% 0 10,000 20,000 30,000 40,000 50,000 Bills Bonds Sub-debt
Funding mix
Deposits
BANKS
0% Dec-09 7 6 5 4 3 2 1 0 2009 2010 2011 2012 9M-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Sep-13
Asset quality (%)

9 8 7 6 5 4 3 2 1 0 Impaired loans ratio
Deposits by type, Sep-13 (PHP mn)
Time
36%

Revenue by type of income, 9M-13 (PHP mn)

20 15 Trading 10 16% 30% 54% 0 2,000 4,000 6,000 8,000 10,000 Other 0%
Fees/commissions 5 Net interest 0
239
Asia Credit Compendium 2014 Rural Electrification Corp. (Baa3/Sta; NR; BBB-/Sta)

REC is a quasi-sovereign credit, deriving support from its policy status and its mandate to fund and promote rural electrification in India. It has strong capitalisation and profitability, and its close links with the government enable it to tap diversified funding sources. While REC enjoys good recovery mechanisms on its loans, its asset quality has deteriorated, given concentrated exposure to the power sector. The government has provided ongoing support to REC, and we expect this high level of support to prevent a severe deterioration in its credit profile. That said, we maintain our Negative outlook on REC in line with our Negative sovereign outlook.

Quasi-sovereign credit with a clear policy role: REC is a quasi-sovereign credit, with majority ownership by the Indian government. In addition to providing funds for rural electrification, it acts as a nodal agency for Indian government programmes for building electricity infrastructure in rural and semi-urban areas (a key policy focus). It is the main agency implementing the Ministry of Powers RGGVY scheme that aims to provide electricity supply to all rural households. REC operates autonomously and on commercial terms, even though it is a public-sector enterprise under the Ministry of Power. While RECs focus was initially on T&D, all aspects of the power sector, including generation, have been under its ambit since 2003 (generation and T&D accounted for 44% and 54% of loans, respectively, as of September 2013). Loan growth has been strong in recent years (CAGR of 26% between FY09 and FY13). REC also offers support services, including project appraisal, consultancy, technical support and project monitoring. We see a low probability that its policy role will diminish or that the government will give up its majority stake in the medium term. Clearly demonstrated support: The government has supported REC through capital injections, the provision of loans and funding guarantees, and by giving REC special status to raise tax-exempt bonds. The government has also intervened in NPL resolution resulting from distress at SEBs. Based on the memorandum of understanding between the SEBs, REC and the Ministry of Power, the Ministry can assist REC in the recovery of dues. We expect continued support for REC. Asset-quality concerns from power sector: REC enjoys good recovery mechanisms (a large proportion of its loans are backed by government guarantees, escrow mechanisms and asset charges) and more lenient NPL classification norms relative to banks. Its NPL ratio remains moderate, below 1%, and significantly better than that of Indian public-sector banks. However, its large exposure to SEBs (82% of loans), many of which have faced financial difficulties, has led to a fair amount of loan rescheduling (rescheduled loans were c.27% of total loans as of March 2013, up from 20% a year earlier). Single-sector concentration is high its largest borrower group accounted for 16% of loans as of March 2013, while the top 10 individual borrower groups constituted 80%. Finally, RECs loan-loss coverage is weak in this context, at 23% as of September 2013. While financial restructuring measures announced by the government should provide some reprieve to SEBs, structural issues will likely persist, particularly for private-sector projects (which have grown strongly and make up c.13% of the companys loans). Good profitability: RECs profitability is healthy, with ROE and ROA of 24% and 3.2%, respectively, in FY13. Net income increased by 24% y/y in H1-FY14 on the back of strong loan growth (24% y/y) and a c.40bps improvement in interest margins. We expect RECs profitability metrics to remain broadly stable in the medium term. Dependence on wholesale funding: Like Indias other policy financial institutions, REC is funded by a mix of local-currency and international borrowings. Its policy status also enables it to access to government guarantees and tax-exempt bonds, and source foreign-currency loans from bilateral and multi-lateral agencies. About 14% of its funding is in foreign currency, while domestic bonds constitute 79%. Capitalisation is strong: RECs Tier 1 ratio is strong, at 16.5% as of March 2013 (well above the regulatory requirement of 10%). Although strong loan growth has placed some negative pressure recently, we expect strong profitability to enable REC to maintain adequate capitalisation levels.
BANKS
Company profile
Rural Electrification Corp. (REC) is the second-largest power-sector lender in India, with an asset base of c.INR 1.4tn (USD 22.7bn) as of 30 September 2013. It was set up in 1969 as a 100% government-owned company to develop power infrastructure in rural and semiurban India. In 1998, it was declared an NBFC regulated by the Reserve Bank of India. In 2010, it was accorded Infrastructure Finance Company status. It is 66.8% owned by the government and is controlled by the Ministry of Power. REC has traditionally funded power transmission and distribution (T&D), but it has increased its focus on generation. It funds central/state government power utilities, State Electricity Boards (SEBs), rural electric co-operatives, NGOs and private power developers.
240
Asia Credit Compendium 2014 Rural Electrification Corp. (Baa3/Sta; NR; BBB-/Sta)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Long-term borrowing Short-term borrowing Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Other income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 4.2 10.6 4.6 0.2 0.0 21.5 3.3 0.0 90.9 NA 14.8 18.0 19.1 4.0 4.7 5.7 0.2 1.4 20.6 2.9 0.5 13.2 NA 13.4 15.1 16.0 4.5 4.2 4.0 0.2 2.5 23.8 3.2 0.4 18.3 NA 13.4 16.5 17.7 5.1 (0.3) 3.2 0.2 2.7 24.9 3.3 0.4 22.9 NA 13.3 NA NA 33,357 3,865 37,222 (2,457) 34,765 (2) 34,763 25,699 40,067 2,451 42,517 (4,066) 38,451 (523) 37,929 28,170 54,410 3,077 57,487 (4,541) 52,946 (1,307) 51,640 38,176 34,134 (91) 34,043 (1,078) 32,965 (891) 32,074 22,643 19,404 865 817 8 737 0 612 89 128 21,335 1,085 1,014 8 940 0 766 135 146 24,043 1,305 1,273 7 1,131 0 910 168 175 22,673 1,421 1,385 7 1,231 0 NA NA 189 FY12 FY13 H1-FY14 Others 3%
Loans by type of power business, Sep-13 (INR bn)
Generation
44%
T&D 0 200 400 600
54% 800
Borrowing mix
Capital gains, tax-free and infra bonds Banks, FI CP Institutional and zero-coupon bonds Foreign currency borrowing
100% 80% 60% 40% 20% 0% Mar-10 14 12 10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14 Net interest margin Average interest earned Mar-11 Mar-12 Mar-13 Sep-13
BANKS
Asset quality (%)

0.9 0.8 0.6 0.5 0.3 0.2 0.0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 Loan-loss coverage (RHS) NPL ratio 100 80 60 40 20 0
Loans by type of borrower, Sep-13 (INR bn)

Central public sector corp. 5%
Private
13%
State 0 200 400 600 800 1,000
82% 1,200
Equity/assets and ROE (%)

20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 ROE (RHS) Equity/assets 30 25 20 15 10 5 0
Loans outstanding by state, Mar-13 (INR bn)

West Bengal Haryana Punjab Andhra Pradesh Uttar Pradesh Rajasthan Tamil Nadu Maharashtra Others 0 50 100 150 200 5% 6% 7% 9% 10% 11% 14% 19% 20% 250 300
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013; Source: Company reports, Standard Chartered Research
241
Asia Credit Compendium 2014 Shinhan Bank (A1/Sta; A/Sta; A/Sta)


We view Shinhan as Koreas strongest commercial bank. The bank has a superior track record and is one of the countrys bestrun banks, in our view. Its sound fundamentals are underpinned by (1) a solid franchise as the third-largest bank in the Korean market, (2) robust asset-quality indicators that are among the best for Korean commercial banks and (3) better capitaladequacy ratios than its peers. However, like the other Korean banks, Shinhans profitability is hampered by stagnant loan growth, relatively high loan-loss provisions, tightening margins and regulatory-driven costs. Our Stable outlook is predicated on our expectation that the banks fundamentals will remain sound in 2014.

Superior track record: On a standalone basis, Shinhans financial profile is among the strongest of the four largest Korean commercial banks, in our view. The bank has the reputation of being one of the best-managed banks in Korea and for being more commercial but less aggressive than some of its peers. It has navigated some of the most difficult periods for the Korean banking system well most notably the 1997 Asian financial crisis when, unlike most of its peers, it did not have to be rescued. Solid franchise: As Koreas third-largest bank, Shinhan has a good franchise; its domestic market share of deposits is almost as large as that of Woori Bank, Koreas second-largest bank. At the group level, SFG is more diversified than the other Korean financial groups. Shinhans strong franchise has translate d into a solid funding base and reasonable funding costs. Although its LDR is lower than the average for other Korean commercial banks (100% at end-September 2013), it is still relatively high by Asian standards. Foreign-currency funding requirements at end-June 2013 were 9% of total funding, in line with the average for Koreas big four commercial banks. Above-average exposure to residential mortgages and SMEs: Among Koreas big four banks, Shinhan has significant exposure to residential mortgages (30 % of its KRW loans at end-September 2013). Despite concerns about high consumer leverage levels in Korea, delinquencies in this sector have been relatively low, and loan-to-value ratios hover around 50%. Although Shinhan has tended to have above-average exposure to the SME sector as a percentage of its total loan book (37% of KRW loans at end-September 2013), the banks performance in this sector has been strong. Also, corporate loan growth has been biased towards large corporates since 2010. Robust asset-quality indicators: Shinhans asset-quality indicators have historically been better than the average for the other large banks, as Shinhan has been more prudent on how fast it grows its loan book and how it manages its exposures to vulnerable sectors. Like the other Korean banks, Shinhans reported asset-quality indicators deteriorated in 2013 due to reclassification of nonperforming corporate loans. The banks NPL ratio stood at 1.4% at end -September 2013, with loan-loss coverage of 132%. These ratios compare favourably with the peer average. Although some sectors such as construction, shipbuilding and shipping remain vulnerable, we do not expect a material deterioration in the banks asset quality in 2014. Moderate earnings generation capacity: Like the other Korean commercial banks, Shinhans bottom-line profitability continues to be hampered by stagnant loan growth, relatively high loan-loss provisions, tightening margins amid a low interest rate environment, and regulatory-driven costs. However, compared to its peers, Shinhan has historically had lower costs of risk and less earnings volatility. The banks annualised ROA for 9M-2013 was 0.6% on net income of KRW 1.1tn. We believe profitability is unlikely to improve significantly in 2014, as margins are likely to remain under pressure. Robust capital adequacy: Stagnant loan growth, coupled with modest retained earnings, has helped Korean banks gradually boost their capital-adequacy indicators in recent years. Shinhan is among the best capitalised large Korean commercial banks, with a Tier 1 capital ratio of 13% at end-September 2013, and an equity-to-assets ratio of 8.3%. However, double leverage at Shinhans parent company is above the average for the other Korean financial holding companies.
BANKS
Company profile
Shinhan Bank (Shinhan) is Koreas second-largest commercial bank, with total assets of KRW 245tn (USD 228bn) at end-September 2013 and market shares of loans and deposits of 12% and 15%, respectively. Shinhan offers a broad range of banking services, with good franchises in both corporate (including SME) and consumer lending. Shinhan is owned by Shinhan Financial Group (SFG), Koreas third-largest financialservices group; the bank represents c.77% of the groups consolidated total assets and contributed 65% of consolidated net income in 9M2013. The bank has a network of 957 branches, and its operations are mostly domestic.
242
Asia Credit Compendium 2014 Shinhan Bank (A1/Sta; A/Sta; A/Sta)

Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.2 15.5 41.9 1.1 33.0 11.6 0.8 1.3 133.1 104.5 7.3 13.2 15.9 2.4 14.2 45.4 1.3 21.8 12.4 1.0 1.1 166.1 100.6 8.4 12.5 15.3 2.2 14.7 47.7 1.2 28.2 8.6 0.7 1.1 171.3 101.4 8.7 12.6 15.8 1.9 14.0 50.5 1.1 28.7 7.1 0.6 1.4 131.9 99.9 8.3 13.1 16.1 4,315 1,054 5,369 (2,247) 3,122 (1,030) 2,092 1,648 4,971 1,244 6,215 (2,820) 3,395 (740) 2,655 2,119 4,751 930 5,681 (2,709) 2,972 (838) 2,133 1,697 3,239 763 4,002 (2,021) 1,980 (568) 1,413 1,090 100% 80% 60% 40% 20% 182,396 205,378 145,882 40,187 190,372 139,666 15,298 20,742 15,006 198,627 228,908 163,638 43,392 209,618 162,582 13,417 19,055 19,290 219,990 234,158 169,196 42,901 213,846 166,820 10,847 18,501 20,312 228,101 245,127 174,697 40,649 224,777 174,806 11,902 18,522 20,350 2011 2012 9M-13

Large corporates Consumers Residential mortgages SMEs 0 10,000 20,000 30,000 40,000 Debt 50,000 15% 18% 30% 37% 60,000
Funding mix
Deposits Borrowings
BANKS
0% Dec-09 8 6 4 2 Net interest margin 0 2009 2010 2011 2012 9M-13 Average interest earned Dec-10 Dec-11 Dec-12 Sep-13
Asset quality (%)

2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Impaired-loans ratio Loan-loss coverage (RHS) 200

Other 150 100 50 Customer loans 0 0 50,000 100,000 150,000 200,000 71% Cash and due from banks Investment securities 6% 7% 17%

20 ROE (RHS) 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Tier 1 capital ratio 5 Tier 2 capital 10 15

Other 5%
Fees/ commissions Net interest income 0 0
14%
81% 1,000 2,000 3,000 4,000
243
Asia Credit Compendium 2014 Siam Commercial Bank PCL (A3/Sta; BBB+/Sta; BBB+/Sta)

SCBs credit profile benefits from its leading market share in several segments, respected franchise and ownership by the Crown Property Bureau. Strong profitability, income diversity (its focus on higher-margin and fee businesses), good asset-quality metrics (thanks to the aggressive write-off of legacy NPLs) and adequate capitalisation also support its credit quality. Aggressive growth in the past several years, particularly into untested segments and others supported by temporary government tax rebates (firsttime automobile and home buyers), could pressure asset quality over time. These concerns are offset by the banks strong pre-provision profitability and adequate capitalisation buffers.

Strong market position with a retail-market focus: SCBs 16% loan market share makes it Thailands second-largest bank by assets (a close second to BBL) and the largest by loans (exceeding KTB by a small margin). It has the largest retail book among the countrys big four commercial banks, wit h 44% of loans to the retail segment. SCB is the market leader in home mortgages, and holds a topthree position in auto loans, credit cards, asset management and bancassurance. The banks overall loan growth continued to outpace peers, increasing 13% y/y in September 2013 versus 9-10% for peers, though the pace was far more measured than in September 2012 (20% y/y). Growth was underpinned by 19-22% y/y growth in SME loans, auto loans, and mortgages. This strong loan growth was the result of new lending to non-traditional segments outside of the banks traditional products, such as used-car loans, home equity loans, and loans to smaller SMEs, which poses risks. Growth in auto loans will also remain subdued after declining rapidly in the quarter ended September 2013, as the impacts of the tax-rebate scheme for first-time car buyers ended in June 2013. Systemically important: SCB benefits from 23.2% ownership by the Vayupak Mutual Fund (an indirect holding of the Ministry of Finance) and 21.3% ownership by the Crown Property Bureau, the Thai monarchys investment arm. The banks large size makes it systemically important, and although it is commercially operated, its ownership by government- and monarchy-related entities lends it support. Although political risks remain, we believe that the current situation in Thailand poses a much lower risk to the banking sector than in prior years. Robust profitability from higher-margin lending and non-interest income: SCBs headline profitability is the strongest among peers, due to the banks loan portfolio tilt towards higher-yielding retail and SME sectors. Its fee-income earning ability is second only to Kbanks among the big four as a result of its strength and recent growth in the net insurance, credit card, corporate finance and brokerage fee businesses. Nevertheless, its NIM has generally remained stable, as new lending to higher-yielding segments has been partly offset by increasing funding costs. SCB had previously utilised bills of exchange (BEs) more than peers, which brought its LDR to 111% in Q3-2011. However, the ratio had declined to 96% by September 2013, driven by a regulatory change in February 2012 that imposed the same fees on BEs as on deposits. As a result, the bank has become more reliant on higher-cost fixed-term deposits, which rose 22% y/y in September 2013 versus 3% y/y for low-cost deposits (46% of deposits are low-cost deposits). Asset quality appears sound, and reserves have improved: SCBs NPL ratio has remained low (2.3% at end-September 2013), although it has benefitted from a relatively brisk pace of loan growth. In order to mitigate concerns surrounding a rise in impairments (associated with recent rapid consumer-loan growth), the bank has taken countercyclical provisions to boost its reserve coverage to 150%, the second strongest after BBLs. Furthermore, as a result of its healthy profitability, provisions have remained low versus pre-provision profits (16.5% for 9M-2013 compared with a peer average of 18.9%). Although NPL formation has turned positive in recent quarters, further increases in provisioning should be manageable. Capitalisation is adequate: SCBs Tier 1 ratio was 13.4% at end-September 2013, an improvement from 11.9% at end-Q1-2013, primarily due to the delayed appropriation of H2-2012 earnings and lower RWA growth. SCBs capitalisation should remain adequate as the banks strong accretive earnings should continue to offset increases in RWAs.
BANKS
Company profile
Established in 1906 under a Royal Charter, Siam Commercial Bank (SCB) is Thailands oldest local bank. It is the second-largest bank by assets, with end-September 2013 assets of THB 2.4tn (USD 78bn). It shares a 16% loan-market share with BBL and KTB. It had 1,163 branches, Thailands largest network, at end-September 2013. Its loan base is diversified, though it is the most retail-oriented among the major Thai banks. It is the market leader in mortgages and holds a top-three position in auto loans, credit cards, asset management and bancassurance. The Crown Property Bureau owns 21.3% of SCBs shares, while the government-run Vayupak Mutual Fund owns 23.2%. The rest are widely held, with foreign shareholding of c.35%.
244
Asia Credit Compendium 2014 Siam Commercial Bank PCL (A3/Sta; BBB+/Sta; BBB+/Sta)
Summary financials
2010 Balance sheet (THB bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (THB bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.4 26.2 45.6 2.3 12.1 16.4 1.8 4.1 95.7 97.1 10.5 11.6 15.5 3.2 28.6 40.5 2.2 12.2 21.2 2.2 3.1 114.9 109.4 10.0 11.1 14.5 3.3 28.9 41.2 2.1 15.5 20.8 2.0 2.3 139.9 95.6 9.4 11.7 16.2 3.2 27.9 37.7 2.0 16.5 23.3 2.3 2.3 150.1 96.1 9.8 13.4 16.9 160 Loan-loss coverage (RHS) 140 120 100 80 'specialmention' ratio NPL ratio Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 ROE (RHS) 60 40 20 0 0 10 20 30 40 50 60 Net interest 59% Fees/commissions 28% Trading 8% Other 5% 44.5 26.4 70.9 (32.3) 38.6 (4.7) 33.9 24.3 50.5 40.5 91.0 (36.9) 54.2 (6.6) 47.5 36.3 62.1 40.9 103.0 (42.4) 60.6 (9.4) 51.2 40.5 54.0 37.5 91.6 (34.5) 57.0 (9.4) 47.6 38.9 100% 80% 60% 40% 20% 0% Dec-09 6 5 4 3 2 1 2009 2010 2011 2012 9M-13 Net interest margin Dec-10 Dec-11 Dec-12 Sep-13 49,095 1,477 1,019 180 1,322 1,092 48 63 155 59,538 1,878 1,250 358 1,691 1,184 53 256 187 70,136 2,145 1,494 357 1,943 1,615 112 132 202 77,546 2,423 1,626 499 2,186 1,753 111 94 237 Automobile SME Housing Corporate 0 100 200 300 400 Interbank 500 600 Debt 11% 20% 28% 36% 700 2011 2012 9M-13
Loans by borrower type, Sep-13 (THB bn)

Other retail 4%
Funding mix
Customer deposits
BANKS

Asset quality (%)

9 8 7 6 5 4 3 2 1 0

Loan growth and LDR (y/y, %)

25 20 15 25 20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Loan-todeposit (RHS) Loan growth 115 110 105 100 95 90 85
Tier 2
10 5 0
245
Asia Credit Compendium 2014 State Bank of India (Baa3/Sta; BBB-/Neg; BBB-/Sta)

SBIs credit profile is underpinned by its dominant market position, strong franchise and systemic importance. The banks nationwide presence gives it access to a stable, lowcost funding base. Exposure to stressed sectors has led to a marked deterioration in SBIs asset quality; despite this, loan growth in some of these sectors remains high. We anticipate further pressure on asset quality, which, along with weakening margins, will continue to dampen profitability. Strong loan growth and weak profitability have stretched SBIs capital ratios. With capital requirements likely to remain high in light of Basel III implementation, we expect ongoing reliance on capital support from the government.

Systemic importance: As Indias largest bank, SBI enjoys strong support from its largest shareholder, the government. The banks close linkages with the government are evident in the large amount of government-related business it handles (according to SBI, it has a c.58% market share of government business). It has also received support in the form of multiple capital injections to enable it to maintain adequate capital for credit growth. Given its extensive nationwide reach, SBI plays an important role in promoting financial inclusion, a key priority of the Reserve Bank of India. Strong franchise, dominant market share: SBI has a dominant position in Indias banking sector, with the largest market shares of loans and deposits. Its wide network provides good diversification, unlike the regional bias of some of Indias other large public-sector banks. While it is largely a corporate lender (only c.20% of its loans are retail), it has a leading market share in retail loans given its large size (23-26% market shares in home, auto and education loans). Its international loan book, at c.USD 30bn, is also the largest in absolute terms among Indian banks, even though peers like BOI and BOB have almost one-third of their loans geared towards overseas businesses, versus 17% for SBI. SBIs loan book grew at a rapid pace in FY13 and H1-FY14 (19-21% y/y), despite the weak macro backdrop. The large-corporate segment posted the strongest growth rates during these periods (36-40%). The bank expects its growth to be more in line with the system going forward; management has revised down its growth guidance to 16-17%. Good funding base: SBI has a solid deposit base due to its wide network. 44% of its total deposits are low-cost deposits and 76% of its term deposits are from retail sources. While its CASA share has declined slightly as large private banks have caught up, it remains among the strongest in the sector at 44%. Depositor concentration is low, with the top 20 depositors accounting for c.7% of deposits. Asset-quality weakness: SBIs exposure to stressed sectors of the economy has led to worsening asset-quality metrics, and we expect pressure to persist over the next few quarters. These sectors account for a large part of the banks loan book . Infrastructure comprised 13% of loans as of Q2-FY14. Power made up 55% of the infrastructure book, telecoms 17%, and roads and ports 12%. In addition, these loans have grown strongly; the infra book has increased 41% in the past 18 months, led by a surge in power-sector lending. Slippage into the NPL category has been high, and despite a respite in Q2-FY14, the banks NPL ratio of 5.7% compares unfavourably with large peers. The mid-corporate, SME and agri segments account for over 80% of the NPL book, with NPL ratios in these sectors in the 9-11% range. The banks restructured loan book also cont inues to increase (3.4% of loans as of Q2-FY14), and another INR 60bn is under consideration for restructuring. Specific loan-loss coverage is low at 50%. Profitability likely to remain under pressure: SBIs strong funding base makes its NIM more defensive than state-owned peers; its fee income base is also better. However, the banks profitability has been under pressure. Net income declined 24% y/y in H1-FY14 despite strong loan growth, due to lower NIM, higher operating expenses and rising loan-loss provisions. We expect margin pressure and elevated credit costs to keep the banks profitability subdued. Capitalisation likely to rely on government support: Strong loan growth and weak internal capital generation lowered SBIs Tier 1 ratio to 8.7% as of Q2 -FY14 (9.1% including H1-FY14 profits). With Basel III implementation underway, we expect the bank to continue to rely on the government for capital support. The government approved INR 20bn of capital for FY14 and the bank plans to raise INR 80-90bn via a QIP.
246
BANKS
Company profile
State Bank of India (SBI) is Indias oldest and largest bank, with a c.18% market share of loans, almost three times larger than its next-biggest competitor. It had INR 16.8tn (USD 267bn) of assets and a nationwide network of 15,143 branches as of September 2013 (66% in rural and semi-urban areas). The bank has a large overseas presence across 34 countries, contributing c.17% of loans. SBI shares are listed, with 62.3% government ownership (statutory requirement of minimum 51% government ownership). The State Bank Group, of which SBI accounts for c.73% of assets, has subsidiaries in asset management, insurance and investment banking, as well as five regional banks (with a c.6% market share).
Asia Credit Compendium 2014 State Bank of India (Baa3/Sta; BBB-/Neg; BBB-/Sta)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income 325,264 432,911 443,313 237,632 Other income 158,246 143,514 160,348 77,521 Total income 483,510 576,425 603,661 315,153 Overheads (230,154) (260,690) (292,844) (176,524) Pre-provision profits (PPP) 253,356 315,735 310,817 138,629 Impairments (103,813) (130,902) (111,308) (58,946) Profit before tax 149,542 184,833 199,509 79,683 Net income 82,645 117,073 141,050 56,160 Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.0 23.9 47.6 2.0 41.0 12.6 0.7 3.3 51.2 82.4 5.3 7.8 12.0 Loan-loss coverage (RHS) NPL ratio Std. restructured loans-toloans** 3.5 21.0 45.2 2.0 41.5 15.7 0.9 4.5 60.1 85.4 6.3 9.8 13.9 3.2 19.0 48.5 2.0 35.8 15.4 1.0 4.8 57.1 89.4 6.3 9.5 12.9 3.0 16.4 56.0 2.2 42.5 10.9 0.7 5.7 49.9 87.8 6.5 8.7 11.7 100% 80% 60% 40% 20% 274,473 12,237 7,567 2,956 11,588 9,339 313 1,196 650 262,503 13,355 8,676 3,122 12,516 10,436 294 1,270 840 288,552 15,663 10,456 3,509 14,674 12,027 408 1,692 989 267,467 16,758 11,031 3,985 15,677 12,925 NA 1,889 1,081 FY12 FY13 H1-FY14

Others Other retail Housing Agri SME Overseas Domestic corp. 0 1,000 2,000 3,000 4,000 2% 8% 11% 11% 14% 17% 37% 5,000 Debt
Funding mix
BANKS
0% Mar-10 10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14 Net interest margin Mar-11 Mar-12 Mar-13 Sep-13*

Asset quality (%)

6 5 4 3 2 1 0 Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 70 60 50 40 30 20 10 0

Treasury 23%
Wholesale
34%
Retail 0 100,000 200,000
42% 300,000 400,000

15 Total capital ratio ROE (RHS) 20
Revenue by type of income, H1-FY14 (INR bn)

Others 15 10 Fees/commissions 16% 8%
10 Tier 1 capital ratio Mar-10 Mar-11 Mar-12 Mar-13 Sep-13
5 0
Net interest income 0 50,000
75% 100,000 150,000 200,000 250,000
Note: Financial year ends 31 March, H1-FY13 ended 30-Sep-2013;*Deposit breakdown available for domestic operations only;**comparable data not available for FY10-FY11; Source: Company reports, Standard Chartered Research
247
Asia Credit Compendium 2014 Suhyup Bank (A2/Sta; A-/Sta; NR)


Despite being the smallest of Koreas policy banks, we believe Suhyup enjoys government support because of its policy role and its 100% ownership by the Korean government. However, unlike most of the other policy banks, Suhyup does not benefit from a legal obligation for the government to ensure its solvency. The banks fundamentals are weaker than those of some of its peers, owing to its small size, limited franchise, low (albeit improving) profitability and its obligation to eventually repay the capital injection by Korea Deposit Insurance Corporation.

Policy role: Suhyup Bank is the financial arm of the NFFC, which is the channel for implementing the governments policies to promote the development of the fisheries and maritime sector. Although the government regards the sector as key to Koreas balanced economic development, it is not as important in terms of size as, for example, the agricultural sector. At this stage, there are no plans to privatise Suhyup Bank. Implicit government support: As a specialised bank, Suhyup enjoys implicit government support. In the past, support from the Korean government has been forthcoming when necessary in 2001, the government, through KDIC, injected KRW 1.16tn to recapitalise the bank. Based on a memorandum of understanding with KDIC, Suhyup is required to repay the money eventually, but there is no fixed timeline. Under the terms of the capital injection, Suhyup is also prohibited from using its retained earnings to support either of the other two units of the NFFC. No solvency obligation: While the government is legally obliged to ensure the solvency of KEXIM, KoFC, KDB and IBK, Suhyup does not benefit from such a solvency obligation. Although the old Ministry for Food, Agriculture, Forestry and Fisheries provided a letter of support to the NFFC, we believe this is not as strong as a solvency obligation. Limited amount of policy loans: Policy loans made up 16% of the banks loan portfolio at end-June 2013. Although these loans have below-market rates, the government subsidises Suhyup for the difference between the rate to the borrower and the market rate. More importantly, depending on the type of loan, the government guarantees repayment of 85-100% of the loan through two special guarantee funds. Relatively small size: Suhyup is a relatively small player in the Korean financial system. NH Bank is its closest peer in terms of function and structure, as it too is a specialised bank without a solvency obligation. However, NH Bank is almost nine times bigger than Suhyup. Suhyups small size relative to the larger commercial banks limits its ability to offer a broader product range, in our view. Narrow franchise and high SME exposure: Although Suhyup engages in nonpolicy commercial banking and is keen to expand, its franchise is still relatively narrow and concentrated. In particular, its retail franchise and distribution network is relatively small (118 branches). Also, because of its policy role, the banks exposure to the SME sector is high SMEs represented 60% of its KRW loans at end-June 2013, compared with an average of less than 40% for the four largest commercial banks. Weak fundamentals: On a standalone basis, the banks fundamentals are weak. Although profitability has been slowly improving since 2008, mainly due to lower loan-loss provisions, it remains low (ROA of 0.2% for H1-2013.) The banks assetquality indicators are also slightly worse than average, partly because of its high exposure to SMEs. However, the credit risk of policy loans is partly offset by guarantees provided by government-supported funds. At end-June 2013, the banks NPL ratio stood at 2.3%, with loan -loss coverage of 81%. From a funding point of view, the banks LDR is high, reflecting its weaker funding base (144% at end-June 2013, according to our calculations). However, unlike the policy banks, Suhyup derives almost two-thirds of its funding from customer deposits. Capital adequacy has remained broadly unchanged over the past five years, but it is lower than the average for the large Korean banks. Its Tier 1 capital ratio was 7.3% and its equity-to-assets ratio was 4.3% at end-June 2013.
BANKS
Company profile
Suhyup Bank is the smallest of Koreas five specialised/policy banks. It is the credit business unit of Koreas National Federation of Fisheries Cooperatives (NFFC), and its remit is to provide financing and support for the development of the countrys fisheries and maritime sector. The bank had total assets of KRW 23tn (USD 20bn) at end-June 2013 and a market share of c.1% of assets. Its customer base is comprised mainly of SMEs, although the bank also serves individuals and large corporates. Following a capital injection in 2001, Suhyup is 100% owned by the Korea Deposit Insurance Corporation (KDIC). The bank operates through a network of 118 branches.
248
Asia Credit Compendium 2014 Suhyup Bank (A2/Sta; A-/Sta; NR)

Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.2 5.0 46.0 0.9 77.7 5.1 0.2 3.8 75.9 142.1 4.3 7.3 13.1 2.1 4.9 48.2 0.9 55.4 8.5 0.4 2.5 97.6 143.8 4.3 7.0 12.6 1.9 7.4 61.0 1.0 53.8 5.2 0.2 2.4 87.8 150.1 4.4 7.1 13.1 1.8 7.6 59.0 0.9 59.6 5.0 0.2 2.3 81.0 143.8 4.3 7.3 13.3 409 (23) 386 (178) 208 (161) 47 42 422 (24) 398 (192) 206 (114) 92 75 403 (62) 340 (208) 133 (68) 61 49 192 (14) 178 (105) 73 (43) 29 25 17,566 19,780 15,993 2,450 18,929 11,252 2,590 3,577 850 18,621 21,459 17,388 2,588 20,544 12,091 3,097 3,855 915 20,849 22,192 17,992 2,525 21,226 11,987 3,002 4,512 966 20,021 22,850 18,395 2,336 21,856 12,796 2,741 4,379 993 2011 2012 H1-13*

Households Large corporates Public sector and others SMEs 0 2,500 5,000 Borrowings 7,500 Debt 10,000 11% 13% 15% 60% 12,500
Funding mix
100% 80% 60% 40% 20% Deposits
BANKS
0% Dec-09 6 5 4 3 2 1 0 2009 2010 2011 2012 Jun-13 Net interest margin Average interest earned Dec-10 Dec-11 Dec-12 Jun-13
Asset quality (%)

4.5 NPL ratio 160 Loan-loss coverage (RHS) 140 120 100 80 1.5 60 40 20 0.0 Dec-09 Dec-10 ROE (RHS) Tier 2 capital Tier 1 capital ratio Dec-11 Dec-12 Jun-13 0
Loans by sector, Jun-13 (KRW bn)

Wholesale/retail Households Manufacturing Fisheries Public sector RE rental/business services Others 0 2,000 4,000 9% 9% 9% 14% 16% 19% 24% 6,000
3.0

15 20

Other -16% 15 10 5 0 Fees/ commissions Net interest income -50 0 50 100 150 8%
10
108% 200 250
0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13

*Unconsolidated; Source: Company reports, Standard Chartered Research
249
Asia Credit Compendium 2014 Syndicate Bank (Baa3/Sta; BBB-/Neg; NR)


Syndicate Banks good franchise in southern India and its majority ownership by the government underpin its credit profile. The bank has performed well against mid-sized peers in recent years in terms of both earnings and asset quality. However, recent quarters have been weaker as interest income comes under pressure from falling yield on advances and asset quality deteriorates at a faster pace. We expect higher credit costs and low income diversity to keep profitability muted. Syndicates capitalisation levels compare favourably to similar-sized peers but will likely remain constrained in light of Basel III implementation, higher credit costs and muted internal capital generation.

Stable banking franchise: Like other Indian public-sector banks, Syndicate Bank focuses primarily on corporate lending. Retail loans made up c.13% of its loan portfolio as of June 2013; of this, housing and personal loans were 45% and 22%, respectively. The banks well-entrenched distribution network particularly in southern India, where over half its branches are located lends stability to its franchise. While its loan book is fairly diversified, the bank focuses on the agriculture and small-scale segments. Syndicates loans grew at a fairly moderate pace between FY10-FY12, although growth has picked up recently (21% y/y in H1FY14). The retail and SME sectors are likely to be the key drivers of the 18% y/y credit growth management forecasts for FY14. Syndicates overseas loan book almost doubled y/y in H1-FY14. At 21% of loans, it is larger than those of similarsized public-sector peers like Union Bank and IDBI Bank, but is a small contributor to revenue (3.5% in H1-FY14). Improved funding profile: Syndicates funding profile has improved as management has focused on increasing the CASA ratio and shedding bulk deposits. Its CASA deposit share (c.32% of domestic deposits) is comparable to those of larger peers like BOB and BOI, and is higher than those of similar-sized peers like IOB and IDBI. The banks dependence on bulk deposits also declined to 14% in Q1-FY14 from more than 20% in FY12. Asset-quality deterioration expected: While Syndicate initially weathered the ongoing asset-quality down-cycle better than many peers, recent quarters have seen a sharp deterioration. The gross NPL ratio rose 90bps in H1-FY14 to 2.9%, although it is still low relative to many public-sector peers. The banks restructured loan book also rose to 5.7% of loans in Q1-FY14 (the latest data available) from 4.8% in FY12. The services segment had an NPL ratio of 5.1% in FY13, followed by agri and personal loans, with ratios of 4.5-4.7%. NPLs in the industry segment (including SMEs) were lower, at 2.1%. We anticipate further asset-quality pressure in the coming quarters given the banks exposure to stressed sectors such as infrastructure (13% of loans in FY13). Power-sector loans account for c.9%, mostly to state-owned enterprises. Additional stress could potentially emerge from the banks large unsecured retail book and its exposure to SMEs. The concentration of its exposures compares unfavourably with peers the top 20 exposures accounted for c.16% of its total exposures in FY13. Specific loan-loss coverage, historically stronger than peers, declined sharply to 43% in Q2-FY14. Weak profitability outlook: Syndicate Banks NIM is somewhat better than peers, but while its cost of funds has come down, NIM has also declined due to a lower yield on advances. Accordingly, net interest income was largely flat y/y in H1-FY14, despite c.21% loan growth. Like other public-sector banks, Syndicate suffers from low income diversity and limited cross-selling ability (fee income accounted for c.8% of total income in FY13). We expect NIM pressure and higher provisioning costs arising from weaker asset quality to keep the bottom line depressed. Moderate capitalisation: Syndicates capitalisation, while better than similar-sized peers, is moderate, with a Tier 1 ratio of 8.1% as of June 2013. The bank received capital from the government/Life Insurance Corp. of India in FY11-FY12. While it did not receive similar support in FY13, INR 2bn was approved for FY14 in the latest round of capital injections announced by the government. We expect the banks capital position to remain constrained over the medium term in light of Basel III implementation, higher credit costs and muted internal capital generation.
BANKS
Company profile
With assets of INR 2.2tn (USD 35.5bn) as of September 2013, Syndicate Bank is a mid-sized bank th (Indias 13 largest), with a c.3% market share of loans. It has a nationwide network of 3,047 branches, with a bias towards southern India. Corporate banking accounted for 54% of operating profit in FY13, and retail operations contributed 22%. Although the bank has only one international branch (London), overseas loans have grown rapidly (21% of loans in Q2FY14). Syndicate is publicly traded, with 66.17% government ownership (statutory requirement of minimum 51% government ownership). Founded in 1925 in southern India to support the local weaver community, the bank was privately owned until 1969, when it was nationalised.
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Asia Credit Compendium 2014 Syndicate Bank (Baa3/Sta; BBB-/Neg; NR)

Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.0 8.3 48.1 1.7 53.2 16.5 0.7 2.4 60.3 79.9 4.5 9.3 13.0 3.1 8.9 45.7 1.7 58.5 16.3 0.8 2.5 62.8 79.5 5.0 8.9 12.2 2.8 8.2 48.0 1.6 54.7 20.5 1.0 2.0 62.2 80.6 4.9 9.0 12.6 2.6 NA 47.0 1.4 47.1 16.7 0.8 2.9 43.1 81.2 5.2 NA 11.6 43,828 9,151 52,979 (25,481) 27,498 (14,643) 12,855 10,479 50,850 10,759 61,609 (28,141) 33,468 (19,588) 13,880 13,134 54,541 11,744 66,284 (31,788) 34,496 (18,862) 15,634 20,044 27,487 5,709 33,196 (15,598) 17,597 (8,291) 9,306 9,224 100% 80% 60% 40% 20% 35,110 1,565 1,068 351 1,495 1,356 146 95 71 35,865 1,825 1,236 408 1,734 1,579 175 106 90 39,632 2,151 1,476 456 2,046 1,854 247 128 105 35,454 2,221 1,530 471 2,106 1,908 NA 139 116 Other retail SME Agriculture Corp 0 200 400 600 800 7% 11% 14% 62% 1,000 Debt FY12 FY13 H1-FY14
Loans by borrower type, Jun-13 (INR bn)

Housing 6%
Funding mix
BANKS
Asset quality (%)

6 5 4 3 2 1 0 Mar-10 15 Mar-11 Mar-12 Mar-13 Sep-13** 25 20 15 10 5 0 Mar-10 Mar-11 Mar-12 Mar-13 Jun-13 NPL ratio Loan-loss coverage (RHS) 70 60 50 40 30 20 10 0

Other Treasury Retail Wholesale 0 2% 21% 23% 53% 10,000 20,000 30,000 40,000 50,000 60,000
Std. restructured loans-to-loans*
Capital adequacy and ROE (%)**

Other income
17%
10
Net interest income
83%
5,000 10,000 15,000 20,000 25,000 30,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013;*comparable data not available for FY10-FY11; ** Jun-13 restructured loan data used; Source: Company reports, Standard Chartered Research
251
Asia Credit Compendium 2014 Union Bank of India (Baa3/Sta; BBB-/Neg; NR)

Union Banks credit profile is underpinned by its healthy corporate banking franchise and its majority government ownership. The banks panIndian presence gives it access to a low-cost, stable funding base. Asset quality has deteriorated on higher slippage, and we expect further pressure given the large restructuring pipeline and high exposure to stressed sectors. Furthermore, loan-loss coverage is low and compares unfavourably with peers. The banks profitability has weakened on lower margins and higher credit costs. Its capitalisation (Tier 1 ratio of 7.1%) is weaker than that of the larger public-sector banks, and we expect ongoing reliance on the government to shore up capital and support growth.

Well-established commercial banking franchise: Like most large public-sector banks in India, Union Bank has a corporate-focused loan book. About threequarters of its loans are to the domestic corporate and SME segments. Its retail exposure (10%) is also broadly in line with peers like BOB, BOI and Canara. Housing and auto loans account for close to 70% of the retail portfolio. The bank reported loan growth of 25% y/y in H1-FY14; we view this as aggressive in light of the weak macro backdrop and the banks constrained capitalisation (the infrastructure segment grew 14%, retail 27%). Management seeks to grow the retail book (primarily mortgages) and increase fee income, which is low relative to peers. Union Banks international book has grown strongly in the past few years, although it constitutes a fairly small proportion of loans, at c.7%. The bank has two international branches (Hong Kong and Dubai), and is setting up branches in Sydney and Antwerp and a subsidiary in London. Decent funding profile: Union Bank relies primarily on deposits for funding (over 90% of the funding mix as of September 2013). The banks nationwide presence gives it access to a low-cost deposit base. Although its deposit base grew strongly in H1-FY14 (27% y/y), the CASA ratio declined to c.28%, lower than larger publicand private-sector peers. Depositor concentration is on the high side the 20 largest depositors accounted for c.14% of total deposits in FY13. Asset quality has slipped: Union Bank has experienced mounting pressure on asset quality in recent quarters. Its gross NPL ratio increased by c.70bps in H1FY14 to 3.7% as slippage accelerated. The agricultural and SME segments continue to report high NPLs (over 5%) and together account for c.37% of total NPLs. The restructured loan book also increased in H1-FY14, taking the banks stressed loan ratio (NPLs plus restructured loans) to 8.6%, although this is still low relative to most public-sector peers. Union Banks loan-loss coverage has declined to 42% and is low compared to peers, despite a substantial jump in provisioning in H1-FY14. Large exposures to stressed sectors such as infrastructure (17% of domestic loans) and metals (6%) are key pressure points, and we expect further deterioration in asset quality. The restructuring pipeline stood at c.INR 38bn as of Q2-FY14, versus a restructured book of INR 109bn. Borrower concentration is considerably higher than peers, with the 20 largest borrowers accounting for 23% of the banks exposure at end- FY13. Weakening profitability: Union Banks net income fell 28% y/y in H1-FY14, despite strong loan growth of 25%. Net interest income growth was sluggish as margin pressure intensified on lower asset yields and higher funding costs. The banks domestic NIM has declined in the past year and compares unfavourably with peers like BOB and BOI. Union Banks lower income diversity versus peers constrains profitability. Higher operating costs (cost-to-income ratio of 50%) and a spike in provisioning (up 61% y/y) have exacerbated pressure on earnings. We expect the banks core profitability to remain subdued, constraining its ability to absorb higher credit costs and limiting internal capital generation. Weak capitalisation: Strong loan growth and weak internal capital generation have weighed on Union Banks capitalisation. The banks Tier 1 ratio (under Basel III) stood at 7.1% as of September 2013 (CAR: 9.7%), among the lowest of the Indian banks we track. We expect the bank to rely on capital injections from the government to maintain its capitalisation and support growth. The government has a good track record of providing capital to public-sector banks, including Union Bank. The bank received equity of INR 11.14bn from the government in March 2013, and another INR 5bn was approved in October 2013.
252
BANKS
Company profile
With an asset base of INR 3.4tn (USD 54bn) as of September 2013, Union Bank of India is Indias ninth largest bank, with a c.3% market share of loans. It has a nationwide distribution network of 3,589 branches, 44% in the north and 20% in the west of the country. It has a small international presence (c.7% of loans). Although the bank offers a broad range of services, it is predominantly a corporate bank, with only c.10% of its loans to the retail segment. Union Bank is publicly traded, with a 57.9% government stake (statutory requirement of 51% government ownership). Founded in 1919, the bank was privately owned until 1969, when it was nationalised (along with 13 other banks) to expand banking in rural areas. It was listed in 2002.
Asia Credit Compendium 2014 Union Bank of India (Baa3/Sta; BBB-/Neg; NR)
Summary financials
FY11 Balance sheet (INR bn) Total assets (USD mn) Total assets (INR bn) Loans Investments Total liabilities Deposits Interbank Borrowings Equity Income statement (INR mn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 3.0 4.4 47.8 1.8 31.3 18.0 1.0 2.4 50.2 75.5 5.4 8.7 13.0 2.8 4.0 43.1 1.6 48.4 13.0 0.7 3.0 44.5 80.9 2.6 8.4 11.9 2.7 3.6 44.7 1.6 45.1 13.5 0.8 3.0 46.9 80.0 5.5 8.2 11.5 2.4 NA 49.6 1.6 61.4 8.7 0.5 3.7 42.1 76.9 5.3 7.1 9.7 62,162 20,388 82,550 (39,500) 43,050 (13,496) 29,554 20,819 67,931 24,482 92,413 (39,875) 52,538 (25,410) 27,128 17,871 75,428 25,520 100,949 (45,122) 55,827 (25,185) 30,642 21,579 38,636 13,674 52,310 (25,943) 26,367 (16,183) 10,184 7,683 100% 80% 60% 40% 20% 52,929 2,360 1,510 584 2,232 2,025 66 133 128 51,539 2,622 1,779 624 2,476 2,229 105 179 68 57,454 3,119 2,081 808 2,946 2,638 120 238 173 54,136 3,392 2,173 956 3,211 2,870 NA 277 180 FY12 FY13 H1-FY14

Other retail Housing Overseas Agri MSME Domestic corp 0 500 Savings deposits 1,000 Time deposits 4% 6% 7% 10% 17% 56% 1,500 Debt
Funding mix
Current deposits
BANKS

Asset quality (%)

6 5 4 3 2 1 0 Mar-10 15 Mar-11 Mar-12 Mar-13 Sep-13 25 20 10 Tier 2 capital Tier 1 capital ratio Mar-10 Mar-11 Mar-12 Mar-13 Sep-13 15 10 5 0 NPL ratio Loan-loss coverage (RHS) Std. restructured loans-to-loans* 70 60 50 40 30 20 10 0

Other Retail Treasury Wholesale 0 20,000 40,000 60,000 1% 25% 27% 47% 80,000

ROE (RHS)

Fees/commissions 4%
Others
22%
Net interest income 0 20,000 40,000 60,000
75% 80,000
Note: Financial year ends 31 March, H1-FY14 ended 30 September 2013; *comparable date not available for FY10-FY11; Source: Company reports, Standard Chartered Research
253
Asia Credit Compendium 2014 United Overseas Bank Ltd. (Aa1/Sta; AA-/Sta; AA-/Sta)

We view UOB as Singapores strongest bank and a defensive play in the Asian banking space. UOBs strong franchise in Singapore has given it a good base from which to expand into other markets. The bank has been expanding its presence in neighbouring countries since the 1990s, albeit at a measured pace. The bank has a solid franchise, particularly in the consumer and SME sectors. It has successfully navigated various downturns and shocks, while reporting stable performance. Its fundamentals are underpinned by robust asset quality, sound capital adequacy and good earnings generation capacity. We expect the banks fundamentals to remain good in 2014, which underpins our Stable outlook.

Robust franchise: Although UOB is the smallest of Singapores three banks on a consolidated basis, its Singapore loan portfolio is slightly larger than that of DBS Bank Ltd., the largest bank in Singapore. UOB has a robust franchise, notably in the consumer and SME sectors. Domestically, it is the market leader in private residential mortgages and credit cards. Its Malaysian and Thai subsidiaries are among the 10 largest domestic banks by assets and control 5% and 2% of domestic deposits, respectively. Good track record: UOB has been a steady performer for many years, successfully navigating various downturns and shocks, while reporting stable performance. The bank has expanded its business overseas at a measured pace and has successfully integrated its acquisitions. Expansion into emerging markets: Like its peers, UOB has expanded into several emerging markets in Asia notably Malaysia, Thailand and Indonesia both organically and through acquisitions. Businesses outside of Singapore contributed 38% of pre-tax profits in 9M-2013, up from 25% in 2006. Malaysia is UOBs second-largest market, accounting for c.15% of revenue, profits and loans. In markets outside Singapore, the bank focuses on SMEs and the higher-end retail market. While geographic diversity is positive and growth prospects in these economies are attractive, UOBs presence in these markets increases its risk profile. We expect expansion to continue, albeit at a measured pace. Dependence on the Singapore economy: Despite its expansion into other markets, UOB is arguably the most exposed to Singapore of the domestic banks. Singapore accounts for about 65% of its loan portfolio and pre-tax profits. Although Singapore is the most developed economy in Southeast Asia, it is a relatively small and concentrated market. Its open and trade-oriented nature makes the economy vulnerable to external shocks, as was evident in late 2008 and 2009. Exposure to the property market: Like its two domestic competitors, UOB has significant exposure to the property market. Residential loans accounted for 28% of its total loans at end-September 2013, and building and construction exposure accounted for a further 12%. Also, some of its exposure classified under investment and holding companies (15% of total loans) is real estate -related. Pick-up in loan growth in 2013: UOBs loan growth was 16% y/y in 9M-2013, in line with peer loan growth of 16-19%. However, UOBs loan growth was spread more evenly across its geographic coverage than its peers and was less concentrated in the Greater China region, which grew 22% y/y in 9M-2013 (versus 33-47% for peers). The bank has also managed its foreign-currency liquidity more conservatively than its domestic peers, keeping its USD LDR at 84% at endSeptember 2013 versus 110-133% for peers (its overall LDR was 90%). Strong fundamentals: UOBs fundamentals are underpinned by adequate earnings generation capacity, robust asset quality, solid capital adequacy and a sound funding base. Its profitability compares favourably with that of its peers thanks to its larger presence on the asset side in higher-yielding sectors such as SMEs and consumers, and its low cost of funding. The banks annualised ROA for 9M-2013 stood at 1.2% (stable compared with end-2012), exceeding the ROA of its peers, which declined from end-2012. UOBs asset-quality indicators are robust, with an NPL ratio of 1.2% and loan-loss coverage of 160%. UOB is adequately capitalised, and was the first Asian bank to issue Basel III-compliant Tier 1 securities. Its common-equity Tier 1 and Tier 1 ratios stood at 12.9%, and its total capitalisation ratio was 16.3% at end-September 2013.
BANKS
Company profile
United Overseas Bank Ltd. (UOB) is the third-largest Singaporean bank on a consolidated basis, with total assets of SGD 273bn (USD 220bn) at end-September 2013. In Singapore, the bank had estimated market shares of 17% of loans and 19% of deposits at end-2012. UOB was founded in 1935 and is controlled by the Wee family. Although it offers a broad range of services, UOB is primarily a banking group. Despite continued expansion in Asia, Singapore remains UOBs core market, generating c.60% of revenue and profits. Other key markets are Malaysia, Thailand, Indonesia (where it targets SMEs and the affluent retail segments) and the Greater China region.
254
Asia Credit Compendium 2014 United Overseas Bank Ltd. (Aa1/Sta; AA-/Sta; AA-/Sta)
Summary financials
2010 Balance sheet (SGD mn) Total assets (USD mn) Total assets Total loans Investments Total liabilities Customer deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net Income Key ratios (%) Net interest margin Fee income/total income Cost/income Cost/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.9% 19.6% 38.0% 1.1% 13.2% 13.3% 1.4% 1.9% 124.5% 80.9% 10.1% 15.3% 19.8% 1.8% 22.8% 42.3% 1.1% 16.0% 10.5% 1.0% 1.4% 136.2% 84.9% 9.8% 13.5% 16.7% 1.7% 22.9% 41.7% 1.1% 12.6% 11.7% 1.2% 1.5% 123.8% 85.6% 10.0% 14.7% 19.1% 1.7% 25.1% 41.4% 1.1% 9.6% 12.0% 1.2% 1.2% 160.5% 89.9% 9.3% 12.9% 16.3% 166,572 213,778 112,440 40,453 192,124 142,299 31,862 6,263 21,654 3,532 2,407 5,939 (2,258) 3,681 (485) 3,196 2,716 182,753 236,957 141,191 32,588 213,813 169,460 19,750 11,786 23,144 3,678 2,113 5,791 (2,450) 3,341 (533) 2,808 2,341 206,697 252,900 152,930 34,069 227,628 182,029 21,538 12,800 25,272 3,917 2,665 6,582 (2,747) 3,835 (484) 3,351 2,821 220,075 273,272 173,478 31,080 247,893 196,411 24,289 17,022 25,379 3,025 2,131 5,156 (2,136) 3,020 (290) 2,730 2,249 2011 2012 9M 13

Indonesia Thailand Others Greater China Malaysia Singapore 0 50,000 100,000 3% 5% 6% 6% 14% 66% 150,000

Manufacturing Others Commerce Construction Individuals FI/invt companies Housing loans 0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009 2010 2011 2012 9M-13 Net interest margin Average interest earned 20,000 40,000 9% 9% 12% 13% 14% 15%
BANKS
28% 60,000
Asset quality (%)

3 2 2 1 1 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Impaired-loans ratio Loan-loss coverage (RHS) 180 160 140 120 100 80 60 40 20 0

Others Global markets and IM Wholesale Retail 0 500 1,000 1,500 2,000 9% 12% 39% 40% 2,500

25 20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13

ROE (RHS) 14 12 10 8 6 4 2 0 Others Indonesia Greater China Thailand Malaysia Singapore 0 500 1,000 1,500 2,000 2,500 6% 7% 8% 9% 14% 56% 3,000
Tier 2
255
Asia Credit Compendium 2014 Vietnam JS Commercial Bank for Industry and Trade (B2/Sta; BB-/Sta; B/Sta)

VietinBank remains challenged by the difficult domestic operating environment, although some progress has been made through the establishment of VAMC. The banks high exposure to SOEs and potentially hidden asset-quality problems are also of significant concern. However, the banks credit profile has recently improved as a result of its share issuance to BOTM in May 2013; BOTM now holds a strategic 20% stake. Also, loan growth has slowed in 2013, while deposit growth remains healthy, possibly due to safe-haven flows, resulting in an improvement in the LDR. Nevertheless, given the opacity in the banking sector and the potential for further assetquality deterioration, we maintain our Negative outlook on VietinBank.

Challenging operating environment: After a decade of very rapid growth in the 2000s, Vietnamese banks are facing a difficult operating environment. Credit growth has been slowing since 2011 (but has shown signs of bottoming), liquidity is tight, asset quality has remained under pressure and economic growth is below the historical average. After a number of smaller banks faced problems, the prime minister approved a plan in Q1-2012 to address the issues facing the sector by 2015. The plan includes the resolution of NPLs through sales to a state asset management company, mergers of weaker banks with stronger ones and the lowering of banks LDRs. While progress has been made through the establishment of an asset management company (VAMC), we believe it is primarily a liquidity-enhancing mechanism and will not engage in bank recapitalisation. Systemic importance: As Vietnams second-largest bank and one of five stateowned banks, VietinBank has systemic importance, in our view. However, following the default of a foreign-currency obligation by Vinashin (a state-owned enterprise) in 2010, we believe that sovereign support for foreign bondholders of state-owned banks should not be considered a certainty. Weak asset quality: According to Vietnamese Accounting Standards, VietinBanks NPL ratio stood at 2.2% at end-June 2013, with loan-loss coverage of 73%. The banks reported asset-quality indicators may significantly understate the true level of non-performing loans. Market estimates of the actual system NPL ratio remain in the vicinity of 10-15%, compared with 4.6% reported by the SBV at end-August 2013. Disclosure and transparency remain low at the bank and sector levels. High exposure to SOEs: Like some of the other state-owned banks, VietinBank has high exposure to SOEs, representing 35% of total loans at end-June 2013. Some of the SOEs are heavily indebted and loss-making; as a result, they are likely to account for a large proportion of the NPLs in the system. Strong loan growth: While loan growth slowed in H1-2013, the banks loan book doubled in size between 2009 and 2012, outpacing system loan growth by a sizeable margin. Although this growth took place in an environment of high inflation, we are concerned that rapid credit growth could lead to asset-quality deterioration as exposures season. Liquidity risks in the system remain: The bank run on Asia Commercial Bank in August 2012 highlighted liquidity risks in the system. As a state-owned bank, VietinBank will be perceived by depositors as a safe haven, in our view. The bank would also likely be used to provide liquidity to weaker banks if required. Deposit growth has remained relatively good at an annualised 12% from end-2011 through H1-2013, likely reflecting depositor confidence in the bank. The LDR improved to 109% in June 2013 from 115% at end-2012. The banks liquidity has also improved markedly subsequent to its May 2013 share issuance. Share issuance is positive for capitalisation: In May 2013, VietinBank successfully completed a share issuance that resulted in BOTM taking a 20% stake in the bank. This helped boost the banks Tier 1 capital ratio to c.14% from 10% at end-2012, and provided it with a strategic shareholder. This action follows the 2011 capital raising that included the sale of a 10% stake to the IFC. Nevertheless, the banks capitalisation may continue to come under strain in light of the difficult operating environment in Vietnam, potential asset-quality deterioration and the banks low loan-loss coverage. The new issuance also diluted the SBVs ownership stake, which declined to 65% from 80%. While we do not expect the governments stake to fall below 51%, the documentation for the 2017 bond contains a change-of-control clause (at 101%) if it does.
256
BANKS
Company profile
Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) is Vietnams secondlargest bank, with total assets of VND 522tn (USD 25bn) at end-June 2013 and an estimated market share of loans of c.12%. Although the bank provides a broad range of services, its loan portfolio is skewed towards corporate and SME customers rather than retail customers. The bank operates through a network of 150 branches, and its operations are mostly domestic in nature. VietinBank is one of the countrys five stateowned banks and is 65% owned by the State Bank of Vietnam (SBV). The Bank of Tokyo-Mitsubishi UFJ (BOTM) owns 20%, the World Banks International Finance Corporation (IFC) owns 8%, and the remainder is widely held.
Asia Credit Compendium 2014 Vietnam JS Commercial Bank for Industry and Trade (B2/Sta; BB-/Sta; B/Sta)
Summary financials
2010 Balance sheet (VND bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (VND bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 4.1 9.9 48.4 2.4 39.5 22.1 1.1 0.7 180.1 113.7 5.0 6.7 7.0 5.1 5.2 40.6 2.2 36.9 26.6 1.5 0.8 137.8 114.1 6.2 9.6 11.0 4.0 5.8 43.0 2.0 34.8 19.7 1.3 1.5 75.1 115.3 6.7 9.7 10.3 4.3 8.6 42.6 2.0 29.7 17.2 1.5 2.2 72.5 108.9 9.2 NA NA 12,089 2,770 14,859 (7,195) 7,663 (3,025) 4,638 3,445 20,048 2,326 22,374 (9,078) 13,296 (4,904) 8,392 6,259 18,420 3,542 21,962 (9,436) 12,526 (4,358) 8,168 6,170 9,313 1,604 10,917 (4,652) 6,265 (1,861) 4,404 3,385 100% 80% 60% 40% 20% 18,860 367,731 231,434 61,810 349,328 205,919 26,188 86,698 18,402 21,889 460,420 290,398 67,992 431,721 257,136 58,212 91,403 28,699 24,176 503,530 329,683 73,692 469,690 289,105 19,983 141,513 33,840 24,627 522,221 329,247 77,671 474,074 307,267 15,784 122,527 48,147 2011 2012 H1-13
Loans by borrower type, Jun-13 (VND bn)

Others Foreign-invested enterprises Private companies Individuals State-owned enterprises Limited companies 0 50,000 Interbank 100,000 1% 3% 3% 15% 35% 44% 150,000
Funding mix
Customer deposits Borrowings and debt
BANKS
0% Dec-09 16 14 12 10 8 6 4 2 0 2009 2010 2011 2012 H1-13 Dec-10 Dec-11 Dec-12 Jun-13
Net interest margin
Asset quality (%)

2.5 2.0 1.5 1.0 0.5 0.0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Impaired loans ratio 100 50 0 Loan-loss coverage (RHS) 200 150
Customer deposits by source, Jun-13 (VND bn)

Private companies Foreign-invested enterprises Limited companies Others State-owned enterprises Individuals 0 50,000 100,000 150,000 0% 3% 6% 7% 30% 54% 200,000

12 10 8 6 4 2 0 Dec-09 Dec-10 Dec-11 Dec-12
Source: Company reports, Fitch, Standard Chartered Research
Revenue by type of income, H1-13 (VND bn)

30 Other 6%
Tier 2
ROE (RHS)
25 20
15 10 5 0
Fee and commission income
9%
Net interest income 0 2,000 4,000 6,000
85% 8,000 10,000
257
Asia Credit Compendium 2014 Wing Hang Bank Ltd. (A2/Neg; NR; A-/Sta)

WHB has strong financial fundamentals, with a strong track record, robust asset quality, good capital adequacy and a strong funding base with limited dependence on wholesale funding. However, it is a small bank and like its peers, suffers from limited growth opportunities in its saturated home market and high exposure to real estate. Unlike some of its peers, though, WHB has pursued a more measured growth strategy in the mainland, which mitigates risks somewhat. However, we revise our outlook to Negative from Stable to reflect not only the deteriorating environment, but also the risk of a potential acquisition by a mainland institution, which would probably result in a sharp increase in lending to the mainland.

Attractive acquisition target: Hong Kong is a highly competitive and saturated market, and smaller banks are at a competitive disadvantage because of their relative lack of pricing power. Independent banks are also at a competitive disadvantage because of their balance-sheet constraints and their ability to offer cross-border services to their customer base. However, Hong Kongs independent banks are attractive to larger institutions who want to use them as gateways to China. They are also attractive to mainland Chinese institutions who want to use them as an offshore platform. WHBs controlling shareholders were approached in Q3-2013 about their willingness to sell their stakes in the bank. We believe that if WHB were acquired by a mainland institution, it would result in a sharp increase in mainland lending. This has happened with other small Hong Kong banks acquired by mainland Chinese institutions. Modest size in Hong Kong, with high real estate exposure: Hong Kong accounts for around 75% of WHBs loan portfolio and generated 72% of revenue in H1-2013. In Hong Kong, the banks loan portfolio is split 60:40 between corporate and retail. However, like other Hong Kong banks, WHBs exposure to the property segment is high. Exposure to property development and investment accounts for 50% of its Hong Kong corporate loan book, while residential mortgages account for 78% of its retail loan book. Over 86% of the banks Hong Kong loan portfolio is covered by collateral; this is higher than average, but reflects the banks high real estate exposure. Moderate non-Hong Kong exposure: WHBs growth in the mainland has been slower than peers, and accounted for a relatively small 12% of the loan book at end-June 2013. On the mainland, the bank lends to Hong Kong corporate customers and mainland borrowers. However, as a bank with no mainland parent, WHB may be more exposed to smaller, higher-risk enterprises. Over a third of its mainland loans are property related. In Macau, the bank has a well-established franchise through Banco Weng Hang. Its Macau loan book (10% of total loans) is well diversified across sectors and more granular. However, according to Fitch, 70% of the loans are property related. Reasonable asset quality, though at the low point in the cycle: WHBs assetquality indicators are reasonable. The banks NPL ratio has historically tended to be below the peer average, and it stood at 0.3% at end-June 2013. At 63%, loanloss coverage is below average, but it excludes collateral. Although WHBs assetquality indicators are currently strong, we believe the asset-quality cycle in China has turned. In Hong Kong, slower economic growth and eventually higher interest rates are likely to be the catalyst for asset-quality deterioration. Moderate earnings-generation capacity: WHBs profitability, too, has historically tended to be slightly higher than the peer average (ROA of 1% in H1-2013) thanks to higher-than-average NIMs and reasonable efficiency levels. WHBs NIM (at 1.7% in H1-2013) is one of the best and most stable among peers. The bank has protected its margins better than mid-sized peers thanks to its larger proportion of low-cost deposits. Also, like many peers, its expansion into mainland China, where NIMs are higher, has enabled WHB to partly offset margin pressure at home. We believe a material improvement in profitability is unlikely in the near term as growth slows and risk costs increase. Good capitalisation: WHB has a strong capital position, with a Tier 1 capital ratio of 10.1% at end-June 2013. Unlike most of its peers, the banks capital ratios have remained stable, despite the implementation of Basel III in 2013, thanks to exceptional gains on the sale of real estate assets.
258
BANKS
Company profile
Wing Hang Bank (WHB) is a small bank in Hong Kong, with total assets of HKD 189bn (USD 24bn) and a 2% domestic loan market share at end-June 2013. The bank operates through 45 branches in Hong Kong, 12 in Macau and 15 in the southern part of mainland China. Its customer base is made up primarily of SMEs and individuals. The banks approach to mainland growth appears to have been more moderate than that of its peers. Hong Kong remains the banks core market, accounting for around 75% of total loans at endJune 2013 and 78% of PBT in H12013. The Fung family which founded the bank in 1937 and Bank of New York Mellon (BNYM) together control 45% of WHB. The banks management has a good track record and consists of former BNYM managers and Fung family members.
Asia Credit Compendium 2014 Wing Hang Bank Ltd. (A2/Neg; NR; A-/Sta)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.8 19.5 46.1 1.1 (3.4) 12.1 1.1 0.3 67.9 73.7 9.0 10.3 16.6 1.7 15.8 40.3 1.0 1.9 13.6 1.2 0.3 57.3 72.8 9.2 10.1 15.9 1.6 15.0 44.1 1.0 9.9 9.8 0.9 0.4 66.1 72.9 9.9 10.0 15.7 1.7 14.5 45.2 1.0 3.5 10.1 1.0 0.3 63.0 77.9 10.1 10.8 16.5 20,554 159,297 99,937 38,909 144,999 135,607 1,124 5,190 14,298 2,644 849 3,493 (1,610) 1,883 65 1,948 1,626 24,161 187,249 114,891 32,896 169,993 157,754 808 7,442 17,256 2,871 1,433 4,304 (1,735) 2,569 (48) 2,521 2,149 25,466 197,364 120,919 46,192 177,830 165,935 1,091 7,514 19,534 2,954 1,250 4,204 (1,852) 2,352 (232) 2,120 1,802 25,927 201,104 130,714 41,988 180,695 167,868 1,681 7,723 20,410 1,601 634 2,235 (1,009) 1,226 (43) 1,183 1,007 2011 2012 H1-13
Loans by geography, Jun-13 (HKD bn)

Banks Credit card Others Other consumer Corporate (property) Resi. mortgage Corporate (others) Outside HK 0 10 20 30 0.1% 0.2% 1.8% 5.6% 17.8% 19.2% 23.8% 31.4% 40 50
Funding mix
100% 80% 60% 40% 20% Deposits Debt/CDs Interbank
BANKS
0% Dec-09 4 Average interest earned 3 2 1 0 2009 2010 2011 2012 H1-13 Net interest margin Dec-10 Dec-11 Dec-12 Jun-13
Asset quality (%)

0.8 0.6 0.4 0.2 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Loan-loss coverage (RHS) Restructured loans/loans Impaired loans ratio 80 70 60 50 40 30 20 10 0

Others Mainland Macau Hong Kong 0 25 50 75 2% 10% 13% 75% 100


16 14 12 10 8 6 4 2 0 0.0 0.5 1.0 1.5 2.0 Net interest income 72% Fees/commissions Trading 13% 15% Other 1%
ROE (RHS) Tier 2 capital Tier 1 capital ratio
259
Asia Credit Compendium 2014 Wing Lung Bank Ltd. (A3/Neg; NR; NR)

We initiate coverage of WLB with a Negative credit outlook. This is underpinned by our expectation that the banks asset quality will deteriorate in the medium term and potentially more than some of its peers. Although WLBs reported asset-quality indicators are strong, since its acquisition by CMB, WLB has been more aggressive than most of its peers in growing its loan portfolio in the mainland. Strong loan growth has in turn affected the banks capital-adequacy and loan-to-deposit ratios. Despite its modest position in the Hong Kong market, WLBs credit profile is supported by its 100% ownership by CMB and the role that it plays in its parents overall business.

Closer links with its Chinese parent: Hong Kongs smaller banks are at a competitive disadvantage in a highly competitive and saturated market, because of balance-sheet constraints and their relative lack of pricing power. However, unlike independent small banks, WLB can capitalise on the support from and linkages with its parent, CMB. Since its acquisition, WLB has aligned its overall business with that of its parent. Although it accounts for only around 4% of CMBs assets, WLB plays a crucial role in offering offshore banking services to CMB s corporate customers. Modest position in Hong Kong, focusing on SMEs: Hong Kong accounts for around half of WLBs loan portfolio. However, with a loan market share of c.2%, WLB is a relatively small bank by Hong Kong standards. The banks Hong Kong loan portfolio is around one-third the size of Bank of East Asias and is skewed towards corporates, in particular SMEs. Retail loans accounted for c.21% of the banks Hong Kong loan portfolio (excluding trade finance) at end-June 2013. Exposure to real estate is high. Property development and investment accounted for 38% of Hong Kong loans at end-June 2013 and residential mortgages for a further 17%. Aggressive loan growth, particularly in the mainland: Since the change of ownership, WLB has been the fastest-growing bank among the Hong Kong banks under our coverage. The banks loan portfolio has increased by 2.3x since end 2009, compared with an average 1.65x for the banks under our coverage. Like ICBC Asia, WLBs strong loan growth has been driven by CMBs over all strategy. A large portion of WLBs loan growth is concentrated in the mainland, particularly in the corporate sector, following referrals from CMB. Exposure to the mainland accounted for 40% of total loans at end-June 2013, up from c.7% at end-2009. Strong reported asset-quality indicators, but likely to deteriorate: The banks reported asset-quality indicators are very strong, with an NPL ratio of 0.1% and strong loan-loss cover well in excess of 100%. However, the asset-quality indicators have probably been flattered by strong loan growth. They are also at cyclical lows. Given the banks aggressive loan growth in the mainland in recent years, we believe asset quality is likely to deteriorate. Robust profitability underpinned by strong loan growth and low provisions: Increased lending to the mainland where margins are wider has enabled WLB to maintain margins wider than its peers. This, coupled with low provisions and reasonable overheads, has led to WLB reporting slightly-better-than-average profitability. Excluding fair-value gains on investment properties of HKD 264mn, ROA and ROE in H1-2013 would have been 1.0% and 11.5%, respectively. Strong funding base, but loan growth having an impact: Customer deposits are WLBs main source of funding, accounting for 78% of total funding at end -June 2013. However, due to strong loan growth (particularly in H1-2013), the banks LDR has deteriorated, and at almost 87% at end-June 2013, was higher than average for the Hong Kong banks under our coverage. Below-average capital adequacy: WLBs capital-adequacy ratios are the lowest among the Hong Kong banks under our coverage. The banks Tier 1 capital ratio stood at 9.1% at end-June 2013, with an equity/assets ratio of 8.7%. The decline in the banks capital-adequacy ratio versus at end-2012 was driven mainly by strong growth in the banks loan portfolio. However, because of very strong loan growth, the bank has been reliant on capital support from its parent to maintain capitaladequacy ratios.
BANKS
Company profile
Wing Lung Bank (WLB) is a small Hong Kong bank, with total assets of HKD 211bn (USD 27bn) and a market share of loans of c.2% at end-June 2013. The bank was acquired in 2008 by China Merchants Bank (CMB, Baa3/Sta; BBB+/Sta; BBB/Sta), a mid-sized Chinese bank, with USD 620bn in total assets at end-June 2013. WLB is now a wholly owned subsidiary and has rapidly grown its mainland China business. Loans to the mainland now account for almost 40% of total loans. The banks customer base in Hong Kong is made up primarily of individuals and SMEs. In the mainland, its customer base comprises slightly larger corporates. The bank operates through a network of 51 branches in Hong Kong, the mainland and Macau.
260
Asia Credit Compendium 2014 Wing Lung Bank Ltd. (A3/Neg; NR; NR)
Summary financials
2010 Balance sheet (HKD mn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 1.2 14.6 46.1 1.1 5.4 11.2 1.1 0.5 82.3 69.3 9.3 9.6 14.9 1.4 12.8 39.8 1.0 5.1 13.5 1.2 0.3 105.9 76.2 9.1 9.6 13.9 1.5 11.3 42.2 1.0 (0.2) 13.3 1.2 0.1 280.2 77.1 9.6 10.0 14.9 1.4 14.2 43.6 1.0 2.6 14.5 1.3 0.1 300.5 86.8 8.7 9.1 13.8 17,687 137,075 72,236 24,776 124,325 104,250 10,862 4,304 12,750 1,529 1,396 2,925 (1,350) 1,575 (85) 1,578 1,349 21,142 163,851 87,746 24,710 148,907 115,140 12,873 14,622 14,944 2,089 1,723 3,812 (1,516) 2,296 (117) 2,257 1,867 23,070 178,792 101,855 20,302 161,710 132,094 12,358 11,488 17,083 2,504 1,609 4,113 (1,737) 2,375 4 2,561 2,133 27,218 210,936 125,190 29,613 192,507 144,195 20,240 21,007 18,429 1,360 860 2,220 (969) 1,251 (32) 1,496 1,284 2011 2012 H1-13

Credit card Other consumer Resi. mortgage Corporate (property) Corporate (others) For use outside HK 0 20 Deposits Debt/CDs 40 Interbank 0.3% 3.1% 8.8% 20.2% 21.5% 46.1% 60
Funding mix
100% 80% 60% 40% 20%
BANKS
0% Dec-09 4 3 Average interest earned 2 1 0 2009 2010 2011 2012 H1-13 Net interest margin Dec-10 Dec-11 Dec-12 Jun-13
Asset quality (%)

0.8 0.6 0.4 0.2 0 Dec-09 Dec-10 Dec-11 Dec-12 Jun-13 Impaired loans ratio Loan-loss coverage (RHS) 350 300 250 200 150 100 50 0

Others 5%
Mainland
40%
Hong Kong 0 25 50
54% 75


16 14 12 10 8 6 4 2 0 0.0 0.5 1.0 1.5 Net interest income 61% Other 17% Trading Fees/commissions 7% 14%
ROE (RHS)
Tier 2 capital Tier 1 capital ratio
261
Asia Credit Compendium 2014 Woori Bank (A1/Neg; A-/Sta; A-/Sta)


Wooris credit profile benefits from its position as the secondlargest commercial bank in Korea and its strong corporate banking franchise. However, some of its fundamentals, particularly on the asset-quality and profitability fronts, have tended to be weaker than those of its peers because of aboveaverage exposure to weaker corporate sectors and aboveaverage provisions. Despite the asset-quality deterioration in 2013, our Stable outlook is underpinned by the expectation that the banks fundamentals will not deteriorate further in 2014. Our view also takes into account remaining vulnerabilities in some large corporate sectors and prolonged delay of the banks privatisation plans.

Strong market position: WFH is Koreas largest financial-services group. If the operations of Kyongnam Bank and Kwangju Bank were included, Woori would be slightly larger than Kookmin Bank by total assets. The bank has strong relationships with key corporate clients, and its market share in the corporate segment is higher than its 13-15% overall market share. Loans to large corporates represented 13% of KRW loans at end-September 2013. Higher chances of privatisation, but not a foregone conclusion: The government of Lee Myung-Bak was unsuccessful in selling WFH as a group. The new government of Park Geun-Hye aims to break up the group and sell Woori in 2014 after selling Kyongnam Bank and Kwangju Bank and other subsidiaries. This approach should increase the likelihood of a privatisation going through. However, because of its size and prominence in the Korean banking sector, the universe of potential bidders for Woori is likely to be limited, in our view. Weaker-than-average asset quality: Wooris risk appetite has been higher than some peers in the past, in our view. Woori has the highest relative exposure to the SME sector (39% of KRW loans at end-September 2013). It has also had higherthan-average exposure to troubled large corporate sectors such as construction, shipbuilding and shipping. Very rapid loan growth in the run-up to the 2010 economic slowdown, coupled with higher-than-average exposure to weaker sectors, has led to worse-than-average asset-quality indicators. As a result, the banks NPL ratio stood at 3% at end-September 2013 by far the highest among the big four banks while its loan-loss coverage was the lowest, at 85%. Although some large corporate sectors remain weak, we believe headline reported assetquality indicators should not deteriorate considerably in 2014. Spin-off of credit card business: In April 2013, Woori spun off its credit card business, which accounted for c.2% of its loans at end-March 2013. As a result, the banks business mix is now more comparable to that of its peers. (The credit card units of the other large Korean financial groups are separate legal entities owned by the holding companies.) However, the spin-off of the credit card unit led to a reduction in the banks NIM. Below-average earnings generation capacity: The profitability indicators of all major Korean commercial banks continue to be hampered by stagnant loan growth, relatively loan-loss provisions, tightening margins amid a low interest rate environment, and regulatory-driven costs. Although Woori has moderate earnings generation capacity at the pre-provision level, bottom-line profitability has tended to be below average because of higher risk costs. Loan-loss provisions ate up 75% of the banks pre-provision profits for 9M-2013. As a result, the bank reported net income of KRW 0.4tn for 9M-2013 (ROA of 0.2%). We believe profitability is unlikely to improve significantly in 2014, as further provisions might be required to reach regulatory-guided NPL ratios. Funding position: The banks overall LDR is high by international st andards (118% at end-September 2013) and is above the average for its peer group. Wooris gross foreign-currency funding requirements represented 11% of its total funding at end-June 2013, marginally higher than the 9% average for the big four banks. Sound capital adequacy: Despite their relatively low profits, the lack of loan growth has helped Korean banks gradually boost their capital-adequacy indicators in recent years. Wooris capital-adequacy indicators are in line with the average for the large Korean commercial banks. The banks Tier 1 capital ratio stood at 12% at end-September 2013, and its equity-to-assets ratio was 7.5%.
262
BANKS
Company profile
Woori Bank (Woori) is Koreas thirdlargest commercial bank, with total assets of KRW 241tn (USD 224bn) at end-September 2013 and estimated loan and deposit market shares of 13% and 15%, respectively. The bank, created in 1999 by the merger of two banks, offers retail and corporate banking services through a network of 993 domestic branches. The bank is 100% owned by Woori Finance Holdings (WFH) and is the groups key entity, accounting for c.72% of WFHs total assets at endSeptember 2013. WFH is also the parent of Kyongnam Bank and Kwangju Bank, two smaller regional banks. WFH was 57% owned by the government-run Korea Deposit Insurance Corporation (KDIC) at end-September 2013.
Asia Credit Compendium 2014 Woori Bank (A1/Neg; A-/Sta; A-/Sta)

Summary financials
2010 Balance sheet (KRW bn) Total assets (USD mn) Total assets Loans Investments Total liabilities Deposits Interbank Debt Equity Income statement (KRW bn) Net interest income Other income Total income Overheads Pre-provision profits (PPP) Impairments Profit before tax Net income Key ratios (%) Net interest margin Fee income/income Costs/income Costs/average assets Provisions/PPP ROE ROA Impaired loans/loans Loan-loss coverage Loan/deposit Equity/assets Tier 1 capital Total capital 2.4 8.6 36.8 1.0 63.4 8.0 0.5 3.3 70.1 102.0 6.2 11.4 14.7 2.5 7.2 36.3 1.1 40.6 12.8 0.9 1.6 109.2 117.0 7.5 10.7 13.7 2.3 7.9 43.3 1.1 50.3 7.9 0.6 1.7 111.8 119.1 7.5 11.4 14.7 1.8 15.1 48.1 1.1 74.5 3.1 0.2 3.0 84.7 117.5 7.5 12.0 15.3 5,063 1,065 6,128 (2,256) 3,872 (2,456) 1,416 1,108 5,726 1,303 7,029 (2,553) 4,476 (1,817) 2,659 2,069 5,612 689 6,301 (2,728) 3,573 (1,798) 1,775 1,449 3,493 611 4,104 (1,970) 2,134 (1,589) 545 427 100% 80% 60% 40% 20% 202,670 228,206 162,162 36,851 214,016 158,970 18,104 23,989 14,191 210,397 242,472 191,909 41,389 224,345 164,092 19,174 19,812 18,126 232,289 247,248 200,049 38,682 228,682 168,008 17,446 17,842 18,566 223,829 240,536 198,872 32,081 222,395 169,230 14,355 15,406 18,141 Large corps. Resi mortgages Consumer SMEs 0 13% 21% 23% 39% 10,000 20,000 30,000 40,000 50,000 60,000 Deposits Borrowings Debt 2011 2012 9M-13

Others 4%
Funding mix
BANKS
Asset quality (%)

4 3 2 1 0 Dec-09 20 15 10 5 0 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 ROE (RHS) Tier 2 capital Dec-10 Dec-11 Dec-12 Sep-13 25 20 15 Tier 1 capital ratio 10 5 0 Loan-loss coverage (RHS) NPL ratio 120 100 80 60 40 20 0

Other Cash and due from banks Investment securities Customer loans 0 50,000 100,000 150,000 2% 2% 13% 83% 200,000

Other 3%
Fees/ commissions Net interest income 0
15%
81% 1,000 2,000 3,000 4,000
263
BANKS
264
Credit analysis High-grade corporates
Asia Credit Compendium 2014 Axiata Group Bhd. (Baa2/Sta; BBB+/Sta; NR)

Axiata generates strong and stable cash flow at Celcom, and XL is likely to turn FCF-positive in the next two to three years. Its exposure to underpenetrated markets such as Bangladesh, Sri Lanka and Cambodia will also ensure strong revenue growth. While Axiata generates large annual CFO of c.MYR 6.5bn, adequate to meet budgeted capex of MYR 4.5bn, its high dividend payouts of MYR 2bn will moderate balance-sheet strength. Leverage is also set to increase to c.2.3x following the Axis acquisition. However, we think Axiatas metrics remain comfortable for its ratings and will gradually improve as capex requirements in Indonesia decrease. We therefore maintain outlook. our Stable credit

Stable cash-flow generation at Celcom: Celcom is Malaysias second-largest operator, with a 35% market share. It is focused on voice, data, mobile broadband and enterprise solutions. It operates in a mature market and faces tepid growth in voice and SMS revenue. However, it is experiencing strong growth in data revenue (13% y/y in 9M-2013), led by rising smartphone and broadband penetration, the key driver of top-line growth. Celcoms EBITDA constitutes 47% of group EBITDA, and it generates significant FCF and has low leverage (1.4x). While Celcom will continue to invest in the LTE rollout and the digital space to enhance data-related revenue, we do not expect a significant spike in capex, and we expect the company to remain FCF-positive in the next couple of years. Margin pressure at XL: XL is the third-largest player in Indonesia, with a 19% market share. It operates in a highly competitive market amid price competition, declining ARPUs and a shift in revenue mix from voice and SMS to data. XL is therefore expanding its 3G coverage and creating differentiated content to drive revenue, and saw a 18% rise in data revenue in 9M-2013. However, its EBITDA (in MYR terms) declined 19% due to lower margins from data services and a weakening IDR. Also, XLs planned acquisition of Axis for an enterprise value of USD 865mn will dilute its margins and increase leverage to more than 3.0x from 2.0x. That said, XL will subsequently benefit from a reduction in capex following the acquisition of Axis' spectrum, and annual capex will likely fall to IDR 7tn in 2014 from IDR 10tn in 2012. XLs importance to Axiata has also increased, as XL resumed dividend payments in 2011 (Axiatas share was MYR 240mn in 2012). Axiata will extend a shareholder loan to XL to fund part of the Axis acquisition. Strong growth in other markets: Sri Lanka, Bangladesh and Cambodia are underpenetrated markets. Axiatas regional subsidiaries are experiencing strong growth, although their contributions to the groups cash flow are small. Dialog, the largest player in Sri Lanka, is experiencing strong growth in the mobile segment: EBITDA grew 10% in 9M-2013. Its leverage has also improved, with debt/EBITDA falling to 1.2x in 9M-2013 from 2.6x in 2009. Robi, the third-largest operator in Bangladesh, is also growing strongly and is transforming from a regional to a national player. Regulatory uncertainty in Bangladesh has been resolved after the 2G and 3G licence auction. Robis financials have improved on stronger EBITDA and capital injections by Axiata. In Cambodia, Axiata is now the second-largest operator following the merger with Latelz, which has led to a strong turnaround in profitability. In India, while Idea has delayed its proposed stock sale, Axiata may be called on to provide support for a spectrum licence auction in 2014. That said, the subsidiaries are likely to continue to raise debt on a non-recourse basis. Financial position is moderate: Axiata has been FCF-positive since 2009, and will generate operating cash flow of c.MYR 6.5bn, sufficient to fund capex needs of MYR 4.5bn. However, increased shareholder returns and aggressive acquisitions could affect its financial metrics. Axiata has progressively increased its dividend payout to MYR 2.0bn (payout ratio of 70%); it also paid a special dividend of MYR 1.0bn in 2012. Consolidated leverage will likely moderate to c.2.3x from 1.8x following the Axis acquisition. Axiata may also look for other acquisitions, as it has a large cash balance of MYR 3.1bn at the holdco level. Barring another acquisition, Axiatas metrics will remain comfortable for its ratings. It also plans to spin off its tower assets in Malaysia, Sri Lanka and Bangladesh in the next year or two. Separately, we estimate that only 17% of its debt is at the holdco level, leading to subordination risks for bondholders. Government link provides support: Axiata is one of Khazanahs five regional champions. Government entities fully subscribed to Axiatas USD 1.5bn rights issue in 2009, and Khazanah underwrote a further 20% of the issuance.
HG CORPORATES
Company profile
Axiata Group Bhd. (Axiata) is one of Asias leading wireless operators. It was set up in April 2008, when the domestic and international wireless businesses of Telekom Malaysia Bhd were de-merged to form a separate entity. It operates in highgrowth markets and has over 239mn subscribers in nine countries. Key investments include Celcom in Malaysia (wholly owned), XL in Indonesia (66.5% stake), Dialog in Sri Lanka (85%), Robi in Bangladesh (70%), and Smart in Cambodia (90%). It also holds minority stakes in M1 in Singapore (28.8%), Idea Cellular in India (19.9%) and Samart I-Mobile in Thailand (24.4%). The Malaysian government owns an effective 59.6% stake in Axiata through Khazanah Nasional Bhd. (38.9% stake) and other entities.
266
Asia Credit Compendium 2014 Axiata Group Bhd. (Baa2/Sta; BBB+/Sta; NR)
Summary financials
2009 Income statement (MYR mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (MYR mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (MYR mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 24.1 41.4 8.5 40.4 2.2 1.9 38.4 6.1 29.6 45.7 10.0 36.3 1.5 0.6 56.3 10.6 2.1 44.8 12.4 34.6 1.6 0.7 40.2 11.4 3.1 42.6 12.0 36.5 1.7 0.6 38.3 10.5 (0.9) 41.3 11.3 39.2 1.8 0.8 25.2 10.8 4,726 (3,280) 1,446 (0) 6,013 (2,838) 3,175 (0) 5,902 (5,064) 839 (1,297) 6,934 (5,503) 1,431 (2,086) 4,428 (4,061) 367 (2,436) 5 4 3 2 Celcom 1 0 -1 2009 2010 2011 2012 9M-2013 2,006 37,028 12,323 10,317 18,880 6,277 38,101 10,684 4,406 20,279 6,617 41,106 11,459 4,843 21,675 7,906 42,931 12,658 4,752 22,007 7,097 43,241 13,416 6,319 20,783 8 7 6 XL Robi Dialog 13,312 5,510 (896) 2,666 1,653 15,621 7,143 (671) 3,206 1,770 16,290 7,294 (638) 3,577 2,346 17,652 7,522 (718) 3,762 2,513 13,859 5,729 (525) 2,806 1,974 8 6 4 2 0 2009 2010 2011 2012 9M-2013 Celcom 2010 2011 2012 9M-13
Revenue breakdown (MYR bn)

20 18 16 14 12 10 XL Others Robi Dialog
EBITDA breakdown (MYR bn)
HG CORPORATES
Number of subscribers (mn)

250 M1 200 Idea 150 Other
Position of group companies, Jun-13

Subsidiary Celcom XL Robi Dialog Smart Idea M1 Country Malaysia Indonesia Bangladesh Sri Lanka Cambodia India Singapore Market share (%) 35 19 21 38 30 11 26 Market position 2 3 3 1 2 3 3
100
Robi Dialog
50
XL Celcom 2009 2010 2011 2012 9M-2013
0
267
Asia Credit Compendium 2014 Beijing Enterprises Holdings Ltd. (Baa1/Sta; A-/CWN; NR)
Analyst: Bharat Shettigar (+65 6596 8251)

BEH has a monopoly in gas distribution in Beijing. While uncertainty surrounding the tariff adjustment process poses some risk, BEHs backward integration has ensured steady margins. The beer business is more competitive, although the focus on key brands should ensure steady earnings growth in 2014. The companys leverage has increased in recent years, and we do not expect a material improvement in balance-sheet metrics given its HKD 6-7bn of annual capex and dividend payout ratios of around 30%. While its government links will provide support, large acquisitions (especially a China Gas stake increase) or non-core investments would be creditnegative. We maintain our Stable credit outlook for now.

Gas business: Beijing Gas has a monopoly on gas distribution in Beijing, and is set to grow strongly due to the local governments plans to replace coal with natural gas in the city's power plants and heating facilities. Distribution volumes grew 17.2% y/y to 4.7bcm in H1-2013, and revenue grew 21.6% to HKD 12.5bn. However, it faces regulatory risks given uncertainty surrounding tariff adjustments (especially in the residential segment). Also, a formula-based cost pass-through mechanism is unlikely to be implemented in the near term. While Beijing Gas has maintained its gross margin at 12.5-14.5% since 2010, its expansion in 10 provinces outside Beijing could lead to execution risks. Also, it recently acquired a 22% stake in China Gas, which has lower profitability and a more leveraged capital structure. It has backward-integrated through a 40% JV with CNPC for transmission pipelines, which generates steady cash flow, but Beijing Gas share of the transmission segments future capex will be limited. Brewery operations: Yanjing Beer is among Chinas largest beer co mpanies (market share of more than 10%) and is dominant in Beijing (market share of c.85%). However, the business has faced intense competition. Owing to the economic slowdown in 2012, volumes declined 1.8% and PBT margin declined by 530bps to 7.1% in 2012. To counter this, the company has promoted mid- to highend products and focused on its top four brands (c.89% of volume). This helped it register volume growth of 5.7% y/y and improved margins in H1-2013. It targets volume of 8bn litres in 2015 (2012: 5.4bn litres) and has lined up large capacity expansions (HKD 1.1bn capex in H1-2013). Its CNY 1.64bn equity raising in H12013 indicates a prudent financial strategy. Water treatment and sewage: BE Water has developed into a leading water treatment company in China, with total designed capacity of 12.6mt a day across 204 plants as of June 2013. In H1-2013, it posted a 97% y/y increase in revenue to HKD 2.76bn. However, BE Water has a highly leveraged capital structure (debt/EBITDA of 11.2x in H1-2013) owing to its BOT project model, which involves large upfront investment. Given high capex requirements, BE Water will need to raise further debt in 2014-15, although it is unlikely to call on BEH for financial support. Leverage will remain high: While BEHs cash-flow volatility is low, high growth in recent years has led to a secular increase in debt (debt/capital is currently 31.9%, versus 22% in 2009; debt/EBITDA is 4.2x, versus 2.4x). Its capital structure improved slightly in H1-2013 following Yanjing Beers equity raising and the conversion of convertible bonds. We believe the acquisition of the China Gas stake in H2-2013 with HKD 6.2bn of equity (and HKD 2bn of cash) will further improve the debt-to-capital ratio. We expect HKD 6-7bn of annual capex in 2013-14 and a dividend payout of c.30%. While the companys liquidity was solid as of June 2013, with HKD 12.9bn of cash and equivalents, we expect leverage to remain high at 45x in 2014. We see the company as a high-BBB credit; large acquisitions (especially a China Gas stake increase) or non-core investments would be negative for its credit profile. Government linkage: The Beijing municipal government restructured BEH from 2005-07, injecting Beijing Gas into BEH and spinning off some non-core assets. This improved the overall business and financial profile. Also, the HKD 6.2bn equity injection for the China Gas stake indicates the parents ongoing support. However, the type and quality of future asset injections could pose risks. For example, in 2011, BEH invested HKD 1.5bn in Beijing Development (HK) Ltd., a small real-estate company with a poor financial profile.
268
HG CORPORATES
Company profile
Beijing Enterprises Holdings Ltd. (BEH), an investment holding company, is the Beijing municipal governments main listed vehicle for raising capital to fund public utility projects. It was set up and listed in Hong Kong in 1997, and its asset portfolio has changed significantly since then. BEH now focuses on three key businesses: pipeline gas operations (70.5% of pre-tax profit, conducted through wholly owned Beijing Gas), brewery (31.8%, through subsidiaries under 80%owned Yanjing Beer), and water and sewage treatment (9.2%, through subsidiaries and 49.8%owned Beijing Enterprises Water). BEH is 58% owned (directly and indirectly) by Beijing Enterprises Group, which is in turn 100% owned by the Beijing municipal government and supervised by Beijing SASAC.
Asia Credit Compendium 2014 Beijing Enterprises Holdings Ltd. (Baa1/Sta; A-/CWN; NR)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 23.8 15.5 6.9 22.0 2.4 0.3 31.1 12.6 4.3 14.2 8.1 23.4 2.2 (0.3) 31.0 15.1 (0.5) 12.8 4.1 30.9 4.8 1.8 8.7 6.3 (6.8) 10.2 4.5 35.9 5.3 2.9 10.8 4.6 (0.1) 12.5 5.2 31.9 4.2 2.1 NA 5.2 0 2009 2010 2011 2012 H1-2013 0 1 2 3 8 6 4 2 2,730 (3,107) (377) (942) 6,568 (5,627) 940 (1,263) (1,573) 4,384 4,730 NA NA NA 4 5 Revenue (RHS) 9,486 59,105 11,024 1,538 39,017 14,447 67,029 12,491 (1,956) 40,936 12,579 77,355 20,248 7,668 45,197 12,237 89,508 26,624 14,387 47,640 12,937 97,197 25,046 12,109 53,388 3 2 1 1 0 2008 2009 2010 2011 2012 H1-2013 0 2 24,208 3,754 (367) 3,605 2,399 27,613 3,914 (377) 3,795 2,639 30,472 3,895 (664) 4,249 2,776 35,570 3,629 (1,092) 4,202 3,270 20,550 2,575 (553) 2,794 2,062 2010 2011 2012 H1-13
Gas business (bcm LHS, mn RHS)

9 8 7 6 5 3 4 Subscribers (RHS) 4 Gas volumes 5 6
Brewery business (bn litres LHS, HKD bn RHS)

6 Volume 16 14 12 10
(7,967) (10,355) (9,540) (1,179) (5,971) (1,149)
HG CORPORATES
Revenue breakdown (HKD bn)

40 35 30 25 20 15 10 5 0 2009 2010 2011 2012 H1-2013
Pre-tax profit breakdown (HKD bn)

Brewery Expressway & toll road Piped gas Sewage & water treatment Others Brewery Expressway & toll road
Piped gas Sewage & water treatment Others
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5
2009
2010
2011
2012
H1-2013
269
Asia Credit Compendium 2014 Bharat Petroleum Corp. Ltd. (Baa3/Sta; NR; BBB-/Sta)

BPCL has an important position in Indias petroleum sector and enjoys majority state ownership. However, the governments discretion to set retail fuel prices and the absence of a transparent mechanism to compensate BPCL for losses have led to volatile cash flow and high debt levels. Given the upcoming elections and Indias weak fiscal position, large fuel price increases are unlikely, and BPCLs compensation may remain ad hoc in the near term. The company is implementing a large investment programme (INR 400bn over FY14-FY18), and its leverage will remain relatively high. That said, its growing upstream E&P portfolio will provide earnings diversity in the long term. We maintain our Negative credit outlook on BPCL.

Fuel-price regulation: Indias diesel and cooking fuel prices are regulated by the government, and companies such as BPCL therefore face under -recovery on their sales. BPCL is compensated through discounts from upstream companies on crude oil purchases (52.6% of the total in H1-FY14) and government subsidies (42.3%), while the remainder (5.1%) is borne by the company. In September 2012, the government raised diesel prices by 12%, and BPCL has been allowed to increase diesel prices by INR 0.5 per litre every month since January 2013. However, sharp INR depreciation in 2013 has kept BPCLs under-recoveries high. With India heading towards national elections in 2014 and inflation still high, it is unclear whether fuel prices will be raised significantly in the near term. Also, given the governments tight fiscal position, it may not fully compensate BPCL (in FY12 FY13, BPCL was almost fully compensated). BPCLs earnings and cash flow will remain exposed until a viable and transparent fuel-pricing or subsidy-sharing formula is established. Growing E&P portfolio: BPRL has acquired minority stakes in upstream assets (11 in India and 14 overseas), which are in various stages of exploration. Its key asset is the 10% stake in Mozambiques Rovuma basin (gas reserves of 65tcf), which is valued at over USD 2.5bn. BPCL is not directly involved in the E&P segment and has tied up with upstream companies such as ONGC, Petrobras and Anadarko, which act as operators. Given continuing investment in development capex (BPCLs share will be c.INR 60-80bn during FY14-FY18), the upstream assets will not generate large cash inflows in the next few years. However, BPCL has the option of monetising some of these investments. Large capex plans: BPCL is in the midst of a large capex programme. It is expanding the Kochi refinerys capacity to 15.5mtpa from 9.5mtpa (INR 140bn), undertaking operational improvements at the Mumbai refinery (INR 30bn), and investing in its marketing infrastructure (INR 46bn). Annual spending in the next few years will be significantly higher than the INR 56bn spent in FY13 and will lead to continuous negative FCF. BPCL expects capex of INR 300bn in the refinery segment over the next five years, and c.INR 100bn of spending on other businesses such as upstream E&P. Financials: BPCLs GRMs improved in FY13 (USD 4.97/bbl) and H1 -FY14 (USD 4.38/bbl) due to better product cracks, improvements in the Kochi refinery, and the recovery of the 3% entry tax on crude oil purchases for the Mumbai refinery. With refining margins in Asia likely to be under pressure on account of regional overcapacity, we do not see further improvements in FY14-FY15. The ad hoc nature of subsidy payments to BPCL creates spikes in its borrowing requirements and stress in its liquidity position. In FY13, BPCLs gross debt increased by INR 30bn to INR 331.6bn; c.62% of this was ST working-capital debt. The companys leverage was 3.3x and interest coverage was 8.8x in FY13. If the current fuel pricing mechanism continues, debt levels will increase further and leverage will remain high. Given its INR 50.2bn of oil bonds and easy access to local bank funding, we do not expect BPCL to face major liquidity problems. Strategic importance and government support: BPCL accounts for 15% of Indias refining capacity and 23% of its petroleum product sales. It is strategically important, given its role in implementing the governments socio -economic policies and reducing Indias reliance on crude oil imports through upstream investments. The government is likely to maintain a minimum ownership of 51% in the company and has a track record of compensating BPCL (though not always in a timely and adequate manner) and ensuring a reasonable level of profitability.
270
HG CORPORATES
Company profile
Bharat Petroleum Corp. Ltd. (BPCL) is a downstream petroleum company in India, specialising in oil refining and marketing. It has investments in four refineries Mumbai (100%, 12mtpa), Kochi (100%, 9.5mtpa), Numaligarh (61.5%, 3mtpa) and Bina (50%, 6mtpa) and accounts for c.15% of Indias refining capacity. In FY13, its throughput (excluding Bina) was 25.7mt, and it accounted for c.23% of the countrys petroleum product sales. BPCL has also invested in the E&P sector through its 100%owned subsidiary Bharat PetroResources Ltd. (BPRL), which has investments in India, Brazil, Australia, Mozambique, Indonesia and East Timor. The Indian government owns 54.9% of BPCL, while other state-owned entities own a further 7.7%.
Asia Credit Compendium 2014 Bharat Petroleum Corp. Ltd. (Baa3/Sta; NR; BBB-/Sta)
Summary financials
FY10 Income statement (INR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (INR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (INR bn) Net operating cash flow Capex & investments Free cash flow Dividends (16.5) (54.4) (70.9) (3.0) 21.9 (43.4) (21.5) (5.5) (3.8) (42.8) (46.6) (5.6) 33.0 (55.6) (22.6) (4.3) NA NA NA NA 4 EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 0.3 4.9 11.6 63.9 4.4 2.6 8.6 5.4 (5.7) 3.7 9.3 60.5 4.4 2.9 5.6 5.9 38.5 3.8 12.6 64.1 3.8 2.9 10.3 7.2 24.9 4.1 15.3 65.0 3.3 2.5 12.0 8.8 NM 2.2 9.1 48.8 3.2 1.8 NA 3.1 1 1.0 2 2.0 3 3.0 4.0 5 108.5 617.8 266.6 158.1 150.8 80.9 667.9 250.4 169.5 163.5 73.6 778.1 301.5 227.9 169.2 80.7 795.6 331.6 250.9 178.5 71.8 684.9 168.9 97.1 177.2 6 EBITDA margin GRM (RHS) 0 FY10 FY11 FY12 FY13 5 Mumbai 1,238.2 1,537.6 2,121.4 2,421.8 61.0 (11.2) 27.7 16.3 57.5 (9.8) 28.3 16.3 79.7 (11.1) 16.0 7.8 99.5 (11.4) 32.2 18.8 1,205.2 26.4 (8.5) 15.2 10.8 FY11 FY12 FY 13 H1-FY14*
Refinery throughput (mt)

30
25
Numaligarh
20 Kochi
15
10
EBITDA margin and GRM (% LHS, USD/bbl RHS)

6.0
5.0
HG CORPORATES
0 FY10 FY11 FY12 FY13 H1-FY14
0.0
Under-recovery compensation (INR bn)

450 400 350 300 250 200 150 100 Govt. subsidy Net underrecovery
Capex breakdown (INR bn)

60
50 E&P 40
30
20
Refining
10 50 0 FY10 Upstream discount FY11 FY12 FY13 H1-FY14
0 FY10 FY11 FY12 FY13
Note: Financial year ends 31 March; *data on a standalone basis; Source: Company reports, Standard Chartered Research
271
Asia Credit Compendium 2014 China Merchants Holdings (International) Co. Ltd. (Baa2/Neg; BBB/Neg; NR)

CMHI has a diversified portfolio of port assets in Greater China, with a long track record of steady earnings and a high market share. Its bonded logistics and cold chain operations are growing steadily and will become important contributors to cash flow. That said, the company has made acquisitions (mostly overseas) worth c.HKD 10bn since H2-2012, which have primarily been debt-funded. CMHI will face execution risks in some of these ventures, and with cash flow from the projects expected only in 2014-15, leverage will likely remain elevated in 2014. While the CMG ownership is a positive, another large acquisition would pressure CMHIs ratings. We revise our outlook on CMHI to Negative from Stable.

Excellent portfolio of port assets in China: CMHI is Chinas largest port operator: its assets handled around 32% of Chinas container throughput in 2012. It has strong market positions in Shanghai, Shenzhen, Hong Kong, Ningbo, Qingdao and Tianjin, all of which are among the worlds top 10 ports. Its well -diversified portfolio generates relatively stable CFO and dividends, and will mitigate the impact of the gradual migration of activity from the Pearl River Delta region and intense competition on account of overcapacity in some regions. Container throughput at CMHIs Greater China ports increased by 5% y/y In 9M-2013, and bulk cargo volume rose 5.2% y/y. We expect container throughput growth at CMHI's ports to be around 5-6% in 2014, although margins will be under pressure due to rising labour costs and higher fuel charges and taxes. Aggressive overseas expansion could lead to risks: CMHI has been on an aggressive overseas expansion drive since H2-2012. It paid EUR 400mn for a 49% stake in Terminal Link SAS, which has 15 terminals in eight countries (throughput of 5mn TEU in H1-2013). It paid EUR 150mn for a 50% stake in a terminal in Togo (scheduled to start operations in 2014) and USD 185mn for a 23.5% stake in Port de Djibouti (throughput of 522,000 TEU in 9M-2013). Separately, the first phase of the 85%-owned Colombo project became operational in H2-2013, and the full project will come onstream in 2014 (HKD 1.5bn spent until June 2013). While these overseas investments will diversify CMHIs asset portfolio, they have been largely debt-funded. CMHIs leverage levels have therefore increased, and cash flow from most of the projects is expected only in 2014-15. Also, CMHI may face political and execution risks in some of these overseas ventures. Non-port operations: CMHIs non-port businesses comprise logistics services (bonded logistics and cold chain operations) and port-related manufacturing (mainly container boxes). The non-port businesses generated EBIT of HKD 444mn and contributed 14% of CMHI's total EBIT in H1-2013. Complex group structure: CMHI does not have controlling interests in most of its port assets; hence, they are equity-accounted and are not fully reflected on the balance sheet. That said, it is adopting a strategy of majority ownership or holding operational rights in its new investments. In the past, it consolidated its investments in Shekou Container Terminal, Haixin port, Mawan port and China Nanshan. In 2012, it deconsolidated China Nanshans non -port businesses and increased its stake in Shenzhen Chiwan Wharf by 25% for CNY 1.8bn. We expect CMHI to increase its stake in the Shanghai port (currently: 24.5%) in the long term. Financial metrics have deteriorated: CMHI consistently posted FCF from 200811 and has maintained its Baa2/BBB ratings since 2005. However, acquisitions of c.HKD 10bn in H2-2012 and H1-2013 were largely debt-funded (through a 3.8% USD 1bn loan from CMG), and CMHIs debt increased to HKD 26.6bn in H1 -2013 from HKD 18.8bn at end-2012. We expect EBITDA to increase by 6-8% y/y in 2014 on account of throughput growth and incremental earnings from the overseas operations. While the pace of capacity expansion at the China ports will be slow, CMHIs overseas investments will lead to annual spen ding of c.HKD 5bn. Given dividend payout ratios of 40-45%, we do not see a material improvement in CMHIs financial metrics in 2014; another large acquisition/investment would pressure CMHIs ratings. Strong parentage: CMHI has a long history of independent management, and its operations are largely commercially driven. That said, it has received support from CMG in the form of asset injections, low-interest-rate financing, and subscription to scrip dividends instead of cash dividends.
272
HG CORPORATES
Company profile
China Merchants Holdings (International) Co. Ltd. (CMHI) has interests in a number of ports, including Hong Kong and Shenzhen in the Pearl River Delta; Ningbo and Shanghai in the Yangtze River Delta; and Qingdao and Tianjin in the Bohai Rim. It has also expanded outside of Greater China, with a 49% stake in Terminal Link SAS (15 terminals in eight countries) and projects in Sri Lanka, Nigeria, Togo and Djibouti. In 2012, its ports had container throughput of 60.2mn TEU and bulk cargo throughput of 327mt. It also has a 25.5% stake in China International Marine Container Group Co. Ltd. (CIMC), the worlds largest container manufacturer. CMHI is 54.7% owned by China Merchants Group Ltd. (CMG), a conglomerate that is wholly owned by SASAC.
Asia Credit Compendium 2014 China Merchants Holdings (International) Co. Ltd. (Baa2/Neg; BBB/Neg; NR)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios 2,084 (1,224) 860 (1,585) 2,173 (1,275) 898 (1,277) 3,623 (2,383) 1,240 (3,242) 4,893 (6,618) (1,725) (2,670) 1,741 (1,767) (26) (1,196) 300 250 3,206 52,468 14,459 11,253 35,619 6,352 78,351 22,272 15,920 49,371 6,811 87,086 24,726 17,915 54,760 4,192 77,466 18,822 14,630 53,682 4,059 86,436 26,597 22,538 53,026 10 0 2009 2010 2011 2012 H1-2013 3,588 3,261 (703) 3,735 3,238 5,811 4,347 (825) 7,238 5,876 9,470 6,469 (1,148) 7,686 5,569 11,022 6,447 (1,434) 6,871 3,818 3,745 2,963 (592) 2,736 1,935 30 20 Hong Kong PRD ex-HK YRD 50 40 Others 2010 2011 2012 H1-13 70 60
Container throughput (mn TEU)
Bulk and general cargo throughput (mt)

350
HG CORPORATES
EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x)
(15.7) 90.9 5.0 28.9 4.4 3.5 7.3 4.6
33.3 74.8 5.5 31.1 5.1 3.7 9.7 5.3
48.8 68.3 6.7 31.1 3.8 2.8 7.0 5.6
(0.3) 58.5 6.8 26.0 2.9 2.3 9.1 4.5
(7.0) 79.1 6.2 33.4 4.3 3.6 NA 5.0
200 150 100 50
Others
Shanghai
PRD 0 2009 2010 2011 2012 H1-2013
Operating profit by segment (HKD mn)

9,000 8,000 7,000 6,000 5,000 4,000 3,000 Ports 2,000 1,000 0 2009 2010 2011 2012 H1-2013
Debt profile, Jun-13

Other operations Bonded logistics & cold chain 100% 90% 80% 70% 60% Port-related mfg. 50% 40% 30% 20% 10% 0% Interest rate Category Currency Duration Fixed CMG loan CNY 1-2Y Bonds Others 2-5Y Floating Bank loan >5Y
<1Y
273
Asia Credit Compendium 2014 China National Petroleum Corp. (Aa3/Sta; AA-/Sta; A+/Sta)

CNPCs large and highly profitable upstream operations support the companys excellent business risk profile. Its dominance across Chinas entire oil and gas value chain leads to very high strategic importance. Also, earnings at CNPCs downstream operations, which previously faced pressure, will likely improve in 2013-14 on account of reforms in refined product and natural gas prices. That said, the companys solid financial metrics could deteriorate gradually as it undertakes large capex and aggressive overseas expansion. We expect debt/capital to rise from 26% to 30% in the coming years, although this is unlikely to put pressure on CNPCs ratings. We therefore maintain our Stable outlook on the credit.

Excellent E&P operations: E&P is CNPCs most important business, accounting for 45.5% of assets, 55.1% of capex and most of its pre-tax profit in 2012. CNPC is among the worlds top five integrated oil and gas companies. While it has historically concentrated on China, it has expanded to 31 countries, and 8% of its reserves and 23% of its production came from overseas fields in 2012. It has also diversified its reserve base, and natural gas accounts for 49% of its reserve portfolio. Its three-year average reserve replacement rate is high at 115%, and its reserve life is moderate at 13.9 years. PetroChinas three-year F&D cost is low at USD 16/boe, although it is rising due to maturing oilfields and overseas expansion. Profitability in downstream operations to improve: CNPC has integrated downstream operations with China's second-largest refining and petrochemical capacity and its largest natural gas/oil pipeline network. While CNPCs crude oil self-sufficiency ratio of over 100% provides a hedge against oil prices, the government previously regulated refined product prices, which led to poor earnings in the refining segment. That said, the government has allowed product prices to be changed every 10 days (instead of 22) in 2013, without a 4% floating band for oil price changes. Hence, the companys pre-tax losses in the refining segment (CNY 47.3bn in 2012) narrowed in H1-2013. In the gas pipeline business, while the fixed transmission tariff leads to strong cash flow, wholesale tariffs are determined by the government, and PetroChina suffered losses of CNY 42bn in 2012 on sales of imported gas (c.25% of total). Average city-gate tariffs were hiked by 15.4% in July 2013, and the government expanded the use of a market-based pricing mechanism, which will narrow losses on imported gas sales. Strategic importance: Of the entities owned by SASAC, CNPC is the largest in terms of assets and the second-largest in terms of revenue. CNPC accounts for 70% of Chinas petroleum reserves and 60% of its oil and gas production, and is the largest importer of crude oil and refined products. Given its dominance in the oil and gas sector, CNPCs strategic importance is very high. Government support: The government's diplomatic efforts give CNPC easier access to politically riskier countries in Africa and the Middle East. In 2008, the government provided CNY 20bn of subsidies for losses in the refining segment. Separately, in early 2012, the government raised the threshold of its special oil gain levy to USD 55/bbl from USD 40/bbl, which helped offset the impact of the change in resource tax calculation introduced in September 2011. In September 2013, several senior managers of CNPC and PetroChina were placed under investigation. While the situation needs monitoring, we do not see a major impact since the government has taken measures to ensure smooth operations. Strong financial profile: CNPCs EBITDA increased 7.4% to CNY 380bn In 2012, and EBITDA margin declined slightly to 14.2%. CNPCs financial management has historically been conservative, and it enjoyed a net cash position until 2008. However, large capex and investment spending led to average annual negative FCF after acquisitions of CNY 237bn in 2010-12. While debt/capital rose to 26.4% in 2012 (from 8.8% in 2008) and debt/EBITDA is 1.8x (versus 0.5x), these metrics remain comfortable for its ratings. Ambitious capex and overseas expansion/acquisition plans will require annual investment spending of c.CNY 400450bn in 2013-14. We expect the company to continue to post negative FCF in the next couple of years, and debt/capital to rise to c.30%. However, the rating agencies have emphasised CNPCs strategic importance and, given ongoing capital injections by the government (CNY 100bn from 2009-12), we do not see rating downgrade pressure. CNPC enjoys strong liquidity, with a CNY 296bn cash balance as of December 2012.
HG CORPORATES
Company profile
China National Petroleum Corp. (CNPC) is Chinas largest oil and gas company in terms of reserves (23.3bboe in 2012) and production (4.6mmboed). It also has large downstream operations in refining (total capacity of 226.1mtpa), chemicals (production of 42.7mtpa) and product trading. Separately, it is Chinas largest natural gas transporter and dominates the natural gas, crude oil and refined product pipeline segments. Its main operating arm is the 86.5%-owned PetroChina Co. Ltd. (PetroChina), which accounted for 64% of CNPCs assets and 82% of revenue in 2012. CNPC is 100% owned by the government through SASAC.
274
Asia Credit Compendium 2014 China National Petroleum Corp. (Aa3/Sta; AA-/Sta; A+/Sta)
Summary financials
2010 Income statement (CNY bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 27.2 19.0 9.9 22.5 1.4 0.7 58.0 34.8 8.4 14.9 8.8 24.3 1.5 0.7 51.2 23.8 7.4 14.2 8.1 26.4 1.8 1.0 44.6 18.5 1.7 14.8 10.6 27.4 1.4 1.2 49.3 14.1 (8.9) 13.5 9.3 30.9 1.8 1.3 40.4 12.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009 2010 2011 2012 Crude oil 269.8 (542.3) (272.5) (23.6) 293.4 (451.2) (157.8) (38.8) 198.8 (525.9) (327.0) (47.0) 220.0 (326.6) (106.6) (65.5) 91.4 (137.0) (45.6) (4.2) 237.1 281.5 296.0 46.2 152.8 5 1,720.9 2,381.3 2,683.5 2,195.3 1,101.1 326.4 (9.4) 172.7 97.3 353.9 (14.8) 181.7 105.5 379.9 (20.6) 183.9 114.8 324.5 (22.9) 166.8 115.3 148.1 (12.7) 93.8 65.5 10 Crude oil 15 20 Natural gas 2011 2012 2012* H1-13*
Oil and gas reserves (bboe)

25
2,630.0 3,027.9 3,409.4 2,168.9 2,341.5 456.2 219.1 544.6 263.1 667.6 371.6 445.0 398.8 550.6 397.8
1,568.1 1,700.7 1,864.1 1,180.7 1,233.5
0 2008 2009 2010 2011 2012
Oil and gas production (mmboed)

5.0 4.5 4.0 3.5 Natural gas
HG CORPORATES
Capex breakdown (CNY bn)

500 450 400 350 300 250 200 150 100 50 0 2009 2010 2011 2012
*Data for PetroChina; Source: Company reports, Standard Chartered Research
Pre-tax profit breakdown (CNY bn)

350 Marketing Others Natural gas & pipelines Refining and chemicals 300 250 200 150 100 50 E&P 0 -50 -100 2009 2010 2011 2012 Refining and chemicals E&P Natural gas & pipelines Marketing Trading Others
275
Asia Credit Compendium 2014 China Overseas Land & Investment Ltd. (Baa1/Sta; BBB+/Sta; BBB+/Sta)
Analyst: Zhi Wei Feng (+65 6596 8248)

COLI has a proven delivery track record, supported by strong contracted sales performance, stable profitability, high asset turnover, solid liquidity and a steady credit profile. The company will potentially grow further if the asset-injection proposal from CSCECL materialises. Benefiting from its SOE background and HG credit rating, the company is also active in the offshore capital market; it raised a total of USD 1.5bn of bonds via three tranches of 5Y, 10Y and 30Y at low coupon rates in October 2013. COLI has seven bonds in total, with total outstanding principal of USD 4.25bn. While land acquisitions have remained high, totalling CNY 25bn in 10M-2013, the company has sufficient liquidity to meet its land and project capex needs and financial obligations.

A strong national player with an HG rating: COLI has been active in the offshore debt market, benefiting from its HG rating status and its SOE background. In October 2013, it issued USD 500mn each of 5Y, 10Y and 30Y bonds at low coupon rates of 3.375%, 5.375% and 6.375%, respectively. This was in addition to the HKD 6.25bn, 5Y syndicated loan and the HKD 5.75bn, 3Y bridge loan it raised in H1. In 2012, the company issued USD 750mn 4.875% of 2017 bonds, USD 700mn 3.95% of 2022 bonds, and USD 300mn 5.35% of 2042 bonds. Land acquisitions remain high, in line with high asset turnover model: The company added 6.6mn sqm of attributable GFA to its land bank in 10M-2013 for a total cost of CNY 25.1bn, while COGO bought 2.6mn sqm of land for CNY 6.2bn in the same period. In comparison, attributable land cost totalled CNY 21.1bn (for 6.5mn sqm) in 2012, and COGOs land cost was CNY 4.5bn (for 3.4mn sqm). COLIs land purchases are mostly in Tier 1 and 2 cities, and COGOs are in Tier 3 cities. High sales and asset turnover and stable profitability: Contracted sales totalled HKD 121bn (8.1mn sqm) in 10M-2013 at an ASP of HKD 15,050psm, exceeding the full-year target of HKD 120bn. The companys sales were evenly geographically distributed across China Yangtze River Delta region (32%), Pearl River Delta region (24%), western and Bohai Rim regions (15% each), and northern region (14%). Revenue totalled HKD 32.2bn in H1-2013, up 10% y/y. Profitability was negatively affected by higher land and construction costs. That said, the decline in profit margins was small gross margin was 36.3% (2012: 38.3%), and EBITDA margin was 32.7% (2012: 35.2%). Solid liquidity position and credit metrics: Total cash rose to a high HKD 51.7bn as of June 2013, from HKD 40.9bn at end-2012. Total debt increased to HKD 66.4bn from HKD 58.8bn as the company raised about HKD 12.2bn of new loans and repaid HKD 4.7bn of existing loans. Despite higher debt, credit metrics remained largely stable. Total debt/LTM EBITDA edged up to 2.8x in H1-2013 from 2.6x in 2012, and LTM EBITDA/interest remained high at 11.4x, but lower than the 12.2x in 2012. Total debt/capital was 40.3% as of June 2013, little changed from 40.2% at end-2012. Net debt/capital was low at 13.0%, down from 17.0% at end2012, thanks to higher cash. Parent support and asset injection: COHL is committed to maintaining its majority shareholding in COLI. According to a COLI announcement in August 2013, CSCECL plans to inject its real-estate development business into the company. COLI will have the option of buying the projects and/or managing the projects on behalf of CSCECL. However, there is no definitive agreement or timetable for the asset injection at present. Geographical distribution of land bank, Jun-13 (mn sqm)
6 5 4 3 2 1 0 Shenzhen Zhongshan Guangzhou Foshan Zhuhai Xiaomen Shanghai Ningbo Hangzhou Suzhou Nanjing Changsha Wuhan Nanchang Qingdao Dalian Jinan Tianjin Beijing Yantai Changchun Shenyang Chengdu Chongqing Xi'an Kunming HK & Macau
276
HG CORPORATES
Company profile
Incorporated in 1979 and listed on the HKSE in 1992, China Overseas Land & Investment Ltd. (COLI) is an indirectly state-owned property developer. It is 53.18% owned by China Overseas Holdings Ltd. (COHL), a wholly owned subsidiary of the SSE-listed China State Construction Engineering Corporation Ltd. (CSCECL). CSCECL is c.55.11% owned by the China State Construction Engineering Corp., which is under the direct supervision of the central SASAC. As of June 2013, COLI had a total land bank of 34.49mn sqm (attributable GFA of 33.29mn sqm), and its 38%-owned China Overseas Grand Oceans Group (COGO) had a total land bank of 9.64mn sqm (attributable GFA of 8.38mn sqm). COLI and COGO together have a presence in 38 cities across China.
Pearl River and southern China
Yangtze River and central China
Bohai Rim and northeastern China
Western China
Asia Credit Compendium 2014 China Overseas Land & Investment Ltd. (Baa1/Sta; BBB+/Sta; BBB+/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 57.3 28.1 36.1 2.3 12.7 544.9 51.8 35.9 43.5 2.8 13.3 309.1 18.2 38.7 37.2 2.3 12.8 181.7 20.8 35.2 40.2 2.6 12.2 719.1 11.7 32.7 40.3 2.8 9.5 502.5 8,385 (3,297) (9,087) 6,549 NA NA NA 23,781 31,574 17,841 40,880 51,742 37,322 10,491 44,313 15,921 48,583 18,819 64,581 22,741 32,188 10,522 2010 2011 2012 H1-13
Profitability (HKD bn LHS, % RHS)

80 EBITDA margin (RHS) 64 Revenue 80 100
(829) (1,194) (1,474) (1,868) (1,113) 12,054 7,469 20,567 12,373 23,765 15,119 29,422 18,722 16,109 11,033
48
60
32
40
114,117 162,248 175,975 229,825 272,890 23,666 (115) 41,810 44,538 12,964 57,942 42,624 24,783 71,890 58,789 17,909 87,557 66,401 14,659 98,388
16
20
0 2009 2010 2011 2012 LTM Jun-13
Debt metrics (x)

5 LTM EBITDA/ int. (RHS) 15
(24) (1,707) (1,601) (1,703) 8,361 (5,004) (10,688) 4,888
12
(1,302) (2,012) (2,458) (3,100) (1,961)
HG CORPORATES
3 Total debt/LTM EBITDA
0 2009 2010 2011 2012 H1-13
Debt metrics (HKD bn LHS, % RHS)

70 Total debt/cap. (RHS) 56 Total debt 42 Total cash* 28 40 60 80 100
Debt maturity, Jun-13** (HKD bn)

40 35 30 25 20 15 10 Bank loans
USD bonds
14
20 5
0 2009 2010 2011 2012 H1-13
0 < 1 yr 1-2 yrs 2-5 yrs > 5 yrs
*Including restricted cash; **estimate; Source: Company reports, Standard Chartered Research
277
Asia Credit Compendium 2014 China Petrochemical Corp. (Aa3/Sta; A+/Sta; NR) China Petroleum and Chemical Corp. (Aa3/Sta; A+/Sta; A+/Sta)

Sinopec Groups upstream operations generate strong cash flow, and its dominance across energy segments results in high strategic importance. Fuel-price controls have hit Sinopecs refining earnings in the past, although pricing mechanism reform in 2013 will help future profitability. Sinopec aims to balance its upstream and downstream portfolios and is investing significantly in E&P assets, which carry high execution risk. That said, despite large investments in recent years, its balance-sheet structure has been largely steady. While capex and acquisition spending will be c.CNY 270-280bn in 2014, the equity raising in 2013 will keep debt/capital in the 40% area. We maintain our Stable credit outlook on the company.

Decent profile in upstream operations: Sinopec Group is one of Chinas three wholly government-owned oil and gas companies. It has expanded overseas over the years, and its proportion of overseas reserves was c.35% in 2012 (versus 21% in 2009). It has undertaken USD 5.6bn of overseas acquisitions YTD in 2013, in which it typically partners with global players and receives strong diplomatic support from Chinas government. That said, its domestic fields (especially Shenli and Zhongyuan) are mature, and domestic reserves have been stagnant at c.3.9bboe in recent years. F&D costs have also been trending higher: its three-year average F&D cost is c.USD 30/boe, higher than similarly rated global E&P players. Weaker profitability in downstream operations: Sinopec Groups refineries enjoy economies of scale (average capacity of 150kboed). They are able to take in a wide mix of crude slates and are located in Chinas more developed coastal regions, which lowers transportation costs. However, its crude oil self-sufficiency is only c.25%, and the government controls retail fuel prices in China. That said, the government has allowed product prices to be changed every 10 days (instead of 22) in 2013, without a 4% floating band for oil price changes. Hence, Sinopecs GRM rose to USD 4.6/bbl in H1-2013 from USD 0.5/bbl in H1-2012, and the segment has posted small EBIT profits since Q3-2012. The petrochemical business commands significant market share across products, although its margins have been cyclical. It posted an operating loss of CNY 1.67bn in H1-2013. Strategic importance and government support: Sinopec Group accounts for 48% of Chinas refinery production, 63% of its refined -product sales and over 60% of its ethylene production. Separately, it is among the largest central SOEs supervised by SASAC in terms of revenue, and its tax payments accounted for c.2.7% of Chinas fiscal income in 2012. Given its high strategic importance, Sinopec received CNY 50bn of subsidies to compensate for losses in its refining business in 2008. It has also received ongoing equity injections from the government (averaging CNY 22.5bn annually from 2010-12). Aggressive investment appetite: Sinopec Group is strategically focused on the E&P sector to balance its upstream and downstream portfolios. Given Chinas limited potential for reserve growth, it has increased reserves through overseas acquisitions (its overseas reserves grew to 2.1bboe in 2012 from 1.1bboe in 2009). From 2010-12, c.62% of its CNY 788bn investment was in the E&P segment, and it has spent more than USD 10bn annually on acquisitions. Since Sinopec has predominantly been an onshore operator, it may face significant execution risks as it diversifies into offshore and unconventional international projects. Large negative FCF and moderate financial metrics: Sinopec Groups financial profile is tempered by the poor profitability of its refining and petrochemical operations, and its metrics are therefore weaker than CNOOCs and CNPCs. Given average investment spending of CNY 263bn in 2010-12, the company posted large negative FCF, which was funded through incremental debt and equity injections. Hence, leverage rose to 2.3x in H1-2013 from 1.9x in 2010, and debt/capital is at 39%. We expect 2014 capex of c.CNY 220-230bn, with a further CNY 50bn being spent on potential acquisitions. The companys financial polic y is to maintain debt/capital below 40% and debt/EBTIDA under 2x. Given that Sinopec Corp. raised HKD 19bn of equity in early 2013 and plans to issue convertible bonds, we expect metrics to be broadly within its target limits. Sinopec Groups liquidity profile is strong, with a cash balance of CNY 42.6bn and available credit facilities of CNY 890bn as of end-2012.
HG CORPORATES
Company profile
China Petrochemical Corp. (Sinopec Group), 100% owned by SASAC, is an integrated energy company with a skew towards the downstream sectors in China. Its oil and gas reserves (6bboe) and annual production (630mmboe) are Chinas second largest. It also has the largest refinery capacity in Asia, and is Chinas largest distributor of refined products (over 30,000 retail stations) and largest producer of petrochemical products (ethylene capacity of 10mtpa). Most of Sinopec Groups businesses are held by the 73.4%-owned China Petroleum & Chemical Corp. (Sinopec), except the overseas E&P assets, engineering business and nonproductive assets. Sinopec accounted for 64% of Sinopec Groups assets and 97% of revenue in 2012.
278
Asia Credit Compendium 2014 China Petrochemical Corp. (Aa3/Sta; A+/Sta; NR) China Petroleum and Chemical Corp. (Aa3/Sta; A+/Sta; A+/Sta)
Summary financials
2011* Income statement (CNY bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 5.2 8.7 11.4 37.8 2.0 1.6 40.6 18.6 4.1 8.2 9.6 39.9 2.3 2.1 34.7 13.9 9.4 8.3 8.7 39.0 2.3 2.0 NA 14.3 (0.1) 6.1 11.9 33.7 1.6 1.6 43.4 14.0 14.9 6.1 10.9 34.6 1.7 1.7 29.3 15.6 800 600 400 200 0 2009 2010 2011 2012 Crude oil 202.7 (243.8) (41.0) (22.8) 170.4 (292.8) (122.4) (30.7) 35.4 (100.9) (65.5) (14.3) 133.2 (167.3) (34.1) (25.5) 27.7 (69.3) (41.6) (12.6) 1,200 1,000 77.3 42.6 52.7 10.9 11.4 1 2,552.0 2,830.6 1,452.5 2,786.0 1,415.2 222.1 (11.9) 120.1 61.1 231.2 (16.6) 104.7 51.9 120.5 (9.0) 54.5 25.8 169.1 (12.1) 90.6 63.9 85.7 (5.6) 45.1 30.3 5 Natural gas 2012* H1-13* 2012** H1-13**
Oil and gas reserves (bboe)

6
Crude oil
1,748.7 1,956.8 1,990.1 1,266.7 1,273.7 436.9 359.7 720.3 526.0 483.4 792.8 547.2 494.5 854.7 278.1 267.2 548.0 309.0 297.7 584.6
0 2009 2010 2011 2012
Oil and gas production (kboed)

1,600 1,400 Natural gas
HG CORPORATES
Refinery operations (mt LHS, % RHS)

300 Utilisation (RHS) Capacity Throughput 90
Operating profit breakdown (CNY bn)

160 140 80 120 100 80 70 Others Technical services Marketing and dist. Chemicals
250
200
150
60 40 E&P
100 60 50
20 0 -20 Refining 2009 2010 2011 2012
0 2009 2010 2011 2012
50
-40
*Data for China Petrochemical Corp.; **data for China Petroleum & Chemical Corp.; Source: Company reports, Standard Chartered Research
279
Asia Credit Compendium 2014 China Railway Construction Corporation Ltd. (A3/Sta; A-/Sta; NR)

CRCC enjoys a dominant position in Chinas market for construction of government-funded railways and infrastructure. Its substantial order backlog and long track record provide good earnings visibility. That said, upfront payments and long payback periods for BT/BOT projects have stretched its working-capital requirements and caused leverage to increase in the past three years. CRCC is also leveraged to Chinas investment cycle, and a slowdown could lead to a deterioration in cash flow. While we do not expect CRCCs credit metrics to improve in 2014, its high strategic importance and potential support from the parent should protect its credit profile. We have a Stable credit outlook on CRCC.

Strong position in the construction business: CRCC is the largest railway construction contractor in China. It has a 50% share of the domestic railway construction market, which is a virtual duopoly and is largely government-funded. Chinas annual railway investment budget is likely to average more than CNY 650bn from 2013 to 2015, and CRCC will benefit from this, given its large market share. CRCC also has a 15% share of Chinas highway construction market and is one of the countrys largest metropolitan railway contractors. Its strong construction order backlog of CNY 1.45tn provides good earnings and cash-flow visibility. Increasing importance of other businesses: CRCCs non-construction businesses provide diversification and have higher margins, especially real estate. In 2012, these businesses contributed 18% of revenue and 23% of gross profits. Also, the contribution of new contracts from the non-construction businesses to CRCCs total new-contract value rose to 16.3% in 2012 from 9.3% in 2010. Working capital risk: CRCCs largest customer China Railway Corporation (CRC, formed after the Ministry of Railways split) faced funding pressure in 2011. This led to negative operating cash flow and an increase in CRCCs accounts receivable to 56 days in 2012 from 39 days in 2010. While CRCs funding position has improved, it remains under pressure due to its high debt level. While the risk of default on CRCCs accounts receivable is low, further payment delays could lead to higher working-capital requirements for CRCC. Moreover, CRCC aims to increase its involvement in BT/BOT projects, which require upfront funding and have long payback periods. Capex for BT/BOT projects increased to CNY 1.6bn in 2012 from CNY 0.6bn in 2011 and is likely to remain elevated, as CRCC has successfully bid for large BOT projects in 2013. Leveraged to Chinas macro environment: CRCCs revenue from construction operations rose to CNY 429bn in 2010 from CNY 163bn in 2007. The increase was due to the governments massive fixed asset investment push, particularly in railways, in the wake of the 2008-09 global financial crisis. However, investment in railway infrastructure slowed in 2011 following a high-speed train accident; consequently, CRCCs construction revenue dropped to CNY 407bn in 2012. Chinas railway investment has picked up again in the past 12 months, and we expect the level of investment to be sustained. CRCC could also be negatively affected by the adverse policy environment in the property sector, as 4% of its revenue and 10% of its gross profits are from real estate development. Stable financial profile: CRCC has low net debt/EBITDA of 1.3x and strong interest coverage of 4.2x. However, gross debt increased to CNY 129bn in June 2013 from CNY 26.7bn in 2009, and leverage rose to 5.0x from 1.9x; this was due to larger working-capital requirements arising from payment delays by CRC and investment in real estate development. We expect leverage to remain high at c.45x in 2014. We believe CRCCs cash position of CNY 96bn (as of June 2013) and its annual FFO of c.CNY 18bn in 2013 will be adequate to cover short-term debt of CNY 74bn, capex needs of c.CNY 15bn, a working-capital deficit of CNY 10-15bn, and dividend payments of c.CNY 4bn. CRCC also had large undrawn credit facilities of CNY 348bn as of December 2012. High strategic importance: CRCC benefits from its large market share in the railway sector, which plays an important role in Chinas investment -led growth. It has received asset injections, financial subsidies and tax exemptions from the government. CRCC Group has also provided financial support to CRCC it paid CNY 2.1bn after CRCC incurred a CNY 4.2bn loss in its light-railway metro project in Saudi Arabia in 2010.
280
HG CORPORATES
Company profile
China Railway Construction Corp. Ltd. (CRCC) is one of Chinas largest construction groups. Its construction business focuses on railway, highway, urban transit and municipal projects. CRCC also engages in design and consultancy, equipment manufacturing, real estate development, and logistics and trading. Since 1949, it has participated in the construction of almost all of Chinas railway lines and has built more than 50% of the total length of the countrys railway lines. CRCC is 61.3% held by China Railway Construction Corp. (CRCC Group), an SOE wholly owned by SASAC, and accounts for more than 95% of the parents assets and revenue. CRCC is the successor to the Railway Corps of the Peoples Liberation Army and is listed in Hong Kong.
Asia Credit Compendium 2014 China Railway Construction Corporation Ltd. (A3/Sta; A-/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 43.5 4.1 10.1 33.1 1.9 (2.7) 40.0 9.0 4.6 3.1 7.7 40.5 2.7 (1.7) 22.8 9.1 48.6 4.8 9.9 56.6 3.9 0.1 17.2 5.9 10.3 5.0 8.8 58.1 4.2 0.4 14.3 4.1 19.3 5.1 7.5 62.7 5.0 1.3 12.6 4.2 300 200 100 0 2008 2009 2010 2011 2012 H1-2013 0.5 0.0 15,981 6,083 (14,182) 2,534 (9,767) 64,952 65,207 83,058 92,274 96,162 344,976 470,159 457,366 484,313 236,038 14,010 (1,559) 8,307 6,599 14,656 (1,618) 6,089 4,246 21,782 (3,683) 10,056 7,854 24,020 (5,840) 10,896 8,479 12,016 (3,233) 5,785 4,674 2010 2011 2012 H1-13
CRCCs revenue and gross profit split, H1-2013 (%)

100 90 80 70 60 50 40 30 20 10 0 Revenue Gross Profit Construction Equipment manufacturing Others Property Services
282,990 350,265 422,983 480,661 521,679 26,714 39,613 85,738 101,743 129,079 2,681 65,719 9,469 73,329 32,918 76,740
(38,239) (25,593) 54,079 58,231
CRCCs new-order value (CNY bn LHS, x RHS)

900 800 700 600 500 400 Construction 1.0 Order backlog/revenue (RHS) Nonconstruction 3.5 3.0 2.5
(14,522) (18,440) (13,692) (12,281) (12,514) 1,459 (12,358) (27,874) (1,254) (3,578) (3,169) (9,747) (22,280) (3,821) (2,785)
HG CORPORATES
2.0 1.5
CRCCs capital expenditure (CNY bn)

20 18 16 14 12 10 8 6 Construction Services Equipment mfg Property Others
CRCCs debt maturity profile, H1-2013 (CNY bn)

80 70 60 50 40 30 20
4 2 0 2009 2010 2011 2012 H1-2013

10 0 < 1Y 1Y-2Y 3Y-5Y > 5Y
281
Asia Credit Compendium 2014 China Railway Group Ltd. (NR; BBB+/Sta; BBB+/Sta)

CRG enjoys a dominant market position in the governmentfunded railway and infrastructure construction market. Its substantial order backlog and established track record provide strong earnings visibility. However, it has large exposure to fixed-price contracts, with limited flexibility to pass through cost increases. The company is also leveraged to Chinas investment cycle, and a slowdown could lead to a deterioration in cash flow. CRG has consistently posted negative operating cash flow since 2010, and its leverage is high. While its high strategic importance and parent support should protect its credit profile, we expect credit metrics to remain weak in 2014. We have a Stable credit outlook on the company.

Strong position in the construction business: CREC is Chinas second-largest railway construction contractor. It has a 40-45% share of the domestic railway construction market, which is a virtual duopoly. Chinas annual railway investment budget is likely to average over CNY 650bn from 2013 to 2015; CREC will benefit from this due to its large market share. CREC has a 10% market share in Chinas highway construction sector and a 50% share in the metropolitan railway construction sector. Most of its construction contracts are on a fixed-price basis, with a limited ability to pass through cost increases. Gross margin in its construction business is therefore low at 5.7%. CRECs stro ng order backlog of CNY 1.14tn provides good earnings and cash-flow visibility. Increasing importance of other businesses: CRECs non-construction businesses provide diversification and have higher margins, especially real estate and mining. These businesses contributed 20% of CRECs revenue and 41% of its gross profits in 2012. The contribution of new contracts from non-construction businesses to CRECs total new-contract value increased to 26.6% in 2012 from 15.8% in 2010. Working-capital risk: CRECs largest customer, China Railway Corporation (CRC; accounts for 36% of revenue), faced funding pressure in 2011. This led to an increase in CRECs working-capital requirements. While CRCs funding position has improved, CRECs operating cash flow remained negative in 2012. CRCs funding position could be further pressured due to its gross debt position of CNY 2.7tn (CRC has total assets of CNY 3.3tn). While we see a low risk of a default on CRECs accounts receivable, payment delays could further pressure work ingcapital requirements. While CRECs involvement in BT/BOT projects is much lower than CRCCs, it has a 50% share of Chinas metropolitan railway construction market (versus 31% for CRCC). Local governments are the counterparties in metropolitan railway projects, and some have stretched financial positions. Leveraged to Chinas macro environment: CRECs revenue from construction operations rose to CNY 416bn in 2010 from CNY 168bn in 2007. The increase was due to the governments massive fixed asset investment push, particularly in railways, in the wake of the 2008 financial crisis. Investment in railway infrastructure slowed in 2011 following a high-speed train accident; consequently, CRECs construction revenue dropped to CNY 397bn in 2012. Railway invest ment has picked up again in the past 12 months, and we expect it to be sustained given Chinas rapid urbanisation and low railway density. CREC could be negatively affected by the adverse policy environment in the property sector. CRECs real estate cash flow (4% of revenue and 14% of gross profits in 2012) and gross floor area under construction are similar to CRCCs. Weak financial profile: CRECs leverage rose to 9.0x in 2012 from 4.5x in 2009 due to larger working-capital requirements arising from payment delays by CRC, and investments in real estate and mining development. We expect leverage to remain elevated in the next 12 months, given its working-capital deficit of CNY 1520bn, capex requirements of CNY 10-12bn and annual dividend payments of CNY 1.5bn. That said, we do not expect liquidity stress given CRECs cash position of CNY 75.8bn and large unused credit facilities of CNY 118.7bn. High strategic importance: CREC benefits from its high market share and large workforce in the strategically important railway sector, which plays an important role in Chinas investment-led growth. CREC has received asset injections, financial subsidies and tax exemptions from the government. S&P gives CREC a three notch-rating uplift to reflect its high strategic importance.
282
HG CORPORATES
Company profile
China Railway Group Ltd. (CRG) is the listed subsidiary of China Railway Engineering Corporation (CREC), one of Chinas largest integrated construction groups. CRECs construction business focuses on railway, highway, urban transit and municipal projects. CREC is also engaged in survey, and design and consultancy services, equipment manufacturing, real estate, development and mining. Since the 1950s, it has participated in the construction of most of Chinas railway lines, and it has a 40-45% market share of the railway construction market. CRG is 56.1% held by CREC, which is wholly owned by SASAC. CRG accounts for over 98% of the parents assets and revenue.
Asia Credit Compendium 2014 China Railway Group Ltd. (NR; BBB+/Sta; BBB+/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 35.0 3.7 6.7 45.6 4.5 0.3 16.0 3.5 21.2 3.3 7.1 53.5 5.6 1.8 9.2 4.2 13.1 3.9 5.8 61.6 7.6 3.9 7.4 2.7 5.2 3.9 5.1 64.7 9.0 4.9 3.6 1.8 17.1 3.8 4.5 67.7 9.8 5.9 NA 1.8 400 300 200 100 0 2008 2009 2010 2011 2012 Construction 0.5 1.5 15,413 (2,142) (19,282) (13,874) (12,137) (9,354) (6,204) 51,776 57,218 63,583 72,491 75,814 334,045 456,162 442,216 465,625 238,956 12,504 (3,583) 8,682 6,875 15,152 (3,592) 10,548 7,398 17,139 18,026 9,073 (5,106) 5,277 3,682 2010 2011 2012 H1-13
CRGs revenue and profit-before-tax split, H1-2013 (%)

100 90 80 70 60 50 40 30 20 10 0 Revenue Profit before tax Survey design and consulting Infrastructure construction Equipment manufacturing Others Property development
(6,458) (10,237) 9,998 6,690 11,085 7,354
312,400 391,599 468,560 550,556 605,514 55,863 4,087 66,584 85,135 130,096 161,661 189,316 27,917 74,118 66,513 81,179 89,170 113,982 88,393 90,334
CRGs new-order value (CNY bn LHS, x RHS)

800 700 600 500 Order backlog/ revenue (RHS) 3.0
(15,488) (15,366) (10,657)
(75) (17,508) (29,939) (23,228) (18,341) (323) (3,975) (1,407) (1,253) (204)
Nonconstruction
2.5
2.0
HG CORPORATES
1.0
0.0
CRGs capital expenditure (CNY bn)

Infrastructure construction 20 18 16 14 12 10 8 6 4 2 0 2008 2009 2010 2011 2012
CRGs debt maturity profile, 2012 (CNY bn)

80 70 60 50 40 30 20 10 0 < 1Y 1Y-2Y 2Y-3Y 3Y-4Y 4Y-5Y > 5Y Survey design and consulting services Equipment manufcaturing Property development Others (mining, BOT projects and others)
283
Asia Credit Compendium 2014 China Resources Gas Group Ltd. (Baa1/Sta; NR; BBB+/Sta)

CR Gas has emerged as one of Chinas largest city-gas distributors and is likely to enjoy high earnings growth in the next few years. While residential sales are subject to tariff risks, we do not expect them to materially affect profitability. Also, CRHs incubation strategy has substantially reduced execution risks. That said, CR Gas has ambitious growth plans and will likely spend HKD 5-6bn annually on capex and investments in 2014-15. Despite expected EBITDA growth of 20-22% in 2014, we gross debt levels to rise. That said, debt/capital should remain at c.50% and debt/EBITDA will likely be c.3.5-4x, adequate for its ratings. We therefore maintain our Stable credit outlook.

Strong market position and high growth: CR Gas has emerged as one of Chinas largest city-gas distributors, with 159 projects (end-2008: seven projects). Driven by new project acquisitions and supportive factors such as urbanisation, the cost advantages of natural gas and government policy initiatives, the company posted an EBITDA CAGR of 55% from 2008-12. CR Gas projects are well diversified across the country and include large industrial centres such as Chongqing, Tianjin, Chengdu, Zhengzhou and Wuxi (these five cities accounted for 56% of gas sales volumes in H1-2013). Around 65% of CR Gas sales are to commercial and industrial (C&I) customers, which do not face high tariff risks (see below). 17% of sales are to CNG stations. Separately, CR Gas has strategic gas supply collaborations with CNPC (64% of supply), Sinopec (16%) and CNOOC (6%), which assures it of stable gas supply. Regulatory risks: While upstream gas prices and transmission tariffs are controlled by the central government, end-user tariffs are decided by local governments. CR Gas is able to pass on price increases to C&I and vehicular gas customers with a slight delay, but residential customer tariff revisions require a local hearing and take at least three to six months. In June 2013, the city-gate price for non-residential customers was increased by c.18% (or CNY 0.5 per cubic meter). CR Gas was able to pass on price increases to customers accounting for c.80% of its H1-2013 volumes, and does not see a major impact on profitability in 2013. Separately, we see a risk that CR Gas connection fees (which accounted for c.52% of EBIT in H1-2013) may be reduced or eliminated for some projects. Strong parental support: CR Gas has received strong support from its parent as part of an incubation strategy, under which CRH transfers only profitable projects to CR Gas after a three- to four-year incubation period. From 2008 to 2012, CRH transferred 46 projects to CR Gas that were funded predominantly through equity subscriptions (HKD 7.5bn) and shareholder loans (HKD 4bn) from the parent. With the final batch of 16 projects transferred in 2012, the benefits of incubated projects will cease. However, given CRHs SOE status, CR Gas will continue to be able to acquire city-gas projects through negotiated contracts with local governments, and enjoy ongoing access to low-cost bank funding. Large investment plans: CR Gas targets to expand its reach to 20mn households and achieve gas sales of 20bcm by 2015. In H1-2013, it paid HKD 3bn for a 49% stake in Jinran China Resources Gas Co. and incurred HKD 1.1bn of organic capex. We expect annual investment spending (including acquisitions) of c.HKD 56bn in 2014-15. That said, CR Gas has exhibited a willingness to raise equity to partly fund acquisitions (the latest was HKD 2.7bn in November 2012). Financial profile will moderate gradually: In H1-2013, CR Gas posted 76% revenue growth and a 98% EBITDA increase on the back of acquisitions and organic growth. That said, its large capex and M&A appetite have led to an increase in debt to HKD 14bn (versus HKD 6.7bn in end-2011). Its very healthy financial metrics, with a net cash position during 2010-12, changed in H1-2013, and debt/capital is now 45.2%. As of June 2013, CR Gas had HKD 9bn of cash on its books; we expect it to retain HKD 2-3bn for normal operations and to spend the rest on acquisitions. We expect 20-22% EBITDA growth in 2014, although CFO will be inadequate to fund the significant investments lined up. While gross debt levels will increase further, we believe incremental earnings will help keep debt/capital around 50%, while debt/EBITDA will be c.3.5-4x, which we think is appropriate for its ratings.
HG CORPORATES
Company profile
China Resources Gas Group Ltd. (CR Gas) is involved in the construction and operation of piped natural gas distribution facilities in China. As of June 2013, it operated 159 city-gas projects in 20 provinces. In H1-2013, its gross gas sales volume was 6.2bcm, it generated revenue of HKD 9.8bn (of which 82% was from piped gas sales and 18% from connection fees) and had 17mn residential customers. CR Gas is headquartered in Hong Kong and Shenzhen and is listed on the HKSE. CR Gas is 63.9% owned by China Resources (Holdings) Co. Ltd. (CRH), a conglomerate that is ultimately owned by Chinas State Council through China Resources National Corporation.
284
Asia Credit Compendium 2014 China Resources Gas Group Ltd. (Baa1/Sta; NR; BBB+/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 27.1 17.1 11.9 46.4 3.9 0.1 18.6 21.6 132.4 17.5 12.3 41.6 3.5 NA 23.3 30.0 34.9 15.5 10.2 36.1 3.0 NA 25.9 26.0 44.8 16.3 10.8 44.5 3.7 NA 18.1 10.0 98.4 18.3 9.8 45.2 3.9 1.4 NA 6.1 969 (751) 218 (139) 1,601 (2,153) (552) (136) 1,927 (2,903) (976) (187) 4,775 (7,017) (2,243) (428) 2,937 (3,607) (670) (320) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009
3
History of project acquisitions (nos.)

2010 2011 2012 H1-13 180 160 9,331 1,637 (55) 1,367 787 14,208 2,209 (85) 2,135 1,176 19,591 3,199 (320) 2,803 1,651 9,786 1,795 (297) 1,878 1,072 140 120 100 80 60 40 20 0 2008 2009 2010 2011 2012 H1-2013 Acquired from CR Holdings Direct acquisition from market
4,110 704 (33) 644 460
2,672 10,717 2,731 60 3,158
6,707 20,779 5,690 (1,017) 7,984
7,124 28,838 6,692 (432) 11,866
12,286 42,399 11,861 (425) 14,804
8,970 44,741 14,032 5,061 17,009
Revenue split and gross margins (%)

Gas sales Connection fee 70% 60% 50%
Connection fee margin (RHS)
HG CORPORATES
40% 30% 20% 10% 0% 2010 2011 2012 H1-13
Gas sales margin (RHS)
Gross gas sales volume mcm

10,000 Residential C&I CNG stations Bottled gas
Number of households, C&I capacity mn (LHS),, 000 m (RHS)

20 18 Daily installed capacity for C&I customers (RHS) 45 40 35 30 Number of connected households 25 20 15 10 5 0 2008 2009 2010 2011 2012 H1-13
8,000
16 14
6,000
12 10
4,000
8 6
2,000
4 2
0 2008 2009 2010 2011 2012 H1-13

285
Asia Credit Compendium 2014 China Resources Power Holdings Co. Ltd. (Baa2/Sta; BBB/Sta; NR)

We have a Stable credit outlook on CR Power. It has a competitive operating profile due to its large plants, geographical advantages and high utilisation rates. Hence, it has posted higher EBITDA margins than its IPP peers. While regulated tariffs have led to some uncertainty in cash flow, the decline in coal prices supported EBITDA growth of 39% y/y in H12013. We expect the company to meet planned capex of HKD 1517bn in 2014 largely through CFO, and therefore maintain its credit metrics. CR Powers track record of raising equity/hybrid capital and its flexibility to defer capex indicates a prudent financial strategy. That said, an adverse outcome of the Shanxi coal-mine acquisition investigation would be negative for corporate governance.

Competitive operating profile: CR Powers plants are mostly located in economically developed regions of China with high growth potential. More than two-thirds of the companys output comes from Shandong, Jiangsu and Henan provinces, which have high urbanisation rates. As a result, CR Power has maintained high coal-plant utilisation (2,690 hours in H1-2013, versus the national average of 2,412 hours) and above-average on-grid tariffs. It has not chased capacity growth and has typically set up large plants of 1,000MW and 600MW. Hence, CR Power has maintained cost-competitive operations and higher EBITDA margins than Chinas other IPP groups. That said, the slowdo wn in Chinas economy led to a 0.2% y/y decline in same-plant generation volumes in 9M-2013 (although overall generation rose 10.1% y/y as four large power plants started operations in H2-2012). Regulatory risks: On-grid tariffs are regulated in China, while coal prices are largely market-driven. In January 2013, the government announced a price linkage mechanism that allows coal-fired power producers to pass through 90% of changes in coal prices. However, given the absence of a track record, we are uncertain whether tariff adjustment will be undertaken annually. On-grid tariffs for 33 of CR Powers plants were reduced by 4-6% in September 2013. While this is negative for profitability, the tariff cut was much smaller than the 18% y/y decline in CR Powers unit fuel costs in H1-2013. Backward integration: Given the absence of a cost pass-through mechanism, CR Power has invested in coal assets to improve its coal self-sufficiency ratio. That said, coal production declined 14% y/y to 7.6mt in H1-2013 due to the weak coal market and production disruption at one of its mines. Hence, the segments EBIT contribution declined to 8.1% in H1 versus 37% in 2011. The company plans to produce 15mt of coal in 2013, which will be c.20% of its annual coal consumption. CR Power also faces an investigation of its acquisition of coal-mine assets in Shanxi. While the direct financial impact on the company will likely be limited, we believe an adverse outcome would be negative for the companys corporate governance and transparency practices (which have been excellent so far). Leverage likely to remain steady: CR Powers EBITDA grew 39% y/y In H1-2013 on lower coal prices and higher generation volumes. The companys debt level had increased from HKD 26.6bn to HKD 83bn from 2007-11 on account of large investment spending. It has since slowed its expansion plans and posted marginally positive FCF in 2012. Gross debt was therefore relatively steady between 2011 and H1-2013 debt/capital improved to 52.2% (from 59.4%) and debt/EBITDA improved to 4.2x (from 6.8x). We expect HKD 15-17bn of capex in 2014, versus HKD 18-20bn in 2013. Assuming coal prices do not increase significantly, the company should be able to fund most of its 2014 capex with CFO. The company has shown financial discipline in the past (in raising equity and issuing perpetual bonds) and a willingness to protect its investment-grade ratings. While 41% of its debt is due within two years, we believe CR Power has the flexibility to roll over or refinance most of its short-term bank debt. Moderate strategic importance: CR Power has moderate strategic importance, accounting for only c.2% of Chinas power capacity; other IPP groups are much larger. In 2013, CR Power proposed a merger with CR Gas, a sister company owned by CRH. While the proposal was rejected by minority shareholders, it could be revived in the medium term. This would be positive, as the merged entity would enjoy larger scale and a stronger market position.
HG CORPORATES
Company profile
China Resources Power Holdings Co. Ltd. (CR Power) is an independent power producer (IPP) that invests in and operates power plants in China. It was incorporated in Hong Kong in 2001 and was listed on the HKSE in November 2003. As of June 2013, it had 83 plants under operation with a total capacity of 26,062MW. 89.4% of this capacity is coal-fired, while the remainder is based on wind, hydropower and gas. CR Power has also invested in upstream coal assets, and it produced 10.8mt of coal in 9M-2013. CR Power is 63.2% owned by China Resources (Holdings) Co. Ltd. (CRH), a conglomerate that is ultimately owned by SASAC through China Resources National Corporation.
286
Asia Credit Compendium 2014 China Resources Power Holdings Co. Ltd. (Baa2/Sta; BBB/Sta; NR)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow 7,204 7,955 7,980 13,979 10,231 8,172 7,132 4,801 4,647 5,303 10 60 40 5 20 0 2008 2009 2010 2011 2012 H1-2013 0 33,214 10,284 (1,932) 6,408 5,317 48,578 11,398 (2,527) 6,517 4,904 60,709 12,564 (3,650) 6,728 4,451 62,436 16,482 (4,045) 9,695 7,479 32,347 10,581 (2,103) 7,593 5,331 15 80 20 25 Capacity 140 120 100 2010 2011 2012 H1-13
Operating details (000 MW LHS, bn kWh RHS)

30 Generation (RHS) 180 160
118,926 143,011 168,366 177,790 192,212 56,484 48,312 45,155 74,911 67,779 50,260 85,937 81,137 58,622 83,216 78,568 65,947 82,221 76,918 75,316
Fuel cost and margin (CNY per MWh LHS, % RHS)

300 EBITDA margin (RHS) Fuel cost 35 30 25
Capex and investments (22,727) (21,238) (20,448) (12,371) (10,837) Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 79.3 31.0 8.3 55.6 5.5 4.7 12.0 5.3 10.8 23.5 6.3 59.8 6.6 5.9 8.1 4.5 10.2 20.7 5.2 59.4 6.8 6.5 7.7 3.4 31.2 26.4 7.0 55.8 5.0 4.8 11.3 4.1 39.3 32.7 9.4 52.2 4.2 4.0 NA 5.0 50 100 150 (15,522) (13,283) (12,468) (1,085) (2,455) (2,836) 1,608 (2,508) (605) (3,895) 200 250
HG CORPORATES
20 15 10 5 0 2008 2009 2010 2011 2012 H1-2013
Operating profit by segment (HKD mn)

14,000 Coal mining 12,000 10,000 8,000 Electricity
Debt maturity profile, Jun-13 (HKD bn)

30
25
20
15 6,000 10 4,000 2,000 0 2008 2009 2010 2011 2012 H1-2013

0 < 1Y 1-2 Y 2-5 Y > 5Y Perpetual
287
Asia Credit Compendium 2014 China State Construction International Holdings Ltd. (Baa3/Sta; BBB-/CWP; BBB-/Sta)

CSCI benefits from a strong market position in Hong Kong and Macau. For its China projects, CSCI follows conservative project investment criteria and works only with local governments with strong financial positions. Hence, it has collected payments on time or in advance for all of its existing China projects. Leverage is set to increase in the next 18 months due to upfront funding for BT/BOT projects, and potential receivables risk persists since CSCIs projects have not gone through the full life cycle of construction and payments. That said, CSCIs large equity raising in the past few years and its target net debt/equity ratio of 40% suggest that it will maintain its prudent financial strategy. We have a Stable credit outlook on the company.

Strong position in Hong Kong and Macau: CSCI has a double-digit market share in the construction sector in Hong Kong and Macau. It has attained the highest status (Group C) in Hong Kong, allowing it to participate in building, port works, road and drainage, site formation, and waterworks projects with stringent requirements. In Macau, CSCI benefits from casino-related construction; it signed a HKD 10.5bn contract (the largest in its history) with MGM casinos in H1-2013. CSCIs projects in Hong Kong and Macau are related to engineering construction and services, and it receives progress payments during the construction phase with reference to the value of work done. A strong order backlog of HKD 37.6bn in Hong Kong and Macau provides good cash-flow visibility. China has increased the companys risk profile: CSCI began constructing affordable housing and infrastructure projects in China in 2010. Its China operations contributed 43% of revenue in 2012, up from 4% in 2008. CSCIs China projects are based on BT/BOT contracts, which require upfront funding for at least two years, with payments collected in instalments over the next two to three years. This leads to high initial debt and exposes CSCI to receivables risk from local governments. CSCIs total accounts receivable are rising and made up 40% of its assets as of June 2013. Some of its upcoming projects are large compared with its current revenue base, which may lead to execution risks. On the positive side, it concentrates only on Tier 2 and Tier 3 cities, which have a low dependence on land sales for fiscal revenue (less than 30%), and it signs contracts with local governments (not LGIVs) with the approval of the local Peoples Congress. CSCI also obtains collateral against the project value and an asset pledge/bank guarantee to hedge its risk. As a result, it has collected payments on time or in advance for all of its existing BT projects. However, given high growth in orders, the China business is unlikely to be self-funding before 2015. Leverage will likely rise: CSCI had an order backlog of HKD 77bn as of June 2013; a large share of this was in BT/BOT projects, and this is likely to increase as CSCI targets a 1% share of Chinas affordable housing market by 2015. It is therefore likely to face large funding needs in the next 18 months. CSCIs annual FFO of HKD 1.5bn, although rising rapidly due to previous BT projects, is small compared with its funding needs. CSCI is likely to use debt financing to partly fund the gap. Leverage (currently 7.7x) is therefore likely to remain high in 2014. Prudent financial strategy: CSCI raised HKD 5.8bn of equity from 2010 to 2012, versus HKD 6.2bn of debt raised during the period. As a result, debt/capital was steady at c.53% between 2009 and 2012, despite large investments in BT projects in China since 2010. CSCI targets net debt/equity of less than 40% and cash/totalassets above 10%, indicating a prudent financial strategy. Strategic importance and parental support: We think CSCIs strategic importance is low, as it operates mostly outside of China and its China operations have a small market share. However, it benefits from strong support from COHL, its parent, and received a two-notch rating uplift on account of this. COHL has made asset injections into CSCI, fully subscribed to CSCIs rights issues, provided inter-company loans for BT projects in China and co-invested in some joint ventures, and provides operational support. Subordination risk: Moodys makes a one-notch downward adjustment to CSCIs ratings, since debt at CSCI's subsidiaries was 15-20% of consolidated assets at end-2012. We do not think subordination risk is significant. CSCI has access to stable FCF from its unencumbered Hong Kong/Macau subsidiaries; its China subsidiaries are more leveraged, in our view.
288
HG CORPORATES
Company profile
China State Construction International Holdings Ltd. (CSCI) provides building construction and civil engineering works services in Hong Kong and Macau. It is also engaged in the construction of affordable housing and the construction and operation of infrastructure projects (bridges and toll roads) in China. Many of its China projects are based on BT and BOT contracts. Government projects account for 60-70% of CSCIs revenue and order backlog. CSCI was spun off from China Overseas Land & Investment Limited (COLI) in 2005 and is listed in Hong Kong. It is 57.1% held by China Overseas Holdings Limited (COHL), which is 55.1% held by China State Construction Engineering Corp. (wholly owned by SASAC).
Asia Credit Compendium 2014 China State Construction International Holdings Ltd. (Baa3/Sta; BBB-/CWP; BBB-/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (7.7) 4.9 6.9 52.6 8.2 (4.2) 6.0 36.5 95.9 7.7 9.6 53.7 5.8 1.7 8.0 59.5 53.8 8.7 9.7 39.7 4.4 0.6 11.3 7.4 38.6 10.0 8.6 42.6 5.1 1.7 10.0 8.2 36.4 10.3 7.0 53.1 7.7 1.9 NA 7.1 20 10 0 2009 2010 2011 2012 H1-13 1.0 0.5 0.0 40 30 2.0 1.5 (198) (364) (562) (187) (169) (3,485) (3,653) (252) (1,282) (1,575) (2,857) (430) (3,690) (1,176) (4,867) (523) (1,236) NA NA NA 60 50 5,874 15,313 3,889 (1,985) 3,664 3,736 18,679 5,351 1,615 4,623 5,464 26,733 6,259 795 9,497 6,719 37,213 10,045 3,326 13,853 12,812 47,793 17,133 4,321 15,153 9,706 472 (13) 801 674 11,983 926 (16) 1,333 1,036 16,379 1,424 (193) 1,844 1,507 19,765 1,974 (239) 2,522 2,131 10,896 951 (185) 1,397 1,173 2010 2011 2012 H1-13
CSCIs revenue split by region (%)

100 90 80 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2015 Target Hong Kong Macau PRC Others
CSCIs order backlog (HKD bn LHS, x RHS)

80 70 BT - Affordable housing BT - Infrastructure EPC - HK/Macau EPC - PRC Others Order backlog/revenue (RHS) 4.0 3.5 3.0 2.5
HG CORPORATES
CSCIs revenue split by business (%)

Cash construction 100 90 80 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2015 Target
CSCIs debt maturity profile, 2012 (HKD bn)

Others 7 6 5 4 3 2 1 0 < 1Y 1Y-2Y 2Y-5Y >5Y
Infrastructure investment
289
Asia Credit Compendium 2014 China Vanke Co. Ltd. (Baa3/Sta; BBB/Sta; BBB+/Sta)

We like Vankes strong delivery track record, high sales and asset turnover model, solid credit metrics and strong liquidity. We also think continued urbanisation in China will support the companys business model. We believe these factors will compensate for the challenges it is likely to encounter with continued large replenishment and construction needs per annum to maintain its high sales and asset turnover. The company has generally maintained a high cash level (total cash of CNY 37bn as of September 2013). While land acquisition costs rose to CNY 49bn in 9M-2013 and new construction starts totalled 13.6mn sqm, contracted sales have performed well, amounting to CNY 146bn in 10M-2013. Credit metrics have also been stable, in line with its HG credit rating.

A mass-market player focused in top-tier cities with high asset turnover: Vankes contracted sales are much higher than those of peers with similar land bank sizes. The company sold CNY 141bn worth of property (13mn sqm of GFA) in 2012 and targets CNY 160bn of sales in 2013 (sales in 10M-2013 totalled CNY 146bn at an ASP of CNY 11,518psm). Meanwhile, recognised sales hit CNY 94bn (9.0mn sqm) in 2012 and CNY 59bn (5.8mn sqm) in 9M-2013. As such, Vanke needs to aggressively replenish its land bank each year to ensure sufficient saleable resources for at least two to three years of sales. However, its profitability is limited by its sales and development model while selling prices are held competitive given its target markets, cost pressure is increasing with rising land and construction costs. Gross margin was 29.4% in H1-2013 (2011: 36.1%; 2012: 32.4%), and EBITDA margin was 22.9% (2011: 28.6%; 2012: 26.5%). Liquidity is key for sustaining its business model: Vanke generally keeps a high cash buffer in view of its continuously increasing land and construction capex needs. Total cash was CNY 37bn as of September 2013, lower than the CNY 52bn at end-2012, but marginally higher than the CNY 34bn at end-2011. The fall in cash level reflects the companys high land acquisitions and commencement of new construction in 9M-2013 land acquisitions totalled CNY 49bn in 9M-2013 (2012: CNY 48bn), and new construction starts amounted to GFA of 13.6mn sqm (2012: 14.3mn sqm). Solid credit profile, with HG ratings from all three rating agencies: Vanke is one of the few non-SOE developers with an HG rating. The company has maintained a strong credit profile in the past five years, despite a continued increase in debt. It had total debt of CNY 74.7bn as of September 2013, compared with CNY 71.6bn at end-2012 and CNY 50.4bn at end-2011. In addition to onshore bank and trust loans, Vanke raised its first offshore debt in March backed by its HG rating (USD 800mn of 2.625% of 2018 bonds). It also issued SGD 140mn 3.275% of 2017 bonds and CNY 1bn 4.5% of 2018 CNH bonds in November. Total debt/LTM EBITDA was 2.73x in H1-2013 (2012: 2.79x), LTM EBITDA/interest was 4.33x (2012: 4.44x), and total debt/capital was 45.7% as of June 2013, compared with 46.6% at end-2012. Challenging business environment, despite strong delivery track record: While we think continued urbanisation in China will support the companys business model, we expect it to face an increasingly difficult operating environment as it continues to purchase large amounts of land per annum to achieve high asset turnover while maintaining a competitive pricing strategy to ensure sales. The company is also exploring expansion into offshore property markets (such as Hong Kong, Singapore and the US). Shareholding and bond structure
China Resources Co. Ltd.
14.72%
HG CORPORATES
Company profile
Founded in 1984 and listed on the SZSE in 1991, China Vanke Co. Ltd. (Vanke) is Chinas largest property developer in terms of contracted sales. Over the past 20 years, the company has established a strong brand name nationwide, specialising in the development of small to medium-sized residential units for mass-market buyers across more than 60 cities in China. The company adopts a high asset turnover strategy and needs to replenish land bank aggressively each year. The companys contracted sales exceeded the CNY 100bn mark in 2010. As of September 2013, Vanke had a total attributable land bank of 45.68mn sqm, sufficient for two to three years of sales.
Other A shareholders
73.32%
B/H shareholders
11.96%
China Vanke Co. Ltd. (A- and B-shares listed on the SZSE) Onshore Offshore 100% Vanke Real Estate (HK) (Guarantor of the proposed bonds)
100%
Keepwell deed Deed of equity purchase undertaking

Guarantee
Bestgain Real Estate Limited (Bond issuer, Baa3)
Bond issues
Bondholders
290
Asia Credit Compendium 2014 China Vanke Co. Ltd. (Baa3/Sta; BBB/Sta; BBB+/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating CF^ Capital expenditure Free cash flow Dividends^ Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) NA 18.7 41.3 3.7 3.9 266.6 65.7 30.1 46.5 3.3 4.8 225.3 34.6 28.6 42.6 2.6 4.6 145.3 32.6 26.5 46.6 2.8 4.4 147.1 16.6 22.9 45.7 2.8 2.9 83.8 6,697 (806) 5,891 NA (1,081) (262) (1,343) NA (2,862) (262) (3,124) NA (2,871) (14,268) (151) (49) 23,002 37,817 34,240 52,292 37,604 46,346 8,683 (2,207) 9,387 5,330 47,764 14,391 (3,003) 14,543 7,283 67,709 19,374 (4,208) 19,490 9,625 96,860 25,686 (5,782) 25,698 12,551 38,941 8,920 (3,046) 8,793 4,556 2010 2011 2012 H1-13
Profitability (CNY bn LHS, % RHS)

120 EBITDA margin (RHS) Revenue 80 100
100
80 60 60 40 40 20
137,609 215,985 296,534 379,095 432,242 31,925 8,923 45,409 47,395 9,578 54,586 50,393 16,153 67,833 71,593 19,302 82,138 74,136 36,533 88,065
20
0 2009 2010 2011 2012 LTM Jun-13
Debt metrics (x)

5.0
4.5
LTM EBITDA/ interest
(3,022) (14,316) NA NA
4.0
HG CORPORATES
3.5
3.0
2.5
Total debt/LTM EBITDA
2.0 2009 2010 2011 2012 H1-13
Debt metrics (CNY bn LHS, % RHS)

75 Total debt/cap. (RHS) 100
Debt maturity, Jun-13** (CNY bn)

50
60 Total debt 45 Total cash*
80
40
60
30
30
40
20 USD 2018 bonds
15
20
10 Bank loans < 1 yr 1-2 yrs 2-3 yrs > 3 yrs
0 2009 2010 2011 2012 H1-13
*Including restricted cash; **estimate; âfter dividend payments; Source: Company reports, Standard Chartered Research
291
Asia Credit Compendium 2014 CLP Power Hong Kong Ltd. (A1/Neg; A/CWN; A/RWN)

CLP Power enjoys predictable cash flow from its Hong Kong operations with a full cost passthrough. However, it will need to invest significantly to improve its capacity mix in the medium term, and will likely face pressure on future tariff adjustments. High dividend payouts since 2009 have moderated its balance-sheet strength, while CLPHs operations in Australia and India are riskier and face profitability pressure. The proposed stake increases in PSDC and CAPCO will lead to a further weakening of credit metrics if they are majority debtfunded. We change our outlook to Negative from Stable, while acknowledging that the company could issue equity or hybrid bonds and undertake an IPO of EnergyAustralia to improve its credit standing.

Stake increases in CAPCO and PSDC: CLP Power is acquiring a further 30% stake in CAPCO for HKD 12bn and the remaining 51% in PSDC for HKD 2bn. It will fund the acquisitions through a HKD 10bn bridge loan, and has plans to issue equity or hybrid debt or undertake asset sales to partly refinance the bridge loan. It expects to complete the acquisitions in mid-2014, and we expect a one-notch rating downgrade if they are majority debt-funded (more than HKD 5bn). Secure business position and stable cash flow: CLP Powers business risk is low, given its monopoly over power supply in Kowloon and the New Territories. It supplies c.74% of the electricity consumed in Hong Kong, although demand growth will be low in the medium term, as Hong Kong is a mature market. CLP Power operates under a Scheme of Control (SOC), which leads to the timely recovery of costs and stable cash flow. While the revised SOC (implemented in October 2008) lowered the permitted rate of return to 9.99% on average net fixed assets (from 13.5-15.0%), the tariff mechanism has been transparent and allows a 100% cost pass-through until 2018. That said, there is increasing social and political pressure on tariff adjustments, and CLP Power was allowed a tariff hike of only 4.9% (versus its proposed 9.2%) in 2013. Hence, its earnings increased 5.6% y/y in H1-2013, despite a 3.8% y/y decline in total electricity sales. The Hong Kong government undertook a mid-term review of the SOC in November 2013; we believe the small changes proposed will not have a material impact on CLP Powers credit metrics . Fuel supply risks in the medium term: To tackle Hong Kongs poor air quality, the government is tightening environmental regulations and will finalise a 2020 target for a cleaner fuel mix. Hence, the company may need to reduce its dependence on coal-based plants and invest in alternate fuel capacity, leading to some uncertainty for its mid- to long-term operations and financing needs. Gradual increase in leverage: CLP Group has carried out a capital management exercise that has leveraged up CLP Power via the upstreaming of dividends to CLP Holdings. CLP Powers dividend payout ratio was 85% in 2011 and 74% in 2012. Thus, while it generates substantial FCF (average of HKD 4.45bn from 200912), its debt level increased to HKD 33.4bn in 2012 from HKD 14.8bn in 2008. We believe future dividend payments will be tailored to prevent a major deterioration in the capital structure. We expect CFO of HKD 10.5-11.0bn in 2014, which will keep debt/capital around 50-55% (52.2% as of 2012) and debt/EBITDA around 3.0x (2.9x). CLP Power enjoys excellent access to capital markets, and its liquidity position is sound (HKD 5.8bn of undrawn facilities as of June 2013). Credit profile is tied to the parents: CLP Power is the main operating entity of CLPH (74.7% of parents EBIT in 2012), and given its large dividend payouts, the credit profiles of the two companies are interlinked. CLPH has expanded into riskier, non-regulated businesses and power-generation projects in China, India, Taiwan and Thailand. In March 2011, it completed the AUD 2.2bn acquisition of energy assets in New South Wales, which weakened its financial metrics. In H12013, CLPH recorded a 51% y/y decline in recurring earnings to HKD 347bn. The Australian operations recorded a loss of HKD 45mn (profit of HKD 268mn in H12012) due to weak demand, low wholesale prices, rising operating costs and regulatory uncertainty. The Indian operations posted a larger loss of HKD 212mn (HKD 19mn loss in H1-2012) as ongoing coal shortages lowered the Jhajjar plants availability to 40%. We do not expect a material improvement in the Australia and India operations in 2014. That said, the company raised HKD 7.5bn of equity at end-2012 and is considering a potential IPO of its Australian business, indicating a desire to improve its balance-sheet metrics.
292
HG CORPORATES
Company profile
CLP Power Hong Kong Ltd. (CLP Power) is an integrated electric utility in Hong Kong. It has a de facto monopoly in Kowloon, the New Territories, Lantau Island and some outlying islands. Its supply area covers c.1,000 sq km, and it has c.2.4mn customers. It buys power from Castle Peak Power Co. Ltd. (CAPCO), Guangdong Daya Bay nuclear power station and Hong Kong Pumped Storage Development Co. Ltd. (PSDC). In 2012, its fuel mix was 49% coal, 30% nuclear and 21% gas. CLP Power is currently 100% owned by CLP Holdings Ltd. (CLPH), which has operations in Australia (EnergyAustralia), mainland China and other Asian countries. CLPH is listed in Hong Kong. The Kadoorie family owns a 33.4% stake.
Asia Credit Compendium 2014 CLP Power Hong Kong Ltd. (A1/Neg; A/CWN; A/RWN)
Summary financials
2010 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 6.2 34.1 13.3 47.9 2.5 2.5 8.8 15.5 4.2 33.7 12.3 47.9 2.6 2.5 11.6 13.7 9.8 34.7 12.6 52.2 2.9 2.3 13.7 13.9 (8.6) 18.4 8.1 42.1 3.4 2.8 13.4 5.2 5.9 16.2 8.3 41.9 3.2 2.8 (0.3) 5.0 8,832 (4,331) 4,501 (6,110) 8,391 (4,716) 3,675 (5,000) 9,969 (5,304) 4,665 (5,600) 17,306 (9,535) 6,786 (6,135) 2,563 (3,948) (2,110) (3,819) 71 82,744 25,603 25,532 27,903 609 85,836 27,391 26,782 29,811 6,054 13,026 7,640 10,000 5,000 0 2009 2010 2011 2012 H1-2013 29,944 10,199 (660) 7,335 6,342 31,518 10,629 (777) 7,355 6,480 33,643 104,861 11,671 (837) 7,978 6,868 19,325 (3,688) 9,984 8,312 51,706 8,366 (2,040) 4,436 3,767 20,000 15,000 2011 2012 2012* H1-13*
CLP Powers sales mix (GWh)

35,000 30,000 25,000 Commercial Exports Manufacturing Infra and public servics
88,909 228,756 214,763 33,435 27,381 30,645 66,198 53,172 91,201 62,655 55,015 86,846 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2009 2010 2011 2012 H1-13 CLP Power CAPCO EM's share CAPCO CLP's share Residential
CLP Powers capex (HKD mn)
HG CORPORATES
CLP Holdings EBIT breakdown (HKD mn)

16,000 14,000 12,000 10,000 8,000 SE Asia & Taiwan
CLP Holdings equity-adjusted capacity mix (MW)

9,000
China India 7,500
Australia 6,000
4,500 6,000 4,000 2,000 0 -2,000 2011 2012 H1-2013

*Data for CLP Holdings; Source: Company reports, Standard Chartered Research
Hong Kong
3,000
Under construction In operation
1,500
0 Hong Kong China Australia India Others
293
Asia Credit Compendium 2014 China National Offshore Oil Corp. (Aa3/Sta; AA-/Sta; A+/Sta) CNOOC Ltd. (Aa3/Sta; AA-/Sta; A+/Sta)

We maintain our Stable credit outlook on CNOOC Group and CNOOC. The companies has a strong operating profile in E&P due to a competitive cost structure, long reserve life and a supportive regulatory regime. We believe the contribution from nonE&P businesses will increase in the next few years. Given that 58.5% of CNOOCs reserves are undeveloped, organic capex will remain high. CNOOC Groups conservative financial metrics have weakened somewhat after the Nexen acquisition. Given the large investment plans, consolidated leverage will be c.1.5x in 2014. While sovereign ownership and its strategic importance will provide support, we believe the Group has limited rating headroom for another large debt-funded acquisition.

Strong operating profile in E&P: CNOOCs reserve base of 3.49bboe (excluding Nexen) and reserve life of 10.2 years is comparable to large independent E&P companies globally. It also benefits from a low production cost base with low labour costs, predominantly shallow waters offshore China and favourable productionsharing contracts (PSCs). While all-in production costs have been rising (USD 37.8/bbl in H1-2013, versus USD 22.2/bbl in 2009), they still compare favourably with standalone E&P players. That said, we expect costs to increase due to the companys focus on unconventional reserves and deep -water exploration. Also, its China output levels have stagnated the 2013 production target of 338-348mmboe (excluding Nexen) is broadly similar to its 2010 output level. Non-E&P businesses growing strongly: CNOOC Group plays an increasingly important role in China's energy chain. It has grown to be a major player in LNG (76% share of Chinas imports in 2012) and offshore drilling and oilfield services. That said, its market position in refining and petrochemicals is weaker than CNPCs and Sinopecs. Non-E&P businesses accounted for 18% of PBT in H1-2013, and we expect their contributions to grow in the coming years. Supportive regulatory regime: CNOOC has the exclusive right to enter into PSCs with foreign partners offshore China. The foreign companies bear all exploration costs, while CNOOC has the right to acquire a stake of up to 51% in any block where a foreign partner has discovered petroleum. That said, the government imposed a special oil levy in 2006, and CNOOCs outlay on this represented c.25% of its pre-tax profit in H1-2013. Large investment appetite: CNOOC has a good track record of growing its reserves thanks to its experience in offshore China. However, c.58.5% of its reserves are undeveloped, and it plans to further diversify geographically and maintain a reserve replacement ratio of more than 100% (183% during 2010-12). it has undertaken a series of acquisitions and in 2012, it acquired Nexen for USD 15.1bn. CNOOC has budgeted capex of USD 12-14bn in 2013, which is 30-50% higher than the 2012 levels. That said, we expect the pace of acquisitions to slow down and CNOOC to focus on integrating the Nexen acquisition in the near term. Separately, CNOOC Group is constructing several LNG receiving terminals, expanding its refinery capacity and constructing several deep-water exploration platforms. Financial metrics have weakened: CNOOC posted consistent FCF in 2000-12. However, its strong financial metrics have since weakened somewhat due to the USD 6bn debt raised to fund the Nexen acquisition debt to EBITDA is now 1x (versus 0.3x in 2011), while debt to capital is 28.3% (versus 12.6%). In H1-2013, EBITDA grew 21% to CNY 72bn; we expect 8-10% growth in earnings in 2014. CNOOC Groups investment spending has risen in recent years and, given its sizeable E&P capex plans (including costly deep-water exploration), we expect consolidated annual capex of c.CNY 85-95bn in 2013-14. We believe the company has little rating headroom to undertake another substantial acquisition. Assuming no further large M&A, we expect consolidated leverage of around 1.5x and debt to capital of around 30% in 2014. Sovereign linkage: CNOOC Group is strategically important to China, given its role in developing offshore oil and gas reserves and in importing LNG to supplement the countrys onshore gas production. CNOOC Group will likely be used as a vehicle to support Chinas long-term energy-security goals. Hence, its overall credit profile will continue to benefit from a high likelihood of support from the government.
HG CORPORATES
Company profile
China National Offshore Oil Corp. (CNOOC Group) is among the three oil and gas companies wholly owned by Chinas State Council. It owns 64.45% of CNOOC Ltd. (CNOOC), which is the designated operator of the countrys offshore oil and gas assets. CNOOC has also expanded into Indonesia, Australia, Nigeria, Argentina, Canada and other countries; overseas reserves made up 31% of its reserve base of 3.49bboe as of December 2012. CNOOCs output volumes have stagnated in recent years and are budgeted at 338-348mmboe in 2013. CNOOC accounted for 79% of CNOOC Groups profits in 2012; the remaining 21% was contributed by the growing gas, power, refining petrochemical and other downstream operations.
294
Asia Credit Compendium 2014 China National Offshore Oil Corp. (Aa3/Sta; AA-/Sta; A+/Sta) CNOOC Ltd. (Aa3/Sta; AA-/Sta; A+/Sta)
Summary financials
2011* Income statement (CNY bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 23.7 50.3 33.1 12.6 0.3 NM 194.4 76.3 (0.9) 48.5 26.1 15.7 0.5 NM 139.4 65.6 20.8 51.8 21.3 28.3 1.0 0.2 NA 46.3 (5.8) 26.9 16.0 21.4 1.0 0.1 NA 66.3 15.6 31.3 15.2 28.6 1.4 0.7 NA 115.0 10 5 0 2009 2010 2011 2012 H1-2013 20 15 114.5 (60.4) 54.1 (20.9) 90.7 (65.4) 25.3 (15.6) 52.6 (124.1) NA NA 64.8 (248.1) (183.3) NA 46.0 (179.2) (133.2) NA 30 75.7 384.3 38.0 (37.7) 262.9 133.7 456.1 57.9 (75.8) 309.8 100.9 614.6 130.1 29.2 329.6 132.9 818.1 141.9 9.0 520.4 107.3 988.7 219.8 112.5 550.1 40 35 0 2009 2010 2011 2012 H1-2013 200 Oil 240.9 121.1 (1.6) 92.6 70.3 247.6 120.0 (1.8) 90.2 63.7 139.0 72.1 (2.6) 47.8 34.4 526.6 141.5 (2.1) 105.0 48.8 277.9 86.9 (0.8) 58.4 28.5 2012* H1-13* 2012** H1-13**
Average production levels* (kboed)

1,200
1,000
800
600
Gas
400
Total production costs* (USD per boe)
HG CORPORATES
25
Capex breakdown* (USD bn)

10
Debt and cash levels* (CNY bn)

140 120
8 100 Others 6 Production 80 60 Development 2 20 Exploration 0 2009 2010 2011 2012 H1-2013 0 2009 2010 2011 2012 H1-2013 40 Debt Cash and equiv.
*Data for CNNOC Ltd.; **data for CNOOC Group; Source: Company reports, Standard Chartered Research
295
Asia Credit Compendium 2014 ENN Energy Holdings Ltd. (Baa3/Sta; BBB-/Sta; BBB/Pos)

ENN benefits from a strong position in the piped gas distribution sector, enabling it to generate secure cash flow. Chinas policy support for natural gas and ENNs strategy of focusing on cities with low penetration rates will lead to strong earnings growth. However, the regulatory environment is evolving, and operating margins will decline on account of a lower share of connection fees. Also, its track record (e.g., its HKD 9.2bn bid for China Gas) and high cash balance indicate a tolerance for large-scale M&A. While our base case is for a gradual improvement in ENNs financial metrics in 2014, we highlight that its acquisition appetite and dividend payout plans will be key for its credit profile. We currently have a Stable credit outlook on ENN.

Solid operational profile: ENN has monopoly positions in its piped gas projects (typically for 30 years), enabling it to generate stable earnings from gas sales. As of June 2013, it had secured supply of 5.84bcm of natural gas through long-term (15- to 25-year) contracts and its own upstream investments. Over the years, it has expanded its piped gas sales, although one-off connection fees declined to 17.8% of revenue in H1-2013 from 50.2% in 2005. That said, the company faces increasing competition from major oil and gas companies in acquiring projects. Strong growth prospects: Chinas rapid urbanisation and rising affordability levels, the governments promotion of natural gas, and the construction of gas infrastructure projects (national pipelines and LNG terminals) will support ENNs long-term growth prospects. In H1-2013, the company added nine piped gas projects, while increasing its connected households by 704,334 and installed daily capacity of its C&I customers by 3.98mcm. We believe its business model is slowly shifting from a focus on new city licences to organic growth. Current gas penetration in ENNs projects is only 43.8%, which indicates strong growth potential. In addition, the vehicle gas-refuelling business is now a steady source of revenue (revenue growth of 29.3% in H1-2013 and a revenue share of 13.2%). Regulatory risks: While upstream gas prices and transmission tariffs are controlled by the central government in China, end-user tariffs are decided by local governments. ENN is able to pass on price increases to C&I and vehicular gas customers with a slight delay, but residential customer tariff revisions require a local hearing and take at least three to six months to implement. In June 2013, the city-gate price for non-residential customers was increased by an average of CNY 0.49 per cm, which affected 55 of its projects. As of September 2013, ENN had been able to pass on price increases for 90% of the projects, and we do not forecast a major impact on profitability in 2013. Separately, there is a risk that ENNs connection fees may be reduced or eliminated for some projects. M&A risks: In 2011, ENN risked a substantial deterioration in its financial profile when, as part of a consortium, it made a cash offer of HKD 9.2bn for China Gas (the consortium offered a total of HKD 16.7bn). While the bid was eventually dropped due to strong opposition from China Gas shareholders, we believe the incident indicates ENNs M&A appetite. ENN had raised debt to fund the China Gas acquisition and has not deleveraged even after the deal failed. With HKD 7.75bn of cash on its books (much higher than its normal requirement of HKD 2.53bn), ENN may look for acquisition opportunities over the next 12-18 months. Moderate financial metrics: ENN posted a strong set of H1-2013 results, with EBITDA up 20% y/y at CNY 2.1bn. We expect its EBITDA margin to gradually trend lower as the share of connection fees in the revenue mix declines further. However, CFO should grow by c.10-15% in 2014 on the back of strong volume growth. ENNs FCF, which had been negative during 2010 -12, turned positive in H1-2013. We expect annual investment of c.CNY 3-3.2bn in 2013-14, with c.7080% spent on network extensions and maintenance, and the remainder on new licences. While the investment outlay can be funded through CFO, the companys M&A appetite and evolving dividend policy (it did not pay an interim dividend in H12013) lead to a lack of clarity on its deleveraging plans. ENNs leverage was 3.3x, and debt to capital was 53.2% as of June 2013. Our base-case scenario assumes a gradual improvement in these metrics, although we highlight that its acquisition appetite and dividend payout plans will be key for its credit profile.
HG CORPORATES
Company profile
ENN Energy Holdings Ltd. (ENN) is one of the largest privately owned piped gas operators in China. It is involved in developing gas pipeline infrastructure, the distribution and sale of piped gas and bottled LPG, and the operation of vehicle gasrefuelling stations. Its customers include residential households and commercial and industrial (C&I) users. As of June 2013, it had 126 projects in 14 provinces in China, with a connectable population of 57.4mn, residential connections of 8.5mn and a pipeline network of 22,588km. It also owned 376 vehicle gas-refuelling stations. The company has also expanded into Vietnam with three projects. ENN, which was formerly known as Xinao Gas, is 30.1% owned by its founders, Wang Yosuo and Zhao Bajou.
296
Asia Credit Compendium 2014 ENN Energy Holdings Ltd. (Baa3/Sta; BBB-/Sta; BBB/Pos)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 36.8 22.6 13.2 47.8 3.1 1.7 16.9 5.1 8.8 18.5 12.5 45.4 3.0 1.6 17.4 5.9 33.2 18.3 13.4 54.7 3.9 1.7 11.2 5.0 26.7 19.4 13.9 51.3 3.2 1.5 12.4 4.7 19.9 20.3 13.8 53.2 3.3 1.3 NA 5.2 1,798 (1,715) 83 (309) 2,370 (2,688) (318) (418) 2,083 (3,460) (1,377) (527) 3,215 (3,451) (236) (670) 1,441 (1,069) 547 0 2,713 16,635 5,885 3,172 6,427 2,851 19,640 6,263 3,412 7,540 5,869 26,888 10,672 4,803 8,840 6,156 30,893 11,242 5,086 10,670 7,751 33,897 12,808 5,057 11,255 8,413 1,902 (370) 1,383 803 11,215 2,070 (350) 1,811 1,013 15,068 2,758 (549) 2,327 1,253 18,027 3,494 (749) 2,852 1,482 10,386 2,112 (346) 1,563 737 2010 2011 2012 H1-13
Residential segment (000 connections LHS, mcm RHS)

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2009 2010 2011 2012 H1-2013 Sales volume (RHS) Connections 1,000 900 800 700 600 500 400 300 200 100 0
C&I segment (mcm/day LHS, mcm RHS)

40 35 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 H1-2013 Capacity 1,000 4,000 Sales volume (RHS) 6,000
5,000
HG CORPORATES
3,000
2,000
Revenue breakdown, H1-2013 (CNY mn)

Others
EBITDA breakdown, H1-2013 (CNY mn)
Others
Wholesale gas
Wholesale gas
Vehicle gas
Vehicle gas
Connection fee
Connection fee
Piped gas 0 2,000 4,000 6,000 8,000
Piped gas 0 200 400 600 800 1,000 1,200 1,400 1,600
297
Asia Credit Compendium 2014 GS Caltex Corp. (Baa2/Neg; BBB/Neg; NR)


GS Caltex enjoys a strong operating profile, given that it operates one of the most complex refineries in Asia and holds a 25% domestic market share in refined products. However, refining earnings are volatile and GRMs will likely be under some pressure in 2014. The petrochemical segment should generate strong earnings due to product diversity. Also, the company has completed its large investments, and annual capex in 2013-14 will reduce to c.KRW 600-800bn. Our base-case scenario assumes a 4% EBITDA margin and leverage of 4.5-5.0x in 2014. Since these metrics remain weak for its ratings, we revise our credit outlook on GS Caltex to Negative from Stable.

Strong operating profile but earnings volatility in refining: GS Caltex has integrated operations, and it enjoys a market share of c.25% for refined products in Korea. The Yeosu complex is the fourth-largest single-site refinery globally, and a series of facility upgrades in the past five years has made it one of the most complex refineries in Asia. This in turn will improve the companys product mix and increase the proportion of high-value-added products like gasoline and diesel. That said, the refining industry is facing structural overcapacity, and with GS Caltex exporting c.60% of its refinery production, its profitability is under pressure. The segment posted an EBIT loss of KRW 508bn in 2012 due to the sharp decline in oil prices. While earnings improved somewhat in 9M-2013 (an EBIT profit of KRW 100bn), we believe refining margins will remain weak in 2014. Petrochemicals are an important contributor to earnings: In petrochemicals, GS Caltex operates the worlds fourth-largest paraxylene plant, with the bulk of its volume sold under long-term contracts. It also has extensive presence in benzene, toluene and polypropylene, which have different price cycles; this helps anchor overall cash flow. While more than 80% of its petrochemical production is exported, its strong business profile helped the segment post average EBIT of KRW 674bn during 2009-12. In 9M-2013, the segment was the biggest contributor to earnings, with a 71.6% share of overall EBIT. Shareholder and institutional support: Chevron (Aa1/AA) is closely involved in GS Caltexs operations through a 50% board representation. GS Caltex accounts for c.50% of Chevrons Asian refining capacity and buys around 30% of its feedstock from its parent. Separately, GS Caltex is important for the domestic economy, since it is among the few fuel suppliers in Korea. Given the Chevron linkage and potential institutional support, Moodys accords GS Caltex a two -notch rating uplift, while S&P provides it a one-notch uplift. Capex will decline: GS Caltex has undertaken a series of investments for upgrading its oil-refining facilities in recent years, including construction of its fourth heavy oil upgrading plant, which became operational in March 2013. Average annual capex during 2009-12 was KRW 1.26tn, although future investment spending will be largely for maintenance purposes. As a result, we expect the company to spend only c.KRW 600-800bn annually in 2013-14. Credit metrics will remain weak for its ratings: GS Caltexs credit metrics have deteriorated in recent years (and are currently weak for its ratings) as a result of heavy capex, higher working capital requirements and refining margin pressure. EBITDA margin improved to 3.7% in 9M-2013 from 2.2% in 2012. In 2014, we expect EBITDA of KRW 1.7-1.9tn (margin of c. 4%) and leverage to remain high at 4.5-5.0x (versus 6x in 9M-2013). That said, the company has demonstrated some willingness to reduce its debt burden. In 2012, it raised KRW 1.5tn through disposal of non-core assets, a large portion of which was used for retiring debt. That said, the company also paid out a one-time special dividend of KRW 100bn, and further special dividend payments cannot be ruled out (we expect dividend payments of KRW 400-500bn in 2013-14, versus KRW 294bn in 2012). Liquidity and ratings: GC Caltexs liquidity appears tight with its cash balance of KRW 1.55tn and annual CFO of KRW 1.3-1.5tn inadequate to cover short-term debt of KRW 4.94tn. However, a large part of its short-term debt is usance facilities for crude oil purchases (which will be rolled over), and the company has strong access to local markets. Moodys and S&P both have a negative outlook on the company, and we believe it could face a rating downgrade if 2014 margins are narrower or capital investment is higher than our assumptions.
298
HG CORPORATES
Company profile
GS Caltex Corp. (GS Caltex) owns and operates Koreas secondlargest oil refinery (775kbd). This is located in Yeosu and accounts for 27% of domestic capacity. It has an extensive retail network of over 3,400 service stations (or c.22% of the service stations in Korea). The company also has an integrated petrochemical plant, with capacity of 1.35mtpa for paraxylene and 0.93mtpa for benzene. Separately, GS Caltex is one of the leading producers of lubricant oil products, with a 22% domestic market share. The company was set up in 1967 as a JV between Lucky Chemical and Caltex. It is currently 50% owned by GS Holdings Corp. (through GS Energy) and 50% owned by Chevron Corp. (through intermediate holding companies).
Asia Credit Compendium 2014 GS Caltex Corp. (Baa2/Neg; BBB/Neg; NR)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 40.2 5.6 6.3 59.8 7.0 5.7 9.2 4.2 14.6 5.0 7.0 58.1 6.3 5.4 10.2 7.0 43.3 5.5 9.8 56.5 4.6 3.9 13.9 7.5 (57.8) 2.2 2.6 51.5 9.0 7.6 1.1 3.2 40.1 3.7 5.9 52.6 6.0 5.1 4.5 5.2 159 (2,010) (1,855) 0 (148) (1,112) (1,263) (200) 518 (841) (326) (346) 1,565 (1,061) 501 (497) 87 (393) (91) (494) 2,017 21,139 10,867 8,850 7,290 1,634 22,846 11,192 9,558 8,069 1,538 25,539 11,595 10,057 8,930 1,488 22,544 9,683 8,195 9,128 1,550 22,832 10,123 8,573 9,113 27,908 1,552 (373) 610 670 35,316 1,778 (254) 978 865 46,456 2,548 (341) 1,618 1,242 47,873 1,076 (334) 739 734 34,251 1,264 (244) 145 477 2010 2011 2012 9M-13
Profitability (KRW tn LHS, % RHS)

60 EBITDA margin (RHS) Revenue 6
50
40
30
20
10
0 2009 2010 2011 2012 9M-13
Debt metrics (x)

62 60 58 56 54 52 50 2 48 46 2009 2,500 Petrochemical 2,000 2010 2011 2012 9M-13 1 0 Debt/capital 10 9 Debt/EBITDA (RHS) 8 7 6 5 4 3
HG CORPORATES
EBIT contribution, 9M-13

2,500 2,000 1,500 Lubricants 1,000 500 0 -500 -1,000 2009 2010 2011 2012 9M-2013
Capex trend (KRW bn)
1,500
Refining Others
1,000
500
0 2009 2010 2011 2012 9M-13
299
Asia Credit Compendium 2014 Guoco Group Ltd. (NR; NR; NR)

Guocos consolidated balance sheet has weakened in recent years (debt/capital of 49.8%, versus 29.7% in FY10), and we believe the financial metrics of its key operating subsidiaries are unlikely to improve in the near term. While the interest coverage ratio at the holdco level is comfortable at 6.2x, modest returns of the PID in recent years and the lack of disclosure about its investment book indicate risks for bondholders. We believe recent events such as attempts to privatise Guoco and Hong Leong Capital (although unsuccessful) and the special dividend declared by the holdco are credit-negative for the company. We therefore maintain our Negative credit outlook on Guoco.

Holdcos moderate credit profile: As a holding company, Guoco does not have direct access to cash flow of the listed operating companies, and only receives dividends from them. However, it has full management control over its wholly owned PID. At the holdco level, Guoco previously had strong metrics, with a net cash position of USD 2.4bn until FY09. However, given the channelling of funds to the PID, stake increases, and on-lending to various subsidiaries, the holdco had a net debt position of USD 430mn as of FY13. The holdco also paid a special dividend of USD 207mn in FY13, by way of a distribution in specie of Rank shares, which brought down its stake to 51.8% from 74.5% and will moderately affect its dividend inflows. While we expect the holdcos dividend income (at USD 222mn) and the interest coverage ratio (at 6.2x) to remain comfortable in FY14, we think Guoco could aggressively deploy its cash balance of USD 1.1bn towards portfolio investments or stake increases in subsidiaries, since the privatisation bids for Guoco and Hong Leong Capital were not successful. Investment risks at the PID: The PID does not disclose any information on the composition of its USD 3.1bn investment book, apart from the 14.9% stake in BEA. While the portfolio is only moderately leveraged (net debt-to-portfolio value of 28%) and generated strong returns of 18% in FY13, we estimate that total returns over FY08-FY13 were modest at USD 240mn. As of FY13, its 15% stake in BEA was worth USD 1.3bn and made up 41% of the portfolio, suggesting concentration risks. Guoco is a passive investor and has no board representation in BEA. Tight liquidity at GuocoLand: GuocoLands balance sheet has moderated following aggressive land acquisitions in Singapore and China. Debt/EBITDA is currently at 74x, and liquidity is tight, with cash of SGD 934mn against short-term debt of SGD 1.5bn. It is involved in a large-scale integrated development project (Tanjong Pagar, at a cost of SGD 3.2bn), and some of its residential projects have faced cost over-runs in Singapore. The high land acquisition cost of SGD 1.7bn for the Tanjong Pagar project led it to undertake a SGD 533mn rights issue and divest a 20% stake in the project. Its China business has slowed since FY10 and posted an operating loss in FY13. GuocoLand has also disposed of its stake in a Chinese subsidiary for SGD 246mn to improve liquidity. Moderate credit profile for hospitality and leisure: GuocoLeisures hotel and gaming businesses are cyclical and are currently experiencing a slowdown. However, it receives stable cash flow from its share of Bass Strait royalties (USD 45mn in FY13), which account for 35% of its EBITDA. As of FY13, GuocoLeisure had moderate leverage of 2.7x and EBITDA coverage of 4.1x. The Rank Groups financial profile has weakened following its debt-funded acquisition of Gala Casinos (GBP 179mn). Its leverage increased to 3.1x as of FY13 from 0.5x in FY12. If we include non-operating leases of GBP 556mn in its debt, leverage would rise further to 13.5x. Privatisation attempts: Hong Leong Co. tried unsuccessfully to privatise Guoco Group and, separately, HLFG tried unsuccessfully to privatise Hong Leong Capital in FY13. We believe these privatisation attempts, if successful, would have been credit-negative. Hong Leong Co.s attempt could have risked the loss of PIDs independence from Hong Leong Co.s own investment division and led to lower granularity in disclosures. HLFGs privatisation attempt would have further weakened its leveraged balance sheet, putting its dividend payout to Guoco at risk. Subordination risk: The holdco does not guarantee any debt of its non-wholly owned subsidiaries. We estimate that debt at the holdco+PID level is 23% of the groups total debt. Separately, 45% of the groups borro wings are secured, including c.32% of the PIDs borrowings. We believe this creates subordination risk for its USD bondholders.
300
HG CORPORATES
Company profile
Guoco Group Ltd. (Guoco) is a holding company with primary operations and investments across Hong Kong, China, Singapore, Malaysia, Vietnam and the UK. Its core businesses include the principal investment division (PID, wholly owned), property (65%owned GuocoLand), hospitality and leisure (66%-owned GuocoLeisure and 52%-owned The Rank Group), and financial services (100%-owned subsidiaries and 25%-owned Hong Leong Financial Group, HLFG). Guoco also holds a 15% stake in Bank of East Asia (BEA) through its PID, and a 55% interest in royalty receipts derived from the production of oil and gas in Bass Strait. Hong Leong Co., controlled by Quek Leng Chan, is Guocos ultimate holding company, with a 74.1% stake.
Asia Credit Compendium 2014 Guoco Group Ltd. (NR; NR; NR)
Summary financials
FY09 Income statement (USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (13.6) 18.5 2.4 33.0 12.0 (2.0) (8.7) 1.8 (6.7) 25.2 2.5 29.7 12.0 7.8 3.6 1.9 63.5 31.2 4.1 49.2 19.0 12.8 (0.1) 2.5 5.5 19.9 2.3 49.8 16.7 13.4 (10.3) 1.7 67.1 24.9 3.1 49.8 11.4 7.7 9.4 2.4 (83) (79) (163) (171) (1,791) (84) (1,875) (112) (1,401) (1,198) (2,599) (148) (378) (179) (558) (146) 386 (384) 3 (106) 2,944 9,531 2,518 (426) 6,164 824 9,743 2,347 1,524 6,527 2,003 15,015 6,093 4,089 7,740 1,135 13,839 5,654 4,519 7,061 2,073 15,992 6,455 4,382 8,056 1,136 210 (116) 40 61 779 196 (102) 420 364 1,029 321 (126) 635 534 1,700 338 (197) (136) (167) 2,272 565 (238) 990 812 FY10 FY11 FY12 FY13
Revenue by business segment (USD mn)

2,400
2,000 Securities, 1,600 commodities and brokerage 1,200
Hospitality and Leisure
800 Property 400 PID 0 FY08 FY09 FY10 FY11 FY12 FY13
Dividend and interest income at holdco+PID (USD mn)

Guocos stake BEA (equity investment) Other equity investments of the PID GuocoLand GuocoLeisure Rank Group HLFG Interest income PIDs interest expenses Interest expenses on USD bond Interest coverage 15.0% 100% 65.2% 66.5% 51.8% 25.4% 100% 100% 100% FY12 +38.4 +67.1 +46.3 +18.2 +8.7 +18.7 +5.5 (15.9) 12.8x FY13 +37.1 +68.7 +35.3 +14.4 +17.2 +31.0 +14.0 (12.2) (23.8) 6.1x FY14E +44.1 +73.1 +29.2
HG CORPORATES
+17.6 +13.0 +31.0 +14.0 (12.2) (23.8) 6.2x
Debt distribution by business segment (USD mn)

7,000 6,000 5,000 4,000 3,000 2,000 1,000 PID 0 FY08 FY09 FY10 FY11 FY12 FY13
Debt maturity profile, Jun-13 (USD mn)

3,000
Hospitality and Leisure 2,500 Mortgage debenture stock
2,000 Property 1,500
Other borrowings
1,000
500
Bank loans
0 <1Y 1-2Y 2-5Y 5Y+
301
Asia Credit Compendium 2014 Hang Lung Properties Ltd. (NR; NR; NR)
Analysts: Chun Keong Tan (+65 6596 8257); Zhi Wei Feng (+65 6596 8248)

We have a Stable outlook on HLP, underpinned by stable recurring income from its investment properties and its strong balance sheet. While H12013 revenue fell 22% y/y on lower residential sales, revenue from its investment properties grew 9% y/y. HLPs investment properties is expected to generate c.HKD 6bn in revenue on an annual basis, which can be used to fund capex. During H12013, HLP issued HKD 435mn of 7Y fixed-rate bonds through its MTN programme. Together with additional bank loans, total debt rose to HKD 33.9bn. With a cash balance of HKD 33.6bn, HLP now sits on a net debt position. However, its net debt to capital is just 0.3%, and it therefore still has one of the strongest balance sheets among the IG developers.

Recurring income continues to grow, but revenue was lower on lower property sales: HLPs H1-2013 revenue fell 22% y/y to HKD 3.3bn largely due to lower property sales. Revenue from property sales was just HKD 83mn, down from HKD 1.3bn in H1-2012. However, revenue from its investment portfolio still grew 9% y/y to HKD 3.2bn. Excluding the investment properties that were divested in 2012, revenue grew 13%. On an annual basis, its investment property portfolio is expected to generate c.HKD 6bn. H1-2013 EBITDA fell by a smaller 17.6% y/y to HKD 2.4bn due to higher margins of investment property compared with residential sales. EBITDA margin was 73%, versus 69% a year earlier. Higher leasing revenue in China: Helped by higher revenue across most of its properties and the opening of a new mall, leasing revenue from its China operations rose 15% y/y to HKD 1.7bn. In Shanghai, both Plaza 66s and Grand Gateway 66s revenue grew by 7%. Plaza 66s retail and office rents rose by 8% and 7%, respectively, on occupancy of about 96%. Grand Gateway 66s occupancy was 100%, and revenue increased by 7%. Operating margins in both malls held firm. Revenue from Parc 66 at Jinan rose 6%, and rental margins improved by 4ppt to 57%. Forum 66 has been in operation since September 2012 and has maintained occupancy at 100%, with a rental margin of 61%. Construction of the office tower next door, however, has had an adverse impact on Forum 66 in terms of footfall and sales. Road works near Palace 66 also affected its performance, as did the extensive tenant re-mixing it undertook as part of its repositioning. Although margins were affected and revenue collected declined, management expects performance to improve. It remains cautious on the retail market in China given slowing retail sales, especially in the luxury segment. HLP continues to target completion of at least one shopping mall a year. Balance sheet remains one of the strongest: Total debt rose 14% to HKD 33.9bn as of June 2013 from HKD 29.7bn at end-2012, but short-term debt was just HKD 285mn. The fixed-rate bonds issued under its medium-term note (MTN) programme contributed HKD 6.2bn to total debt. The cash balance remains ample at HKD 33.6bn, but this is mostly held in CNY deposits, so as to provide a natural hedge for its construction commitments in China. As such, HLP has reversed the net cash position it maintained over the past few years. However, with net debt to capital of just 0.3%, HLPs balance sheet remains one of the strongest within the Hong Kong IG developer space. As of June 2013, HLP had committed undrawn banking facilities of HKD 4.0bn and an MTN programme of about HKD 17bn. In addition, HLP has c.HKD 20bn worth of completed residential units to be sold in Hong Kong. Credit ratios remained healthy: Total debt/capital rose to 21.2% as of June 2013 from 19.3% at end-2012. Due to higher debt and lower EBITDA, total debt/EBITDA rose to 7.3x from 5.8x, and LTM EBITDA/interest fell to 4.7x from 7.0x. More 66s in the works: The high-end shopping mall in Phase 1 of Center 66, Wuxi, Jiangsu, commenced operations in September 2013. Spanning over 118,000sqm, it houses more than 250 tenants. With total GFA of 262,720sqm, Phase 1 will comprise two grade-A office towers, due for phased completion from 2014 onwards. Pre-leasing of its Tianjin shopping mall, Riverside 66, has also started. In February 2013, HLP acquired a 82,650sqm site in Qiaokou, Wuhan, for CNY 3.3bn. It plans to build a shopping mall, an office tower and serviced apartments there on GFA of approximately 460,000sqm (excluding parking slots and ancillary facilities).
HG CORPORATES
Company profile
Hang Lung Properties Ltd. (HLP) is the property arm of Hang Lung Group, and its operations are focused largely in Hong Kong and mainland China. Listed on the HKSE since 1954, HLP has a proven track record across major real-estate sectors. The company is particularly well known for the quality of its commercial property. HLPs first foray into China was in 1992, to Shanghai, where it now has two landmark properties Plaza 66 and Grand Gateway 66. Given the success of its 66 brand, HLP has invested in other cities such as Shenyang, Jinan, Wuxi, Tianjin, Dalian and Kunming, forming a pipeline to extend the 66 footprint across China.
302
Asia Credit Compendium 2014 Hang Lung Properties Ltd. (NR; NR; NR)
Summary financials
2010 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) (59.7) 70.3 9.8 3.5 (3.7) 14.3 21.7 72.6 15.1 5.0 (0.7) 12.0 24.2 69.9 19.3 5.8 (1.2) 7.0 50.7 69.5 18.7 5.3 (0.3) 10.4 (17.6) 73.3 21.2 7.3 0.1 4.6 7,329 NA NA NA 1,931 (9,771) (7,840) (3,176) 4,167 (5,328) (1,161) (2,403) NA NA NA NA NA NA NA NA 24,565 23,732 36,025 28,972 33,559 4,845 3,407 (239) 10,935 8,829 5,712 4,148 (347) 6,391 4,890 7,372 5,151 (741) 10,169 8,395 4,234 2,942 (282) 4,608 3,678 3,305 2,423 (529) 3,679 2,828 2011 2012 H1-12 H1-13
Revenue breakdown by segment (HKD bn)

12 Property Sales (HK)
10
8 Property Leasing (China)
135,925 150,663 167,864 159,941 174,434 12,084 (12,481) 20,734 (2,998) 29,736 (6,289) 27,389 (1,583) 33,886 327
Property Leasing (HK) 2009 2010 2011 2012 LTM Jun-13
111,672 117,018 123,978 118,928 126,028
Upcoming China investment property projects

Investment property under development Center 66, Wuxi Forum 66, Shenyang Riverside 66, Tianjin Olympia 66, Dalian Spring City 66, Kunming Heartland 66, Wuhan Total GFA (000 sqm) 491.5 1,060.0
HG CORPORATES
262.5 373.7 607.8 661.0
Total
3,456.5
Capital commitments (HKD bn)

50 45 40 35 30 25 20 15 10 5 0 Dec-10 Jun-11 Dec-11 Contracted but not provided for Jun-12 Dec-12 Jun-13 Authorised but not contracted for
Debt maturity, Jun-13* (HKD bn)

18 16 14 12 10 8 6 4 2 0 < 1 year 1-2 years 2-5 years > 5 years Senior notes Bank loans
*Estimate; Source: Company reports, Standard Chartered Research
303
Asia Credit Compendium 2014 Henderson Land Development Co. Ltd. (NR; NR; NR)

We have a Stable outlook on HLD. H1-2013 revenue was driven by the property business, and revenue from its investment portfolio continued to grow on higher rentals. Although government policy dampened market sentiment, HLD managed to sell more properties than it did a year ago in both Hong Kong and China. HKCGAS continues to deliver stable results. HLDs credit profile remains strong, with total debt/capital at just 17.3% and higher EBITDA coverage ratios. Liquidity remains ample, with cash of HKD 13.7bn compared with short-term debt of HKD 8.4bn. H2-2013 revenue is likely to remain strong following the opening of new investment properties and the completion of its residential properties, mainly in Hong Kong.

Higher revenue driven by property business: HLDs H1-2013 revenue rose 20% y/y to HKD 8.6bn, helped by higher revenue from its development and investment properties. Rental revenue from investment properties climbed 12% y/y to HKD 2.5bn, owing to higher average rentals from the Hong Kong portfolio (occupancy remained high at c.98%) and increased contribution from its mainland China investment portfolio, including the World Finance Centre in Beijing, Beijing Henderson Centre and Henderson Metropolitan in Shanghai. We believe HLDs rental income will continue to grow following the opening of a new hotel in Wanchai and Henderson 688 in Shanghai in H2-2013. Profit margins remained strong, with gross profit margin at 41.6% (47.6% in 2012) and EBITDA margin at 27.7% (31.4%). Excluding one-off gains and property-related businesses, HKCGAS reported profit after tax of HKD 3.3bn, a 2% y/y increase. Well-diversified investment portfolio: As of June 2013, HLD had 6.4mn sq ft of completed investment property in mainland China, mainly comprising offices and retail malls in the city centres of Beijing, Shanghai and Guangzhou. Occupancy rates were 85-100%. In Hong Kong, the company had total attributable GFA of 9.2mn sq ft in its investment portfolio 4.5mn sq ft of shopping arcade/retail space, 3.4mn sq ft of offices, 0.9mn sq ft of industrial property and 0.4mn sq ft of residential/apartment space. The leasing rate for HLDs core rental properties stood at 98%. We expect an annual contribution of c.HKD 4.7bn of recurring rental revenue from the investment portfolio and that HLD will continue to expand this portfolio. HLD has a 20% attributable interest in a JV that holds the Citygate project in Tung Chung, and it won the bid for a commercial land lot in Tung Chung Town Centre for a consideration of about HKD 2.3bn in March 2013. Hong Kong operations still contribute the most revenue: Hong Kong contributed some 76% of total H1-2013 revenue (down from 79% in 2012), while mainland China contributed the remaining 24% (up from 21% in 2012). Although government policy has hurt sentiment in the Hong Kong residential market, HLD has continued to move sales, for example, by launching its Global Trade Square, a grade-A office tower, for sale. About 80% of the GFA had been sold as of end-June 2013. In total, HLD had sold an attributable HKD 3.9bn worth of property in Hong Kong, a 30% y/y increase. In China, HLD had sold an attributable HKD 4.0bn worth of property, a 144% y/y increase. Liquidity remains adequate: Total debt fell 4% in H1-2013 to HKD 45.6bn (HKD 47.7bn at end-2012), but short-term debt rose to HKD 8.4bn from HKD 3.4bn. Total cash was HKD 13.7bn as of June 2013, higher than the HKD 12.5bn reported at end-2012. As such, total debt/capital fell marginally to 17.3% as of June 2013 from 18.5% at end-2012. Excluding contributions from associates and jointly controlled entities, total debt/LTM EBITDA fell marginally to 8.8x in H1-2013 from 9.7x in 2012, owing to lower debt and higher EBITDA, while EBITDA/interest was flat at 2.1x. HKCGAS declared attributable dividends of HKD 1.15bn for H1-2013 (HKD 3.04bn for 2012). Ample land bank in Hong Kong and China: In Hong Kong, HLD still has some 10.1mn sq ft of property held for development or under development, and 0.5mn sq ft of unsold property units. Some 0.8mn sq ft of residential units will be ready for launch in H2-2013. The group also has 33 urban redevelopment projects with entire or majority ownership, and expects these to provide total attributable GFA of c.3.1mn sq ft, costing HKD 14.4bn, or HKD 4,600psf of GFA. In addition, HLD holds c.43.0mn sq ft of land area in New Territories, one of the largest holdings among Hong Kong property developers. In China, HLD has a sizeable development land bank across 15 major cities totalling 138.7mn sq ft of attributable GFA. Of this, 83% is currently planned for residential development.
304
HG CORPORATES
Company profile
Incorporated in 1976, Henderson Land Development Co. Ltd. (HLD) is one of the largest property development and investment companies in Hong Kong. It holds a large development land bank of 148mn sq ft and 6.9mn sq ft of completed investment property in mainland China. In Hong Kong, it has 10.1mn sq ft of development land bank, 9.1mn sq ft of investment property under operation, 1mn sq ft of hotels, and 42.4mn sq ft of agricultural land. HLD also holds strategic investments in a listed subsidiary, Henderson Investment Ltd., and three listed associates: The Hong Kong and China Gas Co. Ltd. (HKCGAS), which in turn has a listed subsidiary, Towngas China Co. Ltd.; Hong Kong Ferry Holdings Co. Ltd.; and Miramar Hotel and Investment Co. Ltd.
Asia Credit Compendium 2014 Henderson Land Development Co. Ltd. (NR; NR; NR)
Summary financials
2010 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income 7,092 1,258 (1,441) 17,239 15,820 15,188 4,346 (1,812) 18,981 17,184 15,592 4,903 (2,334) 21,337 20,208 7,176 2,095 (1,192) 8,257 7,733 8,585 2,381 (1,115) 8,957 7,757 2011 2012 H1-12 H1-13

18 16 14 12 10 8 6 9,797 18,850 12,538 11,806 13,658 4 2 0 2009 2010 2011 2012 LTM Jun-13 Property devt Construction Others Property leasing Infrastructure Hotel operation Department stores
Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow (16,390) Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) (65.9) 17.7 24.9 43.4 35.6 0.9 245.5 28.6 22.7 12.8 8.5 2.4 12.8 31.4 18.5 9.7 7.2 2.1 (33.5) 29.2 19.8 14.6 11.1 1.8 13.7 27.7 17.3 8.8 6.2 2.1 (377) (16,767) (833) 176 (471) (295) (1,655) 4,695 (498) 3,788 (533) NA NA NA NA NA NA NA NA
230,312 262,470 281,557 262,835 292,142 54,615 44,818 55,740 36,890 47,743 35,205 48,188 36,382 45,642 31,984
164,423 189,925 209,901 195,441 217,486
China land bank breakdown by type and location

100% Others 3% Retail 8% Office 6% 80% Tier 2/Tier 3 cities 11%
HG CORPORATES
60% Prime cities 89%
40%
Residential 83%
20%
0% By usage By region
China sales and pre-sales (HKD bn)

7 6 5 4 3 H2
Debt maturity, Jun-13 (HKD bn)

14 12 10 8 6 4
2 2 1 0 2011 2012 H1-13

H1
0 < 1yr 1 -2 yrs 2-5 yrs > 5 yrs Amount due to fellow subsidiary
305
Asia Credit Compendium 2014 Hongkong Land Holdings Ltd. (A3/Sta; A-/Sta; A/Sta)

We have a Stable outlook on HKL. We believe it has sufficient liquidity to cover its obligations, given its high-quality investment property portfolio that generates stable rental income (USD 750800mn annually). Occupancy across its investment properties remained healthy and average rentals rose, despite subdued leasing activity. Development profits in Singapore boosted H1 revenue, and a third Singapore completion, together with ongoing completions in China, will drive H2 revenue. HKLs credit profile remains strong, with robust EBITDA strengthening credit metrics. Total debt to capital was strong at 14.2%, and total debt to EBITDA was 4.8x, while EBITDA to interest was high at 9.2x.

Completion of residential projects and higher recurring income boosted revenue: H1-2013 revenue was USD 912mn, almost double the USD 478mn reported in H1-2012, largely due to higher contributions from development properties, including the completion of two large residential projects in Singapore. Despite subdued rental activity, rental income from its investment properties continued to be strong, rising 9% y/y to USD 398mn, mainly on positive rental reversions. Revenue from property sales jumped eightfold to USD 454mn from just USD 54mn in H1-2012. EBITDA margin fell to 52% from 71% due to higher development profits. We believe HKL will benefit from the completion of the third residential project in Singapore and ongoing completions in China in H2-2013. We expect the investment property portfolio to generate USD 750-800mn of recurring income on an annualised basis. Positive rental reversions despite subdued leasing activity: While overall leasing activity remained low, HKLs Hong Kong office portfolio saw positive rental reversions, with the average office rental rising to HKD 96.6psf, versus HKD 89.3psf a year earlier. Vacancies in H1-2013 were higher at 5.6%, versus 3.4% as of end-2012, due to key lease expiring in April 2013. Of the space given up, 75% has already been secured. HKLs Hong Kong retail portfolio remains fully leased, with an average rental of HKD 197.4psf, versus HKD 165.3psf a year earlier. HKLs Singapore office portfolio is 97% leased, and its 50% owned office portfolio in Jakarta is 93% leased. Construction has commenced on HKLs Wangfujing development in Beijing, its first significant commercial property in mainland China. Residential sales update Singapore: Two large residential projects were completed in H1-2013: the fully sold The Estuary project and the one-third-owned Marina Bay Suites development (89% sold). The fully sold Este Villa in Singapore is scheduled for completion in H2-2013. Launched in June 2013, its 738-unit J Gateway project was fully committed within a few days of launch, given the popularity of the location. HKL is also selling the Palms@Sixth Avenue and Hallmark Residences. Residential sales update Hong Kong/China: In Hong Kong, HKL handed over five units of Serenade to buyers in H1. In Macau, it handed over seven units of its 47%-owned JV project. Attributable contracted sales in China during H1-2013 were USD 369mn, higher than the USD 200mn in H1-2012, supported by improved market conditions and additional launches. Jakarta expansion update: Master planning for HKLs 49%-owned residential JV in the southwest region of Jakarta is complete. Construction is scheduled to start in 2014. HKL also has a 40% stake in a luxury residential project to be developed in Jakarta with its affiliate. This project will house some 500 units and will be completed in 2018. Steady credit profile: Total debt was relatively flat at USD 4.4bn in H1-2013, compared with HKD 4.3bn as of end-2012. HKL raised USD 930mn of debt, of which USD 645mn is for refinancing. Liquidity remains ample, with total cash of USD 1.05bn (2012: USD 982mn) and short-term debt of USD 852mn (2012: USD 365mn). HKL also has committed undrawn lines of HKD 1.5bn. Debt levels have remained largely unchanged: total debt to capital stood at 14.2%, compared with 14.0% in 2012. Higher development profits contributed to higher EBITDA, increasing total debt/EBITDA to 4.8x from 5.3x in 2012 and EBITDA/interest to 9.2x from 7.2x. Composition of commercial portfolio: As of H1-2013, HKLs completed investment property portfolio comprised 8.3mn sq ft of net floor area (NFA); 6.7mn sq ft, or 81% of this is office space 59% in Hong Kong and 22% in Singapore.
HG CORPORATES
Company profile
More than 50% owned by the Jardine Matheson Group, with a primary listing in London, Hongkong Land Holdings Ltd. (HKL) is a leading property investment, management and development company in Asia. It owns and manages about 5mn sq ft of prime commercial space in Hong Kongs Central district. Together with its JV partners, the company has established a strong presence in Singapores new central business district, through the One Raffles Quay (ORQ) and the Marina Business and Finance Centre (MBFC) projects. HKL is also engaged in developing premium residential properties in a number of cities in the region, mainly in China and Singapore, via its subsidiary MCL Land.
306
Asia Credit Compendium 2014 Hongkong Land Holdings Ltd. (A3/Sta; A-/Sta; A/Sta)
Summary financials
2010 Income statement (USD mn) Revenu EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (USD mn) Net operating cash flow Capex & invesments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 7.8 65.5 16.1 4.2 7.6 1.6 (5.5) 67.8 11.8 4.0 8.3 16.7 (3.8) 71.5 14.0 5.3 7.2 2.7 (21.5) 74.4 13.6 5.4 7.6 1.5 33.6 52.1 14.2 4.8 9.2 1.2 690 (35) 656 (366) 336 (89) 247 (372) 299 (563) (264) (375) (68) (511) (578) (234) 227 (79) 148 (259) 1,367 24,143 3,725 2,358 19,478 968 29,024 3,327 2,359 24,764 982 31,785 4,256 3,273 26,184 816 30,371 3,963 3,148 25,276 1,047 32,235 4,362 3,316 26,425 1,341 878 (115) 4,907 4,739 1,224 829 (100) 5,446 5,306 1,115 798 (111) 1,574 1,439 478 356 (47) 682 626 912 475 (52) 690 598 2011 2012 H1-12 H1-13
Revenue breakdown by segment (USD bn)

Rental income 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2009 2010 2011 2012 LTM Jun-13 Service and management charges Residential sales
Property values on balance sheet (USD bn)

30 Properties for sale
25
20
HG CORPORATES
15 Investment properties
10
0 2009 2010 2011 2012 LTM Jun-13
Capital commitments (USD bn)

1.6 1.4 1.2 1.0
Debt* maturity, Jun-13 (USD bn)

3.5 3.0 2.5 2.0
0.8 1.5 0.6 0.4 0.2 0.0 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13
*Includes drawn and undrawn bank facilities; Source: Company reports, Standard Chartered Research
1.0 0.5 0.0 2013 2014 2015 2016 2017 2018 >
307
Asia Credit Compendium 2014 Hutchison Whampoa Ltd. (A3/Sta; A-/Sta; A-/Sta)

We have a Stable credit outlook on Hutch. We believe its established businesses will help anchor the overall credit profile, with EBITDA of HKD 30-33bn in 2013. 3 Group is showing improving profitability, though positive FCF may still be elusive in 2014. The organic capex cycle has peaked, and we expect c.HKD 25-30bn of spending in 2013. The company may list its A.S. Watson and Hong Kong Electric units, although significant deleveraging is unlikely. While acquisitions remain a key risk, the group has shown a willingness to raise equity and quasi-equity to fund recent transactions. Hutchs cash flow-related metrics remain modest for its ratings, although we do not see a risk to its lowsingle-A ratings.

3 Group Europe posting improved profitability: 3 Group Europes profitability improved in H1-2013, with EBITDA growing 38% y/y to HKD 5.66bn. This was driven by a 9% y/y increase in subscribers, and increased data usage and handset sales, and ongoing cost savings from outsourcing activities, cost controls and effective working capital management. Earnings were also boosted by the acquisition of Orange Austria, completed in January 2013. The segment posted its first positive EBITDA minus capex figure, although cash flow was a negative HKD 1.18bn after including licence fees. It has announced the acquisition of O2 from Telefonica in Ireland for EUR 780mn; the combined entity will be the secondlargest player in Ireland, with a 38% share. Capex will be lower in 2014, given that major network rollouts are complete. While 3 Group Europe has streamlined its operations and the cash drain is declining, market conditions remain tough throughout Europe, and we do not expect FCF in 2014. Established businesses are holding up well: Hutchs established businesses (i.e., the non-3G portfolio) command strong competitive positions. In H1-2013, the ports division posted a 2% increase in throughput, although EBIT was flat due to higher energy and labour costs, and start-up expenses at some ports. The property division reported 19.2% EBITDA growth on 36% higher sales volumes and a 14% increase in rental income. The retail segment continued its strong performance, with 8.9% EBITDA growth due to an 8% increase in number of stores. CKI posted a 13.8% rise in EBITDA on earnings growth from Power Assets and UK Power Networks, and newly acquired assets in Wales & West Utilities. That said, EBITDA losses in Hutchison Asia Telecommunications increased 26% y/y due to increased start-up costs and the delayed network ramp-up in Indonesia. We expect the established businesses (excluding associates) to post annual EBITDA of HKD 3033bn in 2013-14, supporting Hutchs overall financial profile. Divestments and potential acquisitions: Hutch appears to be adopting a strategy of exiting some mature businesses and reinvesting in growth areas and more stable cash flow-generating assets. In 2013, it announced a strategic review of its retail unit, A.S. Watson (which operates more than 11,000 stores in 33 countries); this could lead to a potential IPO of the entity. It also plans to spin off and separately list Hong Kong Electric through a business trust structure. While these transactions will lead to cash inflow, Hutch is unlikely to use bulk of the proceeds for deleveraging. In 2014-15, its spending will be concentrated in Europe telecom and the ports business; however, it may also acquire large land banks in China while CKI could continue to acquire regulated assets. Steady credit metrics and strong liquidity: In H1-2013, Hutch posted 18% growth in EBITDA to HKD 20.2bn. We expect a single-digit earnings increase in 2014 on growth in CKIs dividend, higher profits in retail and slow improvement in 3 Group Europe. Annual FFO will be c.HKD 40-45bn and organic capex will be c.HKD 25-30bn in 2014, and we expect debt/capital of 38-42% and net debt/EBITDA of c.4x in the next 12-18 months. The company has maintained net debt at around HKD 145bn since end-2011, and its internal target is to keep net debt to capital less than 25% (20.2% in H1-2013). That said, any strategic acquisitions or asset sales will be swing factors affecting its credit metrics. Hutch has strong liquidity, with cash and equivalents of HKD 114bn as of June 2013. Its debt maturities are lumpy, with 7% of borrowings due in 2014 and 30% in 2015, and it will likely revisit the G3 markets over the next 12-18 months. Hutchs cash flow-related metrics remain weak, although it has retained its A3/A- rating throughout the 3G investment cycle; we believe this is unlikely to change.
308
HG CORPORATES
Company profile
Hutchison Whampoa Ltd. (Hutch) is a large conglomerate and the holding company of the group. Its operations span six core areas: (1) ports (52 ports in 26 countries, including six of the top 10 ports in the world); (2) telecoms (in Europe, Australia, Hong Kong, Indonesia, Sri Lanka and Vietnam); (3) retail (brands such as Watsons); (4) property and hotels (14.1mn sq ft of rental properties and a 92mn sq ft land bank); (5) energy (stake in Husky Energy); and (6) infrastructure stakes in companies such as Cheung Kong Infrastructure (CKI), Power Assets Holdings and Hong Kong Electric. Hutch is 49.97% owned by Cheung Kong Holdings Ltd., which is c.43% owned by the family trusts and companies of Li Ka-Shing.
Asia Credit Compendium 2014 Hutchison Whampoa Ltd. (A3/Sta; A-/Sta; A-/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income 208,808 209,180 233,700 243,089 123,262 28,911 (9,613) 25,696 13,631 35,622 (8,476) 28,925 20,179 34,601 (8,415) 74,949 56,019 37,927 (9,243) 34,781 26,128 20,166 (4,335) 18,757 12,398 6 86,778 131,447 114,260 3 9 12 Adj. EBITDA 2010 2011 2012 H1-13
3 Groups financials (HKD bn)

15 Capex incl. licences
Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios 20,227 29,867 38,592 32,672 17,255 115,734 116,237
690,365 721,301 720,544 803,881 789,209 273,864 272,549 232,856 278,043 259,565 158,130 156,312 146,078 146,596 145,305 319,912 349,459 390,983 426,892 428,794
0 2009 2010 2011 2012 H1-2013
EBITDA (incl. associates/JCEs), H1-13 (HKD bn)

Finance & others Other Ports
(20,443) (42,563) (56,821) (33,636) (16,149) (216) (12,696) (18,229) (10,904) (964) 1,106 (8,964)
(9,840) (24,989) (12,274)
HG CORPORATES
(7.5) 13.8 3.8 46.1 9.5 5.5 5.1 3.0
23.2 17 6 43.8 7.7 4.4 8.5 4.2
(2.9) 14.8 6.5 37.3 6.7 4.2 1.6 4.1
9.6 15.6 6.8 39.4 7.3 3.9 8.4 4.1
18.4 16.4 6.7 37.7 6.3 3.5 12.0 4.5
Retail 3 Group Property Husky CKI 0 2 4 6 8 10 12
Capex breakdown, H1-13 (HKD bn)

80
Others
70 60 50
Retail
Other telecom
40 30
Ports 20 3 Group 0 1 2 3 4 5 6 7 10 0 H2-13 2014 2015 2016 2017 2018-22 2023-32 > 2033
309
Asia Credit Compendium 2014 Hyundai Motor Co. (Baa1/Sta; BBB+/Sta; BBB+/Sta)

Hyundai has a dominant position in Koreas auto market and has built a strong global market share thanks to an improving brand image, new product launches and a focus on emerging markets. That said, sales momentum has slowed in 2013 due to limited capacity expansion and a conservative pricing strategy. Margins have also narrowed a bit due to intense price competition, KRW appreciation and rising labour costs. While investment spending will rise slightly in 201314, Hyundai will continue to generate sizeable free cash flow and its financial metrics should improve somewhat. However, a further upgrade of its credit ratings is unlikely, and we therefore change our credit outlook to Stable from Positive.

Strong global position, but slowing sales momentum: HMGs solid business profile is underpinned by its dominance in Korea (72.3% share in 9M-2013, including Kia), global market-share gains since 2008, and an improved product profile and brand image. That said, Hyundais performance has slowed after years of strong growth; ex-factory sales (excluding the China JVs) increased only 3% y/y in 9M-2013. Despite high utilisation rates of over 100% at a few key facilities, the group is increasing capacity by only 250,000 units in 2013-14 as it focuses on a profitability-centric sales strategy of increasing ASP and lowering incentives. New product launches have been low, and KRW appreciation (along with JPY weakness) has affected cost competitiveness. Hyundais market share declined marginally in the US (to 4.5% from 5.0%) and the EU (to 3.0% from 3.1%) in 9M-2013, and its sales volume in Korea declined 0.6% because of higher competition from imported cars. China remained a bright spot, with volume growth of 33.9% y/y. We expect volumes to grow 3-5% in 2014. Hyundais strength in pricing and after-sales service, its geographic diversification (no single market accounts for more than 21% of sales), and its focus on emerging markets should protect its position over the medium term. Excellent margin profile: HMG has a competitive cost structure on account of the vertical integration of its supply chain, low labour costs and increasing lowcost global production bases. The reduction in the number of its platforms (to six from 18) and high utilisation rates have helped it post better margins than similarly rated peers. That said, Hyundais consolidated EBITDA margin has declined a bit (to 12.5% in H1-2013 from 13.3% in 2011) due to intense price competition, one-off large-scale recalls in the US, and KRW strength (64% of domestic production was exported in 9M-2013). While we expect profitability to remain robust in 2014, the strong exchange rate and rising labour costs will keep EBITDA margin below 2011-12 levels. Strong FCF generation: Hyundai posted negative FCF until 2008 due to aggressive overseas expansion and working-capital deficits. It has posted high FCF in the past five years thanks to strong earnings. As a result, ex-finance leverage improved to 0.8x in 2012 from 2.8x in 2009 and, according to Fitch, Hyundais non-financial operations and Kia had a combined net cash position of KRW 15.2tn in H1-2013. While capex (KRW 4.4tn in 2012) will increase a bit in 2013-14 on account of higher R&D expenses, we expect the ex-finance operations to continue to post large (albeit declining) FCF. Our base-case scenario assumes a further improvement in metrics, which should hold Hyundai in good stead in the inherently competitive and volatile global auto industry. Hyundais liquidity is strong, with KRW 22.2tn of consolidated cash as of June 2013 and strong access to the bank and bond markets. Other considerations: The group has affiliates in auto parts and auto-financing services in Korea and the US. These companies have weaker credit profiles than Hyundai and, given operational links and reputation risks, the company may need to step in if they need capital or liquidity support. Separately, in 2011, HMG acquired a 35% stake in Hyundai E&C for KRW 5tn; Hyundai invested c.KRW 3.1tn, even though Hyundai E&C had no links to Hyundais core operations. While we do not expect further non-core investments, the groups complicated structure with large cross-holdings means they cannot be ruled out. Hyu ndais labour union has filed a lawsuit demanding additional holidays and overtime wages for work done in the past few years. While it is unclear how much Hyundai may need to pay, this is unlikely to dent its credit profile materially.
310
HG CORPORATES
Company profile
Hyundai Motor Group (HMG) is the worlds fifth-largest automaker. Hyundai Motor Co. (Hyundai) is the flagship group company; its 33.8% affiliate Kia Motors (Kia) is the other important group entity. Hyundai has domestic production capacity of 1.8mn units and had a domestic market share of 47.2% in 9M-2013. Its overseas facilities are in China (capacity of 900,000 units), India (600,000), the US (300,000), Turkey (100,000), the Czech Republic (300,000), Russia (150,000) and Brazil (150,000). In 9M-2013, it sold 3.45mn vehicles globally. The group is also involved in auto-parts and steel, auto/consumer financing, credit cards and E&C businesses. Hyundai is 26% owned by the Chung family and other group companies through ownership structure. a complex
Asia Credit Compendium 2014 Hyundai Motor Co. (Baa1/Sta; BBB+/Sta; BBB+/Sta)
Summary financials
2009* Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 41.3 10.1 7.5 61.4 5.0 3.4 18.9 6.7 NA 10.4 6.5 54.0 5.6 3.6 21.3 8.7 49.2 13.3 10.3 51.8 4.2 2.7 25.6 13.3 5.8 13.0 9.5 48.5 4.1 2.4 26.0 17.6 (5.3) 12.5 8.1 47.4 4.4 2.3 26.2 19.6 13,800 (5,123) 8,676 (277) 3,611 (2,943) 668 (588) 2,977 (6,768) (3,791) (458) 3,978 (4,365) (387) (523) 3,787 (1,640) 2,147 (554) 5,000 4,500 4,000 3,500 14,494 102,325 46,005 31,511 28,961 13,638 15,415 19,143 22,180 91,463 9,203 (1,367) 5,558 2,970 66,985 6,944 (797) 7,492 5,567 77,798 10,364 (780) 10,447 7,656 84,470 10,961 (624) 11,605 8,562 44,551 5,561 (327) 5,939 4,346 2,000 1,500 1,000 500 0 2010 2011 2012 9M-2013 China EU US Korea 2010 2011 2012 H1-13
Retail sales breakdown (000 units)

5,000 4,500 4,000 3,500 3,000 2,500 Others
94,714 109,480 121,538 129,701 38,596 24,959 32,888 43,339 27,924 40,328 45,207 26,064 47,918 47,144 24,964 52,299
Ex-factory sales by location (000 units)

Korea - domestic India Czech Republic Korea - exports China Russia US Turkey Brazil
HG CORPORATES
3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 2012 9M-2013
Revenue by region (KRW bn)

100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2010 2011 2012 H1-2013 Korea Europe Asia North America
EBIT breakdown by segment (KRW bn)

9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2010 2011 2012 H1-2013 Automotive Others Finance
*Numbers reported as per K-GAAP in 2009 and IFRS from 2010, K-GAAP earlier; Source: Company reports, Standard Chartered Research
311
Asia Credit Compendium 2014 Indian Oil Corp. Ltd. (Baa3/Sta; NR; BBB-/Sta)

We maintain our Negative credit outlook on IOC. The company benefits from a dominant position in the Indian petroleum sector. However, the governments discretion to set retail fuel prices and the absence of a transparent mechanism to compensate IOC for losses have led to volatile cash flow and high debt levels. Given the upcoming elections and Indias weak fiscal position, large fuel price increases are unlikely, and IOCs compensation may remain ad hoc in the near term. IOC is also implementing a large capex programme (INR 113bn in FY14), and its leverage (6.3x as of FY13) will continue to remain high. That said, its high strategic importance and majority government ownership help underpin its overall credit profile.

Fuel price regulation: Indias cooking fuel and diesel prices are regulated by the government and do not move in line with international prices. Fuel-marketing companies such as IOC therefore face under-recovery on their sales, with diesel accounting for the bulk of the under-recovery. IOC is compensated through discounts from upstream companies on crude oil purchases (52.6% of the total in H1-FY14) and direct subsidies from the government (42.3%), while the remainder (5.1%) is borne by the company. In September 2012, the government raised diesel prices by 12% and withdrew the subsidy on bulk diesel sales, while since January 2013, IOC has been allowed to increase diesel prices by INR 0.5 per litre every month. However, the sharp INR depreciation in 2013 has meant that IOCs under-recoveries continue to be high. Since India is heading into national elections in 2014 and inflation is still high, it is unclear whether fuel prices will be raised significantly in the near term. Also, given the governments tight fiscal position, it may not fully compensate IOC (in FY12-13, IOC was almost fully compensated). IOCs earnings and cash flow will remain exposed until a viable and transparent fuel-pricing or subsidy-sharing formula is established. Large capex plans: IOC is in the midst of a large investment programme. The largest project currently underway is the 300kbd greenfield refinery at Paradip (INR 298bn), which will be commissioned by March 2014. IOC is also implementing a fluidised catalytic cracker unit in Mathura (INR 10bn) and a butadiene extraction unit in Panipat, and is building a number of pipelines (c.INR 50bn). The company is scouting for overseas oil and gas assets, as it targets to increase its crude oil self-sufficiency in the long term. To this end, it has taken a 3.5% stake in the USD 20bn Carabobo E&P project in Venezuela. It plans to further expand its petrochemical business, increase investments in the gas marketing business and invest in power plants (solar, wind and nuclear). The companys strategy to partner with established players in the respective industries lowers the risk profile of these diversification moves. It has budgeted capex of INR 113bn in FY14 (INR 94bn in FY13), and medium-term annual capex will be c.INR 120-140bn. Financials: In H1-FY14, IOCs GRM improved to USD 5.2/bbl (versus USD 2.26/bbl in FY13) due to better regional margins and inventory valuation gains. So while normalised EBITDA levels improved, the company recorded INR 61.8bn of FX losses and net under-recoveries of INR 16bn. The Indian government typically pays subsidies with a lag of about six months, which creates spikes in IOCs borrowing requirements and some stress in its liquidity position. In FY13, IOCs gross debt increased by INR 121bn to INR 867bn (c.72% of which is short-term working-capital debt). The companys leverage has increased to 6.3x, and interest coverage was 2.3x in FY13. While IOC has cut back on dividend payouts in FY12-13, if the current fuel pricing structure continues, debt levels will increase by c.INR 50-100bn in FY14. Given large holdings of oil bonds, equity stakes in state-owned oil and gas companies and easy access to local bank funding, we do not see IOC facing major liquidity problems. Strategic importance and government support: IOC accounts for 31% of Indias refining capacity, 60% of its pipeline network and 44% of its petroleum product sales. Given its role in implementing the governments socio-economic policies, IOC is strategically important. The government has a track record of compensating IOC (though not always in a timely and adequate manner) and ensuring a reasonable level of profitability. The IOCLIN b ond has an event of default clause in case the governments shareholding falls below 50%.
312
HG CORPORATES
Company profile
Indian Oil Corp. Ltd. (IOC) is a leading petroleum company in India involved in oil refining and the marketing, distribution and retailing of petroleum products. It operates 10 of India's 21 operational refineries and has an aggregate capacity of 1.3mmbd. It accounts for c.31% of Indias refining capacity, and in FY13, its refinery throughput was 54.6mt. It has extensive crude oil and product pipelines (11,214km) and a wide retail network (22,372 outlets), and accounts for 44% of the countrys petroleum product sales. The company is also involved in petrochemical production and the upstream oil and gas E&P sector. The Indian government owns a 78.9% stake in IOC.
Asia Credit Compendium 2014 Indian Oil Corp. Ltd. (Baa3/Sta; NR; BBB-/Sta)
Summary financials
FY10 Income statement (INR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (INR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (INR bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 122.9 5.2 9.5 47.7 3.8 2.3 24.7 7.5 (2.8) 4.1 6.9 49.3 4.6 3.3 12.1 4.2 54.3 4.8 11.1 54.5 3.8 3.3 5.9 3.9 (29.2) 3.0 5.6 57.4 6.3 5.3 5.1 2.3 NM 1.1 9.0 57.2 3.2 3.1 NA 4.5 0 FY09 FY10 FY11 FY12 FY13 H1-FY14 0.0 1 2 EBITDA margin 1.0 2.0 3 3.0 (49.5) 57.8 (59.9) 15.2 NA NA NA NA 4 4.0 5 5.0 16.0 15.4 8.2 12.2 24.9 2,244.6 798.5 773.6 598.5 10 20 85 2,501.2 3,081.3 4,089.2 4,617.8 129.6 (17.3) 150.5 107.1 126.0 (29.8) 101.1 78.3 194.5 (49.8) 40.0 42.3 137.6 (60.3) 45.0 44.5 2,208.6 24.9 (28.2) (14.1) (14.1) 30 Throughput 90 40 95 50 Utilisation (RHS) 100 FY11 FY12 FY13 H1-FY14*
Refinery throughput and utilisation (mt LHS, % RHS)

60 105
1,547.1 1,845.7 2,198.3 2,377.0 494.7 478.7 543.0 578.4 563.0 595.7 746.1 737.9 623.2 867.1 854.9 643.0
0 FY09 FY10 FY11 FY12 FY13 H1-FY14
80
EBITDA margin and GRM (% LHS, USD/bbl RHS)

6 GRM (RHS) 6.0 (138.2) (137.2) (170.2) (128.0) (39.9) (10.9) (52.5) (223.9) (103.8) (38.1) (28.1) (14.9)
HG CORPORATES
Under-recovery compensation (INR bn)

1,000 900 800 700 600 500 400 300 200 100 0 FY09 FY10 FY11 FY12 FY13 H1-FY14 Upstream discount Oil bonds Net underrecovery Govt. subsidy
Capex breakdown (USD mn)

3,000
2,500 Petrochemicals
2,000
1,500
E&P
1,000 R&M
500
0 FY13 FY14F FY15F FY16F FY17F
313
Asia Credit Compendium 2014 Indian Railway Finance Corp. (Baa3/Sta; BBB-/Neg; BBB-/Sta)

IRFC enjoys close linkage with the sovereign, as it is the sole financing vehicle for the MOR. All the risks in IRFCs borrowings are transferred to the MOR, and it is not responsible for maintaining the quality of assets that are leased to the MOR. Also, the lease agreements require the MOR to fund any of IRFCs debt repayment shortfalls through advance lease rental payments. IRFC enjoys a diverse funding profile, and its liabilities are well matched with the average tenor of its assets. The company also enjoys steady profitability and adequate capitalisation. Since IR has been posting operating surpluses, we do not see IRFC facing any material financial risk in the medium term. We maintain our Stable credit outlook.

Sovereign linkage: IRFC is fully owned by the MOR, and its board is appointed by the government. The MOR determines IRFCs annual borrowing targets, and the government closely monitors its operations. IRFC has typically financed 2030% of IRs annual capital plan outlay (28.7% in FY13 and 23.7% expected in FY14) and had provided funding for nearly 50% of IRs rolling stock as of end FY13. We do not expect the government to dilute its stake in IRFC (or IR) and see a very strong likelihood of extraordinary support in the event that IRFC faces any financial difficulty. Secure business model: IRFCs borrowings are on behalf of the MOR, and all risks (interest rate, exchange rate and liquidity) are transferred to the MOR through the lease agreements or hedged at the MORs cost. While technically, IRFC owns more than 50% of the rolling stock, the operation and maintenance of the rolling stock are undertaken by IR, and IRFC is not responsible for accidents, injuries or related issues. IRFCs asset quality has been excellent, with zero delinquencies, as its assets are leased to the MOR. Given that IR is one of the few railway systems in the world to have consistently posted operating surpluses, IRFCs financial profile is unlikely to come under stress in the next few years. Guarantee from the MOR: According to IRFCs lease agreements, the MO R has to fund IRFCs debt payment shortfalls through advance lease rental payments (IRFC has never faced any shortfalls and has therefore not been required to call on the MOR for support). Also, the MOR commits to service the lease payments through its annual budget approved by the Indian parliament; hence, the government effectively provides a guarantee of payment to IRFC. Diverse funding profile: IRFC relies primarily on wholesale funding, though its sources are well diversified across domestic and international markets. It is also one of the few public-sector entities in India that are allowed to issue tax-free bonds in the domestic markets. Of the INR 688.3bn of debt on IRFCs books as of FY13, 25% was issued in the form of tax-free bonds, 37% as taxable bonds, 8% as domestic term loans and 15% as external borrowings (including foreigncurrency bonds). IRFCs finance leases with the MOR have a 15 -year primary period, and the average lease period (around 10 years) compares closely with the liability profile of the company. IRFC has been lengthening its debt maturity profile through issuance of 10Y-15Y debt, and the average tenor of new borrowings was 11.9 years in FY13. While temporary asset-liability mismatches could occur (lease rentals are received twice a year, while debt repayments occur throughout the year), they are mitigated by the large cash balances maintained by IRFC. In any case, IRFC is entitled to receive advance lease rentals from the MOR if it faces any mismatches (no occurrences to date). Steady profitability: The MOR indicates to IRFC the market borrowings required at the beginning of each financial year, and a lease agreement is drawn up to cover the capital value of the rolling stock acquired by the MOR at the end of each year. The lease rentals, which are paid every half-year, are based on the weighted average cost of incremental borrowing by IRFC during the year plus a mark-up (typically around 50bps). As IRFC is set up like a special-purpose vehicle, it has only 19 employees, and its operating expenses were only 0.09% of average assets in FY13. In the past three years (FY11-FY13), the companys return on assets was 0.8-1.1%. Adequate capitalisation: IRFC is required to keep its borrowings within 10x its capital base. As of end-FY13, its ratio of debt to tangible equity was within this limit, at 9.2x. IRFCs capitalisation has been regularly bolstered by capital injections from its parent. The MOR injected INR 7.5bn of equity in FY12 and INR 6.0bn in FY13 (equity injections budgeted for FY14: INR 15.5bn).
314
HG CORPORATES
Company profile
Indian Railway Finance Corp. (IRFC) was established in 1986 for the sole purpose of acting as a financing arm for Indias Ministry of Railways (MOR). IRFCs principal business is borrowing funds from the commercial markets to finance the acquisition of rolling stock, which is then leased to Indian Railways (IR, the only national railtransport provider in India and the one that operates most of the country's rail transport). IRFC has also taken assets on lease and subleased them to the MOR. IRFC is expected to meet about INR 150bn of the MORs total outlay of INR 633bn in FY14. The Indian government fully owns IRFC through the MOR.
Asia Credit Compendium 2014 Indian Railway Finance Corp. (Baa3/Sta; BBB-/Neg; BBB-/Sta)
Summary financials
FY09 Income statement (INR mn) Net interest income Non-interest income Operating cost Operating profit Profit before tax Net income Balance sheet (INR mn) Gross loans Total assets Total debt Total equity Key ratios NIM (%) Costs/income (%) Costs/avg. assets (%) NPL ratio (%) ROE (%) ROA (%) Loan growth (%) Equity/assets (%) Debt/equity (x) 2.3 2.7 0.06 0.0 6.9 0.6 16.5 8.3 9.8 2.5 14.8 0.36 0.0 14.3 1.2 21.0 8.4 9.9 2.3 7.4 0.16 0.0 12.6 1.1 18.0 9.2 8.9 2.1 6.5 0.13 0.0 9.9 0.9 26.8 8.9 9.3 2.6 4.0 0.09 0.0 9.4 0.8 20.7 9.0 9.2 319,882 387,082 456,676 579,086 697,270 334,113 406,641 466,902 605,893 707,550 273,887 336,086 381,245 502,512 587,530 27,807 34,055 42,860 54,005 63,943 0 FY09 FY10 FY11 FY12 FY13 FY14B 0 6,645 94 (182) 6,557 6,577 1,808 8,726 391 (1,346) 7,772 7,883 4,427 9,461 215 (713) 8,962 8,983 4,852 10,745 122 (703) 10,164 10,132 4,808 15,414 60 (613) 14,861 300 14,842 5,516 200 100 10 5 15 500 400 25 20 FY10 FY11 FY12 FY13
IRFCs share in IRs investments (INR bn, % RHS)

700 600 IRFC's share (RHS) IR's investments 35 30
IRFCs share in IRs rolling stock, Mar-13

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Wagons Coaches Diesel locos Electric locos IRFC Others
HG CORPORATES
IRFCs returns (% LHS, % RHS)

20 ROA (RHS) 16 1.0 12 ROE 8 0.6 0.4 4 0.2 0 FY09 FY10 FY11 FY12 FY13 0.0 0.8 1.4 1.2
IRFCs capital structure (% LHS, x RHS)

10 Equity/assets 8 8 Debt/equity (RHS) 10
0 FY09 FY10 FY11 FY12 FY13
315
Asia Credit Compendium 2014 Kerry Properties Ltd. (NR; BBB-/Pos; NR)

We have a Stable outlook on Kerry. Its development projects have delivered consistently, both in Hong Kong and in China, contributing significantly to revenue. Recurring income from its investment portfolio has been stable. Despite challenging market conditions, its logistics business has also performed admirably. Liquidity remains ample, in our view, with total undrawn bank loan and overdraft facilities of HKD 11.2bn and a cash balance of HKD 12.2bn. This is against HKD 8.8bn of contracted-for capital commitments. While debt has increased, largely due to land premium payments for Ho Man Tin, credit ratios remained fairly healthy debt/EBITDA at 6.1x, EBITDA/interest at 5.8x and debt to capital of 30.3%.

Revenue marginally down y/y on lower development profits: Kerrys revenue was down 4% y/y in H1-2013 as lower residential sales in Hong Kong were offset by higher residential sales in China and higher revenue from its logistics business. China property sales surged to HKD 2.7bn in H1-2013 from just HKD 120mn in H12012. Recognised sales in China include Parkview Residence Phase II in Hangzhou, The Metropolis-Arcadia Court Phase I in Chengdu and Central Residences Phase II Tower 2 in Shanghai. Revenue from Hong Kong property sales halved y/y to HKD 3.9bn from HKD 7.8bn in H1-2012, with projects like Lions Rise and SOHO 189 contributing. Hong Kong made up 33% of H1 revenue, and China 44%, given more development profit made there. EBITDA fell 9% y/y to HKD 3.7bn, while EBTIDA margin fell marginally to 22% from 23% a year earlier. Stable revenue from investment properties: Revenue contributions from investment properties in the China and Hong Kong portfolios increased by 11% and 7% y/y to HKD 521mn and HKD 374mn, respectively. Operating margins remained high at 76% for Hong Kong and 73% for China. As of H1-2013, the China investment property portfolio comprised 5.24mn sq ft GFA (2012: 5.26mn), of which 60% was office space. Occupancy rates were 88% for office space and 93% and 81%, respectively, for commercial and residential space. In Hong Kong, the group has a completed property portfolio of 2.9mn sq ft GFA, of which 25% is office space. Occupancy in the Hong Kong portfolio remains healthy 94% for residential, 97% for commercial and 98% for office. Logistics business sees revenue growth: Despite a challenging operating environment for the logistics industry impacted by slower trade growth, the logistics business revenue rose 6% y/y to HKD 9.5bn. Contribution from its integrated logistics segment was a key driver as it stepped up efforts to provide more value-
HG CORPORATES
Company profile
Kerry Properties Ltd. (Kerry) has two core business divisions: property development and management, and logistics. It holds a portfolio of highquality investment assets, mainly in Hong Kong and mainland China, and has been investing in China since the mid-1990s. As of June 2013, it had a total attributable land bank of about 58.5mn sq ft, of which 78% is under development, 17% is completed investment properties, 2% is hotels and 3% is held for sale. Mainland China makes up 79% of its property portfolio. Kerry Logistics is a premier supply-chain-management expert and third-party logistics service provider, with a near-term focus on Southeast Asia and mainland China. It continues to look at enhancing its global network and business strengths.
added services. Operating margin edged up slightly to 7.2% in H1-2013 from 7.0% a year earlier. Listing of logistics business: Kerry received approval for the spin-off of its logistics business in September 2013. However, details of the proposed spin-off, including size, structure and the decrease in Kerrys shareholding following the spin-off are yet to be confirmed. Sound liquidity and credit profile: Total debt was higher at HKD 39.7bn in H12013 than the HKD 31.9bn reported in 2012, largely due to the payment of the HKD 11.7bn land premium for Ho Man Tin. While cash fell to HKD 12.2bn, it still compares favourably to the HKD 6.2bn short-term debt. Liquidity remains ample, in our view, with total undrawn bank loan and overdraft facilities of HKD 11.2bn. This was against HKD 8.8bn of contracted-for capital commitments as of June 2013. Credit ratios remained healthy: Due to higher debt levels, total debt/EBITDA increased to 6.1x in H1-2013 from 4.6x in 2012, while total debt/capital rose to 30.3% from 27.5%. EBITDA/interest fell marginally to 5.8x from 5.9x. Mixed-use developments will be key drivers: Kerry will continue construction on its Hong Kong and China properties and launch Ningbo Berylville Ph1 and Yingkou Bayuwan Ph1 in H2-2013. The company plans to focus on developing delivery of its mixed-use projects, which it believes will build a strong foundation for the groups sustainable growth in China.
316
Asia Credit Compendium 2014 Kerry Properties Ltd. (NR; BBB-/Pos; NR)
Summary financials
2010 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) 23.5 19.6 23.3 5.0 2.5 6.3 (19.6) 16.2 28.4 8.8 3.6 4.0 107.3 20.1 27.5 4.6 2.3 5.9 154.3 22.9 27.5 5.1 2.8 7.2 (9.3) 21.6 30.3 6.1 4.2 5.8 6,347 (6,476) (129) (1,179) 4,360 11,867 NA NA NA NA NA NA NA NA 10,464 26,649 20,675 10,211 68,237 17,545 37,102 29,495 11,950 74,449 16,060 35,224 31,932 15,873 84,222 13,260 32,957 29,690 16,430 78,102 12,195 32,422 39,718 27,523 91,471 21,226 4,164 (658) 8,738 6,703 20,660 3,349 (837) 7,103 5,348 34,513 6,942 (1,174) 9,899 6,960 17,958 4,103 (574) 4,802 3,386 17,254 3,724 (637) 9,737 5,375 2011 2012 H1-12 H1-13

40 35 30 25 20 15 10 5 0 2009 2010 2011 2012 LTM Jun-13 Logistics/Warehouse Property Sales (HK) Property Rental (HK) Mgmt Service and Others Property Sales (PRC) Property Rental (PRC) Hotel Operations
Land-bank breakdown (58.5mn sq ft, by type and location)

100% 90% 80% 70% Hotels, 2% Invt properties, 17% Held for sale, 3% Overseas, 7% Macau, 4% HK, 10%
(5,202) (15,220) (842) (1,461) (3,352) (1,490)
HG CORPORATES
60% 50% 40% 30% 20% 10% 0% By usage By region Projects under devt, 78% PRC, 79%
Breakdown of projects under development (c.45.6mn sq ft)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% By usage

14 12 10 8
Office, 11% Commercial , 13% Hotels, 11%
Apt-styled office,1% Apts, 2%
Overseas, 5% Macau, 5% HK, 6%
PRC, 84% Resi, 62%
6 4 2 Bank loans 0 Fixed-rate bonds
By region
< 1 yr
1-2 yrs
2-3 yrs
3-4 yrs
4-5 yrs
> 5 yrs
317
Asia Credit Compendium 2014 Korea Electric Power Corp. (A1/Sta; A+/Sta; AA-/Sta)
Analysts: Bharat Shettigar (+65 6596 8251), Jaiparan Khurana (+65 6596 7251)

While KEPCOs profitability and leverage levels have suffered due frequent suspension of the FCATS mechanism, its tariff hikes have become more frequent in 2013. This has led to stronger cash flows despite operational issues in its nuclear reactors. While KEPCOs capex plan of KRW 75.8tn over 2013-16 remains significant, recent tariff hikes will lead to stronger cash flows, and the planned disposal of some non-core assets will fund part of the investment. While leverage will remain high, we expect no material deterioration in its financial metrics from here on, and therefore revise our credit outlook to Stable from Negative. KEPCOs overall credit profile will remain underpinned by its high strategic importance.

Non-implementation of FCATS: The government has frequently suspended KEPCOs Fuel Cost Adjusted-Tariff System (FCATS) due to inflation concerns. Although the government raised tariffs by 4.0% in January 2013 and 5.4% in November 2013, KEPCOs fuel cost coverage ratio remains below 100%. KEPCO took a KRW 1.8tn impairment charge in 2012 due to the write-off of accounts receivable that had accumulated on its balance sheet as it had recognised revenue based on the pass-through tariff formula. That said, the government is considering electricity tariff reforms, including adoption of a fuel cost-linked tariff system and rationalisation of industrial tariffs. However, the timing and extent of the fuel-cost recoveries that will be allowed remain unclear at this stage. Reversal of operating losses: KEPCOs EBIT turned to a profit of KRW 1.1bn in 9M-2013 from a loss of KRW 473bn in 9M-2012 due to the rise in tariffs and lower fuel costs. While the regulatory regime is more supportive now, KEPCOs power purchase costs and reliance on LNG generation has remained high due to operational issues. It has relied on higher-cost LNG over lower-cost nuclear generation, as three of its nuclear power plants were shutdown due to safety concerns (KEPCOs nuclear utilisation rate fell to a low of 67.9% in Q2 -2013 from 83.4% in 2012). That said, the three nuclear plants will come onstream in Q4-2013, and we believe the tariff hike in November will further support its cash flows. The government is looking to scale back its reliance on nuclear energy (the low-cost alternative) in the medium term, which is slightly credit-negative. Large capex due to risk of power shortages: Koreas electricity reserve margin is low, at below 5%, and the ongoing shutdowns of a few nuclear plants due to safety concerns have added to the risk of power outages. The government aims to increase Koreas reserve margin to over 20% as the gencos add c.16,800MW of capacity by 2016. KEPCO has planned a KRW 75.8tn investment programme for 2013-16 to build and upgrade its generation capacity and T&D network. The government is also looking to shift the fuel mix to renewables (which will require high upfront investment) and phase out oil-based generation plants. While the rating agencies expect the government to take policy measures to curtail rising SOE debt, we think KEPCOs capex plan will continue to remain high, given Koreas low electricity reserve margin. Overseas investments: KEPCO has invested in overseas raw-material sources to improve its self-sufficiency ratio. Since 2008, it has invested KRW 1.46tn across 11 coal and uranium E&P projects; all these are scheduled to be in production by 2016. It is also involved in power-plant and T&D network construction projects, to diversify its earnings base. As of May 2013, KEPCO was involved in 41 overseas projects across 22 countries 12 in generation, 11 in E&P and 18 in T&D. Some of the projects involve execution risks, and the overseas investments will continue to contribute less than 10% of revenue in the next few years (below 5% currently). Leverage to remain high: KEPCOs capex has continued to be debtfunded; this increased debt levels to KRW 60.5tn as of Q3-2013 (from KRW 53.3tn at end2012). As a result, KEPCOs leverage was high at 8.1x and interest coverage was weak at 3.0x as of 9M-2013. While annual FFO of c.KRW 6-7tn is low, compared with budgeted capex of KRW 20tn, KEPCO has historically underspent versus its plans. The recent tariff hikes will lead to better cash flows, and KEPCO is also looking to sell some non-core assets, which will help it finance part of the funding gap. While we forecast that leverage will remain high, we expect no significant deterioration in its metrics from here on. We are comfortable about the credit, since KEPCO enjoys ready access to domestic and international debt markets due to its sovereign ownership and strategic role in Koreas economy.
HG CORPORATES
Company profile
Korea Electric Power Corp. (KEPCO) is Koreas only fully integrated electric utility. It controls 84% of the countrys capacity and generates 89% of the electricity consumed through its six wholly owned subsidiaries (five nonnuclear and one nuclear power generation company, known as gencos). In addition, KEPCO has a monopoly in electricity T&D. Its generation capacity of 69,521MW comprises 563 generation units, including thermal, nuclear and hydroelectric plants. It is also engaged in overseas fuel procurement and power-plant construction activities. KEPCO is listed on the NYSE and the KSE. The Korean government owns an effective 51.1% stake in KEPCO (21.2% held directly by the government and 29.9% by KoFC).
318
Asia Credit Compendium 2014 Korea Electric Power Corp. (A1/Sta; A+/Sta; AA-/Sta)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 131.7 23.4 2.4 45.6 4.3 4.1 21.9 5.0 (0.4) 20.1 2.0 49.3 5.0 4.8 19.3 4.9 (29.7) 12.8 (1.4) 46.4 8.3 8.0 10.5 2.6 5.4 12.0 (1.1) 51.7 9.1 8.7 10.0 2.5 33.5 16.3 0.4 54.5 8.1 7.7 11.8 3.0 -5,000 2013 2014 2015 2016 2017-24 10,000 Nuclear 5,738 5,638 3,897 3,763 5,016 1,489 93,208 34,398 32,909 41,027 2,097 1,388 1,955 2,950 33,994 7,958 (1,584) 322 (97) 39,426 7,926 (1,625) 437 (72) 43,532 5,576 (2,124) (2,473) (3,370) 49,121 5,878 (2,344) (4,063) (3,167) 39,763 6,474 (2,275) (199) (535) 2% 1% 0% Aug-10 Aug-12 3% 4% 2010 2011* 2012* 9M-13*
Effective tariff hikes (%)

6% 5%
99,610 136,468 146,153 152,446 39,877 37,780 41,018 46,205 44,817 53,270 53,314 51,359 49,889 60,473 57,524 50,556
Aug-11
Dec-05
Nov-08
Dec-11
Capacity addition/phase-out plan (MW)

25,000 Renewable 20,000 LNG 15,000 Coal
(12,246) (12,028) (12,079) (12,611) (11,265) (6,507) (46) (6,390) (32) (8,182) (45) (8,847) (55) (6,249) (42)
Nov-13
Jan-07
Jan-08
Jun-09
Jan-13
HG CORPORATES
5,000
0 Oil
Budgeted capex (KRW tn)

25
Debt maturity profile, Dec-12 (KRW tn)

12
20 Renewable energy 15
Others
10
Thermal generation 10 Nuclear generation 5 Transmission & distribution 0 2012A 2013 2014 2015 2016
0 2013 2014 2015 2016 2017 2018 2019 2020 2021 +
*From 2011, numbers are reported as per IFRS, compared with K-GAAP earlier; Source: Company reports, Standard Chartered Research
319
Asia Credit Compendium 2014 Korea Expressway Corp. (A1/Sta; A+/Sta; NR)

KEC generates predictable cash flow from toll collection, and receives regular and substantial capital injections from the government, which make up over 50% of its expressway investment. However, its leverage is high because of the long investment recovery cycle of expressway projects, and we do not foresee a near-term improvement, given that KEC will incur significant capex until 2020. It also has substantial refinancing requirements of KRW 3.5tn in 2014-16, which are likely to be met largely through the local debt-capital markets. We believe the companys credit profile is underpinned by its strong policy role and government support. maintain our Stable outlook on KEC. We credit

Strong policy mandate: KEC was established with a clear policy mandate to construct, manage and operate expressways as part of Koreas goal of having an extensive road network by 2020 to facilitate balanced development. While the share of privately operated expressways will grow, the characteristics of expressway construction such as high investment, low returns and slow payback mean that KEC will continue to play an important role. KEC is unlikely to be privatised in the near term, and the KEC Act requires the government to maintain a stake of at least 50%. Steady cash flow from toll operations: KECs toll operations generate strong revenue through a secure business model, underpinned by low demand elasticity and resilience to economic downturns. Its expressways connect Koreas seven major metropolitan areas, home to most of Koreas population and industrial activity. Traffic volume passing through tollgates has increased as KECs road network has expanded, and toll collections accounted for c.91% of revenue, excluding the pass-through business, in 2012. However, KEC does not have the power to set toll rates, and the toll-setting process is not transparent. The government has allowed only four toll-rate hikes since 2002, due to inflation concerns. Moreover, the hikes have been below the increase in KECs operating costs: while KECs utility prices rose 32.7% during February 2006 -November 2011, it was awarded only a modest toll rate hike of 2.9% in November 2011; its tariffs have been frozen since then. Other businesses: KEC is focusing on developing auxiliary businesses to generate alternate revenue streams and improve cash flow. In October 2011, the government amended the KEC Act to allow the company to construct transit and multi-transit centres and undertake renewable energy projects using idle land and roads. KEC is also looking to expand its overseas businesses, which consist primarily of providing consulting services to international expressway projects. Government support: We see a strong likelihood of support from the government, which has committed to funding more than 50% of KECs expressway-construction costs and 100% of its land-acquisition costs. The government provided capital infusions of KRW 1.4tn in 2012 (accounting for about 54% of KECs capex for expressway construction) and KRW 1.1tn in 2013. Significant capex until 2020: Korea will expand its expressway network from 3,762km to 7,266km by 2020 under the governments National 7x9 Plan. As of June 2013, c.647km of expressway were under construction and 324km of existing expressway were being expanded. KECs cost of construction per km is KRW 37.6bn; as over 3,000km of expressway still need to be built, KEC will incur significant capex until 2020. It will fund the investments using its own cash flow, capital injections from the government and debt financing. If it decides to aggressively pursue its 2020 target, the governments capital contribution may again fall to below 50% of expressway construction costs as in 2008-11. Large funding gap: KECs debt metrics have deteriorated, owing to debt -funded capex related to its accelerated construction schedule. Total debt rose to KRW 24tn as of June 2013 from KRW 14.6tn in 2005. Given its capex plans and the long investment recovery cycle of expressways, we expect leverage to remain high (H12013: 10.4x) and interest coverage to remain low (H1-2013: 1.5x). Annual operating cash flow of c.KRW 1.2tn and government support of c.KRW 1.4tn are inadequate to meet capex needs of c.KRW 3tn. It also has annual refinancing requirements of c.KRW 3.5tn in 2014-16. Hence, it will continue to tap the bond market to close the funding gap. It has committed credit facilities of KRW 1.4tn from domestic financial institutions.
HG CORPORATES
Company profile
Korea Expressway Corp. (KEC), formerly known as Korea Highway Corp., is involved in constructing and operating Koreas expressway network. As of June 2013, it had the exclusive right to operate and collect tolls on 31 routes covering 3,762km of expressway (c.92% of the countrys network). Tolls account for c.91% of its revenue, excluding the supervision of government construction projects (a pass-through business), while auxiliary businesses such as leasing gas stations and convenience stores account for the balance. KECs expressways had total traffic volume of 1.34bn vehicles in 2012. KEC is 99.98% owned by the government (82.5% directly and the rest through KoFC, KEXIM and IBK).
320
Asia Credit Compendium 2014 Korea Expressway Corp. (A1/Sta; A+/Sta; NR)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 13.6 52.0 2.2 47.0 11.2 10.8 5.2 2.1 3.1 57.5 2.2 47.1 11.4 11.4 4.9 2.0 10.3 36.9 2.9 47.3 10.5 10.5 5.5 1.9 8.2 32.8 2.6 46.7 10.1 10.0 5.2 1.7 4.2 36.1 2.1 46.9 10.4 10.0 2.8 1.5 5% 0% April 2002 March 2004 February 2006 November 2011 15% 10% Toll rate increase 1,105 (3,960) (2,855) (6) 935 (3,798) (2,863) (8) 966 (2,725) (1,759) (10) 1,020 (3,067) (2,047) (18) 566 (1,471) (906) (15) 25% 20% Inflation for prior period 703 45,155 20,648 19,945 23,314 63 47,173 21,674 21,611 24,318 132 49,279 22,114 21,982 24,709 238 51,460 22,870 22,632 26,130 906 53,372 24,035 23,129 27,200 1,000 0 2007 2008 2009 2010 2011 2012 2020 target 3,551 1,845 (881) 67 56 3,308 1,902 (941) 94 66 5,693 2,098 (1,096) 92 103 6,930 2,271 (1,372) 216 83 3,340 1,207 (787) (24) 41 3,000 2,000 2010 2011* 2012* H1-13*
Length of expressways (km)

8,000 7,000 6,000 5,000 4,000
Toll-rate hikes and increases in KECs costs (%)

35% 30% Utility cost increase for prior period
HG CORPORATES
Revenue breakdown (KRW bn)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 2012 H1-13 Toll revenue Government construction projects Auxiliary business
Debt maturity profile, 2012 (KRW bn)

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 <1Y 1-2Y 3-5Y 5Y+ Loans Bonds
*From 2011, numbers are reported as per IFRS, versus K-GAAP earlier; Source: Company reports, Standard Chartered Research
321
Asia Credit Compendium 2014 Korea Gas Corp. (A1/Sta; A+/Sta; AA-/Sta)

KORGAS FCPT mechanism was reinstated in 2013, which will lead to more stable cash flow and a decline in the high receivables on its books. The government is also looking to rationalise KORGAS E&P investment plans, which will lead to lower debt requirements. That said, the implementation of the FCPT mechanism in an inflationary environment is uncertain. KORGAS operating cash flow will remain inadequate to meet its capex needs, although the planned disposal of some of its E&P assets would fund part of the shortfall. We do not expect a further deterioration in its financial profile from here, and therefore revise our credit outlook to Stable from Negative. Sovereign support will continue to underpin KORGAS credit profile.

FCPT mechanism has been reinstated: The government reinstated KORGAS automatic fuel cost pass-through (FCPT) mechanism for sales to city gas companies in February 2013. Subsequently, KORGAS raised its tariffs by 4.4% in February 2013 and 0.5% in August 2013. That said, it remains uncertain whether the government will allow KORGAS to hike tariffs continuously in an inflationary environment. The government previously suspended the FCPT mechanism in July 2011, shortly after reinstating it in September 2010. This led to subdued profitability and the accumulation of accounts receivable on KORGAS balance sheet (KRW 5.4tn as of H1-2013). Moodys expects higher tariffs to result in a decline of KRW 1.2tn in KORGAS accounts receivable. E&P investments: KORGAS plans to increase its natural gas self-sufficiency rate to 25% by 2017 from 9% in 2012, with 60% of its income coming from overseas operations, to shield it from volatile gas prices. As of end-2012, it was involved in 21 E&P projects in 12 countries and had secured a total of 310mt of oil and gas reserves. Most of KORGAS projects will be in production by 2015, when Koreas LNG demand is expected to peak. KORGAS typically acquires small, nonoperating stakes in projects. A large part of its E&P investment is supported by government loans, which it is not required to repay in case of project failure. Moreover, the government is likely to rationalise KO RGAS aggressive investment plans given concerns about SOE debt. Korea Gas has not undertaken new E&P acquisitions in 2013, and we expect its annual E&P capex to remain in the KRW 12tn range over the next 2-3 years. Execution risks: We see the companys growing involvement in the upstream sector as credit-negative given execution risks and large investment requirements. In 2013, KORGAS booked an impairment loss of KRW 210bn on its West Cutbank and Umiak projects in Canada, and a KRW 28bn loss on the East Timor E&P project. There were also safety concerns related to some of its Iraqi assets, and Moodys thinks this could lead to delays in development and production. LNG sourcing and distribution: KORGAS sources over 90% of its LNG import needs under medium- to long-term contracts from geographically diversified suppliers. It has allocated capex of KRW 4.5tn to build its fourth receiving terminal (capacity of 1.8mn kilolitres), increase the capacity of its three existing terminals, and construct and maintain its pipeline network over the 2013-15 period. High leverage to persist: KORGAS EBITDA increased by 9.2% y/y in 9M-2013, although leverage was high at 10.5x. The company will face a large funding gap in 2014 operating cash flow and cash holdings of KRW 0.6tn are inadequate to meet capex of c.KRW 2-3tn (E&P plus pipeline) and debt maturities of c.KRW 6.5tn. That said, KORGAS raised KRW 700bn of equity in 2013 and may scale back its E&P investments. It also plans to sell part of its 15% stake in the USD 18.5bn Gladstone LNG project in Australia; if successful, this would cover part of the shortfall. Moreover, the reinstatement of the FCPT mechanism will lead to more stable cash flow. We do not expect a material deterioration in KORGAS leverage from here. KORGAS also has strong access to the domestic and global capital markets due to its sovereign ownership. Strategic importance: KORGAS benefits from majority government ownership and has an effective monopoly in the LNG transmission and wholesale businesses. While the government did not fully subscribe to KORGAS KRW 700bn equity issue, causing sovereign ownership to decline to c.55% from 61%, we do not think this signifies a decrease in KORGAS strategic importance. We believe that extraordinary sovereign support would be forthcoming in case KORGAS faced financial difficulties.
HG CORPORATES
Company profile
Korea Gas Corp. (KORGAS) is the worlds largest LNG buyer. It is Koreas sole wholesale distributor of natural gas and has an effective monopoly over the import and transmission of natural gas. In 2012, it supplied 36.5mt of gas (c.17% of Koreas energy consumption) through its 3,558km pipeline network. It has three LNG storage/regasification terminals, and a fourth is under construction. KORGAS major customers are power plants (46% of volume) and city gas distributors (53% of volume). It also has 21 overseas oil and gas E&P projects (10 are in the production stage). KORGAS is a listed company; the government owns a c.55% stake, directly and through KEPCO and the National Pension Corporation.
322
Asia Credit Compendium 2014 Korea Gas Corp. (A1/Sta; A+/Sta; AA-/Sta)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 8.8 8.0 4.9 73.9 9.4 9.2 4.6 2.3 7.1 7.3 5.0 74.7 9.4 9.3 5.5 2.9 12.1 6.6 4.2 71.4 10.7 10.7 5.0 2.6 24.3 6.6 4.2 74.4 10.5 10.4 6.3 2.7 9.2 6.7 3.8 76.2 10.5 10.3 5.6 2.9 0 2011 2012 Feb-13 Aug-13 5 10 674 (1,385) (711) (152) 1,032 (2,000) (967) (118) (641) (3,707) (4,348) (45) 403 (4,763) (4,360) (55) 2,074 (3,168) (1,094) (119) 15 20 220 23,015 14,582 14,362 5,180 145 24,374 15,620 15,476 5,311 150 36,010 20,068 19,918 8,044 245 40,622 24,388 24,142 8,369 562 41,019 26,095 25,533 8,145 19,541 1,557 (684) 367 239 22,805 1,667 (570) 338 210 28,494 1,869 (724) 389 181 35,031 2,323 (857) 519 367 27,345 1,829 (617) 173 (73) 20 15 10 5 0 2008 2009 2010 2011 2012 30 25 2010 2011* 2012* 9M-13*
Volume by usage (mn tonnes)

40 35 Residential Cogen Commercial KEPCO Cooling IPP Industrial
Tariff history (KRW/MJ)

25 Material costs Supply cost + guaranteed return Margin granted to recover accounts receivable
HG CORPORATES
Receivables position due to FCPT suspension (KRW tn)

6
Quarterly EBITDA margins (%)

10 9
8 7
6 5 4 3 2
1 0 Q1 2008 2009 2010 2011 2012 H1-13 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2013 Q3
2011
2012
*From 2011, numbers are reported as per IFRS, compared with K-GAAP earlier; Source: Company reports, Standard Chartered Research
323
Asia Credit Compendium 2014 Korea National Oil Corp. (A1/Sta; A+/Sta; AA-/Sta)

KNOC plays a strategically important role in the Korean governments plans to improve the countrys energy selfsufficiency. It has consistently received equity infusions and low-cost loans from the government and is almost certain to receive extraordinary support in case it runs into financial difficulties. Moreover, the Korean government is likely to curtail KNOCs investment plans. While KNOCs cash flow is weak and it faces significant short-term maturities, the planned disposal of some of its non-core assets would fund part of the shortfall. While leverage will remain high, we do not expect a material deterioration in metrics from here. We therefore revise our credit outlook on KNOC to Stable from Negative.

Important role in Koreas economy: Korea is heavily dependent on oil imports and is the fifth-largest oil importer globally. The government plans to improve Koreas oil and gas self-sufficiency rate to 30% by 2019 from 13.7% in 2011. KNOC plays a pivotal role in this by engaging in the E&P and oil stockpiling businesses to stabilise oil supply and demand. I n line with governments objective, KNOC aims to increase its production volume to 403kboed by 2017 from 240kboed in 2012, and its 2P reserves to 2.1bn boe from 1.3bn boe in 2012. Aggressive acquisition strategy: KNOCs production volume has increased fivefold from 46kboed in 2008, led by aggressive acquisitions in recent years. Since 2009, KNOC has spent over KRW 23tn on capex and investments. It has acquired stakes in six overseas oil companies (Ankor E&P Holdings of the US, Savia Peru S.A. of Peru, KNOC Caspian LLP of Kazakhstan, Harvest Operations Corp. of Canada, Dana Petroleum Plc of the UK, and Altius Petroleum Int. B.V. of Kazakhstan) and nine other oil and gas assets. The company could face significant execution risks given its lack of experience in large-scale overseas E&P projects. In 2012, KNOC missed its 300kboed production target by 60kboed, and took impairment charges of KRW 465bn on unsuccessful exploration projects and KRW 660bn on its unprofitable refinery operations. That said, the government is likely to rationalise KNOCs aggressive investment plans given concerns about SOE debt. The company has not undertaken any acquisitions in 2013, and we do not expect it to make a large acquisition in the near term. Strong government support: The government has injected KRW 5.8tn of equity into KNOC since 2007. It plans further injections to support KNOCs acquisitions, and has increased the companys maximum legal capital to KRW 13tn (the previous limit was KRW 10tn and KNOCs capital was KRW 9.7tn as of 2012). KNOC also receives SAER loans from the government at a discount to treasury rates; some SAER funding related to overseas E&P projects is not required to be repaid in case of project failure. As of 2012, SAER funds were 4.7% of KNOCs borrowings. Separately, in the stockpiling business, the government provides subsidies to compensate KNOC for operating costs and facility construction. Weak financials: KNOC has funded its acquisition and capex spending largely through debt, SAER loans and capital contributions from the government. This has led to the deterioration of its financial profile. The companys debt/EBITDA of 3.5x and interest coverage of 6.6x (as of 2012) are weak for its ratings. KNOC will face a large funding gap in 2014, as its annual FFO of c.KRW 2.9tn and cash balance of KRW 0.9tn are inadequate to cover its short-term debt of KRW 2.4tn and capex of c.KRW 4tn. While we expect KNOCs leverage to remain high, we do not expect a material deterioration from here, as investment spending is likely to decline following the rationalisation of its investment plans. KNOC also plans to dispose of some non-core assets, including the capital-intensive refining operations at Harvest. If this materialises, it will fund part of the shortfall. Sovereign support will continue to underpin ratings: Moodys and Fitch did not raise KNOCs rating after upgrading the Korea sovereign in 2012, given KNOCs weakening financial metrics and the lack of an explicit sovereign guarantee. However, Fitch raised KNOCs rating in 2013 to match that of the Korea sovereign, as it now expects the government to take measures to curtail rising SOE debt (such as scaling back capex). We believe sovereign support will be forthcoming in case KNOC faces financial difficulties, given the companys strategic importance and close operational integration with the government.
HG CORPORATES
Company profile
Korea National Oil Corp. (KNOC) is a 100% government-owned oil and gas company. It was established in 1979 as the governments energy policy execution arm. KNOC is primarily an upstream E&P company and has downstream capabilities through its wholly owned subsidiary, Harvest Operations Corp. As of 2012, it had interests in 102 productive fields (60 oil and 42 gas fields), 9 developing fields, and 129 exploratory fields in 24 countries. In 2012, it had an average production volume of 240kboed. It also operates and manages Koreas oil stockpile facilities and reserves. Separately, it manages the Special Accounts for Energy and Resources (SAER) Fund, which provides government loans to Korea-based energy companies.
324
Asia Credit Compendium 2014 Korea National Oil Corp. (A1/Sta; A+/Sta; AA-/Sta)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 15.0 57.0 5.0 46.1 4.8 3.8 12.5 8.5 159.1 41.0 3.2 47.8 3.1 2.6 24.2 9.3 7.4 35.3 5.4 52.8 3.8 3.4 18.6 7.7 0.3 30.0 3.5 52.7 3.5 3.4 25.8 6.6 (11.3) 29.3 2.8 53.0 4.3 3.9 23.0 6.2 (255) (4,265) (4,520) (25) 5,674 (9,824) (4,149) (68) 2,524 (6,448) (3,924) (34) 2,570 (3,088) (518) 699 (1,720) (1,020) (26) 958 16,966 4,877 3,919 8,422 1,553 26,037 9,249 7,696 10,166 1,223 31,567 11,969 10,746 10,767 592 28,718 11,237 10,645 10,735 941 30,571 12,644 11,702 11,206 1,800 1,027 (121) 649 422 7,168 2,942 (317) 162 6 8,948 3,159 (411) 500 (128) 10,554 3,168 (481) (698) (921) 5,180 1,517 (351) (144) (182) 2010* 2011* 2012* H1-13*
Proven oil and gas reserves (mmboe)

800 700 600 500 400 300 200 100 0 2008 2009 2010 2011 2012 H1-13
Average daily oil and gas production volume (kboed)

250
200
150
HG CORPORATES
100
50
0 2008 2009 2010 2011 2012 H1-13
Consolidated revenue breakdown (KRW bn)

6,000
Debt maturity profile, Jun-13 (KRW bn)

8,000 7,000
5,000
Other 6,000 Refinery sales
4,000
5,000 4,000 3,000 2,000 Loans Bonds
3,000
2,000
1,000
Oil and gas sales
1,000 0
0 H1-10 H2-10 H1-11 H2-11 H1-12 H2-12 H1-13
<1Y
1-2Y
2-5Y
>5Y
* Figures are consolidated; figures for previous periods are on a standalone basis; Source: Company reports, Standard Chartered Research
325
Asia Credit Compendium 2014 KT Corp. (A3/Neg; A-/Sta; A-/Sta)


KT Corp. enjoys a dominant position in the fixed-line segment and has also maintained its market share in the wireless segment. However, its financial metrics have deteriorated in recent years, owing to intense competition and large investments in the wireless segment. That said, competition has rationalised and margins have improved in 2013 on account of regulatory moves. We believe investment spending will slow in 2013 (to KRW 3.5-3.8tn) and 2014 (to KRW 3.2-3.5tn) and KT Corp. will post marginal FCF. We expect leverage to be c.2.5x in 2014, which is slightly weak for its ratings. We maintain our Stable outlook on the credit, while acknowledging downside risks in case of earnings pressure.

Wireless competition has rationalised: KT Corp. enjoys a 30% market share in wireless, which is a mature market with 105% penetration. It enjoys an advantage in convergence products, given its extensive fixed-line network, and it has a firstmover advantage in WiFi locations. It has focused on growth through mobile data by expanding its 4G network; as of Q3-2013, 41.8% of its subscribers were on 4G, versus 15.1% a year ago. KT Corp. experienced tariff pressure and declining ARPUs in 2011-12 due to the competitive environment. However, there have been regulatory interventions over marketing spending and excessive handset subsidies since then, and operators have refrained from actively competing for subscriber acquisitions in 2013. Given that 4G ARPUs are c.40% higher, KT Corp.s blended ARPU increased 3.1% y/y in Q3-2013 to KRW 34,574. Fixed line in gradual decline: KT Corp. dominates Koreas fixed-line segment due to its incumbent status and network quality (67% market share in H1-2013). However, its public switched telephone network (PSTN) subscriber base shrank to 14.7mn subscribers as of September 2013 from 21mn in 2006. It is now positioning VoIP as a growth area (3.5mn subscribers), although the ARPU for VoIP is c.30% lower than for traditional fixed-line services. KT Corp. is also the countrys largest IPTV provider and broadband player, which is sold as a bundled service with IPTV and VoIP. Margins have improved in 2013: KT Corp.s margins declined as the traditional fixed-line voice business was replaced with the lower-margin VoIP and IPTV businesses. In wireless services, high handset subsidies, bundling discounts, unlimited data plans and the introduction of per-second billing pressured margins. However, the increase in 4G subscribers and reduction in marketing expenses led to a recovery in EBITDA margin to 20.9% in H1-2013 from 18.8% in 2012. However, it is unclear whether the pricing discipline will be maintained and the spending cuts will be sustained in the medium term. Credit metrics have weakened: In H1-2013, KT Corp.s EBITDA was flat y/y at KRW 2.47tn, although EBITDA margin improved 210bps to 20.9%. It had historically maintained a relatively conservative financial profile on account of steady cash flow from its fixed-line business. However, its debt profile has moderated due to intense competition, large investments and the inclusion of KT Capital; consolidated debt/EBITDA was 2.6x as of H1-2013, versus 1.9x in 2010. KT Corp.s 4G network rollout and migration of subscribers led to investment spending of KRW 4.9tn in 2012. While it will need to pay the initial licence fee for the recent 4G spectrum auction, we believe overall capex will drop to KRW 3.53.8tn in 2013 and KRW 3.2-3.5tn in 2014. However, the company could look for acquisition opportunities outside Korea. KT Corp. had a dividend payout ratio of 55.5% in 2012, although it has decided to lower its payouts in 2013-14. The company has been selling some property assets and copper cables (it raised KRW 600bn in 2012; annual target of KRW 150-200bn in 2013-14). With earnings growth in the low to mid single digits, KT Corp. should be able to post marginal FCF in 2013-14, and leverage will be c. 2.5x. However, if its earnings come under pressure, there could be further stress on ratings, especially Moodys rating. Other considerations: Given the saturation of the Korean telecom market, KT Corp. has been diversifying its operations. It is currently involved in lease-finance and credit card services (KT Capital) and automobile rental (KT Rental), which together account for c.30% of consolidated debt. While these entities have their own funding channels, KT Corp. may be required to provide support in case of need. Separately, KT Corp.s chairman and CEO offered to resign in November 2013, owing to an investigation related to office building sales. The potential impact (if any) on KT Corps business strategy is unclear at this stage.
326
HG CORPORATES
Company profile
KT Corp. is the incumbent fixed-line operator in South Korea and currently has leading positions across all segments voice (67% market share), broadband (52%) and IPTV (62%). The company also provides corporate telecom services, including leased lines and data transmission. In the wireless segment, KT Corp. is the secondlargest player behind SK Telecom, with a 30% subscriber share. In June 2009, KT Corp. completed a merger with KT Freetel (its wireless affiliate), which has helped it to develop an integrated convergence platform. As of September 2013, KT Corp.s subscriber base was 18.2mn in fixed line, 8.04mn in broadband, 4.7mn in IPTV and 16.3mn in wireless. The company was originally owned by the government. It was fully privatised in 2002, and its equity is currently widely held.
Asia Credit Compendium 2014 KT Corp. (A3/Neg; A-/Sta; A-/Sta)

Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/ EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (15.9) 22.0 4.7 47.4 2.2 1.9 52.2 8.6 26.2 25.6 10.4 46.8 1.9 1.6 45.8 10.3 (13.9) 22.1 7.7 46.7 2.3 2.0 30.6 9.8 (4.7) 18.8 5.0 46.4 2.5 2.1 27.7 9.5 0.2 20.9 4.1 47.4 2.6 2.2 26.7 9.5 10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 31,000 11 13 32,500 12 32,000 31,500 14 33,000 3,372 (2,857) 514 (229) 3,210 (3,727) (5170 (502) 1,993 (3,750) (1,757) (595) 5,513 (4,865) 649 (497) 1,466 (1,561) (95) (509) 16 15 1,546 26,620 9,630 8,084 10,667 1,193 27,713 10,122 8,929 11,496 1,445 32,085 11,000 9,554 11,704 2,055 34,479 11,418 9,363 12,309 1,882 33,490 11,810 9,929 13,081 1,000 0 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 2,000 19,649 4,328 (506) 715 495 21,331 5,461 (529) 1,562 1,168 21,272 4,704 (480) 1,768 1,447 23,790 4,482 (472) 1,391 1,057 11,862 2,474 (235) 496 290 4,000 3,000 2010 2011* 2012* H1-13*
Revenue breakdown (KRW bn)

7,000 6,000 5,000 Wireless Fixed-line Media/Content Finance Others
Wireless subscribers and ARPU (mn LHS, KRW RHS)

17 Subscribers ARPU (RHS) 35,000 34,500 34,000 33,500
HG CORPORATES
Fixed-line subscribers (mn)

20 18 16 14 12 10 8 6 4 2 0 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 PSTN VoIP
Capital expenditure (KRW bn)

1,400 Other 1,200 1,000 800 600 400 200 Wireless 0 Q1-10 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 Fixed-line
*Numbers are reported as per IFRS from 2011, K-GAAP earlier; Source: Company reports, Standard Chartered Research
327
Asia Credit Compendium 2014 Li & Fung Ltd. (A3/Neg; BBB+/Sta; NR)

Li & Fung has a unique, diversified and resilient franchise in supply-chain management for the retail sector. However, large acquisitions, tough end markets and inflation pressure have weakened its profitability of late. Importantly, it set an ambitious EBIT target for 2013 and undertook large acquisitions in the distribution segment. Given high restructuring costs in the US, it has focused on integrating its businesses and slowing down acquisitions in 2013. However, we maintain our Negative credit outlook, since marginal FCF and high dividend payouts will limit any rapid deleveraging in 2014. We will closely monitor the companys plan for the next three years (2014-16), to be announced in early 2014.

Solid business model in trading: Li & Fung has a strong franchise in trading, as its global network cannot be easily replicated and its scale is unmatched by most trading houses. It has strong relationships with about 7,700 customers and works with over 15,000 suppliers across many countries. As it acts as an agent for retailers, it has limited exposure to inventory and receivable risks. It also runs an asset-light structure, with little investment in production facilities and warehouses. The business is highly resilient and has posted gross margins of 8.6-9% since 2010. In H1-2013, the segments EBIT increased 1.4% y/y to USD 203mn (91% of total EBIT). Profitability pressure in distribution: In 2005, Li & Fung expanded into the distribution business, which provides private labels, proprietary brands and licensing of brands. The business came under pressure and posted an EBIT loss of USD 38.9mn in 2012 on account of restructuring costs and the discontinuation of certain brands in the US (LF USA). It appointed a new management team for LF USA, and the business has stabilised in 2013; in H1, the segments EBIT was marginally positive. Li & Fung entered the logistics segment with the IDS acquisition in 2010 and focuses mainly on the Asian markets in the segment. In H1-2013, the logistics platform posted 56% y/y growth in EBIT, although its revenue remains small (2.3% of total). M&A-based strategy has increased risk profile: Li & Fung has undertaken a number of acquisitions over the years to improve its sourcing networks and functional capabilities. Most of the acquired companies were cash-generative, and Li & Fung typically paid over three to six years, with a portion of the payment contingent on the acquired business achieving targets. That said, the company had set itself an ambitious target to double its EBIT between 2010 and 2013; the major focus was on distribution (EBIT growth target of USD 700mn from USD 298mn), and Li & Fung was aggressive in its acquisitions. Given the problems with LF USA in 2012, the company has focused on integrating the existing businesses and has scaled back its M&A. In H1-2013, it acquired five companies for a total consideration of USD 432mn, with an initial payment of USD 135mn. Steady profitability in H1-2013: Li & Fung reported flat y/y EBITDA in H1-2013 of USD 364mn. EBIT margin for trading was steady at 2.8% on account of a solid order book and a stable pricing trend. EBIT margin in the distribution segment declined to 0.2% (versus 0.4%), with strong performance in Europe and Asia being offset by the ongoing restructuring of LF USA. The logistics segment posted EBIT margin of 5.8% (versus 5.1%) due to new customers and increased cross-selling. The company is well behind its original 2013 EBIT target of USD 1.5bn (USD 223mn in H1-2013); it will announce its plan for the next three years (2014-16) in early 2014. Financial metrics have deteriorated: Historically, Li & Fung has maintained financial prudence through a capital-light balance sheet, stringent cost controls and significant equity raising. However, large acquisitions since 2010 and the profitability squeeze in 2012 led to a deterioration in coverage metrics; net debt/EBITDA is now at 3.9x (1.0x in 2009). That said, the company raised USD 498mn of equity in H1-2012 and USD 500mn through a hybrid bond (which gets 50% equity credit by our calculation) in H22012, and the balance sheet is strong, with debt to capital at 42.4% (48.7% in end2011). Li & Fung has also altered its dividend policy, tying payouts to core operating profit instead of net income; as a result, the payout ratio, which was more than 80% in 2005-11, came down to 54% in 2012. We expect single-digit earnings growth in 2014, which, combined with a prudent M&A strategy, should lead to breakeven FCF. Hence, our base-case scenario is for net debt/EBITDA to remain in the 3-4x range in 2014. Li & Fungs liquidity profile is solid, with a strong cash balance (USD 419mn), undrawn facilities (USD 1.5bn) and annual operating cash flow (USD 800-900mn) adequate to cover its short-term debt and acquisition payables of USD 635mn.
328
HG CORPORATES
Company profile
Li & Fung Ltd. (Li & Fung) is one of the worlds largest independent supply-chain management companies. It provides solutions to retailers of garments, fashion accessories, toys, sporting goods and home furnishings. Its activities include product design and planning, raw-material sourcing, shipping and logistics, quality assurance, and import/export documentation processes. It has over 300 offices in 40 countries, and its key markets are the US and Europe, which contribute c.79% of revenue. Headquartered in Hong Kong, Li & Fung is part of the privately owned Li & Fung Group, controlled by the Fung family. Victor Fung and his younger brother, William Fung, own about 33% of Li & Fung.
Asia Credit Compendium 2014 Li & Fung Ltd. (A3/Neg; BBB+/Sta; NR)
Summary financials
2009 2010* 2011* 2012* H1-13*
Gross margin and operating margin (%)

16 Gross margin
Income statement (HKD mn, USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income 105,124 4,531 (372) 3,606 3,369 15,985 884 (98) 596 548 20,118 1,109 (129) 772 681 20,317 797 (135) 677 617 9,159 364 (75) 120 96 8 12
Balance sheet (HKD mn, USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity 4,202 41,847 8,597 4,395 17,726 969 9,494 2,931 1,962 3,632 426 10,920 3,729 3,303 3,939 680 12,015 3,642 2,961 4,893 419 12,009 3,504 3,085 4,748 0 1999 2001 2003 2005 2007 4
Op. margin
2009
2011 H1-2013
Cash flow (HKD mn, USD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 27.0 4.3 19.9 32.6 1.9 1.0 21.4 12.2 52.2 5.5 23.6 44.7 3.3 2.2 11.5 9.0 25.4 5.5 17.0 48.7 3.4 3.0 11.4 8.6 (28.1) 3.9 8.6 42.7 4.6 3.7 0.3 5.9 1.1 4.0 7.9 42.4 4.4 3.9 4.4 5.6 6,384 (4,103) 2,282 (2,180) 667 (757) (90) (426) 817 (1,107) (290) (468) 476 (839) (363) (525) 154 (216) (62) (171)
Revenue by geography, H1-2013 (as a % of total)

100 ROW Asia 80 Europe 60
HG CORPORATES
40 US 20
0 Trading Logistics Distribution Total
Core operating profit (USD mn)

700 600 500 400 300 200 100 0 -100 Trading Logistics Distribution H1-2013 2011
Operating cost/revenue (%)

50% 45% 2010
2012
40% 35% 30% 25% 20% 15% 10% 5% 0% Trading
2011
2010
2012 H1-2013
Logistics
Distribution
*Figures since 2010 are in USD, figures for 2009 are in HKD; Source: Company reports, Standard Chartered Research
329
Asia Credit Compendium 2014 Lifestyle International Holding Ltd. (Baa3/Sta; NR; BBB-/Sta)

Lifestyle enjoys excellent brand recognition in Hong Kong, and its Causeway Bay store has remained resilient even during economic downturns. Its large stores, concessionaire model and ownership of properties lead to higher operating efficiency and steady margins. While its China operations carry higher risks, and it is planning a large department store in Shanghai, Lifestyle has so far adopted a prudent approach to expansion in China. It has also gradually exited its noncore operations and has prefunded a large part of its 2014 capex. Our base-case scenario is for a gradual improvement in leverage to 4-4.5x in 2014 as incremental earnings kick in from its China stores. We therefore maintain our Stable credit outlook.

Strong brands and resilient business model: SOGO and Jiuguang are wellknown brands, and Lifestyle has continuously enhanced its brand image through advertising and actively managing its product mix. The companys stores are in prime locations in Hong Kong and Shanghai, and their large size ensures high operating efficiency. Lifestyle operates largely under a concessionaire model (direct sales are only c.25%), which leads to upfront cash collection, lowers inventory and bad-debt risks, and minimises working-capital needs. In 2012, the average concessionaire rate was 22.4%; the Hong Kong and Shanghai stores have higher rates than its other mainland stores. Lifestyle also owns most of its stores, which insulates it against rising rents and forced relocations. Hong Kong operations in good shape: Lifestyle dominates the department store space in Hong Kong; it had a market share of 21% in 2012. Its flagship store is SOGO CWB (65.5% of group revenue in H1-2013), which enjoys a prime location and high customer loyalty, and has exhibited excellent resilience during economic downturns. In H1-2013, CWB store revenue increased 7.3% y/y due to an 11.9% increase in ticket size and a 1.4ppt rise in the stay-and-buy ratio. In H1, Hong Kong operations contributed 72.7% to the top line, and we expect the share to remain at c.70% in 2014. That said, SOGO TSTs lease will be terminated by February 2014, which will increase Lifestyles concentration risk. It will also face a hit to earnings, as it will take time to relocate and replicate the TST store (according to Fitch, TST accounted for c.5% of EBITDA in 2012). China operations in expansion mode: Lifestyles China operations are relatively small, although the share of mainland revenue will grow with its fourth store opening in Shenyang in H1-2013. After being negatively affected by the industry slowdown and increased competition in 2012, the China operations rebounded in H1, with strong revenue growth in Suzhou (22.6%) and Dalian (8.1%). EBIT margin in China improved to 30.3% in H1 (versus 21.4% in 2010); although this is lower than in Hong Kong (44.9%), we expect a gradual improvement on account of better profitability in the Dalian and Suzhou stores. Lifestyle has acquired 50,000sqm of land for c.HKD 3bn in Shanghais Zhabei district, which will be developed into a Jiuguang store by 2017. While the retail market in China is riskier on account of fragmentation and high competition, Lifestyle has adopted a prudent expansion strategy and opened just a couple of stores in the past two to three years. Focus on core operations: Lifestyle exited its non-core assets by selling stakes in the Sun Plaza property in 2011 and the Tianjin Lifestyle Plaza mall in 2012. It has also spun off and listed its property assets (8% of assets, zero contribution to revenue) in 2013 and plans to focus solely on the department store business. Leverage has increased: Lifestyles EBITDA margin has been 33.1 -40.6% since 2006, and we expect annual CFO to grow to c.HKD 2.0-2.2bn in 2013-14 (versus HKD 1.8bn in 2012). The company had strong financial metrics until 2010, with leverage at 2.1x. However, it raised USD 800mn of bonds in 2012 to pre-fund the Zhabei project and term out its debt maturity profile. Leverage has therefore increased to 4.8x, while debt/capital is at 49.8% (30.1% in 2010). Lifestyles policy of owning its properties, while prudent, requires large upfront investment for land purchase and construction, while the breakeven period is typically two to three years after store opening. Given its HKD 7.7bn cash balance, HKD 3.3bn investment portfolio and undrawn committed revolver of HKD 2bn, the company is in a good position to fund Zhabei construction capex and other investments. We expect dividend payouts of 35-40%, and our base case is for leverage to gradually improve to 4.0-4.5x in 2014.
330
HG CORPORATES
Company profile
Lifestyle International Holdings Ltd. (Lifestyle) is a retail operator that focuses on mid-range to upper-end department stores. It operates through two retail brands SOGO and Jiuguang. Currently, it operates two SOGO stores in Hong Kong Causeway Bay (CWB) and Tsim Sha Tsui (TST) and four Jiuguang stores in China (Shanghai, Dalian, Suzhou and Shenyang). One more Jiuguang store is under construction in Zhabei, Shanghai, which will be operational around 2017. Lifestyle is listed in Hong Kong, and its principal shareholders are Mr. Thomas Lau and Dr. Cheng Yu-tung, who hold a combined 51.5% stake through a JV. Mr. Lau holds an additional 8.7% direct stake in the company.
Asia Credit Compendium 2014 Lifestyle International Holding Ltd. (Baa3/Sta; NR; BBB-/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 4.0 33.3 11.2 32.3 2.5 0.2 24.8 29.0 28.6 37.3 13.2 30.1 2.1 (0.2) 27.6 39.7 24.4 39.0 13.2 42.1 3.3 (0.3) 16.1 29.0 10.2 39.9 10.7 51.1 5.0 1.2 8.4 6.6 9.6 40.6 9.6 49.8 4.8 1.4 NA 5.9 1,439 (536) 904 (405) 1,723 (612) 1,111 (583) 1,886 (1,039) 847 (717) 1,763 (2,993) (1,229) (869) 592 (279) 313 (458) 2,890 12,301 3,187 297 6,683 3,761 13,873 3,398 (363) 7,903 7,269 18,581 6,624 (646) 9,109 8,292 24,599 10,943 2,651 10,482 7,673 24,819 10,970 3,298 11,079 3,756 1,251 (38) 1,498 1,142 4,317 1,609 (36) 1,896 1,408 5,132 2,001 (58) 2,594 1,867 5,523 2,205 (308) 2,755 2,057 2,851 1,158 (207) 1,440 1,097 2010 2011 2012 H1-13
Average daily traffic (000 people)

100 90 80 70 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 2012 H1-2013 Suzhou Jiuguang SOGO TST SOGO CWB
Dalian Jiuguang
Average sales per ticket (HKD LHS, CNY RHS)

900 800 700 600 500 400 300 200 100 0 2007 2008 2009 2010 2011 2012 H1-2013 Sogo TST Sogo CWB 200 150 100 50 0 Shanghai Jiuguang (RHS) 400 350 300 250
HG CORPORATES
Operating costs (% of sales)

40 Cost of sales
Revenue by region (HKD bn)

6
5 30 Distribution and selling costs 4 China
20
2 10 1
Hong Kong
0 2009 2010 2011 2012 H1-2013

0 2010 2011 2012 H1-2013
331
Asia Credit Compendium 2014 Lotte Shopping Co. Ltd. (Baa1/Neg; NR; BBB+/Neg)

We maintain our Negative credit outlook on Lotte. The company enjoys a dominant position among department stores in Korea, which underpins its earnings profile. However, its hypermarket segment exhibits poor SSSG and margin pressure. Importantly, it has expanded aggressively through domestic and overseas acquisitions in recent years; the overseas business posted an EBITDA loss in 9M-2013. While investment spending peaked in 2012, capex will be high in 2013-14. With EBITDA growth expected to be in the mid single digits in 2014, Lotte will barely break even in FCF terms, and leverage will remain high for its ratings at c.5x. Any major deleveraging initiative will be positive for the credit.

Strong market position: Lotte has a leading market share (45% in H1-2013) in Koreas department-store sector. Most of its stores enjoy solid oligopolistic positions; we believe that this, along with ongoing store investments and high entry barriers, will lead to continued market dominance. Lotte is a distant third in the hypermarket segment (15% share) behind E-mart and Tesco, due to its lack of nationwide coverage. Lotte also holds solid positions in supermarkets (No. 1, 51% share), retailing IT products and home appliances (No.1, 47% share), convenience stores (No. 3, 30% share) and TV home shopping (No. 3, 22% share). Operating profit growth to remain weak: Lottes product offerings in department stores (the main contributor to earnings) have historically matched evolving consumer preferences, leading to stable operating performance. A large portion of revenue is either of leasing or concessionary sales commission, which does not entail working capital or inventory write-down risks. Same-store sales growth (SSSG) in department stores was 4.9% y/y in 9M-2013, while EBITDA grew 2.3% y/y. However, the hypermarket business is facing pressure on account of new regulations (two-day closure of stores per month and restrictions on new store openings) and weak consumer demand. Hypermarket SSSG fell 4.6% y/y and EBITDA declined 6.1% in 9M-2013. The companys reported EBITDA increased 8.7% y/y in 9M-2013 due to Lottes Hi-Mart acquisition; excluding that, operating income was actually flat y/y. Consolidated EBITDA margin narrowed to 8.3% in H12013 from 11.7% in 2008. We expect mid-single-digit EBITDA growth in 2014 on continued growth in department store sales and a low impact of regulations. M&A risks: Lotte's expansion into China and Indonesia has increased its overall business risk profile. Its growth strategy has involved acquisitions CTA Makro (hypermarkets in China), PT Makro (hypermarkets in Indonesia) and Times Ltd. (hypermarkets in China). Lotte lacks experience and scale in these markets, and in 9M-2013, the overseas department store and hypermarket businesses posted an EBITDA loss of KRW 43bn. Since 2010, Lotte has also undertaken a number of domestic acquisitions, including convenience store chain Buy the Way (USD 235mn) and the department- and discount-store operations of GS Retail (USD 1.15bn). Its 2012 acquisition of Hi-Mart, the largest electronics goods retailer in Korea for KRW 1.2tn, prompted a rating downgrade by the agencies. Leverage levels unlikely to improve: Lottes financial profile has weakened materially since 2008 due to aggressive acquisitions debt to capital rose to 44% in H1-2013 from 27.8% in 2008. In 2013, it opened three outlet malls and seven hypermarkets in Korea, and two department stores and 15 hypermarkets overseas. While we believe annual investment spending peaked in 2012 at KRW 3.4tn, it will still remain high at KRW 1.8-2tn in 2013-14. That said, the company has indicated some flexibility to scale back capex based on market conditions. It also tried to undertake some deleveraging initiatives through issuing a hybrid bond (KRW 270bn in November 2013) and is planning the sale and lease-back of some stores. However, we expect FCF to barely break even in 2014 (negative FCF of KRW 258bn in H1-2013), and in the absence of a major deleveraging initiative, debt to EBITDA will remain elevated at c.5x (currently: 5.6x), which is weak for its ratings. Lotte has adopted a prudent shareholder policy, with an absence of share buybacks and low dividend payout ratios (c.5%), and its liquidity profile is moderate with cash of KRW 1.4tn versus short-term debt of KRW 4.3tn as of June 2013. Contingent liabilities: Lotte holds 92.5% of Lotte Card and 20.6% of Lotte Capital. While their capitalisation is good, they have weaker credit profiles and rely on wholesale funding; Lotte thus faces the risk of a liquidity call from its affiliates.
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HG CORPORATES
Company profile
Lotte Shopping Co. Ltd. (Lotte) was set up in 1970 as a retailer with a focus on department stores. It entered the hypermarket business in 1998 and subsequently expanded into other retail formats such as supermarkets and outlet stores. As of 30 September 2013, Lotte operated 34 department stores, eight outlet malls and 106 hypermarkets in Korea. It has also expanded into China, Indonesia, Vietnam and Russia. Separately, the company is involved in electronic products, convenience stores, internet/TV home shopping channels and credit cards (Lotte Card), mainly through its subsidiaries. Lotte is listed on the KSE. The Shin family and Lotte Group affiliates hold about 70% of its shares.
Asia Credit Compendium 2014 Lotte Shopping Co. Ltd. (Baa1/Neg; NR; BBB+/Neg)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 14.1 10.6 7.4 27.7 3.0 2.2 28.9 17.0 23.7 11.1 8.2 38.1 4.0 3.4 19.5 6.7 7.1 10.1 7.2 41.0 4.5 3.6 16.8 5.3 (2.8) 8.8 5.6 43.5 5.5 5.1 14.7 6.8 8.0 8.3 6.4 43.9 5.6 5.0 12.5 5.8 930 (1,061) (131) (36) (51) (3,256) (3,307) (45) 703 (1,741) (1,038) (54) 748 (3,382) (2,634) (54) 684 (942) (258) (63) 1,364 24,423 5,042 3,678 13,165 1,242 29,192 8,395 7,153 13,642 1,958 33,061 10,186 8,228 14,679 934 36,857 12,125 11,191 15,718 1,431 38,105 12,761 11,330 16,312 16,010 1,703 (100) 1,126 716 19,018 2,106 (312) 1,508 1,035 22,253 2,255 (427) 1,555 932 25,044 2,192 (322) 1,631 1,080 13,867 1,153 (293) 635 430 2010 2011* 2012* H1-13*
Department stores (KRW bn LHS, % RHS)

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010 2011 2012 9M-2013 2 0 6 4 10 8 EBIT margin (RHS) Revenue 14 12
Hypermarkets (KRW bn LHS, % RHS)

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2007 2008 2009 2010 2011 2012 9M-2013 EBIT margin (RHS) 5.0 Revenue 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
HG CORPORATES
Investment breakdown (KRW bn)

3,500 Overseas 3,000 2,500 2,000 1,500 1,000 500 0 2008 2009 2010 2011 2012 Department stores Discount stores Others
Store network (no. of stores)

300 Korea - Department stores China Vietnam Korea - Hypermarkets Russia Indonesia
250
200
150
100
50
0 2008 2009 2010 2011 2012 2013F
*From 2011, numbers are reported as per IFRS, compared to K-GAAP earlier; Source: Company reports, Standard Chartered Research
333
Asia Credit Compendium 2014 Nan Fung International Holding Ltd. (Baa3/Sta; BBB-/Sta; BBB/Sta)

We have a Stable outlook on Nan Fung. It is one of the few privately held conglomerates in the HG space. In addition to its strong balance sheet, its securities investment portfolio provides a substantial liquidity buffer. While this investment portfolio may experience markto-market losses, it generates recurring income in the form of interest income and dividends. The group remains committed to investing in its core market of Hong Kong, where it has 2.2mn sq ft of investment property and a long track record in the property market. About half of its land bank under development in China is investment property, which we believe will provide stable recurring income when completed.

Revenue dragged down by slower development profits: Nan Fungs revenue fell 23% to HKD 3.6bn in FY13, due to lower development profits in both Hong Kong and China. The property business contributed 47% of total FY13 revenue, and the securities investment business 41%. Lower dividend income from its investments was offset by a higher fair-value net gain from its financial assets as revenue from the investment business reversed losses in FY12 and contributed HKD 1.5bn in FY13. Net cash position reversed, but balance sheet remains strong: Total debt rose 35% to HKD 14.2bn in FY13 from HKD 10.5bn in FY12, largely due to the issuance of new bonds during the year. HKD 3.65bn worth of bonds were issued, of which USD 300mn worth are listed on the SGX. Given that the bonds were largely of 10Y tenor, Nan Fungs weighted average tenor increased to 5.2 years from 3.3 years. ST debt was low at just HKD 1.5bn, versus HKD 2.3bn a year earlier. As such, Nan Fung is now in a net debt position. Total debt/capital rose to 16.6% as of March 2013 from 14.8% a year earlier, while net debt to capital is at 0.5%. Liquidity is ample, with a cash balance of HKD 13.7bn, higher than the HKD 11.9bn in FY12. Nan Fung also has undrawn banking facilities of HKD 6.9bn. Investment portfolio provides an additional source of liquidity: The group has a substantial investment portfolio made up of equities and fixed-income securities. Its investment strategy is a core+satellite approach, where the core portion is held as a long-term investment, and the satellite portion is actively traded, so as to benefit from market fluctuations. As of 31 March 2013, the groups available -forsale assets amounted to HKD 9.3bn, and trading securities to HKD 9.4bn. Besides providing a substantial liquidity buffer, these investments generate stable recurring interest and dividend income for the group (c.24% of FY13 revenue). The portfolio (ex-SOL) was largely unleveraged as of 31 March 2013 and comprised 37% equities, 34% fixed income, and 29% funds and private investments. Hong Kong property segment remains the key contributor: Historically, sales in Hong Kong have been a significant source of operating income, and the company continues to bid for land and develop projects there. As of 31 March 2013, Nan Fung had a land area of approximately 850,978 sq ft available for development in Hong Kong. Attributable GFA from projects under development totalled 2.9mn sq ft. In July 2013, Nan Fung entered into a sale-and-purchase agreement to acquire a parcel of land at Sai Ying Pun for HKD 908mn. Scheduled for completion in 2017, this site for commercial use has GFA of 105,825 sq ft. As part of a 50:50 JV, Nan Fung also won a tender for a 134,496 sq ft GFA residential site in Sha Tin for a consideration of HKD 1.2bn. Its investment portfolio in Hong Kong amounts to 2.5mn sq ft of attributable GFA following two new additions (Winfield Building and Courtyard by Marriott) during the year. Expansion into China: As of 31 March 2013, Nan Fung had total attributable GFA of 685,797sqm in China, of which 60% is under development. Its investment portfolio in mainland China is still low at 110,772sqm. However, upon completion of all investment property currently under development, attributable GFA will rise to 579,130sqm and provide stable recurring income for Nan Fung. In July 2013, Nan Fung entered into conditional agreements to acquire 29.98% of Forterra Trust, a business trust that holds property projects in China, for a consideration of approximately SGD 227mn. New CEO: Nan Fung announced in November 2013 that it would hire Antony Leung, Blackstone Groups former Greater China chairman, as its new CEO. Leung is also a former Financial Secretary of Hong Kong.
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HG CORPORATES
Company profile
Nan Fung International Holdings Ltd. (Nan Fung) is one of Hong Kongs largest privately held property-focused conglomerates based on asset size. Its core businesses are property development and investment. It is also engaged in property management, mortgage financing and financial investment. Founded in 1954 with a focus on the textile industry, Nan Fung was the largest cotton yarn manufacturer in Hong Kong in terms of volume. Since 1965, the company has expanded into the Hong Kong property business. Nan Fung is also the second-largest shareholder of SinoOcean Land (SOL) after China Life Insurance. Following a fund raising by SOL in September 2013, Nan Fung now holds 21% of SOLs shares.
Asia Credit Compendium 2014 Nan Fung International Holding Ltd. (Baa3/Sta; BBB-/Sta; BBB/Sta)
Summary financials
FY10 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) 9,109 72,223 3,557 (5,553) 52,623 13,110 83,259 6,716 (6,394) 59,625 11,868 83,645 10,547 (1,320) 60,491 13,718 94,394 14,188 470 71,233 12,969 10,975 (40) 15,468 14,542 5,071 2,448 (103) 6,697 6,190 4,680 1,725 (132) 5,935 5,389 3,604 1,492 (520) 7,175 6,653 FY11 FY12 FY13

14 12 10 8 6 4 2 0 -2 2010 2011 2012 2013 HK & Overseas Properties PRC Properties Securities Investment Corporate, Treasury and Other Operations
Hong Kong investment property portfolio, Mar-13 (selected)

Project Attributable GFA (sq ft) 295,695 88,648 39,998
Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x)
8,634 (5,713) 2,922 0
9,118 (10,462) (1,344) 0
(2,509) (3,700) (6,209) (3,768)
748 (8,873) (8,125) 0 Nan Fung Tower, Central 80 Robinson Road, Mid-Levels Fortuna Court, Repulse Bay Grand Garden, South Bay Queens Cube, Wanchai Octa Tower, Kowloon Bay Tseung Kwan O Plaza Ma On Shan Centre Richwood Plaza Cheung Fung Industrial Building, Mill 4,5,6 Well Fung Industrial Building, Kwai Chung Nan Fung Industrial City, Tuen Mun Courtyard by Marriott
HG CORPORATES
39,709 22,459 747,635 375,700 95,697 7,893 296,125 7,253 3,431 349,830
NA 84.6 6.3 0.3 (0.5) NA
(77.7) 48.3 10.1 2.7 (2.6) 23.7
(29.5) 36.9 14.8 6.1 (0.8) 13.1
(13.5) 41.4 16.6 9.5 0.3 2.9
China land bank/property under development, Mar-13

By city Beijing Shanghai Guangzhou Wuxi Sanya Dalian Total Attributable GFA (sqm) 38,000 41,944 85,824 306,540 74,207 139,282 685,797 By type Residential/ villas Commercial Office Hotel Exhibition centre Others Total Attributable GFA (sqm) 217,439 108,258 241,808 58,782 42,189
Debt maturity, Mar-13 (HKD bn)

5
1 17,321 685,797 0 < 1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-10Y
Note: Financial year ending 31 March; Source: Company reports, Standard Chartered Research
335
Asia Credit Compendium 2014 New World Development Co. Ltd. (NR; NR; NR)

We have a Stable outlook on NWD, given its diversified business model, which supports its credit metrics. Property remains a key income contributor, and NWD is committed to growing its property business. In Hong Kong, NWD has a strong pipeline of projects to be launched in 2014. Its agricultural land reserves in Hong Kong are also among the largest among peers. Its China sales have performed well, with GFA sold and amount sold rising 63% y/y and 69% y/y, respectively. NWD has also selectively replenished its property land bank following strong sales performance. Liquidity is ample in our view, and its credit metrics remained strong.

Property sector continues to drive revenue: Revenue jumped 31% to HKD 46.8bn as revenue from property sales almost doubled to HKD 24.2bn in the financial year ended 30 June 2013. Key projects that contributed were The Riverpark in Sha Tin and The Signature in Tai Hang. Rental revenue grew 16% to HKD 2.2bn on higher rental rates and stable occupancy. However, revenue from NWDs hotel business was down 2%, largely due to renovation work. The property business (including hotels) made up 64% of total FY13 revenue, compared with 51% in FY12. China contributed 47% of total revenue, while Hong Kong and Macau contributed 52% and 1%, respectively. Non-property business remains stable: Revenue from its department store business grew 12% to HKD 3.9bn on higher sales. Same-store sales growth of the self-owned department stores grew 11% in FY13. Higher revenue was driven by two new self-owned stores and two managed stores that were opened during the year, offset by one store that was closed for redevelopment. Revenue from NWDs infrastructure business grew 15% to HKD 2.2bn, while its services-business revenue fell 10% to HKD 9.2bn, largely due to a concession contract expiring and renewed concession terms. Proposed listing of hotel business: In May 2013, NWD announced plans to spin off part of its Hong Kong hotels via a listing on the HKSE. This will some capital for NWD and will also provide a separate funding enhanced financial flexibility. The initial hotel portfolio will comprise Hong Kong, Renaissance Harbour View Hotel and Hyatt Regency Tsim Sha Tsui. help recycle platform for Grand Hyatt Hong Kong,
HG CORPORATES
Credit profile remains healthy: Total debt rose 14% to HKD 106.4bn as of 30 June 2013 from HKD 93.2bn at end-December-2012 (end-FY12: HKD 88.7bn), largely due to land premium payments and business acquisitions costs. Short-term debt rose to HKD 27.2bn from HKD 19.6bn. However, cash and cash equivalents (excluding pledged cash) were higher at HKD 40.1bn, compared with HKD 30.5bn at end-December-2012. In September 2012, a subsidiary of NWD issued HKD 505mn 5.0% guaranteed bonds due in 2022. In February 2013, NWCL also issued CNY 3bn 5.5% bonds due in 2018. As of June 2013, NWD had contracted but not provided for capital commitments of HKD 7.2bn (including jointly controlled entities). Stable credit metrics: Based on our estimates, EBITDA/interest coverage was relatively flat at 4.5x as of end-June 2013 (4.8x as of end-June 2012) as the improved top line was offset by higher interest costs. Similarly, total debt/LTM EBITDA rose to 6.4x from 6.1x, and total debt/capital rose to 37.4% as of June 2013 from 36.0% at end-FY12. Selectively replenishing land bank: Given the healthy profits recognised from its development properties, NWD continues to look to replenish its land bank through public auctions, redeveloping old buildings, private acquisitions and tendering, and converting agricultural land. In January 2013, NWD won a tender for a site at West Rail Tsuen Wan West station as part of a JV (GFA: 670,000 sq ft). In March 2013, NWD also won a tender for a commercial land parcel located at Tung Chung Town (GFA: 530,000 sq ft). As of 30 June 2013, the company had a total attributable land bank of around 9.3mn sq ft in Hong Kong for immediate development (of which over 55% is in urban areas). NWD also has a total of approximately 18.9mn sq ft of agricultural land reserves pending conversion one of the largest agricultural land reserves in Hong Kong.
Company profile
New World Development Co. Ltd. (NWD) is a Hong Kong-based conglomerate that was listed in 1972. While property remains the groups key growth driver, NWD and its subsidiaries are also engaged in the infrastructure, services, telecommunications and department-store businesses. Listed subsidiaries include NWS Holdings Ltd. (infrastructure, services), New World China Land Ltd. (China property) and New World Department Store China Ltd. (China department store). Most of its operations are concentrated in China, Hong Kong and Macau.
336
Asia Credit Compendium 2014 New World Development Co. Ltd. (NR; NR; NR)
Summary financials
FY09 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow (5,247) Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) (17.1) 24.0 34.2 8.6 6.2 3.6 73.8 33.7 31.3 5.1 2.8 6.6 6.6 33.1 31.1 5.6 3.4 5.6 33.2 40.6 36.0 6.1 4.2 4.8 15.5 35.7 37.4 6.4 4.0 4.5 (1,733) (6,980) (1,722) 8,277 (2,352) 5,926 (2,046) 1,249 (15,470) (4,764) (2,755) 5,547 (5,487) 60 (2,191) 14,080 23,509 23,972 27,910 40,091 24,415 5,863 (1,610) 4,191 2,084 30,219 10,192 (1,552) 17,572 12,399 32,882 10,869 (1,951) 15,578 9,154 35,620 14,477 (2,987) 18,722 10,139 46,780 16,720 (3,703) 23,311 14,149 FY10 FY11 FY12 FY13

60 Rental Contracting 50 Infrastructure Department Stores 40 Others Property Sales Provision of Services Telecommunication Services Hotel Operation
30
20
176,519 199,980 229,115 286,372 332,189 50,555 36,475 52,319 28,811 60,609 36,637 88,711 106,413 60,802 66,321
10
0 FY10 FY11 FY12 FY13
97,483 114,886 134,369 158,041 177,745
Land bank in Hong Kong by location

Land bank Hong Kong Island Kowloon New Territories Agricultural land bank Yuen Long Fanling Sha Tin/Tai Po Sai Kung Tuen Mun Land area (sq ft) 14,311,500 2,590,000 2,162,000 1,364,000 120,000 Attributable GFA 692,969 4,385,962 4,195,360 Attributable land area (sq ft) 13,059,000 2,386,000 2,162,000 1,170,320 120,000
(3,515) (18,225) (1,336) (1,694)
HG CORPORATES
Contracted sales in mainland China

FY11 Contracted sales achieved (sqm) - H1 - H2 Contracted sales achieved (CNY bn) - H1 - H2 Gross margin (%) 1,065,021 514,292 550,729 13.8 6.2 7.6 33 FY12 780,379 309,910 470,469 9.8 4.2 5.6 50 FY13 1,274,851

45 40 35 625,465 649,386 16.5 8.5 10 8.0 42 5 0 < 1Y 1-2Y 2-5Y > 5Y 30 25 20 15
Note: Financial year ending 30 June; Source: Company reports, Standard Chartered Research
337
Asia Credit Compendium 2014 Noble Group Ltd. (Baa3/Sta; BBB-/Sta; BBB-/Sta)

Nobles diversified earnings stream has come under pressure due to weak performance in the agriculture division. However, we expect better profitability in 2014 due to operating efficiencies and new capacities coming onstream. The energy segment should continue to generate strong cash flow, while the MMO divisions earnings will be steady. Noble has shifted back to an asset-light strategy, and 2014 capex will be lower. While its financial metrics are currently weak and operating conditions will remain tough, we believe the company is committed to maintaining its HG rating. We expect it to control working-capital deficits and adopt asset-recycling initiatives to improve balance sheet

Margin pressure in agriculture will ease: Noble does not dominate any commodity category, although it has competitive positions in various sub-segments (top soybean processor and leading marketer of coal in China, one of the largest sugar producers in Brazil, fifth-largest non-residential power marketer in the US). Its portfolio of 25 products mitigates single-sector exposure and improves earnings stability. That said, the agriculture segment posted an operating loss of USD 120mn in H1-2013 due to lower sugar prices, weak crushing margins and transport bottlenecks. Operating efficiencies should improve in 2014 on better economies of scale owing to higher capacity in sugar and new oilseed crushing facilities in South Africa, Ukraine and Brazil (in Q3, segment profit was USD 14mn). The energy segment will continue to perform well due to the strong supply chain in coal and its good market position in US gas and power distribution (9M-2013 gross profit was up 20% y/y). The MMO segment posted lower profits in 9M-2013 (USD 91mn, versus USD 122mn in 9M-2012) due to poor performance in the iron ore division. Investment cycle is waning: Noble undertook USD 5.4bn of capital investment during 2008-12 as it acquired assets and built greenfield projects. However, it has now moved to an asset-light strategy and will focus on securing access and control over commodity supplies. Its major capex on processing facilities will be completed this year, and 2014 capex will be lower at c.USD 500mn (spending of USD 480mn in 9M-2013, versus USD 917mn in 2012). While acquisitions cannot be ruled out, management has indicated that investment decisions will be made based on the potential impact on its credit ratings. In 2013, the company announced a USD 500mn investment (in phases) as a strategic investor in a new mining fund, X2 Resources; Noble will provide logistics and supply chain management services to X2 Resources. Financial metrics are weak for ratings: In 9M-2013, Nobles EBITDA declined 9.2% y/y as weakness in agriculture offset efficiency initiatives and lower SGA expenses. While the operating environment will remain challenging, we expect a sequential improvement in the company's earnings due to lower costs, operational improvements, and capacity additions. In 9M-2013, Nobles debt increased by USD 607mn to USD 6.26bn due to profitability pressure, ongoing investment and working capital deficits. As a result, debt to capital is at 55% (versus 52.2% at end2012), and adjusted debt to EBITDA is 3.8x (versus 2.3x). While some of Nobles financial metrics are weaker than rating-downgrade triggers, we believe the company is committed to maintaining its IG rating. It will likely strengthen its balance sheet by adopting a prudent approach to new investment, controlling working capital deficits and by undertaking asset recycling initiatives. Strong liquidity: Nobles strong liquidity profile is a key source of rating strength. As of September 2013, it had readily available cash and unutilised committed facilities of USD 5.2bn, versus short-term debt maturities of USD 1.98bn. We forecast USD 700mn of FFO in 2014, which will be adequate to cover its capex and dividend payouts. Noble has also termed out its debt maturities, with 55% of debt maturing after two years and 25% maturing beyond five years. Strong risk management practices: Noble takes minimal volume risk and hedges most of its price exposure through derivatives. The proportion of pre-sold and price-hedged inventories was 91.6% as of 9M-2013. Noble remained profitable during the market volatility of 2008-09, but posted its first quarterly net loss for 14 years in Q3-2011 due to losses in the cotton and carbon credit businesses. We believe these losses were one-off; since then, Noble has reduced its exposure to carbon credits and moved to a greater weighting in short-term contracts.
338
HG CORPORATES
strength. We maintain our Stable credit outlook.
Company profile
Noble Group Ltd. (Noble) is the largest commodity supply chain manager in Asia, and it provides value-added services by integrating the origination, processing, distribution and delivery of commodities. Its three primary segments are agriculture, energy (coal, oil, gas and power), and metals and minerals and ores (MMO). Noble has also partially backward-integrated in some commodities by investing in processing plants, mines, warehouses and ports. Noble was set up in 1987 and is headquartered in Hong Kong, with over 140 offices in 40 countries. The company is publicly traded on the Singapore Stock Exchange. It is c.21% owned by its founder and chairman, Richard Elman, and c.15% owned by China Investment Corporation.
Asia Credit Compendium 2014 Noble Group Ltd. (Baa3/Sta; BBB-/Sta; BBB-/Sta)
Summary financials
2009 Income statement (USD mn) Revenue Adj. EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios Adj. EBITDA growth (%) Adj. EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Adj. debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) Adj. EBITDA/interest (x) (10.1) 2.6 12.1 54.5 0.4 3.7 15.5 4.1 32.1 1.9 10.8 58.0 2.3 5.0 7.5 2.9 (6.1) 1.2 6.9 53.7 3.6 4.9 4.7 2.2 9.0 1.1 7.2 52.2 2.3 4.7 8.4 2.6 (9.2) 1.0 6.5 55.0 3.8 5.4 7.3 2.6 0 Q1-09 Q1-10 Q1-11 Q1-12 Q1-13 50 10 0 100 40 30 20 (947) (1,081) (2,028) (108) (1,770) (1,256) (3,026) (130) 1,898 (1,478) 420 (183) 428 (917) (489) (159) (25) (480) (505) (130) 150 200 SGA expenses 616 10,655 3,541 2,925 2,955 872 17,338 6,124 5,252 4,431 1,240 19,830 6,125 4,885 5,290 604 19,700 5,650 5,046 5,182 792 19,831 6,257 5,465 5,113 1.0 0.5 0.0 Q1-09 EBITDA margin 31,183 799 (195) 620 556 56,696 1,056 (360) 723 606 80,732 992 (446) 503 431 94,045 1,081 (415) 436 471 73,524 731 (311) 131 127 2010 2011 2012 9M-13
Gross and EBITDA margin (%)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 Gross margin
Q1-10
Q1-11
Q1-12
Q1-13
SGA expenses (USD mn LHS, % RHS)

250 SGA/gross profit (RHS) 80 70 60 50
HG CORPORATES
Breakdown by segment, 9M-13 (% of total)

100% Metals, minerals and ores
Debt maturity profile, Sep-13 (USD mn)

2,500 Convertible bonds
80%
2,000
60% Energy 40% 1,000 20% Agriculture 0% 500 Bank debt Senior notes 1,500
-20% Tonnage Revenue Gross profit
0 < 12 months 13-24 months 25-60 months > 60 months
339
Asia Credit Compendium 2014 NTPC Ltd. (Baa3/Sta; BBB-/Neg; BBB-/Sta)


Our Stable credit outlook on NTPC reflects its position as Indias largest electricity generator and its relatively solid financial metrics. While it has a large capacity expansion programme, most of its cash flow will remain protected under the cost-plus tariff mechanism. Also, while the financial profiles of its customers are weak, the government-backed payment security mechanism will protect NTPCs receivables position until 2016. However, fuel-supply shortages and capacity expansion delays have affected its operational profile in the past couple of years. We expect NTPCs overall credit profile to remain underpinned by its strategic importance sovereign ownership. and

Supportive regulatory environment: NTPCs tariffs follow a cost-plus structure, helping it recover fixed costs (if it meets certain operational norms) and actual fuel expenses and earn a guaranteed ROE. Hence, it enjoys better cashflow stability than most other utilities in developing Asia. While new power projects since 2011 can be allocated based on competitive tariff-based bidding, NTPC has already signed long-term off-take arrangements for capacity coming onstream in the next five to seven years. While the financial profiles of a number of SEUs are weak, NTPC was able to collect 100% of its receivables since the implementation of the One-Time Settlement Scheme (OTSS) with SEUs, state governments and the Reserve Bank of India in FY04 (the mechanism expires in October 2016). While NTPC has signed escrow agreements with customers for payments beyond 2016, its receivables position could suffer if the SEUs do not undertake adequate tariff increases and operational improvements by then. Strong operational profile offset by fuel risks: NTPC enjoys strong operating efficiency due to high utilisation rates, plants located at mine mouths, a panIndian presence and low generation costs. Hence, its generation share (27.4%) is much higher than its capacity share (18.4%). Indias chronic power shortages (8.7% in FY13), along with NTPCs long -term power purchase agreements with SEUs, ensure minimal off-take risk. That said, NTPC faces fuel-supply issues, as its coal supply agreements cover only c.87.5% of its installed capacity. Domestic coal production has been stagnant in recent years and NTPCs coal -plant PLF declined to 83.1% in FY13 (FY10: 90.8%). Also, utilisation at its gas plants is low (FY13: 55.9%), due to gas shortages. NTPC has increased its dependence on imported coal (it imported 9.1mmt, or c.5.9% of its requirement, in FY13). It is also backward-integrating into coal mining. It currently has 10 coal mines under development and expects the first mine to be operational in FY14. It plans to produce 33mt of coal internally (c.15% of its requirement) by FY17. Large expansion plans: NTPC has scaled back its capacity-addition plans due to challenges in acquiring land and issues with fuel-supply linkages. It is currently implementing c.10,000MW of expansions to reach total capacity of 51,052MW by FY17. It is also pursuing a number of additional projects, and given the large power deficit in India, NTPCs capex will remain high over the next decade (it targets capacity of 128,000MW by 2032). It has budgeted for INR 202bn of capital investment in FY14, and we expect INR 200-250bn of annual spending in the medium term. Since it funds the power generation plants through a 70:30 debt/equity ratio (as mandated by the regulator), debt levels will keep increasing (debt rose by INR 106bn to INR 704bn in FY13). However, given the regulated tariff structure, this will not heighten NTPCs risk profile. Conservative financial profile: NTPC has a solid financial profile, with debt/capital of 45.8% and debt/EBITDA of 3.9x, better than a number of other HG utilities in Asia. That said, despite annual FFO of INR 140-150bn, these metrics will deteriorate in FY14-FY15 given the high debt component of its investment plans. Liquidity is strong, with a cash balance of INR 187bn and state government bonds of INR 49bn. NTPC has a long debt maturity profile, with only 8% of its debt maturing in the next 12 months and over 50% of it maturing after five years. Sovereign linkage: NTPC is strategically important and will play a major role in achieving Indias targeted power generation capacity addition. The government has granted NTPC direct loans and guarantees for external borrowings in the past, and the implementation of the OTSS has eased NTPCs cash -flow problems. Though the government reduced its stake by 9.5% in February 2013, we do not foresee a weakening of sovereign support.
HG CORPORATES
Company profile
NTPC Ltd. (NTPC) is the largest power generating company in India. As of July 2013, it had installed capacity of 41,184MW (including 5,364MW through JVs). Of this, 85.7% is coal-based, and the remainder is based on natural gas and liquid fuels. The company sells electricity primarily to state electricity utilities (SEUs). In FY13, it generated 247bn kWh of electricity, or around 27.4% of Indias power generation. At present, NTPC is primarily a thermal generator, although it is planning some backward (coal mining), forward (electricity distribution and trading), and lateral (hydroelectric and nuclear power) expansion initiatives. The Indian government currently owns a 75.0% stake in NTPC.
340
Asia Credit Compendium 2014 NTPC Ltd. (Baa3/Sta; BBB-/Neg; BBB-/Sta)

Summary financials
FY10 Income statement (INR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (INR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (INR bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 22.0 27.1 10.0 41.2 3.4 2.1 17.5 4.3 2.6 23.4 9.3 44.2 4.1 2.7 13.1 3.5 15.0 23.4 9.6 44.4 3.9 2.7 15.2 3.1 17.8 26.2 10.0 45.8 3.9 2.8 11.5 3.5 9.1 26.7 NA 39.5 3.3 2.3 NA 7.4 50 FY09 FY10 FY11 FY12 FY13 Q1-FY14 65 60 55 104.8 82.1 102.2 118.0 NA NA NA NA 160.5 886.3 441.5 281.0 629.1 178.6 180.9 187.4 165.4 1,687.2 557.7 392.3 854.1 0 FY09 FY10 FY11 FY12 FY13 50 0.5 0.0 483.2 130.8 (30.6) 110.5 88.4 574.9 134.3 (38.9) 123.9 93.5 658.9 154.4 (49.2) 131.4 98.1 693.8 181.8 (52.0) 166.1 125.9 320.8 85.7 (12.4) 67.6 50.2 100 150 200 2.5 2.0 1.5 1.0 FY11 FY12 FY13 H1-FY14*
Volume and realisation (bn kWh LHS, INR/kWh RHS)

250 Sales volume Unit realisation (RHS) 3.5 3.0
985.4 1,124.6 1,338.9 544.5 365.9 688.7 598.0 417.1 748.7 704.2 516.8 833.6
Coal plants operating performance (%)

95 90 85 80 Availability PLF
(140.1) (137.4) (159.3) (204.1) (35.3) (36.7) (55.3) (36.7) (57.1) (41.2) (86.1) (41.2)
HG CORPORATES
75 70
Per-unit costs (INR per kWh)

3.0 Interest
Tariffs versus costs (INR per kWh)

3.0
2.5
Depreciation
2.5 SGA Employee Tariff 2.0 Fuel costs
2.0
1.5 Fuel
1.5
1.0
1.0
Fixed charges
0.5
0.5
0.0 FY09 FY10 FY11 FY12 FY13
0.0 FY09 FY10 FY11 FY12 FY13
341
Asia Credit Compendium 2014 Oil & Natural Gas Corp (Baa2/Sta; BBB-/Neg; NR)

We have a Stable credit outlook on ONGC. It is one of Asias largest E&P companies, with a reserve life of 16 years and a reserve replacement ratio of more than 100%, although its domestic production has stagnated. The governments policy requiring ONGC to provide subsidies on crude oil sales (USD 62.9/bbl in FY13) has affected cash flow in recent years. Also, the companys ambitious overseas expansion could lead to execution risks in the medium term. That said, leverage is very low at 0.4x; even with higher investment spending and marginally negative FCF in FY14-FY15, its financial metrics would remain very strong for its ratings.

Strong business profile: ONGCs total proved reserves of 7.1bn boe are substantial by global standards, and its FY13 production of c.1.18mboed places it among the largest E&P companies in Asia. About 65% of ONGCs reserves are developed reserves, and at current production levels, its reserve life is about 16 years. It has maintained a reserve replacement ratio of more than 100% in the past five years (184% in FY13). That said, ONGCs domestic oil and gas production has stagnated (46.1mtoe in FY13 versus 47.8mtoe in FY09) due to maturing fields especially Mumbai High, which accounted for about c.30% of its domestic production in FY13. Also, ONGCs finding and development costs are rising due to forays into deep-sea drilling in India and international expansion. Subsidy sharing is a negative: Diesel, kerosene and LPG are sold at subsidised prices in India. The subsidy payout is shared between the oil refining companies, the government and upstream companies like ONGC (which offer a discount on their sale prices). However, the mechanism for sharing the subsidy is not transparent and is subject to government intervention. In FY13, ONGC was required to offer a discount of USD 62.9/bbl on its crude oil sales and bear a subsidy burden of INR 494.2bn (30.7% of the total of INR 1.61tn). In H1-FY14, it incurred a notional loss of INR 147.5bn on subsidised sales. The potential deregulation of diesel prices over the medium term would significantly improve ONGCs cash flow. Separately, the government has raised the domestic price of natural gas to USD 8.4/mmbtu from USD 4.2/mmbtu, effective in April 2014; this will increase ONGCs revenues by c. USD 1.5 -2bn. Major international expansion expected: Through OVL, ONGC has expanded into 16 countries and currently has projects in production in Brazil, Colombia, Russia and Venezuela. Major acquisitions in the past year include: (1) the purchase of Hess Corp.s 2.72% stake in an Azerbaijan project for c.USD 884mn; (2) the acquisition of a 6% stake for USD 1.49bn in Mozambique's offshore Area 1 block, and of a further 10% stake for USD 2.64bn; and (3) the purchase of a 12% interest in Block BC-10 in Brazil for USD 529mn from Petrobras. While ONGCs overseas ventures are in line with the Indian governments policy, the company could face significant operating challenges over the medium term since some of these investments are in higher-risk economies. Large budgeted capital spending: ONGC has an ambitious target of more than doubling production to 2.6mmboed by 2030 from the current level of 1.2mmboed. The company estimates that about 1.2mmboed of production will come from overseas oil and gas assets (0.18mmboed currently). Separately, ONGC plans to diversify into areas such as refining, petrochemicals and unconventional energy projects. It has a total capex and acquisition budget of USD 200bn until 2030. We expect annual capex to be in the USD 7-8bn range in FY14-FY15. Excellent financial metrics: ONGC has very strong financial metrics. However, given the governments policy of using ONGC to support its socio -economic objectives, its final ratings of Baa2/BBB- are notched down by one to four notches from its standalone ratings. Despite the large amount of subsidies provided to downstream companies, ONGC has generated strong CFO that has been adequate to meet its investment requirements in the past few years. As a result, as of FY13, leverage was low at 0.4x and debt/capital was comfortable at 11.8%. That said, ONGC is likely to generate marginally negative FCF in FY14-FY15 as capex and acquisition spending increase. While debt levels will increase (from INR 206.5bn as of FY13), we expect the company to retain its conservative financial metrics and solid liquidity profile.
342
HG CORPORATES
Company profile
Oil & Natural Gas Corporation Ltd. (ONGC) is India's largest exploration and production (E&P) company, accounting for 60% of proved reserves (73% of crude oil reserves and 48% of gas reserves). It produced 611.7kbd of crude oil and 567.3kboed of natural gas in FY13. ONGC has diversified overseas and now has 32 projects in 16 countries through its 100%owned subsidiary, ONGC Videsh Limited (OVL). Separately, it owns 71.6% of Mangalore Refinery and Petrochemicals Limited (MRPL), Indias third-largest refinery, and has a 12.5% stake in Petronet LNG Limited, which is involved in LNG projects. ONGC is 69.23% owned by the government of India.
Asia Credit Compendium 2014 Oil & Natural Gas Corp (Baa2/Sta; BBB-/Neg; NR)
Summary financials
FY10 Income statement (INR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (INR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (INR bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 4.0 44.2 25.0 5.7 0.1 NM 371.6 89.5 12.7 42.2 27.4 5.4 0.1 NM 473.8 115.8 15.7 39.8 26.2 10.3 0.3 NM 288.9 134.8 (5.7) 34.0 20.6 11.8 0.4 0.0 172.8 114.3 (4.2) 49.4 NA NA NA NA NA NA 286.0 486.6 461.8 440.1 NA NA NA NA 149.7 208.2 278.9 196.2 195.7 1,965.2 NA NA 1,342.2 1,017.5 1,201.3 1,472.8 1,624.0 449.5 (5.0) 304.5 194.0 506.8 (4.4) 343.2 224.6 586.5 (4.3) 428.0 281.4 552.9 (4.8) 367.5 242.2 417.2 205.9 NA 148.7 100.8 FY11 FY12 FY13 H1-FY14*
Domestic production (mtoe)

60 ONGC - Oil ONGC - Gas JV - Oil JV - Gas
50
40
30
20
1,664.4 1,930.7 2,321.9 2,534.6 62.7 67.0 158.8 206.5 10.3
10
(87.0) (141.1) (120.2)
1,030.5 1,173.2 1,386.6 1,544.7
0 FY09 FY10 FY11 FY12 FY13 FY14F
Subsidy sharing and impact on net income (INR bn)

600 (219.8) (350.3) (395.7) (422.8) 66.2 136.3 66.2 (73.7) 17.3 (95.0)
500
(69.4) (101.4)
400
HG CORPORATES
300
Subsidy Impact on PAT
200
100
0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 H1-FY14
Oil prices pre and post discount (USD/bbl)

140 120 100 80 60 Pre-discount
Capex trends (INR bn)

400 350 300 250 200 150
40 20 0 FY06 FY07 FY08 FY09 FY10 FY11
Post discount 100 50 0 FY12 FY13 FY10 FY11 FY12 FY13 FY14F
* Data is on a standalone basis; Source: Company reports, Standard Chartered Research
343
Asia Credit Compendium 2014 PCCW Ltd./Hong Kong Telecommunications Ltd. (Baa2/Sta; BBB/Sta; NR)*

Our Stable outlook on PCCW is based on its business strength derived from the quadruple-play product offering. The fixed-line business, though saturated, posts strong and steady cash flow. Its wireless operations report high earnings growth, while profitability of the pay-TV operations is also improving. The listing of HKT Trust helped deleverage the balance sheet, and we expect consolidated leverage in the 3.5-4.0x range in 2014. While debt raising at PCCW level increases concerns, its standalone leverage is currently comfortable at c.2.2x. That said, the holding companys investment appetite is unclear, and we believe diversifying into higher-risk businesses will be negative.

Stable fixed-line and broadband business: HKT is the former incumbent telecom provider, and it dominates the Hong Kong market in fixed line (c.60% subscriber share) and broadband (c.70%). While the fixed-line market is saturated, broadband and international services have exhibited steady growth. In H1-2013, segmental EBITDA increased 3% y/y due to growth in broadband and HKTs acquisition of an international carrier service business in H2-2012. PCCWs ability to offer bundled services should help the segment generate consistently strong cash flow. Wireless and pay-TV exhibit strong performance: While HKTs wireless market share is only c.12-13%, it has built a strong position in wireless broadband services. In H1-2013, the wireless segments EBITDA increased 29% y/y on 3% subscriber growth, a 13% ARPU increase and scale advantages of the fixedwireless network. While HKT will benefit from growth in smartphone and tablet users, its market share is unlikely to grow significantly, due to high competition. PCCW is also the largest pay-TV operator in Hong Kong (under the now TV brand). In H1-2013, while subscriber (up 3.3%) and ARPU (up 1.2%) levels increased, margins were steady on higher sales and marketing costs. Separately, PCCWs IT solutions business should maintain strong growth following expansion in China and in the data-centre business (H1-2013 EBITDA was up 29% y/y). Telecom asset listing has ring-fenced HKT bondholders: The spin-off and separate listing of the telecom assets (fixed-line, broadband and wireless) in 2011 has been positive for HKT bondholders. The listing raised HKD 8.9bn, of which HKD 7.8bn was used for debt reduction at HKT level (the remaining proceeds were upstreamed to PCCW). As a result, Moodys estimates that HKT Ltd.s leverage improved to 3.3x in 2012 from 4.8x in 2010. HKT Trust is expected to pay out all its future operational cash flow after capex in the form of dividends (HKD 2.67bn in 2012). Hence, further improvement in leverage will depend on EBITDA growth, and all future debt maturities are likely to be refinanced. That said, given HKTs relatively stable cash flow, HKT bondholders will now be better protected. Holdcos investment appetite is unclear: The listing of HKT Trust helped PCCWs principal shareholders monetise their investments in HKT and cleared some of the uncertainty around PCCWs leverage and dividend policies. That said, the holdcos investment appetite is still somewhat unclear. In 2012, PCCW increased its stake in PCPD for HKD 1.54bn, while in 2013, PCPD paid USD 184mn to acquire a commercial property project in Indonesia (total cost of USD 400mn). PCCW has also decided to enter the highly competitive free-to-air TV business in Hong Kong, with an investment of HKD 600mn in the initial three years. Separately, PCCW paid out 83% of its net income in the form of dividends in 2012, and we expect it to maintain this high payout ratio. Financial profile is steady: PCCWs leverage and capital structure improved after the HKT Trust listing. We expect the fixed-line business to generate stable cash flow, the other businesses to report 5-10% earnings growth, and EBITDA of c.HKD 8.0-8.5bn in 2014. We forecast that HKTs capex will be steady at HKD 2.0 -2.5bn, while PCCWs consolidated investment spending will be c.HKD 4-5bn. Consolidated leverage will likely be 3.5-4.0x in the next couple of years, while liquidity remains strong, following a cash balance of HKD 7.75bn and undrawn committed facilities of HKD 7.4bn as of June 2013. Although raising USD 300mn of bonds and other debt at PCCW level raises concern, we estimate that the holdcos standalone leverage is currently comfortable at c.2.2x. Also, the PCCW bonds contain a change-of-control clause should PCCW cease to be HKTs single largest shareholder, and PCCW will continue to receive strong dividend inflows from HKT (HKD 1.68bn for 2012).
344
HG CORPORATES
Company profile
PCCW Ltd. (PCCW) is the only quadruple-play telecom operator in Hong Kong with dominant positions in fixed line (2.65mn subscribers), broadband (1.54mn) and pay-TV (1.2mn), and a growing presence in wireless (1.65mn). Hong Kong Telecommunications Ltd. (HKT) is engaged in fixed-line, broadband and wireless operations. It has a high degree of integration with PCCW, which is involved in the pay-TV and IT solutions businesses and also has a 93.6% economic interest in Pacific Century Premium Developments Ltd. (PCPD). In 2011, PCCW completed a group restructuring and listed HKT separately as a business trust (HKT Trust). HKT is now indirectly 100% held by HKT Ltd., which in turn is 63% owned by PCCW. PCCW is c.27% owned by Mr. Richard Li and 18% owned by China Netcom Corp.
*Ratings are for HKT
Asia Credit Compendium 2014 PCCW Ltd./Hong Kong Telecommunications Ltd. (Baa2/Sta; BBB/Sta; NR)*
Summary financials (PCCW Ltd.)

2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios 6,433 (2,688) 3,745 (8,823) 4,562 (3,247) 1,315 (2,538) 5,250 (3,980) 1,270 (1,162) 5,328 (6,708) (1,380) (1,767) NA (1,195) NA NA 8,049 44,983 34,913 26,864 (2,025) 8,101 48,133 34,841 26,740 (608) 5,365 45,850 23,510 18,145 7,580 4,553 49,844 26,466 21,913 8,317 7,750 53,585 30,557 22,807 7,955 25,077 7,574 (1,485) 2,380 1,506 22,962 7,305 (1,587) 3,080 1,926 24,638 7,586 (1,565) 2,318 1,607 25,318 7,775 (966) 2,799 1,663 13,314 3,951 (595) 1,355 856 2010 2011 2012 H1-13
Wireless subscribers (000 subscribers)

1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100 0 Post-paid Pre-paid
H1-09 H2-09 H1-10 H2-10 H1-11 H2-11 H1-12 H2-12 H1-13
Pay-TV subs and ARPU (000 subs LHS, HKD RHS)

1,400 ARPU (RHS) 1,200 1,000 800 100 600 400 200 0 H1-09 H2-09 H1-10 H2-10 H1-11 H2-11 H1-12 H2-12 H1-13 0 Subscribers 150 200
HG CORPORATES
(5.1) 30.2 10.9 106.2 4.6 3.5 (11.6) 5.1
(3.6) 31.8 10.4 101.8 4.8 3.7 9.5 4.6
3.8 30.8 11.1 75.6 3.1 2.4 26.0 4.8
2.5 30.7 10.2 76.1 3.4 2.8 17.5 8.0
3.1 29.7 9.1 79.3 3.9 2.9 NA 7.2
50
Fixed-line revenue and profitability (HKD mn)

10,000 Local telephony EBITDA (RHS) 8,000 3,800 Local data Intl. telephony Others 4,200
Debt maturity profile, Jun-13 (USD mn)

1,400 1,200 1,000 HKT Loans PCCW Loans
6,000
3,400
800 600 400 HKT bonds PCCW bonds
4,000
3,000
2,000
2,600
200 0 2013 2014 2015 2016 2017 2018 2022 2023
0 H1-09 H2-09 H1-10 H2-10 H1-11 H2-11 H1-12 H2-12 H1-13

*Ratings are for HKT; Source: Company reports, Standard Chartered Research
2,200
345
Asia Credit Compendium 2014 PT Pertamina (Persero) (Baa3/Sta; BB+/Sta; BBB-/Sta)


Pertamina enjoys a strong market position across Indonesias energy value chain. Its upstream segment has a solid operating profile. However, Pertamina sells fuel products at subsidised prices under its public service obligation mandate, which affects its margins to some extent. Also, It has significantly increased its budgeted capex to USD 17.7bn in 2013-14 from USD 4.6bn during 2011-12 as it seeks to increase upstream production and invests in refinery capacity. We expect Pertamina to post large negative free cash flow and increase its reliance on debt funding. Its financial profile will moderate and leverage is likely to increase to 2.5-3.0x by 2014. That said, its overall credit profile will remain solid, underpinned by its strategic importance and government linkage. We maintain our Stable credit outlook on Pertamina.

Strong market position: Pertamina is one of Indonesias largest oil and gas producers with H1-2013 output of 464kboed. It enjoys favourable terms under its production-sharing contracts and has preferential access to newly released exploration blocks and expiring contracts in the country. Its finding and development costs are lower than those of large global peers; Moodys estimates them at USD 7/boe in 2010-12, versus USD 10/boe for peers. The company also owns six of Indonesias major refineries, with combined capacity of 1.0 3mmbd, which supply 58.5% of Indonesias domestic fuel demand. Around 35% of the refineries crude oil requirements are met through its own upstream production. Pertamina also operates Indonesias largest retail fuel network and conducts its gas sales though its own transmission network. Low margins in the downstream business: Pertamina is required to distribute fuel products such as household kerosene, gasoline and automotive diesel oil at subsidised rates. In H1-2013, 55% of its revenue was through the sale of subsidised fuel. Under the current system, it receives compensation from the government based on a fixed-margin formula. However, if crude oil prices exceed the benchmark price assumed while calculating subsidies (USD 100/bbl assumed in 2013), Pertamina may have to absorb some of the losses (in 2012, the company incurred losses of USD 90.5mn from sale of subsidised fuel). That said, the upstream business will generate stronger cash flow from high-oil prices, and therefore its overall profitability will not suffer significantly. Also, the government raised subsidised fuel prices in 2013 which will r educe Pertaminas working capital requirements. Pertamina also has to seek government approval to increase prices for certain non-subsidised products. In 2012, it incurred losses of USD 538mn on sales of 12kg and 50kg LPG cylinders as LPG prices hikes were disallowed. As a result, the downstream business had EBIT margin of only 0.3% in 2012. Large budgeted capex: Pertamina has significantly increased its budgeted capex to USD 17.7bn for 2013-14 from USD 4.6bn in 2011-12. It will spend two-thirds of the budgeted capex on upstream E&P projects as it aims to raise its output to 876kboed by 2016 to meet the rising demand. Indonesia has become a net importer of crude oil as production has stagnated due to limited discoveries of new reserves. Pertaminas 2P reserves have fallen since 2010 and production levels have stagnated around the 450kboed levels. It has acquired ConocoPhillips Algerian oil and gas assets for USD 1.75bn and a 10% stake in Exxons Iraq West Quarna-1 field in 2013. Also, given the low average Nelson complexity index of its refineries, at 5.4, it plans to upgrade its units and construct two new refineries (capacity of 200-300kbd each). It also plans to enter a multi-billion-dollar petrochemical joint venture in Indonesia with PTT Global Chemicals. Leverage levels to increase: Pertaminas leverage levels have historically been conservative, although large investments in the past few years increased debt to IDR 93.6tn in 2012 (from IDR 20.4tn in 2008). Moreover, its annual FFO of c.USD 3.6bn will be insufficient to cover its large budgeted capex and annual dividend payouts of c.USD 750mn in 2013-14. We therefore expect a sharp increase in debt levels, with leverage rising to 2.5-3.0x by 2014 (from 1.7x in 2012) and debt/capital increasing to around 50% (from 39%). While IDR depreciation in 2013 is marginally negative for Pertamina, we do not expect it to significantly affect its credit metrics. High strategic importance: Pertamina is Indonesias only fully integrated oil and gas company and it plays a strategic role in the upstream and downstream energy sectors. It is the highest revenue contributor among Indonesia's state-owned enterprises given its stated dividend payout policy of 45% of net income. The government has considerable control over Pertaminas strategic direction, and we do not expect the company to be privatised in the next few years.
346
HG CORPORATES
Company profile
PT Pertamina (Persero) is an integrated oil and gas company wholly owned by the Indonesian government through the Ministry of State-Owned Enterprises. Its operations comprise upstream (oil, gas, and geothermal E&P), midstream (gas transmission), and downstream (refining, distribution, trading and petrochemicals) businesses. It also manages and operates LNG plants and is one of the worlds largest exporters of LNG. Pertamina's operations are located primarily in Indonesia, with some exploration assets in Vietnam, Malaysia and the Middle East. As of 2012, domestic reserves accounted for over 99% of the company's 2P reserve base of 3.9bboe; 53% of it was natural gas. Pertamina was established in 1957 and became a limited liability company in 2003.
Asia Credit Compendium 2014 PT Pertamina (Persero) (Baa3/Sta; BB+/Sta; BBB-/Sta)

Summary financials
2009 2010 2011 2012* H1-13*
2P oil and gas reserves (mmboe)

5,000 4,500 70,924 5,836 (329) 4,802 2,761 34,648 3,027 (204) 2,361 1,485 4,000 3,500 3,000 2,500 2,000 1,500 22,709 30,552 4,362 40,882 9,654 5,293 15,193 9,090 47,858 13,127 4,037 15,817 1,000 500 0 2008 2009 2010 2011 2012 Proved oil Proved gas Probable gas Probable oil
Income statement (IDR bn, USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income 365,347 432,049 589,766 34,450 (2,003) 27,908 16,203 36,010 (2,632) 29,926 16,776 56,215 (2,546) 38,926 20,472
Balance sheet (IDR bn, USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity 16,305
302,393 266,497 311,999 38,670 22,365 44,035 21,326 61,695 31,144
142,789 104,681 118,340
Average daily oil and gas production volume (kboed)

500 450 400 350 300
Cash flow (IDR bn, USD mn) Net operating cash flow Capex& investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA interest (x) (13.0) 9.4 16.5 21.4 1.1 0.6 2.7 17.2 4.5 8.3 16.9 29.7 1.2 0.6 60.5 13.7 56.1 9.5 29.3 34.4 1.1 0.6 48.5 22.1 (7.0) 8.2 21.2 39.0 1.7 0.9 29.7 17.7 (6.6) 8.7 17.2 45.4 2.3 0.5 14.0 15.3 9,779 18,830 11,379 1,722 (2,750) (1,028) (764) NA (1,345) NA (438)
(18,750) (17,312) (19,139) (8,972) (6,510) 1,519 -(7,760) (5,628)
HG CORPORATES
250 200 150 100
Gas
Oil 50 0 2008 2009 2010 2011 2012 H1-2013
Principal refined products (mmbls, 2012)

140 120 100 80 60 40 20 0 Automotive Motor diesel gasoline Kerosene Industrial Aviation fuel turbine fuel Other
Budgeted capex (USD bn)

12 Others 10 Downstream Upstream
0 2010 2011 2012 2013F 2014F
*2012 and H1-2013 financials are in USD mn compared with IDR bn earlier; Source: Company reports, Standard Chartered Research
347
Asia Credit Compendium 2014 PT Perusahaan Listrik Negara (Baa3/Sta; BB/Sta; BBB-/Sta)

We maintain our Stable credit outlook on PLN. Its critical role in the Indonesian economy, 100% sovereign ownership, and ongoing government support in the form of subsidies (IDR 44tn in H1-2013) and loan guarantees for Fast Track Program I (FTP I) underpin its credit profile. The government also provides PLN a 7% public service obligation (PSO) margin in computing its cost of supply. However, PLNs standalone financial metrics are weak due to its high, albeit declining, dependence on fuel-oil generation and its massive debtfunded capex programme. We expect leverage (5.3x as of H12013) to remain high in the medium term, owing to its debtfunded capex, the negative impact of IDR depreciation and the absence of further tariff hikes in 2014.

Absence of a cost pass-through tariff mechanism: Indonesias electricity tariffs do not follow a cost pass-through mechanism and require parliamentary approval. Since 2004, PLNs tariff has been raised only twice, by 15% in January 2013 and 10% in July 2010, due to political considerations. As a result, PLNs ASP of IDR 783/kWh in H1-2013 was much lower than its cost of supply of over IDR 1,100/kWh. To bridge the gap, PLN relies on government subsidies, which are budgeted at IDR 100tn for 2013 and IDR 71.4tn for 2014 (subsidies accounted for 38% of revenue in H1-2013). Also, since 2009, the government has incorporated a PSO margin (currently: 7%) to compute PLNs cost of supply (and subsidies). This has helped improve profitability and partially cover capex. Although the government has raised tariffs in 2013, we do not expect further tariff increases in 2014, given the elections in H1-2014 and inflationary concerns. PLN will therefore continue to rely on subsidy payments and PSO margins. Decreasing reliance on fuel oil: Due to the Indonesian governments erstwhile policy of subsidising fuel oil, PLN had an inefficient capacity mix, with a high proportion of fuel oil-based generating units the cost of generating power from fuel oil is high, at IDR 2,409/kWh, compared with IDR 557/kWh using coal. To meet rising domestic demand and reduce its dependence on the more expensive fuel oil, the government mandated that PLN develop 9,927MW of coal-based capacity under FTP I. As FTP I progressed, PLNs fuel oil -based generation fell to 12% of the total in H1-2013 from 34% in 2006. That said, the implementation of FTP l has lagged the original schedule, and only 69% of planned capacity additions were completed as of H1-2013. Large capex plans: FTP I will cost USD 8.8bn plus IDR 28tn, while related T&D projects will cost IDR 6.3tn plus USD 150mn (over 90% of total financing has been secured). PLN will also add nearly 50% of the 10,000MW of generation capacity under the USD 17.8bn FTP II in 2014-20. Total capex for 2014 is budgeted at c.USD 6bn, which will be financed through internal cash flows (USD 2bn), proposed equity injections (USD 1bn), and two-step loans and the capital markets (USD 2-3bn). Moderate financial profile: PLNs standalone financial profile is moderate due to its historical dependence on fuel-oil capacity and its large capex programme. It is also exposed to foreign-currency risks, with revenue denominated in IDR and fuel purchases, IPP payouts and 73% of its debt denominated in foreign currency. While PLNs stated leverage will increase due to the recent depreciation of the IDR against the USD and the JPY, its primary borrowing currencies, we expect the overall impact on its credit profile to be limited, as the impact of foreign-currency fluctuations are reflected in PLNs cost of supply, which is covered by subsidies. PLNs leverage is likely to remain high (5.3x in H1 -2013), as its future capacity expansions will primarily be debt-funded. Government support: Subsidies to PLN have been regular and incorporate a 7% PSO margin. The government has guaranteed PLN's bank loans for FTP I and has on-lent loans from multilateral agencies: as of 2012, 17% o f PLNs total debt was made up of such two-step loans (the government is the primary obligor, and these loans are not collateralised). Also, the government has allowed PLN to cover liquidity mismatches by deferring payments due to Pertamina, the wholly stateowned fuel supplier. Given that a default on PLN's non-government-guaranteed debt could lead to a cross-default on government-guaranteed bank financing, we remain confident of sovereign support should PLN face financial difficulties. The government has no plans to divest its stake in PLN; this further signifies government support and PLNs strategic role.
348
HG CORPORATES
Company profile
Perusahaan Listrik Negara (PLN) is Indonesia's largest power utility. As of end-2012, it had generation capacity of 36,612MW, accounting for 83% of Indonesias total capacity, and served about 50mn customers. It also buys most of the electricity generated by Indonesia's 37 independent power producers (7,331MW). In 2012, PLN generated 149.7bn kWh, or about 75% of Indonesias total power generation, from its 1,543 generation units. PLN has a monopoly over Indonesias T&D networks, which span 38,096 circuit km and 741,957 circuit km, respectively. PLN is 100% owned by the Indonesian government through the Ministry of State-Owned Enterprises.
Asia Credit Compendium 2014 PT Perusahaan Listrik Negara (Baa3/Sta; BB/Sta; BBB-/Sta)
Summary financials
2009 Income statement (IDR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (IDR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (IDR bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 45.4 15.0 3.8 50.4 6.6 5.9 5.8 3.7 18.6 15.9 4.4 53.1 6.6 5.8 12.2 4.3 6.8 13.3 3.7 50.3 5.4 4.5 6.7 4.4 18.9 14.1 4.3 53.6 5.3 4.6 14.6 3.9 6.9 16.9 4.2 53.7 5.3 4.7 18.5 3.7 1,000 500 0 2008 2009 2010 2011 2012 2013F 2014F 2015F 5% Java-Bali 0% 2,000 1,500 15% 4,141 21,663 29,039 26,640 5,391 14,759 20,546 22,724 23,018 20,408 50 145,222 162,375 208,018 232,656 116,732 21,781 (5,942) 12,203 10,356 25,826 (6,011) 11,400 10,087 27,570 (6,298) 5,515 5,426 32,782 (8,354) 1,032 3,208 19,716 (4,830) 5,557 4,774 100 Natural gas 150 200 IPP purchase Hydroelectric Geothermal 2010 2011 2012 H1-13
Generation by fuel type and purchases (000 GWh)

250
333,713 369,560 467,783 540,706 553,758 143,470 169,208 147,840 173,765 180,855 128,711 148,662 125,116 150,747 160,446 141,196 149,683 145,916 150,505 155,924
Coal
Fuel oil 0 2009 2010 2011 2012 H1-13
FTP I COD schedule (MW LHS, % RHS)

4,000 3,500 3,000 2,500 20% Fuel oil-based generation/ total (RHS) 30% Outside Java-Bali 25%
(34,183) (33,434) (39,294) (41,125) (13,218) (30,042) (11,771) (10,256) (14,485) 0 (4,000) (4,545) (3,500) (7,827) (500)
HG CORPORATES
10%
Budgeted and realised subsidy payments (IDR tn)

120 Realised subsidy 100 Budgeted subsidy
Financial liabilities* maturity profile, Jun-13 (IDR tn)

180 160 140
80
120 100 80
60
40
60 40
20 20 0 2009 2010 2011 2012 2013F 2014F

*Includes lease liabilities; Source: Company reports, Standard Chartered Research
0 <1Y 1-5Y 5Y+
349
Asia Credit Compendium 2014 Petroliam Nasional Bhd. (A1/Sta; A-/Sta; A/Neg)

Petronas operational profile is boosted by long reserve life and favourable production-sharing contracts in domestic E&P operations and long-term contracts in the LNG business. Its downstream refining and petrochemical operations offer cash-flow diversity. Petronas has strong credit metrics, with a net cash position and low gross leverage of 0.4x. Also, Petronas annual FFO of over MYR 75bn is sufficient to fund its budgeted capex of MYR 300bn over 201318. That said, we think its leverage levels will gradually rise unless the company lowers its dividend payouts. Petronas integral links with the government will continue to provide strong support for the credit. We maintain our Stable credit outlook on Petronas.

Strong business profile in E&P: Petronas has sole ownership of Malaysias petroleum reserves. A major part of its upstream activity in Malaysia is through production-sharing contracts, under which foreign companies bear all costs during the exploration and development phase. This has lowered Petronas operating risks and capital requirements and led to strong profitability. However, its domestic reserves (68% of total) are maturing, and domestic production levels (425mmboe) have been flat since 2005. Therefore, Petronas has undertaken aggressive overseas acquisitions to diversify its reserve base. It acquired Canada-based Progress Energy for CAD 5.8bn in 2012 and a 75% stake in Talisman Energys Montney shale holdings for USD 1.4bn in 2013. While these acquisitions will increase its reserves base, some of its other investments face geopolitical and legal risks in 2012, it had to temporarily suspend operations in Sudan (28% of its overseas production) and incurred MYR 5bn in impairment charges on its gas assets in Egypt. Gas business: Natural gas accounted for 62% of Petronas reserves and 64% of its production in 2012. Petronas operates one of the worlds largest LNG facilities, and its broad customer base, long-term contracts and highly rated off-takers result in stable cash flow. That said, it also supplies gas to the Malaysian power sector at a subsidised rate of MYR 13.7/mmbtu, which is well below the market rate of c.MYR 40/mmbtu. Moreover, gas prices have been frozen since 2011, and Petronas therefore incurred a gas subsidy burden of MYR 28bn in 2012 (c.MYR 24bn in 2011). The government aims to liberalise gas prices by 2017 and has allowed Petronas to sell gas from its Malacca terminal at market rates, which will gradually reduce its hefty subsidy burden. Downstream businesses: Petronas has a strong presence in petrochemicals and petroleum products, which provides diversity to its earnings profile. The downstream businesses contribute 10% to its net income. Petronas aims to focus on high-volume specialty downstream products and is also looking to develop a refinery and petrochemical plant in Malaysia in collaboration with Itochu Corp. and PTT Global Chemicals. It exited the vinyl business in 2012 and is considering selling its stake in fuel-retailer Engen. Strong credit metrics: Petronas has a net cash position, low gross leverage of 0.4x and strong EBITDA margin of 40%. Petronas generates annual FFO of over MYR 75bn and has large cash holdings of MYR 139bn, which can internally finance its budgeted capex of MYR 300bn in 2013-18. That said, Petronas discretionary cash flow (after dividends) may remain negative due to the large dividend payments (MYR 28bn in 2012). While Petronas is aiming to limit its dividend payout to 30% of net income, which will lower its dividend payouts by MYR 12-15bn, we think this may be difficult, as the Malaysian government is facing fiscal concerns. Petronas has also financially supported its downstream subsidiaries and unsuccessfully tried to privatise MISC for USD 3bn in 2013. While we expect gross debt levels to increase, leverage is likely to remain below 1x in the next two to three years. Government linkage: Petronas plays an important role in ensuring Malaysias energy self-sufficiency and driving its economic development. In 2012, it paid MYR 80bn to the federal government in the form of dividends, petroleum royalties, export duties and corporate taxes (making up c.38% of the governments revenue) and MYR 2bn towards the National Trust Fund. The government also has the flexibility to increase Petronas dividends to fund its budget deficit. Moreover, Petronas has been forced to sell natural gas at below-market rates and undertake projects of national importance that are unrelated to its core E&P operations. Hence, despite its strong standalone financial metrics, Petronas overall credit profile is intertwined with the sovereigns.
350
HG CORPORATES
Company profile
Petroliam Nasional Berhad (Petronas) is an integrated oil and gas company wholly owned by the Malaysian government. It has large oil and gas E&P operations, with reserves of 32.6bboe, production of 2.0mmboed and a reserve life of 44 years as of December 2012. Petronas is one of the worlds largest LNG suppliers, with annual sales volume of 26.1mt. It also has a presence in oil refining (capacity of 500kbd) and marketing, gas transmission operations (pipeline network of about 2,505km), and petrochemicals (production of 8.5mt). Separately, it has a 62.7% stake in energy shipping company MISC Bhd. Petronas derives about 79% of its revenue from exports and international operations.
Asia Credit Compendium 2014 Petroliam Nasional Bhd. (A1/Sta; A-/Sta; A/Neg)
Summary financials
FY10 Income statement (MYR mn) Revenue EBITDA Gross interest expense Profit before tax Net income 208,129 238,081 222,797 290,976 232,507 81,732 (2,526) 67,300 40,286 89,216 (3,473) 90,496 54,848 93,022 106,086 (2,028) 82,687 48,863 (2,935) 89,079 49,388 93,535 (2,155) 76,705 44,546 200 300 400 FY11 FY11D* 2012 9M-13
Domestic production (mmboe, Petronas entitlement only)

500 Gas
Balance sheet (MYR mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (MYR mn) Net operating cash flow Capex & investment Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA interest (x) (23.0) 39.3 22.2 16.2 0.6 NM 36.5 32.4 9.2 37.5 23.1 13.9 0.5 NM 66.4 25.7 39.0 33.1 22.6 14.1 0.6 NM 63.6 45.9 (10.3) 36.5 22.3 11.2 0.4 NM 95.2 36.1 8.0 40.2 29.0 9.8 0.4 NM 89.1 37.5 5 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11FY11D* 2012 10 0 10 20 20 15 40 30 54,207 68,299 69,932 74,180 58,441 123,518 144,425 160,741 128,609 129,951 410,885 438,994 477,612 488,308 525,144 51,870 47,811 52,523 42,217 39,958 0 FY06 FY07 FY08 FY09 FY10 FY11 FY11D* 2012 H1-13 100 Oil
(71,648) (96,614) (108,218) (86,392) (89,993) 267,874 295,914 321,179 336,212 366,124
Reserves data (bboe LHS, years - RHS)

35 30 25 Reserve life - Intl. (RHS) Malaysia Reserve life - Malaysia (RHS) International 70 60 50
(41,262) (38,865) (34,641) (63,374) (41,095) 12,945 29,434 35,291 10,806 17,346
(35,283) (36,529) (36,502) (34,006) (26,536)
HG CORPORATES
Payments to the government (MYR bn)

90 80 70 60 50 40 30 20 10 0 FY08 FY09 FY10 FY11 FY11D* 2012 Taxes Dividends Export duty Royalties
Debt profile, Sep-13

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Maturity Currency Type < 1Y Secured 1-5Y USD 5-10Y 10-20Y Others EUR MYR
Unsecured
Note: FY11 refers to the financial year from April 2010 to March 2011; after that, Petronas switched to a January-December accounting year; *FY11D is an intermediate period from April to December 2011; Source: Company reports, Standard Chartered Research
351
Asia Credit Compendium 2014 Poly Real Estate Group Co. Ltd. (Baa2/Sta; BBB+/Sta; BBB+/Sta)

We initiate coverage of POLYRE with a Stable credit outlook. The company is one of the largest property developers in China in terms of contracted sales. Sales totalled CNY 100.7bn in 10M-2013, 84% of its full-year goal of CNY 120bn. Targeting mass to midrange property buyers, POLYRE adopts a high asset turnover model. However, its aggressive land expansion strategy to sustain high sales and delivery growth pressures its credit ratios total debt/LTM EBITDA was 4.7x, LTM EBIDTA/interest coverage was 3.2x, and net gearing was high at 94.6% as of June 2013. That said, liquidity has remained strong, with total cash of CNY 35bn. The companys strong SOE background also affords it easy access to both onshore and offshore capital markets at relatively cheap funding costs.

One of Chinas largest SOE developers: POLYRE had a total land bank of 75.5mn sqm in 44 cities across different regions in China as of June 2013. Contracted sales exceeded the CNY 100bn mark for the first time in 2012, totalling CNY 101.7bn. The company achieved CNY 100.73bn of sales (8.9mn sqm of GFA) in 10M-2013, meeting 84% of its full-year target of CNY 120bn. Its ASP was CNY 11,378psm, marginally higher than the 2012 average of CNY 11,290psm. POLYREs sales results reflect its portfolio composition, which targets the mass to mid-range markets. Asset turnover is high, but profitability is relatively low versus peers: Total revenue was CNY 68.9bn in 2012, representing a strong CAGR of 44% in 2009-12. Revenue grew 20% y/y to CNY 35.2bn in H1-2013. Its ASP was CNY 10,423psm in H1-2013, flat compared with the 2012 average of CNY 10,426psm. However, profitability fell as the average land cost of GFA delivered rose to CNY 3,144psm in H1-2012, up 22% from CNY 2,578psm in 2012. Gross profit margin was 26.4% in H1-2013 (2012: 30.0%), and EBITDA margin was 22.1% (2012: 26.2%). In comparison, China Overseas Land & Investment Ltd. (COLI) reported gross margin of 36.3% and EBITDA margin of 32.7% in H1-2013. Solid liquidity position, but credit metrics are relatively weak versus HG peers: Total cash rose to CNY 35.2bn as of September 2013 from CNY 32.7bn at end-2012, and total debt grew to CNY 97.3bn from CNY 81.5bn. POLYRE redeemed its CNY 4.3bn domestic corporate bonds in July. Meanwhile, it raised CNY 17bn of net new bank loans in 9M-2013 to support its high construction needs GFA under construction amounted to 40mn sqm as of September, with new construction starts totalling 12mn sqm in 9M-2013. It also issued its first offshore bonds in August (USD 500mn 4.5% of POLYRE 18 at 99.061 to yield 4.713%). The companys aggressive land expansion strategy pressures its credit metrics. Total debt/LTM EBITDA rose to 4.7x in H1-2013 from 4.5x in 2012, LTM EBITDA/interest coverage edged down to 3.2x from 3.4x, and total debt/capital increased to 60.7% as of June 2013 from 59.8% at end-2012. These compare with COLIs leverage ratio of 2.8x, interest coverage ratio of 11.4x and total debt/capital of 40.3%. Strong SOE background: POLYRE is 44.09% owned by China Poly Group through a direct 1.95% holding and an indirect 42.14% holding by Poly Southern Group (wholly owned by China Poly Group). We believe China Poly Group is one of the key SOEs directly governed by the central SASAC. The company continued to expand its land reserve aggressively in 9M-2013, adding 15.0mn sqm of GFA, compared with 13.2mn sqm in 2012 and 9.3mn sqm in 2011. This was despite policy changes and volatile market conditions during the period. We attribute this partly to the companys easy access to funding and national brand recognition, owing to its SOE ownership. Geographical distribution of land bank, Jun-13 (mn sqm)
8 6 4 2 0 Guangzhou Foshan Zhongshan Jiangmen Fujian Others Shanghai Hangzhou Nanjing Hefei Others Wuhan Changsha Nanchang Others Beijing Tianjin Baotou Shijiazhuang Qingdao Shenyang Changchun Others Chongqing Chengdu Deyang Others
352
HG CORPORATES
Company profile
Incorporated in 1992 and listed on the SSE in 2006, Poly Real Estate Group Co. Ltd. (POLYRE) is 44.09% owned by China Poly Group, one of the first five SASAC-owned enterprises in China. POLYRE is one of the top three developers in China in terms of contracted sales. Sales exceeded the CNY 100bn mark in 2012, totalling CNY 101.7bn. As of June 2013, it had a total land bank of 75.5mn sqm from 192 projects in 44 cities across China. Most of the projects are located in top-tier cities Tier 1 (13.8%) and Tier 2 (74.5%). As a major national player, the company has balanced regional exposure in the Bohai Rim region and northern China (25.3%), the Pearl River Delta and southern regions (24.4%), western China (19.5%), central areas (17.1%) and the and Yangtze River Delta region and southern China (13.8%).
Pearl River and southern China
Yangtze River
Central
Bohai Rim and northeastern China
Western
Asia Credit Compendium 2014 Poly Real Estate Group Co. Ltd. (Baa2/Sta; BBB+/Sta; BBB+/Sta)
Summary financials
2010 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow (22,370) (7,922) Capital expenditure Free cash flow Dividends & interest Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 50.0 24.9 64.7 6.6 3.3 261.1 42.5 27.1 61.8 5.4 2.8 130.4 41.9 26.2 59.8 4.5 3.4 127.3 17.3 27.9 63.3 5.6 2.3 134.4 19.6 22.1 60.7 4.7 2.2 136.0 (66) (49) 3,093 (71) 3,021 1,615 (4,080) (38) (23) 19,151 18,153 32,673 25,188 35,158 35,894 8,940 47,036 12,744 68,906 18,083 20,183 5,637 30,544 6,743 2011 2012 H1-12 H1-13

80 Revenue 100
64 EBITDA margin (RHS) 48
80
(2,736) (4,567) (5,337) (2,420) (3,061) 8,856 4,920 12,167 6,531 17,372 8,438 5,454 2,511 6,253 3,407
60
32
40
152,328 195,014 251,168 216,803 283,940 58,635 39,484 32,020 68,188 50,035 42,064 81,522 48,850 54,780 76,173 50,985 44,145 90,881 55,723 58,886
16
20
0 2009 2010 2011 2012 LTM Jun-13
Debt metrics (x)

7
(22,436) (7,970)
1,577 (4,103) 5
(3,235) (5,348) (6,853) (3,758) (4,684)
HG CORPORATES
2 2009 2010 2011 2012 H1-13

100 100
Debt maturity, Sep-13 (CNY bn)

90 USD bonds
80
80
72
60
Total debt
60
54
40
Total debt/cap. (RHS) Total cash*
40
36
Bank loans
20
20
18
0 2009 2010 2011 2012 H1-13

*Including restricted cash; Source: Company reports, Standard Chartered Research
0 < 1 yr 1-5 yrs
353
Asia Credit Compendium 2014 POSCO (Baa2/Sta; BBB+/Neg; BBB+/Neg)


POSCOs large economies of scale, cost competitiveness and focus on high-end products historically helped it to post market-leading profitability metrics. However, slowing demand, regional overcapacity and increasing competition in the domestic market have led to profitability pressure since 2011. EBITDA was down 9.7% y/y in 9M2013, and we expect a 5-6% increase in 2014. While POSCOs investment spending will slow and it plans to sell more non-core assets to improve balance-sheet strength, FCF will likely continue to be negative in 2014. Hence, we expect leverage to remain high at c.4.5x; weaker-than-expected operating margins could pressure its ratings further. We therefore maintain our Negative credit outlook on POSCO.

Profitability under pressure: POSCOs EBIT per tonne declined to KRW 68,700 in 9M-2013, versus KRW 76,400 in 2012, primarily due to regional overcapacity, increased domestic competition and KRW appreciation. Looking ahead, we expect a gradual economic recovery in 2014 as China shuts down some of its excess capacity. While iron ore and coking coal prices are likely to settle at lower levels, we believe the benefits will be offset by cuts in steel-product prices due to customers high bargaining power. Also, Koreas domestic capacity has increased by 4mtpa due to Hyundai Steels expansion . We therefore expect no significant improvement in steel margins; consolidated EBITDA will likely grow by c.6-8%, given higher volumes and growth in contribution from non-steel businesses. Strong operating profile: POSCO enjoys strong cost competitiveness due to its integrated operations, captive power plants, technological capabilities (FINEX process, strip-casting technology), and cost-reduction initiatives (KRW 495bn in 9M-2013). It has longstanding relationships with end users, has increased its output of high-end products and currently enjoys market shares of more than 40% in most products in Korea. As a result, its EBITDA margin has been consistently above its global competitors. That said, POSCO has faced increased competition in the domestic market from Hyundai Steel and imports. Capex spending will moderate: POSCO has been in the midst of a large investment programme: it is currently engaged in optimisation and renovation work in Pohang and Gwangyang, and is constructing the fourth hot-rolled steel plant in Gwangyang. In India, it plans to build a 12mtpa integrated steel mill in Orissa (project cost of USD 12bn) and an integrated steel mill in Karnataka, although the exact timeframe for implementation of these projects is unclear. It also plans to acquire stakes in raw-material mines, as it aims to increase selfsufficiency rate in iron ore and coking coal (19% in 2012); in March 2013, it spent USD 270mn for a minority stake in an iron ore company in Canada. POSCO has budgeted for total capital investment of KRW 8tn in 2013, although it has some flexibility to defer non-urgent capex. We expect 2014 spending to reduce to c.KRW 5.5-6.0tn following completion of much of its planned capacity expansion. Acquisition risk is lower: POSCO has ventured into overseas markets and nonsteel businesses to offset low growth and stiff competition in the domestic market. In September 2010, it acquired a 68.2% stake in Daewoo International Corp. (DIC). The KRW 3.4tn spent on DIC and the KRW 3tn debt assumed from DIC accounted for c.23% of POSCOs debt as of June 2013. That said, we do not expect the company to spend significantly on non-core areas in 2013-14. Leverage will remain high: POSCO's leverage has deteriorated since 2008, and its debt increased by KRW 733bn in 9M-2013. That said, the company has been undertaking some deleveraging initiatives and has raised KRW 993bn YTD through the sale of non-core investments and treasury shares. It also raised a KRW 1tn hybrid bond, which we believe will improve its capital structure somewhat. While POSCO also plans to raise more funds through non-debt financing (e.g., via an IPO of POSCO Specialty Steel), the timing and scale of these measures are unclear at this stage. POSCO has maintained a dividend payout ratio of 20-30% since 2009, and we expect this to continue. The company reported a 9.7% y/y decline in EBITDA in H1-2013, and we forecast 5-6% improvement in earnings in 2014 (CFO will be around KRW 5tn in 2014). Hence, FCF will remain negative (minus KRW 2.8tn in H1-2013), and we expect leverage to be high at around 4.5x. Weaker-thanexpected operating performance will place pressure on S&P and Fitchs ratings.
HG CORPORATES
Company profile
POSCO is the worlds fifth-largest steel producer by volume and the dominant player in South Korea. Its Pohang plant has a crude steel capacity of 16.7mtpa, and its Gwangyang plant has a capacity of 20.8mtpa. In 2012, it sold 35mt of finished products; c.60% of this was sold in the domestic market (major export markets include Japan and China). POSCO also has downstream plants in China, the US, India, Vietnam and Mexico. Its products include hot-rolled and cold-rolled products, plates, wire rods and stainless steel. POSCO is also involved in non-steel businesses like trading, construction and power generation, which together accounted for 24% of its H1-2013 profits. POSCO was set up in 1968, and it currently has a diversified ownership profile.
354
Asia Credit Compendium 2014 POSCO (Baa2/Sta; BBB+/Neg; BBB+/Neg)

Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (32.8) 17.4 9.3 27.9 1.9 0.6 41.0 12.1 32.3 17.7 10.7 35.4 2.5 1.6 32.5 14.5 (10.4) 11.0 8.6 39.7 3.5 2.6 19.6 9.7 (20.4) 9.5 5.4 37.0 4.1 3.0 16.9 7.0 (9.7) 9.7 4.7 38.4 4.8 3.7 16.9 7.5 0 Q1-10 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 0 50 5 100 EBIT margin (RHS) 10 8,609 3,118 1,164 (7,084) (5,920) (771) 6,903 (8,094) (1,191) (752) 1,612 (4,410) (2,797) (495) 150 200 EBIT per tonne 20 8,579 50,312 12,226 3,646 31,664 7,904 69,418 21,140 13,236 38,537 6,821 78,409 26,812 19,990 40,730 6,936 79,266 24,921 17,986 42,429 6,322 83,707 27,421 21,100 43,951 250 6.5 Q1-10 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 7.0 36,855 6,421 (532) 3,778 3,218 47,887 8,495 (587) 5,267 4,106 68,939 7,612 (788) 4,782 3,648 63,604 6,057 (871) 3,368 2,462 30,185 2,941 (310) 706 529 2010 2011 2012 H1-13
Steel sales (mt LHS, 000 KRW/tonne RHS)

9.5 Average sales price (RHS) 1,400 1,200 1,000 800 8.0 600 7.5 400 200 0
9.0
Sales volume
8.5
Steel profitability (000 KRW/tonne LHS, % RHS)

25
(6,588) (10,033) 2,021 (689) (6,914) (693)
15
HG CORPORATES
Revenue by region, 2012 (KRW bn)

Others Middle East Europe North America Japan Asia (ex CN/JP) China 0 1,000 2,000 3,000 4,000 5,000 6,000 2.4% 4.3% 17.7%
Sales and profitability by segment, H1-13 (% of total)

100% Others Construction 80% Trading 60%
5.9% 14.1% 26.7% 28.9% 7,000 0% Sales EBIT 40% Steel 20%
355
Asia Credit Compendium 2014 Power Grid Corp. of India Ltd. (NR; BBB-/Neg; BBB-/Sta)

Power Grid enjoys a strong business profile on account of its near-monopolistic position and good operating efficiencies. Also, its tariffs are set under a transparent formula, which ensures cost recovery and a guaranteed ROE. That said, its budgeted capex (c.INR 200bn annually) is significant, and debt to capital will likely remain at 7072%. However, its assured cash flow, high strategic importance and government linkage will underpin Power Grids ratings in the next few years. We believe collection efficiencies and project-execution skills could have a bearing on its overall credit profile in the long term. We maintain our Stable outlook on the credit.

Strong business profile: Power Grid is the worlds third-largest power transmission utility and enjoys a monopolistic position, with a share of more than 90% of Indias interstate and inter-regional electric power transmission network. The company has been able to maintain its operational parameters above regulated norms. For instance, its system availability has been more than 99.5% in recent years, which enables it to get incentive payments (the regulatory norm is 98%). Also, most of its transmission losses are related to technical losses, in line with global peers. We believe Power Gri d has strong growth prospects, given India's high economic growth, its large power deficit of c.10%, and regional imbalances in power demand and supply. Power Grid has good project-execution skills and has delivered all projects on time in the past two years (which entitles it to an additional 0.5% ROE). While future projects will be competitively bid, we believe that Power Grids project-execution skills and nationwide network of base stations afford it a competitive advantage over private-sector players. Transparent tariff structure leads to strong cash flow: Power Grids tariff structure is very transparent and ensures a guaranteed ROE, while covering operating costs and debt-service charges. Its cost recovery is linked to network availability and is independent of actual power transmitted, which protects the company from volume risks. ROE for the current five-year regulated period (FY09FY14) is set at 15.5%, which leads to strong cash flow. Although tariff-based bidding has been adopted for interstate projects since 2011, this will not apply to Power Grids planned projects during FY12 -FY17, since these projects will continue to be based on tariffs decided by the regulator. That said, the competitively bid projects will be based on normative capex recovery instead of actual capex recovery; Power Grid will need to manage project costs within the normative limits, failing which its earnings could fluctuate. Strong government linkage: Power Grid is one of the key policy-implementation entities in the Indian power sector. Its strategic importance has led the government to guarantee about 20% of the companys outstanding debt. While the financial profiles of its primary customers (state electricity utilities, or SEUs) are weak, Power Grid has been able to collect 100% of its receivables since the implementation of the One-Time Settlement Scheme (OTSS) with SEUs, state governments and the Reserve Bank of India in FY04 (the mechanism expires in October 2016). Its receivables position could suffer if the SEUs do not undertake adequate tariff increases and operational improvements by 2016. Large capex plans will keep leverage elevated: Power Grid has posted strong cash flow on account of the transparent tariff formula, and its return on capital has been 8.4-9.0% during FY10-FY13. Power Grid has budgeted capex of INR 1tn during the five years FY13-FY17 and expects to spend c.INR 200bn annually in the coming years (INR 192bn in FY13, INR 148bn in FY12). The cost-plus-tariff norms applicable to Power Grid's projects incentivise a debt-to-equity structure of 70:30 for new projects (since the 15.5% ROE is based on a maximum equity component of 30% of the project cost). As a result, the company will see a significant increase in debt and post negative FCF in the next few years. However, its assured cash flow will mean that its overall credit profile will not be under threat. We expect leverage of around 6x, while debt to capital will be around 70-72% (some of Power Grids loan covenants require that the ratio be below 75%). Power Grids ability to maintain a high level of collection efficiency and ensure timely completion of projects will remain key drivers of its credit profile in the long term.
HG CORPORATES
Company profile
Power Grid Corp. of India Ltd. (Power Grid) is the only Central Transmission Utility (CTU) in India, and it is responsible for planning, developing and operating Indias interstate and inter-regional power transmission network. It owns and operates more than 90% of the countrys interstate power transmission network and transmits more than 50% of the electricity generated in India. It had 100,200 circuit km of transmission lines and 167 electrical sub-stations as of FY13. It transmitted c.450bn kWh of electricity, or around 50% of all the power generated in India in FY13. Power Grid is also involved in the telecom and consultancy segments, although these businesses are small (4% of revenue in FY13). The company is currently 69.4% owned by the government of India.
356
Asia Credit Compendium 2014 Power Grid Corp. of India Ltd. (NR; BBB-/Neg; BBB-/Sta)
Summary financials
FY10 Income statement (INR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (INR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (INR bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 27.2 82.7 8.4 68.3 5.8 5.3 11.0 2.7 20.7 82.6 8.5 66.0 5.9 5.2 11.8 2.7 22.2 83.3 8.6 69.7 6.3 5.9 10.3 2.6 29.0 85.2 9.0 72.4 6.2 5.9 9.5 2.5 24.8 85.3 NA 72.8 5.9 5.8 NA NA 51.4 34.0 70.4 91.6 NA NA NA NA 32.8 635.6 344.2 311.4 159.4 48.1 776.6 416.1 368.1 214.2 31.1 26.8 19.9 1,274.3 763.5 743.6 285.2 71.3 58.9 (21.5) 26.3 20.4 86.1 71.1 (26.8) 38.3 26.7 104.4 86.9 (33.8) 46.9 33.0 131.6 112.1 (45.5) 57.8 43.1 75.6 64.5 (15.6) 31.4 22.8 FY11 FY12 FY13 H1-FY14*
Profitability (INR bn LHS, % RHS)

140 120 100 80 60 40 20 0 FY09 FY10 FY11 FY12 FY13 EBITDA margin (RHS) Revenue 100 90 80 70 60 50 40 30
921.3 1,133.8 543.6 512.4 235.8 692.3 665.5 264.0
Debt metrics (x)

7 6 5 4 2 3 2 1 0 FY09 FY10 FY11 FY12 FY13 0 EBITDA/ interest (RHS) Total debt/EBITDA 4
(66.7) (103.4) (148.4) (192.3) (15.3) (5.1) (69.4) (7.3) (78.0) (100.6) (10.0) (14.0)
HG CORPORATES
Debt metrics (INR bn LHS, % RHS)

800 700 600 500 400 300 200 20 100 0 FY09 FY10 FY11 FY12 FY13 Total cash* 0 Total debt 40 Total debt/cap. (RHS) 80 100
Capex and investments (INR bn)

250
200
60
150
100
50
0 FY09 FY10 FY11 FY12 FY13
357
Asia Credit Compendium 2014 PTT Exploration & Production PCL (Baa1/Sta; BBB+/Sta; NR)

Our Stable outlook on PTTEP is supported by its strong position in Thailands E&P sector. The companys product mix is skewed towards gas, which is sold to PTT under long-term 'take-or-pay' contracts, ensuring stable cash flow. PTTEP plans to increase output to 600kboed by 2020, lower than the initial target of 900kboed, which has reduced M&A and execution risks. We think its budgeted organic capex of USD 15bn over 2013-17 can be funded internally and that it has the balance-sheet strength to undertake another acquisition of c.USD 2-3bn. However, a larger transaction will need to be debtfunded and could pressure its ratings. Barring the M&A risk, we think the sovereign linkage will continue to underpin the credits standing.

Solid operating profile: PTTEP has a 27% share of Thailands oil and gas production and is the countrys second-largest holder of petroleum reserves. Its reserves are well diversified, with 27 of its 45 projects and 44% of its total reserves located overseas. It has a reserve life index of eight years. Also, it enjoys a favourable cost structure due to production-sharing contracts in various overseas projects, smooth operating conditions in the Gulf of Thailand and competitive labour costs (although its costs are rising). That said, only 45% of its proven reserves are developed, and its proven reserves have fallen 18% since 2010; this could lead to heavy investment requirements. Pricing policy mitigates risks: PTT is PTTEPs primary customer, contributing nearly 100% of its natural gas revenue. The sale of natural gas to PTT is governed by long-term 'take-or-pay' agreements that ensure minimum purchase volumes and stable cash flow. Under the gas sales agreements, prices are revised only once a year, which makes PTTEPs weighted-average product prices less volatile than Dubai crude oil prices; however, this also leads to lower realised sale prices when prices increase. As a result, its margins are less volatile than those of other E&P companies EBITDA margin were 67-75% in the past 10 years. PTTEPs ASP for gas increased sharply to USD 8.02/mmbtu in 9M-2013 from USD 7.43/mmbtu in 9M-2012, due to an upward revision in gas sale prices. Growth plans are still ambitious: PTTEP has lowered its production growth target to a more conservative 600kboed by 2020 (versus its initial target of 900kboed). It acquired a 40% stake in a KKD oil-sands project (USD 2.3bn) and a 100% stake in Cove Energy (USD 1.9bn) to meet its production target. However, based on current visibility of PTTEPs projects, we believe production levels are likely to remain between 375kboed and 400kboed in 2014-17. Hence, PTTEP will need to make more acquisitions, although smaller in size, to reach its 600kboed target. PTTEP bought a stake in Hess Indonesian assets for USD 650mn in 2013 and has also submitted a bid for Hess Thai assets. The company has mentioned it prefers to acquire producing assets rather than greenfield ones. Large capex plans: PTTEP has earmarked USD 15bn for organic capex over 2013-17, and the Cove project will require further capex of USD 1bn during this period. That said, PTTEPs capex will decline from 2014 as the Zawtika (45kboed) and Algeria (20kboed) projects come onstream, and the ramp-up of the Montara project (20kboed) is completed. PTTEP faces execution risks given that it plans to grow its scale of operations substantially, invest in unconventional projects like KKD and in countries with higher geopolitical risk. It has previously faced delays at its Arthit project in 2007 and an oil spill in its Montara project in 2009. Moderating financial strength: PTTEP used to maintain a conservative financial profile, with a net cash position over 2003-08. While increased capex and debtfunded acquisitions have pressured its balance sheet, it has undertaken a USD 3bn equity rights issue and THB 5bn of hybrid bonds. As a result, its gearing is low at 27% and the rise in leverage (0.8x from 0.2x in 2008) has been moderate. We estimate that PTTEP will generate CFO of c.USD 18bn over 2013-17, which, along with its cash balance of USD 2.7bn, will be sufficient to cover organic capex of USD 15bn, Cove-related spending of USD 1bn and dividend payouts of USD 4bn. This also provides it flexibility to fund another acquisition of c.USD 2-3bn without leading to a significant deterioration in its capital structure. However, a larger debtfunded transaction could pressure its ratings. Sovereign linkage: PTTEP plays a key role in developing Thailand's hydrocarbon reserves and has strong links with the government. PTT is required to hold a minimum 51% stake in PTTEP as per the covenants in its Yankee bond. PTT also subscribed to PTTEPs USD 3bn rights issue (PTTs outlay was nearly USD 2bn).
358
HG CORPORATES
Company profile
PTT Exploration & Production PCL (PTTEP) was established in 1985 as the oil and gas E&P arm of PTT PCL (PTT), a state enterprise. As of September 2013, it was involved in 45 projects in 12 countries. These include the Gulf of Thailand (18 projects), Southeast Asia (17), the Middle East and Africa (7), Canada (1) and Australasia (2). It has 21 projects in the production stage, three in the development stage and 21 in the exploration stage. As of December 2012, it held 901mmboe of proved reserves, and daily production volume was 327kboed in 9M-2013. Natural gas accounts for around 71% if its reserves, 66% of its sales volume and 47% of its revenue. PTTEP is listed on the Stock Exchange of Thailand, with PTT owning a 65.3% stake in the company.
Asia Credit Compendium 2014 PTT Exploration & Production PCL (Baa1/Sta; BBB+/Sta; NR)
Summary financials
2009 Income statement (THB bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (THB bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (THB bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (15.9) 67.7 27.5 33.4 0.9 0.3 52.0 43.2 26.0 71.6 27.9 31.1 0.8 0.2 79.7 40.0 14.3 68.5 28.7 38.0 1.1 0.7 60.0 30.8 28.8 70.4 27.9 26.6 0.8 0.3 84.6 25.8 8.1 72.1 25.2 26.6 0.8 0.3 63.4 28.4 0% 2007 2008 2009 2010 2011 2012 9M-13 0 20% Gas 40% 40 41.4 (62.2) (20.8) (13.4) 79.8 (75.2) 4.6 (12.4) 84.1 (128.4) (44.3) (17.1) 101.9 (147.2) (45.4) (18.3) 87.8 (65.3) 22.6 (23.8) 60% 80% Liquid 48.7 300.7 71.8 23.1 143.0 59.5 342.2 77.8 18.3 172.3 42.8 447.8 122.7 79.9 200.0 70.2 601.5 118.1 47.9 325.6 81.3 653.8 130.3 49.0 359.2 0 2008 2009 2010 2011 2012 200 Developed reserves 119.3 80.7 (1.9) 40.4 22.2 142.0 101.7 (2.5) 66.0 41.8 169.6 116.3 (3.8) 79.8 44.7 212.5 149.7 (5.8) 99.4 57.3 166.2 119.8 (4.2) 81.4 48.7 800 1,000 2010 2011 2012 9M-13
Reserves data (mmboe LHS, years RHS)

1,200 Reserves life index (RHS) Undeveloped reserves 14 12 10 8 600 6 400 4 2 0
Revenue split and ASP (% LHS, USD/bbl RHS)

100% Avg. Dubai crude price (RHS) PTTEP's ASP (RHS) 120
100
80
HG CORPORATES
60
20
Sales volume (kboed)

300
Budgeted capex and opex (USD bn)

9 8
280
7 6
Acquisition
260
5 4 3 Opex
240
220
2 1 Capex
200 2009 2010 2011 2012 9M-2013
0 2011 2012 2013 2014 2015 2016 2017
*We have assigned only 50% equity credit to the THB 5bn perpetual bond; Source: Company reports, Standard Chartered Research
359
Asia Credit Compendium 2014 PTT Global Chemical PCL (Baa2/Sta; BBB/Sta; NR)

Our Stable credit outlook on PTTGC is underpinned by its business integration with PTT in the form of long-term feedstock purchase and product off-take agreements. It also benefits from a diversified portfolio mix and economies of scale. Also, as a gas-based olefin producer, PTTGC enjoys a significant cost advantage over naphtha-based players. That said, lower gas feedstock from PTT and volatility in refining and petrochemical product spreads could keep earnings in check. On the other hand, we think PTTGCs capex plan is aggressive and leverage will therefore remain relatively high in the medium term. If PTTGC undertakes more than 50% of its uncommitted capex, it will need to be debt-funded; this will reduce its rating headroom.

Strong business profile: PTTGC is Thailands largest petrochemical company, with dominant market shares in olefins and aromatic products. It benefits from economies of scale due to its vertical integration and diversified product mix. It has long-term feedstock purchase and product off-take agreements with its parent (PTT supplied 100% of crude oil, 100% of condensate and 98% of natural gas feedstock, and accounted for 47% of PTTGCs revenue in 2012). PTTGC purchases gas under a profit-sharing arrangement that links feedstock costs to olefin and polymer prices. This protects margins in the olefin business, whereas aromatics and refining product margins are market-linked. That said, its integration with PTT exposes PTTGC to operational risks one of the PTTs gas separation plants (GSPs) was on unplanned shutdown in 2013, leading to reduced gas feedstock and lower utilisation rates in PTTGCs olefins business. While PTTs GSP will resume operations at full capacity only in Q2-2014 (currently: 50%), PTTGC estimates the impact on profits to be small, at THB 1.8bn, in 2013. Competitive cost position: PTTGCs olefins, EO-based performance chemicals and polymer production (which form 61% of its EBITDA) are based predominantly on natural gas feedstock (89%), which offers it cost advantages over naphthabased players. Its refinery has a complexity of 10.2 (based on Nelson methodology), which helps it process cost-effective crude oil over condensate feedstock. That said, there are few operational synergies between its refinery, aromatics and olefin businesses, owing to their different input requirements. Volatility in earnings: PTTGCs exposure to the cyclicality of the petrochemical industry leads to volatile earnings: it posted a THB 3.8bn inventory valuation gain in Q3-2013, versus losses of THB 1.4bn in Q2-2013 and THB 0.6bn in Q1-2013. New capacity additions in the region could exert pressure on petrochemical and refining margins in 2014, and lower utilisation rates in its olefins business will check any major improvement in earnings. Separately, PTTGC incurred THB 1.0bn due to an oil spill incident in 2013. Large capex plan: PTTGC plans to increase revenue to THB 900bn by 2022 from THB 566bn in 2012 by moving towards higher-value-added products. It aims to strengthen its downstream specialty business and green chemical products. PTTGC has committed capex of USD 1.9bn during 2013-17 and uncommitted capex of USD 4.5bn during 2012-17. To achieve its target, PTTGC will undertake a debottlenecking project to improve capacity organically. It will also develop refinery and petrochemical complexes in Malaysia (in a JV with Petronas and Itochu Corp.), in Indonesia with Pertamina and in China with Sinochem. Furthermore, it has acquired a 50% stake in NatureWorks (USD 150mn), a 51% stake in Vencorex (EUR 121mn) and a 40% stake in PTT Phenol (USD 155mn) in 2012-13. Financial metrics to moderate: We expect the company to post annual operating cash flow of c.THB 45-50bn over the next few years, which will be adequate to cover its committed capex of c.THB 60bn (USD 1.9bn) and dividend payouts of c.THB 80bn during 2013-17. However, the cash flow does not provide an adequate buffer for undertaking more than 50% of its uncommitted capex. We believe that PTTGC has partly pre-funded its uncommitted capex requirement through the USD 1bn bond issuance. Thus, it would require at least USD 1bn of fresh borrowing if it decides to undertake the complete USD 4.5bn investment plan. Hence, leverage will remain high at around 2.5-3.0x over the medium term. PTT linkage: PTTGC is the PTT groups flagship petrochemical and petroleum refining company, and its business is significantly integrated with the parents. PTT may decide to merge IRPC PCL and other unlisted chemical companies with PTTGC over the medium term; while this will lead to operational synergies and increased scale of operations, IRPCs financial metrics are weaker than PTTGC.
360
HG CORPORATES
Company profile
PTT Global Chemical PCL (PTTGC) is the largest integrated petrochemical and petroleum refining company in Thailand and the second largest in Southeast Asia by nameplate capacity. It owns a complex refinery of 145kbd and has petrochemical production capacity of 8.6mtpa. It produces olefins (capacity of 2.9mpta), polymers (1.6mpta), aromatics (2.3mtpa), green chemicals (0.9mtpa), EO-based performance products (0.5mtpa) and high-volume specialties (0.4mtpa). It was formed after the amalgamation of PTT Chemical and PTT Aromatics and Refining in October 2011. It is 48.9% owned by PTT PCL (PTT) and has a high level of operational integration, including feedstock supply and product off-take arrangements, with the parent.
Asia Credit Compendium 2014 PTT Global Chemical PCL (Baa2/Sta; BBB/Sta; NR)
Summary financials
2010 Income statement (THB bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (THB bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (THB bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) NA 8.2 10.5 37.1 4.2 3.6 10.9 5.4 68.3 10.3 11.1 37.7 2.3 1.9 24.8 8.2 3.8 9.5 10.6 38.1 2.5 1.4 28.6 8.5 8.8 10.6 11.2 33.7 2.1 1.2 15.6 9.1 NA NA NA NA 32.6 (10.5) 22.1 (13.2) 47.9 (16.3) 31.7 (10.5) 34.4 (18.6) 15.7 (19.1) 21.0 408.5 130.8 109.7 222.1 22.6 373.0 120.2 97.6 198.5 60.1 436.1 136.9 76.8 222.4 49.6 412.2 120.5 71.0 237.0 376.7 30.9 (5.7) 19.5 15.4 502.0 51.9 (6.3) 32.2 28.8 565.6 53.9 (6.3) 35.9 34.0 397.3 42.0 (4.6) 27.0 25.9 2011 2012 9M-13 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Revenue EBITDA Refinery Aromatics HVS Green chemicals Olefins
Revenue and EBITDA split by division, 9M-13 (%)

Others
Olefins feedstock breakdown (%)

100% 90% 80% 70% Naptha Gas
HG CORPORATES
60% 50% 40% 30% 20% 10% 0% Q1-10 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13
Committed capex (USD mn)

900 800 700 600 500 400 300 Core uplift Green
Debt maturity profile, Sep-13 (THB bn)

35
1-step adjacencies
30 25 20 15 10
200 100 0 2013 2014 2015 2016 2017

Maintenance capex
5 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022+
361
Asia Credit Compendium 2014 PTT PCL (Baa1/Sta; BBB+/Sta; BBB+/Sta)


Our Stable credit outlook on PTT is underpinned by its robust business position in Thailands gas sector and strong cash flow from the E&P segment. That said, the company has huge growth plans and has budgeted for THB 366bn of spending (organic and inorganic) in 2013-17 at the parent level. Importantly, PTT is also targeting businesses like coal mining and power generation, which have few synergies with its core energy operations. Leverage is currently comfortable at 2.1x, but will gradually moderate if PTT undertakes the entire budgeted capex. Large debt-funded acquisitions, especially in noncore areas, pose the biggest risk to the credit profile.

Monopoly in the gas business: PTT operates Thailands only gas transmission network (capacity of 4,380mmscfd). Gas prices are agreed under long-term takeor-pay contracts, and PTT enjoys a cost pass-through mechanism, which incorporates the average gas purchase price, supply margin and pipeline tariffs. PTT also operates all six of Thailands gas separation plants (GSPs, combined capacity of 6.7mtpa). While gas sales revenue increased 5.6% in 9M-2013, EBITDA declined 23.9% as higher feedstock costs and the shutdown of one GSP led to lower profits at the GSPs. Losses in the natural gas vehicle (NGV) business also increased due to strong sales and as the government maintained a cap on NGV tariffs, below PTTs feedstock costs. The gas business contributes 20 -25% of EBITDA and balances cyclical downstream earnings. Solid upstream operations: 66% of PTTEPs product mix is natural gas, and nearly all of it is sold to PTT (meeting 27% of PTTs gas requirements) through long-term take-or-pay contracts, which ensure stable cash flow to PTTEP. In 9M2013, PTTEP contributed 71% of group EBITDA. It plans to increase output from 327kboed to 600kboed by 2020, and has budgeted capex of c.USD 15bn in 201317. While large acquisition is a risk, PTTEPs budgeted capex plan can be funded internally, and its credit metrics remain strong, with leverage of just 0.8x. Downstream operations: PTT has a 39% market share in oil retailing in Thailand, and is directly engaged in the procurement and trading of crude oil and downstream products. PTT is also involved in the cyclical refining and petrochemical sector, with stakes in five of Thailands six main oil refin eries. Regional overcapacities in a number of products will check any major improvement in earnings in its downstream associates in 2014. International business: PTT International has invested overseas in coal mining, power generation, palm plantations, renewable energy and floating LNG. While it has not made any major international investments in 2013, PTT increased its stake in Sakari Resources, a coal-mining company in Indonesia, to 100% for USD 1.1bn in 2012. The international business contributions to revenue and EBITDA are currently low, at less than 5%. We see these international acquisitions as marginally negative for the credit, since most of them are unrelated to the core energy business and carry high execution risks. Large capex plans: PTT (and its wholly owned subsidiaries) has large budgeted capex of THB 366bn for 2013-17, with 53% of spending allocated for international business. That said, capex related to international business is discretionary and will be disbursed opportunistically. Separately, PTTEP (USD 15bn), PTTGC (USD 4.5bn), Thai Oil (USD 1.4bn) and IRPC (USD 1.2bn) also have large capex plans. While we see a very low risk that PTT will be called on to support its subsidiaries, it is likely to facilitate their funding requirements (PTT subscribed to its USD 2bn share of PTTEPs rights issuance in 2012). Moderate credit profile: Large investment and acquisitions caused PTTs debt to increase to THB 476bn in 9M-2013 from THB 249bn in 2008, while leverage moderated to 2.1x from 1.6x in this period. PTTs leverage increases to 3.0x if the debt of associates is included (and credit is given for the dividends received). We expect budgeted capex (c.THB 160bn annually for PTT and PTTEP) to lead to a modest rise in leverage, given annual CFO of c.THB 170bn and dividend payouts of c.THB 40bn. PTTs average debt maturity is comfortable at 8.2 years. Government linkage provides strong support: PTT plays a strategic role in Thailands energy security and development. As of June 2013, THB 6bn of its debt was guaranteed by the government, and some of its bonds have covenants requiring at least 50% government ownership. PTT enjoys strong access to the local banking and capital markets due to its sovereign linkage.
362
HG CORPORATES
Company profile
PTT PCL (PTT) is an integrated oil and gas company and Thailands largest corporate entity. It owns all Thailands gas separation capacity and has a monopoly in gas T&D. It has a presence in upstream E&P through its 65.3%-owned subsidiary, PTTEP. It is directly involved in downstream oil marketing and international trading operations. It has a dominant presence in the Thai refining and petrochemical sectors through its affiliates. Separately, it has made international investments in coal mines, palm plantations and power generation. As of November 2013, the PTT Group made up 16.7% of Thailands equity market capitalisation. The Thai government owns an effective 66.4% stake in PTT.
Asia Credit Compendium 2014 PTT PCL (Baa1/Sta; BBB+/Sta; BBB+/Sta)

Summary financials
2009 Income statement (THB bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (THB bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (THB bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (12.4) 8.7 11.6 42.1 2.6 1.8 35.6 9.7 25.9 9.2 12.4 40.4 2.2 1.3 39.4 10.9 22.0 8.8 14.5 38.8 1.9 1.3 31.5 11.8 6.6 8.1 13.4 38.6 2.0 1.4 32.4 11.5 2.8 8.5 12.5 37.7 2.1 1.3 32.1 11.2 150 300 Unadjusted debt/EBITDA (RHS) 2.0 450 2.5 88 (143) (55) (23) 148 (113) 35 (32) 169 (189) (20) (41) 166 (203) (38) (42) 124 (87) 37 (32) 600 3.0 750 113 1,103 362 249 498 157 1,249 388 230 571 127 1,402 408 281 644 143 1,631 458 314 729 170 1,694 476 307 788 1,586 138 (14) 102 60 1,900 174 (16) 139 83 2,428 213 (18) 168 105 2,794 227 (20) 172 105 2,093 179 (15) 131 79 2010 2011 2012 9M-13
Natural gas volumes sold (mmscfd)

5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Q1-10 Q3-10 Q1-11 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13
Rise in debt levels (THB bn LHS, x RHS)

900 PTT PTTEP PTTGC IRPC Thai Oil 4.0
Adjusted debt/EBITDA (RHS)
3.5
HG CORPORATES
1.5
0 2009 2010 2011 2012 9M-13
1.0
PTT and PTTEP Planned capex (THB bn)

250 Gas Oil & Int. JV (power, coal, etc.) Others PTTEP
Petrochem and refining associates net income

80 70 BCP IRPC SPRC PTTGC TOP Others
200
60 50
150
40 30
100 20 50 10 0 0 2013 2014 2015 2016 2017

-10 2009 2010 2011 2012 9M-13
363
Asia Credit Compendium 2014 Reliance Industries Ltd. (Baa2/Sta; BBB+/Neg; BBB-/Sta)

Reliances earnings have been under pressure after peaking in FY11, due to the sharp decline in KG-D6 volumes. We do not see an increase in output in 2014. However, the refining and petrochemical segments will continue to generate strong earnings, with margin pressure offset by INR depreciation and higher volumes. Also, the large downstream projects will lead to cost savings and a substantial increase in cash flow by FY16. However, in the interim, annual investment spending will be high at INR 350-400bn, and leverage will rise to 3.0-3.3x (from 2.7x) by FY15. Its large cash pile and track record of prudent investment suggest that Reliance will not compromise its ratings. Hence, we maintain our Stable outlook on the credit.

Strong efficiencies in refining and petrochemicals: In refining, Reliance enjoys large economies of scale, superior plant configuration (a Nelson Complexity Index of 12.6), high utilisation (112% in H1-FY14) and proximity to the Middle East (which helps in sourcing crude oil). Hence, it enjoys a better GRM (USD 8/bbl in H1-FY14) than peers. Reliance also has extensive petrochemical operations; it is the worlds largest producer of polyester fibre and yarn and a top global producer of polypropylene and fibre intermediates. In H1-FY14, refining EBIT increased 8.3% y/y due to higher throughput and a favourable exchange rate, while petrochemical EBIT increased 25.6% y/y due to higher volumes and better margins in polymers and fibre intermediates. We believe Reliances operating efficiencies in refining and domestic orientation in petrochemicals will offset any near-term earnings pressure in the businesses. KG-D6 gas production has declined: KG-D6 gas production fell to 14mmscmd in H1-FY13 (from a peak of 63mmscmd in Q1-FY11) due to greater-thanexpected reservoir complexity. The Indian government has imposed a penalty of USD 1.8bn for missing targeted production, and Reliance has filed arbitration proceedings. While its gas sales price will be increased to USD 8.4/mmbtu (from USD 4.2/mmbtu) and the company is taking measures to improve production, we do not expect a material increase in output in the next 12 months. Separately, in H1-FY14, the US shale gas segment produced 74.4bcf of gas (up 49% y/y) and posted EBITDA of USD 292mn (up 47% y/y). The oil and gas segment contributed only 6.3% of overall EBIT in H1-FY14 (peak of 29% in FY11). Large downstream projects to drive long-term growth: Reliance is engaged in three large downstream projects petcoke gasification (to replace its LNG requirement), the refinery off-gas cracker and polyester-related expansions. Part of the polyester-related expansions will be commissioned in the coming year, and Reliance expects the petcoke gasification project to come onstream in FY17. These projects will strengthen its competitive position in the downstream segment, with full operational benefits and earnings likely to kick in by FY16. Non-core areas: In consumer retail, Reliance has 180 stores in 57 cities. In H1FY14, the segment posted revenue growth of 41% y/y to INR 3bn, while EBITDA increased 31% y/y to INR 1.6bn; we forecast EBITDA growth of 30-35% per annum and total investment spending of c.USD 2bn during FY14-FY16. Reliance also plans to launch a wireless broadband network for 4G services, focusing on data, in a few large cities in 2014. It expects segmental investment spending of c.USD 3bn in FY14-FY16. We believe Reliance will be prudent in its non-core investments and invest only 20-25% of incremental spending in those projects. Strong financials: Reliance posted positive FCF of INR 15.6bn in FY13, despite a sharp increase in investment spending (INR 307bn versus INR 164bn in FY12), although leverage increased slightly, to 2.7x (from 2.4x). We expect EBITDA of c.INR 350bn in FY14 and INR 385bn in FY15 on incremental volumes from the petrochemical expansion, higher gas prices and INR depreciation. We also forecast an increase in annual investment spending to INR 350-400bn in FY14FY15, with the bulk of the outlay in downstream projects and domestic E&P. While it has a huge cash pile (INR 793bn at end-FY13), Reliance will need to raise incremental debt in the next two years. We expect a dividend payout ratio of 10-15% (12.7% in FY13). Assuming this base-case scenario, we forecast that leverage will increase to 3.0-3.3x by FY15. We believe financial metrics will improve thereafter as cost benefits and earnings growth from the downstream projects kick in.
364
HG CORPORATES
Company profile
Reliance Industries Ltd. (Reliance) is Indias largest private-sector company in terms of revenue and assets. It owns one of the world's largest refining complexes, with a capacity of 1.24mmbd. It also owns an integrated petrochemicals complex with facilities to manufacture olefins, aromatics, polymers, fibre intermediates and other chemicals. Reliance has backward-integrated into oil and gas exploration (reserves of 660mboe); the KG-D6 gas block is its most important asset, and it also has investments in shale gas ventures in the US (reserves of 1.86tcf). The company has also invested in the consumer retail sector and entered the telecom sector in India. Reliance is c.45.3% held by its promoters family. Mukesh Ambani and
Asia Credit Compendium 2014 Reliance Industries Ltd. (Baa2/Sta; BBB+/Neg; BBB-/Sta)
Summary financials
FY10 Income statement (INR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (INR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow ((INR bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 31.9 14.7 9.9 31.3 2.1 1.4 32.0 15.0 23.1 14.1 10.7 35.2 2.2 1.0 33.8 15.8 (9.3) 9.5 9.0 32.7 2.4 0.4 30.1 11.9 (4.2) 8.2 8.3 32.8 2.7 0.3 24.6 9.5 2.3 7.8 8.7 26.2 2.3 (0.4) NA 9.2 1 0 Q1-FY11 Q3-FY11 Q1-FY12 Q3-FY12 Q1-FY13 Q3-FY13 Q1-FY14 0 4 Oil 3 2 50 100 169.7 298.4 209.1 322.9 NA NA NA NA 5 150 223.2 454.0 679.0 793.3 783.8 3,512.6 674.3 (109.6) 1,900.5 7 Gas (RHS) 6 200 5 0 Q1-FY11 Q4-FY11 Q3-FY12 Q2-FY13 Q1-FY14 2,097.7 2,702.7 3,613.5 4,020.2 309.0 (20.6) 286.8 245.1 380.4 (24.1) 240.5 192.9 345.1 (28.9) 254.1 197.2 330.5 (34.6) 262.2 208.8 1,914.0 149.2 (16.2) 135.3 108.4 FY11 FY12 FY13 H1-FY14*
Refining profitability (INR bn LHS, USD/bbl RHS)

40 35 30 25 20 15 10 2 8 GRM (RHS) 10 12
EBIT
2,594.4 3,075.2 3,271.9 3,623.6 646.1 422.9 841.1 387.1 826.4 147.3 893.2 100.0
1,415.8 1,548.9 1,702.4 1,830.0
Oil and gas production (mmb LHS, bcf RHS)

250
(232.8) (338.6) (163.8) (307.3) (63.1) (22.2) (40.2) (24.3) 45.2 (27.7) 15.6 (29.5)
HG CORPORATES
Petrochemical financials (INR bn LHS, % RHS)

300 20 18 250 EBIT margin (RHS) Revenue 16 14 12 150 10 8 100 6
EBIT breakdown (INR bn)

400 350 300 250 200 150 100 Petrochemical Oil and gas
200
50
4 2 50 0 FY10 FY11 FY12 FY13 H1-FY14* Refining
0 Q1-FY10
0 Q4-FY10 Q3-FY11 Q2-FY12 Q1-FY13 Q4-FY13
365
Asia Credit Compendium 2014 Shenzhen International Holdings Ltd. (Baa3/Sta; BBB/Neg; BBB/Sta)

SZIHL has exhibited earnings momentum in years due to high traffic and a secure business strong recent growth profile.

Stable cash flow from toll roads: SZIHL has a long operating track record, with seven of its 17 expressways being in operation for over 10 years. It generates steady, recurring cash flow from its toll roads, and its concession rights are longterm (until 2022-35). Given Guangdongs affluence and high car ownership, many of SZIHLs toll roads have enjoyed double -digit traffic growth p.a. over the past decade. Around 60-90% of the traffic volume is of small cars, which indicates that the company is not significantly geared to Chinas trade flows. Regulatory risks increasing: Toll-road tariffs in China are set by the government, and the concession agreements do not provide for regular tariff increases in line with inflation. The Guangdong government has not adjusted toll rates for over 10 years, although SZIHLs profitability has not suffered, given the high traffic growth. That said, in 2012, the Guangdong government standardised toll co-efficients for all expressways, and the State Council waived toll fees nationwide for passenger cars during four important national holidays (or around 20 days a year). These two measures have had a negative impact on SZIHL; in H1-2013, the toll-road segment reported a 3% y/y decline in revenue despite strong traffic growth. Assuming no further regulatory issues, we expect revenue growth of 5-8% for the toll-road segment in 2014 on account of continuing traffic growth and completion of the Shenzhen section of the Guangshen Coastal Expressway. Logistics business is growing: SZIHL is increasingly focused on the logistics business; its parks are located in coastal areas and had an average occupancy rate of c.95% in H1-2013. The segments revenue increased by 7% y/y in H1-2013 and contributed 19% to overall revenue. That said, the segment is riskier than toll roads due to less predictable cash flow, and SZIHL plans to build a nationwide logistics network. Also, SZIHL has large land holdings (380,000 sqm) in Qianhai district, where the government plans to build a major commercial service hub. Details on land rezoning and development are unclear at this stage, although project capex will likely be significant. While our base case assumes that SZIHL will be prudent about the project (raise equity or rope in strategic partners), a large commercial property development plan will increase the companys risk profile. Other investments: SZIHL is a financial investor in SA with a 49% stake. While the airline has a leveraged balance sheet, it now generates profits and paid HKD 141mn of dividends to SZIHL in H1-2013. We do not expect SZIHL to participate in any capital call from SA without the support of the Shenzhen SASAC. SZIHL also holds a 5.9% stake in CSG Holdings Co. Ltd. (a glass manufacturer), which it plans to divest (0.5% stake divested in H1-2013 for a profit of HKD 101mn). Linkage with Shenzhen municipality: SZIHL is the Shenzhen governments principal platform for logistics and infrastructure investment. The government exerts strong influence on its strategy, even with a stake of less than 50%. In 2008, it extended the interest-free payment period for SZIHLs acquisition of SZE, and in 2010, it converted SZIHLs convertible bonds into equity of HKD 1.7bn. Financial profile: Strong growth in toll-road traffic and EBITDA helped SZIHL to improve its leverage to 5.3x in 2012 from 8.4x in 2009. While EBITDA growth was modest in H1-2013, the company reduced net debt by HKD 95mn. SZIHL has budgeted HKD 1.76bn on capex (65% on toll roads, 25% on logistics) in 2013, and future investments will be on the repair and maintenance of toll roads and the expansion of the logistics business. We estimate capex of c.HKD 1.5-2bn in 2014, which can be met through operating cash flow. Assuming no large outlay for the Qianhai project, we expect a gradual improvement in SZIHLs financial metrics in 2014, which in turn will be supportive of its credit ratings.
366
That said, regulatory risks have increased, and the tariff changes implemented in 2012 affected profitability mildly in H1-2013. The company is diversifying into the logistics business, and while earnings from the segment are growing, they will remain slightly cyclical in the short term. Investment spending of HKD 1.52bn in 2014 will be funded through internal cash flow, and we expect a gradual improvement in leverage levels. However, the company could face ratings pressure if it invests significantly in the Qianhai project or in Shenzhen Airlines (not our basecase scenario).
HG CORPORATES
Company profile
Shenzhen International Holdings Ltd. (SZIHL) is an investment holding company involved in the construction and operation of toll roads and logistics facilities in China. A large part of its operating assets are located in the city of Shenzhen in Guangdong province. Currently, it has stakes of 25-100% in 17 expressways (179km). SZIHL operates primarily through its 50.9%-owned and listed subsidiary Shenzhen Expressway (SZE); its other two expressways (Longda and Wuhuang) are held directly. It has also invested in seven logistics facilities (operating area of 540,000 sqm), and it has a 49% stake in Shenzhen Airlines (SA). SZIHL is listed in Hong Kong, and the Shenzhen government holds a 48.6% stake in the company through the Shenzhen SASAC.
Asia Credit Compendium 2014 Shenzhen International Holdings Ltd. (Baa3/Sta; BBB/Neg; BBB/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 20.4 43.4 6.1 53.9 8.4 6.2 7.1 2.4 58.1 54.8 7.5 45.0 5.0 3.0 12.2 3.5 23.0 61.7 9.0 48.0 4.9 3.3 8.5 4.0 (0.9) 59.5 9.7 47.3 5.3 3.4 7.1 3.4 1.4 65.9 7.5 46.2 5.2 3.3 6.9 3.4 1,303 (4,525) (3,222) (374) 2,056 (2,360) (304) (479) 1,853 (2,463) (609) (723) 1,929 (1,409) 520 (782) 1,233 (598) 635 (560) 3,995 32,448 14,892 10,898 12,720 5,515 36,796 13,950 8,435 17,024 5,221 39,901 16,734 11,513 18,148 6,515 42,383 17,970 11,454 19,988 6,405 42,673 17,765 11,359 20,685 4,081 1,771 (735) 1,444 866 5,112 2,801 (797) 2,145 1,280 5,581 3,446 (857) 2,803 1,745 5,740 3,416 (1,003) 2,775 1,878 2,797 1,844 (501) 1,434 857 2010 2011 2012 H1-13
Revenue split (HKD bn)

7 6 5 4 3 2 1 0 2009 2010 2011 2012 H1-13 Toll revenue Logistics parks Port Construction services Logistics services
Contributions by expressway, H1-2013

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Revenue split Net profit split Shenzhen Expressway Wuhuang Expressay Longda Expressway
HG CORPORATES
Capex split (HKD bn)

5 Toll Roads Logistics Business Others
Debt maturity profile, June 2013 (HKD bn)

10 9
8 7
6 5
4 3
2 1
0 2009 2010 2011 2012 2013 B

0 <1Y 2-5Y >5Y
367
Asia Credit Compendium 2014 Sime Darby Bhd. (A3/Sta; A/Sta; A/Sta)

Sime Darbys credit profile is underpinned by good cash-flow generation in its plantation business. It has strong operating efficiencies, with high economies of scale, high yields and vertical integration. It also has leading positions in the industrial, motors and property businesses, providing diversification from the plantation segment (which contributed 53% of group EBITDA). Its businesses are geographically diversified, and it generates 50% of its profits from outside Malaysia. While Sime Darbys metrics could moderate slightly owing to its large budgeted investment plans, they should remain comfortable for its rating category. We initiate coverage of Sime Darby with a Stable credit outlook.

Strong palm oil plantation business: The plantation segment is the biggest contributor to Sime Darbys earnings (42% of group EBITDA in FY13). Sime Darby is one of the worlds largest palm oil producers, producing 2.4mt of CPO annually and accounting for c.5% of global output. Its plantation business benefits from large scale, low production costs and a high proportion of prime-age trees. Its upstream plantation business is also well balanced against its downstream operations, and c.70% of its CPO output is sold internally to group refineries. However, it is exposed to volatility in CPO prices, despite the companys vertical integration. Plantation EBITDA fell 38% and EBITDA minus capex declined to MYR 1.2bn in FY13 (from MYR 2.6bn in FY12) due to a moderation in CPO prices. That said, higher CPO prices and fresh fruit bunch (FFB) production, and the opening of a new refinery in Indonesia, should support earnings in FY14. While Sime Darby is also looking to expand its plantation operations in Africa, we do not think they will contribute materially to cash flow in the near term. High growth in the industrial business: Sime Darbys industrial business has exclusive Caterpillar dealership rights in a number of Asia-Pacific countries. With the acquisition of Bucyrus distribution assets in December 2011, Sime Darbys addressable share of the mining-equipment market grew to 75% from 23%. While this led to strong revenue growth of 7% in FY13, a few mines in China and Australia scaled back operations due to weaker coal prices, leading to lower pricing power for Sime Darby. The business contributes c.28% of group EBITDA and has a strong order book of MYR 3.3bn, providing good earnings visibility. Sime Darby is increasing its focus on its after-sales network, which will lead to sustained and recurring revenue growth and is less capital-intensive. Other businesses provide diversification: Sime Darbys motors business is focused on higher-margin luxury cars, primarily BMW, which account for c.70% of the divisions revenue. The division contributes 16% of the groups EBITDA, but the potential slowdown in Chinas economy and measures to curb household debt in Malaysia could moderate revenue growth. Sime Darbys Malaysian property business contributes 9% of group EBITDA and has a strong operating margin of 22%. While it has traditionally developed old plantation land into townships, it has now diversified into high-end districts in Malaysia by acquiring a stake in Eastern & Orient Bhd. (MYR 774mn) and overseas, through its 40% JV stake in the Battersea Power Station project in London (GBP 400mn). This slightly increases its risk profile. Nonetheless, these businesses provide diversification away from the plantation and industrial businesses. Financial profile to moderate slightly: Sime Darby has maintained a conservative financial profile, with annual FFO of MYR 4bn, leverage below 2.0,x and gearing of 27% as of FY13. That said, its credit metrics are likely to moderate to as it seeks to increase investment spending across its businesses. We expect annual capex to rise from MYR 3.3bn in FY12-FY13; budgeted capex for FY14 is MYR 6.0bn, including opportunistic investments. We think Sime Darby has enough headroom in its rating category even if it spends the entire budgeted sum. While it may post negative FCF, leverage will rise only moderately to c.2.3x in FY14. Government linkage: We think Sime Darbys government linkage is low, as the government (or Khazanah) does not own a direct stake in the company. We would therefore expect explicit government support to be limited. However, it has had transactions with government-linked companies in the past. PNB-owned companies Guthrie and Golden Hope were merged with Sime Darby in 2007. Petronas bought Sime Darbys energy engineering and contracting businesses in 2012 (Sime Darby had recorded a loss of MYR 1.7bn in FY10 due to cost overruns in energy contracts).
HG CORPORATES
Company profile
Sime Darby Bhd. is a Malaysiabased conglomerate with operations in over 20 countries. Its five core divisions are plantations, industrials, motors, property, and energy and utilities. Sime Darbys plantation segment (planted area of 525,325ha) has operations in Malaysia, Indonesia and Liberia, and its industrial business is focused on supplying heavy equipment to the coal-mining and construction sector in Australasia and China. Sime Darby is also involved in the assembly, distribution and dealership of highend cars in China, Malaysia, Singapore and Hong Kong, and in property development projects in Malaysia. It is 52.3% owned by government-linked Permodalan Nasional Bhd. (PNB) and 11.9% by the Employees Provident Fund.
368
Asia Credit Compendium 2014 Sime Darby Bhd. (A3/Sta; A/Sta; A/Sta)
Summary financials
FY09 Income statement (MYR mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (MYR mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (MYR mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (35.4) 11.8 10.4 20.3 1.5 0.5 (1.1) 14.3 14.7 13.0 11.6 26.4 1.8 0.6 20.9 14.9 49.7 15.1 17.3 22.2 1.1 0.2 60.2 19.6 12.4 14.7 17.2 26.7 1.4 0.7 27.9 18.2 (28.2) 10.7 10.1 26.8 2.0 1.1 20.4 11.4 0 FY10 FY11 FY12 FY13 30,000 25,000 20,000 15,000 10,000 5,000 Plantation Industrial 586 (2,194) (1,608) (2,366) 2,776 (2,524) 252 (1,404) 2,977 (1,855) 1,122 (727) 2,187 (3,667) (1,480) (1,998) 3,121 (3,106) 15 (2,027) 3,638 35,440 5,607 1,970 22,006 5,033 37,578 7,590 2,556 21,131 5,528 42,866 7,062 1,535 24,818 5,106 48,151 9,803 4,698 26,890 4,654 48,458 10,250 5,596 27,987 31,014 3,672 (256) 3,072 2,280 32,506 4,212 (284) 1,760 727 41,859 6,305 (322) 5,451 3,665 48,308 7,088 (390) 5,655 4,150 47,522 5,088 (447) 4,815 3,701 3,000 2,000 1,000 0 FY10 FY11 FY12 FY13 Plantation 6,000 5,000 4,000 FY10 FY11 FY12 FY13
Revenue by business segment (MYR mn)

8,000 7,000 Energy and Utilities Motors Industrial Property
EBITDA by business segment (MYR mn)

50,000 45,000 40,000 35,000 Motors Energy and Utilities
HG CORPORATES
Property
Plantations Cost of production and ASP (MYR/t)

3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY09 FY10 FY11 FY12 FY13
Debt maturity profile, Jun-13 (MYR mn)

4,500 4,000
Average CPO selling prices
3,500 3,000 2,500 2,000
Cost of production
1,500 1,000 500 0 <1Y 1-2Y 2-5Y 5Y+
369
Asia Credit Compendium 2014 Singapore PowerAssets Ltd. (Aa3/Pos; AA-/Sta; A+/RWP)

SPPA benefits from a monopoly position in electricity T&D services in Singapore and enjoys a transparent tariff and regulatory framework. It generates stable cash flow and has been FCFpositive since FY10. Moreover, its holdco, SingPower, will receive large cash inflows from the proposed partial divestment of its Australian assets, which in turn will give the holdco flexibility to cut SPPAs dividends (if needed). However, the planned increase in SPPAs capex is likely to affect FCF and gradually increase leverage. We believe SPPAs overall credit profile will continue to be underpinned by its strategic importance and by Temaseks 100% (indirect) shareholding. We maintain our Stable credit outlook on SPPA.

Secure business position: SPPAs monopoly position in T&D services in Singapore underpins its stable business profile. Singapores electricity market is mature and has a transparent regulatory framework. SPPA derives over 90% of its revenue from the regulated T&D business. The current tariff accord, applicable over 2003-18, grants SPPA a 6.29% rate of return on its regulated asset base (c.SGD 7.5bn). While SPPA absorbs revenue deviations within a 2% variance from its forecast transmission volume, its tariffs are reset if the variance is wider. While the rate of return set for 2013-18 is slightly lower than the rate for 2008-12, the transparent tariff mechanism offers good visibility on SPPAs cash flow over the medium term. Moreover, the government is required to provide 25 years notice to terminate SPPAs transmission licence; this further strengthens SPPAs monopoly position and long-term cash-flow visibility. Dividend payments to the holdco: SingPower partly funded its AUD 8.4bn Alinta acquisition in 2007 through the aggressive upstreaming of dividends and intercompany loans from SPPA. In FY08-FY09, SPPA paid SGD 1.25bn as dividends and on-lent SGD 1.3bn to SingPower. This caused SPPAs leverage to increase to 6.4x in FY09 from 4.8x in FY07. That said, SPPA has lowered dividend payouts since FY10 (average of SGD 195mn), and its capital structure has been broadly steady. Moreover, SingPower is looking to partially divest its Australian assets SP AusNet (SGD 949mn) and SPI Australia Assets (amount undisclosed). The divestment will lead to cash inflow at the holdco level, which in turn will give the holdco flexibility to cut SPPAs dividends, to support SPPAs capex. Credit profile tied to SingPowers: All SingPowers subsidiaries raise debt on a non-recourse basis. However, SingPower can move funds across its group companies; for instance, it increased SPPAs dividend payouts in 2008. There are also significant operational linkages between the two SPPAs staff and operational requirements are managed by SP PowerGrid Ltd., a subsidiary of SingPower. Another subsidiary, SP Services, is SPPAs agent for the collection of transmission tariffs from non-contestable electricity customers. As a result, SPPAs rating is constrained by SingPowers weaker credit profile. Capex to increase: While annual capex has remained stable at c.SGD 500mn in recent years, SPPA expects a substantial pick-up in investment over 2013-17. SPPA plans to expand its local T&D network and is involved in the construction of two new cable tunnel projects at a cost of USD 2bn. We expect SPPA to undertake capex of SGD 900mn in FY14 and SGD 1.5bn in FY15. Moderate financial profile: SPPA has maintained a steady financial profile, with secure revenue and little variance in margins due to regulated tariffs. It generates strong annual cash flow of c.SGD 750mn and has been FCF-positive since FY10. However, FCF is moderating due to increased capex requirements. Expected CFO of c.SGD 1.5bn over FY14-15 is inadequate to cover capex of USD 2.4bn and dividend payouts of c.USD 400mn. SPPA is likely to turn FCF-negative, and leverage (currently: 5.9x) will likely rise further. That said, any equity injection or shareholder loan from SingPower, following its proposed divestment of Australian assets, would help its credit metrics positively. Government link provides support: We believe SPPA is strategically important to Singapores economy, given its ownership of electricity assets. We therefore believe that support from Temasek would be forthcoming if SPPA faced major financial difficulties. Although Temasek sold its stake in three state-owned powergeneration companies as part of power-sector reforms in 2008, it has no immediate plans to dilute its ownership of SingPower (and SPPA). Also, SingPower received a SGD 1.5bn equity injection from Temasek at end-2009, which shows strong parental support.
370
HG CORPORATES
Company profile
Singapore PowerAssets Ltd. (SPPA) is the sole owner of Singapores electricity T&D assets, and the sole electricity transmission licensee. The company transmits electricity generated by third parties to over 1.3mn customers in Singapore using its 21,000km of underground cable. The technical performance of SPPAs network (as measured by reliability indices such as the SAIDI and the SAIFI) generally exceeds that of its comparable peers in Hong Kong, the UK and the US. SPPA was formed in October 2003 to take over the business of the former SP PowerGrid Ltd. It is a wholly owned subsidiary of Singapore Power Ltd. (SingPower), which is 100% owned by Temasek Holdings Ltd.
Asia Credit Compendium 2014 Singapore PowerAssets Ltd. (Aa3/Pos; AA-/Sta; A+/RWP)
Summary financials
FY09 Income statement (SGD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (SGD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (SGD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (8.0) 75.6 7.2 69.5 6.4 6.3 (1.0) 4.8 4.1 76.1 7.0 67.8 5.9 5.9 10.3 4.6 0.4 76.7 7.2 64.0 5.3 5.3 12.2 4.7 (2.5) 75.4 6.7 63.0 5.5 5.3 9.0 4.7 0.4 78.3 6.4 62.4 5.9 5.1 12.2 4.6 0.2 0.1 0.0 2009 2010 2011 2012 2013 SAIFI (RHS) 0.4 0.020 0.3 0.015 0.010 0.005 0.000 738 (758) (20) (750) 748 (528) 220 (180) 918 (416) 502 (189) 732 (399) 333 (202) 731 (540) 191 (212) 12 10,443 5,861 5,849 2,577 40 10,745 5,674 5,634 2,696 22 10,727 5,121 5,099 2,881 183 10,816 5,165 4,982 3,034 797 11,666 5,603 4,806 3,372 6.2 6.0 FY09 FY10 FY11 FY12 FY13 6.4 Operating ROCE 76.0 75.5 75.0 1,220 922 (194) 423 401 1,261 960 (208) 401 327 1,257 963 (204) 464 372 1,246 939 (201) 390 327 1,204 943 (204) 383 312 6.8 6.6 77.0 76.5 FY10 FY11 FY12 FY13
Profitability metrics (%)

7.4 7.2 7.0 EBITDA margin (RHS) 78.5 78.0 77.5
Operating efficiency (minutes LHS, interruptions RHS)

0.8 0.7 0.6 0.5 SAIDI 0.045 0.040 0.035 0.030
HG CORPORATES
0.025
Capital expenditure (SGD mn)

1,600 1,400 1,200 1,000 800
Leverage and coverage metrics (x)

7 6 5 4 3 Debt/EBITDA EBITDA/ interest
600 400 200 0 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
Note: Fiscal year ends 31 March; Source: Company reports, Standard Chartered Research
2 1 0 FY09 FY10 FY11 FY12 FY13
371
Asia Credit Compendium 2014 Singapore Telecommunications Ltd. (Aa3/Sta; A+/Sta; A+/Sta)

SingTels well-entrenched market positions in Singapore and Australia help generate strong FCF, while minority investments in a number of regional operators create substantial dividend flows. That said, its cash flow has moderated recently due to lower earnings at Optus, ongoing investment in the information and communications technology (ICT) space, and high dividend payouts. We expect SingTel to post FFO of SGD 5.5bn in FY14, versus capex and investment spending of 3.2bn and a dividend outflow of SGD 2.7bn; this will keep leverage moderately high in the medium term. That said, Temaseks majority shareholding provides support for SingTels high-investment-grade ratings. We maintain our Stable credit outlook on the company.

Resilient operations in Singapore: In Singapore, SingTel is the leading provider of wireless (47% share), fixed-line (84%) and broadband (45%) services, while its mio-TV is the second-largest pay-TV operator, with a 43% share. It also provides network integration and infrastructure services, which accounted for 23% of its H1FY14 Singapore revenue. SingTels investments in the 4G LTE network and 3G expansion have led to strong growth in its customer base and prepaid ARPUs as customers have upgraded to higher-tiered subscription plans and increased data usage. This led to a 5% rise in EBITDA from its Singapore operations in H1-FY13. On the regulatory front, SingTel is seeking approval to delay the sale of its 100% stake in NetLink Trust (holds passive fixed-line infrastructure assets used by national fibre network operator OpenNet) to below 25% to April 2018 from April 2014. The sale will lead to a large one-time gain but may reduce market share and margins on account of increased competition. SingTel has also acquired a 70% stake in OpenNet though NetLink Trust to gain cost synergies. Increased competition at Optus: Optus is the second-largest telecom player in Australia, with market shares of 31% in wireless, 20% in fixed line and 17% in broadband. The countrys competitive landscape is evolving due to regulatory reforms, and cuts in mobile termination rates have negatively affected Optus, as it was a net receiver of the fees. Moreover, its competitors have gained wireless market share due to their investment in 4G services. As a result, Optus mobile revenue fell 15% y/y in Q2-FY14, a seventh consecutive quarterly decline. Although its cost-saving initiatives led to a modest rise of 3% in EBITDA, Optus contribution to SingTel was lower due to the weaker Australian dollar. On the other hand, the migration (still in the early stages) of hybrid fibre-coaxial (HFC) customers to the national broadband network will give Optus a chance to increase its market share due to wider geographical coverage. Separately, Optus has delayed the sale of its satellite business, which would have led to a one-time gain of c.USD 2bn. Optus is due to pay c.AUD 650mn for the 4G spectrum in FY15. Steady dividends from associates: SingTels associates (except PBTL) enjoy top-two positions in their home markets. SingTel received SGD 993mn in dividends from associates in FY13, led by Telkomsel (SGD 485mn), AIS (SGD 281mn) and Globe Telecom (SGD 123mn); these accounted for 16% of group EBITDA. The contribution from associates is likely to increase further, as Telkomsel has increased its dividends to SGD 589mn in FY14. W hile associates leverage is moderate and they operate under a non-recourse funding structure, SingTels large investments mean that it might provide support if they faced financial problems. SingTel recently increased its stake in Bharti Airtel to 32% for SGD 302mn. Increasing investment appetite: SingTel has budgeted SGD 2bn for acquisitions in the ICT space in the next three years. Recent acquisitions include Amobee, HungryGoWhere, AdJitsu, and Gradient X. While these acquisitions will help it diversify away from the voice market and capitalise on its 3G/4G data offerings, they are likely to be margin-dilutive and unlikely to contribute significantly to earnings in the next 12-18 months. Moreover, with a number of SingTe ls markets reaching high penetration levels, it may look for growth opportunities elsewhere (it unsuccessfully bid for a licence in Myanmar in 2013). Separately, it has disposed of its stake in Warid, and Moodys expects it to dispose of its stake in PBTL . Leverage to remain moderate: While SingTel generates strong annual FFO of c.SGD 5.5bn, its leverage its likely to moderate, given budgeted annual capex of SGD 2.5bn, investment spending of SGD 2bn over three years and annual dividend payouts of SGD 2.5bn. Furthermore, SingTel has increased its dividend payout policy to 60-75% from 55-70%, and is likely to consider paying a special dividend if it disposes of NetLink Trust. That said, its leverage remains comfortable in the 1.2x-1.5x range, and we do not expect ratings pressure.
372
HG CORPORATES
Company profile
Singapore Telecommunications Ltd. (SingTel) is Asias leading integrated telecom group, providing fixed-line, wireless, data, internet, pay-TV and technology services. The group has 464mn wireless subscribers (165mn on a proportional-equity basis) across 25 countries in Asia, Australia and Africa. The group has wholly owned subsidiaries in Singapore and Australia (Optus). It also has minority stakes in regional players, including Bharti Airtel in India (32% stake), Telkomsel in Indonesia (35%), AIS in Thailand (23%), Globe Telecom in the Philippines (47%) and PBTL in Bangladesh (45%). As of September 2013, SingTel was 51.9% owned by Temasek Holdings Ltd.
Asia Credit Compendium 2014 Singapore Telecommunications Ltd. (Aa3/Sta; A+/Sta; A+/Sta)
Summary financials
FY10 Income statement (SGD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (SGD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (SGD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios 5,003 (2,092) 2,911 (2,085) 5,676 (2,719) 2,957 (2,358) 5,296 (3,363) 1,933 (4,107) 5,474 (2,987) 2,487 (2,518) 2,612 (1,645) 967 (1,594) 1,200 1,000 1,614 37,952 8,120 6,507 23,516 2,738 39,282 8,872 6,134 24,350 1,346 40,418 9,325 7,979 23,448 911 39,984 8,531 7,620 23,989 861 38,647 8,628 7,767 22,947 16,871 5,707 (373) 4,501 3,907 18,071 6,183 (398) 4,446 3,825 18,825 6,036 (423) 4,314 3,989 18,183 6,076 (330) 4,131 3,508 8,456 3,558 (156) 2,266 1,881 FY11 FY12 FY13 H1-FY14 20 18 16 14 12 10 8 6 4 2 0 FY10 FY11 FY12 FY13 H1-FY14
Revenue breakdown (SGD bn)

Mobile communications Data and Internet IT and engineering services Pay television National telephone International telephone Sale of equipment Miscellaneous
Cash dividend breakdown (SGD mn)

Telkomsel 1,400 AIS Bharti Globe SingPost & Southern Cross
HG CORPORATES
5.5 33.8 13.1 25.2 1.4 1.1 35.9 15.3
8.4 34.2 13.6 26.6 1.4 1.0 37.2 15.5
(2.4) 32.1 12.6 28.2 1.5 1.3 12.6 14.3
0.7 33.4 12.3 26.0 1.4 1.2 35.7 18.4
6.4 42.1 9.6 27.3 1.4 1.2 33.1 20.4
800 600 400 200 0 FY10 FY11 FY12 FY13 H1-FY14
Shares in individual markets (Sep-13)

Subsidiary Stake Market share Market position
Number of mobile customers (mn)

Telkomsel 600 500 400 AIS Bharti Globe Warid PBTL Optus SingTel
Telkomsel (Indonesia)
35%
43.6%
AIS (Thailand)
23%
43.3%
1 300
Globe (Philippines)
47%
33.5%
2 200
Bharti Airtel (India)
32%
22.2%
100 0 FY09 FY10 FY11 FY12 FY13 H1-FY14
PBTL (Bangladesh)
45%
1.2%
373
Asia Credit Compendium 2014 Sino Land Co. Ltd. (NR; NR; NR)

We have a Stable outlook on Sino Land, underpinned by its strong credit profile and ample liquidity. Property sales and investment income in Hong Kong are the main drivers of revenue and EBITDA. Sino Land expects its investment property, hotels and property management business to generate more than HKD 4bn of recurring income annually. The group has HKD 10.2bn of total debt, of which HKD 4.6bn is short-term. With a cash balance of HKD 11.6bn, Sino Land has a net cash position. Credit metrics are healthy, with EBITDA/interest at 9.9x in FY13 and total debt/EBITDA of 3.8x. Total debt/capital fell to 8.8% as of June 2013 from 9.2% at end-2012.

Revenue growth driven by property sales: Sino Lands revenue fell 7% y/y to HKD 7.8bn in FY13. While revenue from property sales fell 22% y/y to HKD 3.4bn due to slower revenue recognition, revenue from other major businesses rose 610% y/y. Rental revenue (including hotels) rose 8% y/y to HKD 3.4bn on higher rentals and occupancy rates. Rental income contributed 44% of total FY13 revenue, while property sales contributed 43%. Projects that contributed include The Coronation at West Kowloon; Providence Bay and Providence Peak, both in Pak Shek Kok; Park Summit in Mongkok; and Le Sommet in Xiamen. EBITDA fell 29% y/y to HKD 2.6bn given lower revenue. However, underlying profit excluding revaluation gains rose to HKD 6.6bn from HKD 5.3bn in FY12. Performance of investment properties remained healthy: Excluding hotels, the occupancy rate of its Hong Kong investment properties was 96%, higher than the 94% recorded in FY12. Supported by a stable labour market and tourism growth, Sino Lands retail investment portfolio in Hong Kong enjoyed good rental growth, with occupancy rising 100bps to 97%. Occupancy rates at its Hong Kong office and industrial portfolios were 95% and 97%, respectively, in FY13 (FY12: 96%/95%). Sino Land also has investment properties in Singapore. As of 30 June 2013, it had approximately 11.3mn sq ft of attributable GFA of investment property and hotels in Hong Kong, China and Singapore. Of this, commercial developments (retail and office) accounted for 64.7%, industrial developments 14.4%, car parks 13.0%, hotels 6.3%, and residential developments 1.6%. Diversified land bank: As of 30 June 2013, the group had a land bank of approximately 40.1mn sq ft of attributable GFA in Hong Kong, China and Singapore. Of this, 64.1% is residential, 23.8% commercial, 5.3% industrial, 3.7% car parks and 3.1% hotels. Properties under development accounted for 27.8mn sq ft, investment property and hotels for 11.3mn sq ft, and properties held for sale for 1.0mn sq ft. Sino Land will remain selective in replenishing its land bank. China land bank: In FY13, Sino Land launched over 540 residential units at Dynasty Park in Zhangzhou and 212 units in Central Park in Xiamen for sale. More than 89% and 94%, respectively, of these units have been sold. The groups China land bank totalled 25.3mn sq ft as of FY13. Approximately 87% of the companys China land bank is for residential development, and the remainder is for commercial and hotel development. Sino Land has six projects under development in China in Chengdu, Chongqing, Zhangzhou and Xiamen. It expects to launch the first phases of The Palazzo in Chengdu and The Coronation in Chongqing for sale in the coming 12 months. Despite China accounting for the bulk of its land bank, contributions from China remained relatively low. Strong credit profile, net cash position: Total debt rose 5% in FY13 to HKD 10.2bn. The cash balance rose to HKD 11.6bn as of June 2013 from HKD 5.0bn a year earlier. We believe part of the cash will be used to repay upcoming expiring debt; short-term debt stood at HKD 4.6bn at end-FY13 (FY12: HKD 1.9bn). EBITDA/interest coverage fell to 9.9x in FY13 from 17.1x in FY12 due to a lower top line. Total debt/LTM EBITDA rose to 3.8x from 2.6x, and total debt/capital fell to 8.8% from 9.2%.
HG CORPORATES
Company profile
Sino Land Co. Ltd. (Sino Land) is part of the Sino Group of companies, whose principal business activities are the development of properties for sale, property rental, hotel operations, and property management services. Sino Group encompasses private holding companies owned by the Ng family in Singapore, along with three HKSE-listed entities: Sino Land Co. Ltd., Tsim Sha Tsui Properties Ltd. and Sino Hotels (Holdings) Ltd. Sino Group also has a significant presence in Singapore through the privately held Far East Organization, the groups sister company.
374
Asia Credit Compendium 2014 Sino Land Co. Ltd. (NR; NR; NR)
Summary financials
FY09 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) 57.7 44.3 23.0 4.2 2.4 8.7 (18.2) 45.6 22.4 5.4 4.1 16.5 (25.3) 44.1 14.5 5.6 2.5 10.9 42.8 44.6 9.2 2.6 1.2 17.1 (29.1) 33.9 8.8 3.8 (0.5) 9.9 4,716 (187) 4,529 (15) (258) (347) (604) (32) 712 (463) 249 (87) 3,246 (269) 2,977 (45) 1,412 (338) 1,074 (34) 7,798 89,174 18,044 10,245 60,298 4,495 7,920 5,042 11,620 9,693 4,294 (493) 4,499 3,731 7,698 3,511 (213) 7,185 6,094 5,944 2,622 (241) 12,541 10,544 8,396 3,743 (219) 11,430 10,672 7,819 2,654 (267) 12,503 11,687 FY10 FY11 FY12 FY13

11 Property Sales Property Mgmt/Other Services Investment in Securities Property Rental Hotel Operations Financing
95,650 109,928 114,272 129,263 18,928 14,434 65,694 14,566 6,646 85,780 9,671 4,628 10,193 (1,427)
-1 FY10 FY11 FY12 FY13
95,608 105,985
Land bank by use, Jun-13 (40.1mn sq ft GFA)

27.8mn sq ft - properties under development 11.3mn sq ft - held for investment/hotels 1.0mn sq ft - held for sale
Hotels
3%
Car parks
4%
HG CORPORATES
Industrial
5%
Commercial
24%
Residential
64%
Investment portfolio by use, Jun-13 (11.3mn sq ft GFA)
Debt maturity, Jun-13* (HKD bn)

5
Residential
2% 4
Hotels
6% 3
Car parks
13% 2
Industrial
14% 1
Commercial
65%
0 < 1Y 1-2Y 2-3Y 3-4Y 4-5Y >5Y
Note: Financial year ending 30 June; *estimate; Source: Company reports, Standard Chartered Research
375
Asia Credit Compendium 2014 Sinochem Hong Kong (Group) Company Ltd. (Baa1/Sta; BBB/CWP; BBB+/Sta)

Sinochem HKs earnings have benefited from increased vertical integration and diversification, although its investment appetite could pose a risk. Sinochem HK is strategically important to China's agriculture and food security due to its role in potash imports and stockpiling reserves. Its niche position in the property sector helps to generate strong cash flow and anchors its earnings profile. While its large Peregrino acquisition affected credit metrics, the company appears to have reined in its investment plans, and leverage is now at 4.7x versus 8.4x in 2011. That said, discretionary cash flow will continue to be negative in 2014-15, and debt to capital will be around 45%. We maintain our Stable credit outlook on Sinochem HK.

Important position in fertiliser: Sinochem HK is China's largest importer and distributor of fertiliser, with a production capacity of 10mt across the four major fertiliser products. It has over 2,100 outlets and over 500 warehouses that cover 90% of Chinas farmland. Given Chinas lack of natural potassium deposits and shrinking arable land area, a reliable supply of imported potash is indispensable to the countrys food security. Sinochem HK is dominant in potash imports and production and has well-established relationships with some of the worlds major potash producers (Potash Corp. has a 22.3% stake in and a strategic partnership with Sinofert). However, the company faces regulatory risks due to government control of potash fertiliser prices. It also has a mandate to stockpile off-season fertiliser reserves, which exposes it to inventory risks (and led to an EBIT loss of HKD 2.1bn in 2009). That said, it has now built in better price-adjustment clauses in its contracts and was able to avoid inventory losses despite high potash price volatility in 2012. In H1-2013, Sinoferts sales volume rose 1% y/y, although gross margin declined by 107bps to 5.5% due to lower prices. Business transition in oil and gas: Sinochem HK entered the E&P sector in 2002, although the scale of its business (proven reserves of 238mmboe and production of 23kboed in 2012) is much smaller than the big three Chinese oil and gas companies. In 2011, it acquired a 40% interest in Brazil's Peregrino oilfield for USD 3.1bn, and the field will account for c.50% of total production in 2013. In H12013, the oil and gas segment posted EBIT of HKD 1.55bn and contributed 19.4% to consolidated EBIT. Sinochem HK also has a strong position in crude oil trading, which is conducted mostly on a back-to-back basis. Despite high price volatility, the company has enjoyed gross margins of 40-60bps (typical for oil trading). Real estate is a large contributor to earnings: Franshion enjoys a niche position and has a large portfolio of investment properties and hotels, which generate a high proportion of rental income, compared with other Chinese developers. However, its credit profile is moderated by large investment plans (land acquisitions of CNY 6.4bn in 2012) and modest cash-flow-protection metrics. The companys EBIT level increased 70.5% y/y in H1-2013 due to a large increase in development revenue, while debt/capital improved marginally to 43.7%. Financial metrics have improved: Sinochem HKs EBITDA increased 55.8% y/y in H1-2013 on the back of strong performance in property and steady earnings in oil and gas. Debt-funded E&P acquisitions, land-premium payments for property development, and working-capital outlays in the trading business led to a significant increase in leverage in 2009-11. However, the company has imposed stricter controls on capital spending since then. Hence, debt increased only by HKD 9.1bn to HKD 72.4bn in H1-2013, and leverage is at 4.7x (versus 8.4x in 2011). Given that the company is still in a high-investment phase (capex expected at c.HKD 10bn in 2014), it will likely generate negative discretionary cash flow in 2014-15. Hence, we do not see a major improvement in its financial metrics, and debt to capital will likely remain at c.45%. Its liquidity position is adequate, and refinancing risk is low due to its quasi-sovereign status. Strategic importance and potential support: Sinochem HK is strategically important due to its dominant position in fertilisers (potash imports and off-season reserves) and its growing role in the energy sector (it accounts f or 10% of Chinas crude oil imports). It has received capital injections (HKD 1.2bn in 2012), intercompany loans and guarantees from Sinochem Group. The sovereign linkage and expected government support led to rating uplifts from Moodys (four notches), S&P (three notches) and Fitch (two notches).
376
HG CORPORATES
Company profile
Sinochem Hong Kong (Group) Co. Ltd. (Sinochem HK) is an intermediate holding company of the Sinochem Group, which is 100% owned and supervised by SASAC. It is the group's primary overseas subsidiary and its key platform for conducting international trade, investment and offshore funding. It is 98% owned by Sinochem Group and accounted for 70% of the groups revenue and 60% of total assets in 2012. Sinochem HK is engaged in three primary businesses: fertiliser (13% of revenue, 6% of EBIT in H12013), overseas oil and gas exploration (78%, 19%), and real estate (6%, 61%). Sinochem HK owns two listed companies: Sinofert Holdings Ltd. (52.7% stake) and Franshion Properties China Ltd. (62.9% stake).
Asia Credit Compendium 2014 Sinochem Hong Kong (Group) Company Ltd. (Baa1/Sta; BBB/CWP; BBB+/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (64.5) 1.0 1.2 42.1 14.6 12.1 4.2 2.1 145.4 1.9 4.1 43.4 7.6 4.5 9.0 4.2 35.0 1.8 4.5 47.3 8.4 5.9 2.4 3.0 65.7 3.1 6.7 45.6 5.3 4.0 7.6 4.6 55.8 4.2 7.7 44.8 4.7 3.7 NA 5.9 12 10 8 6 4 2 0 2009 2010 2011 2012 H1-2013 Development (5,823) (9,304) (15,127) (404) 10,724 10,352 9,250 (4,840) (2,325) (7,165) NA 5,710 17,220 19,000 17,039 15,386 4 0 2 0 2009 2010 2011 2012 H1-2013 -2 217,593 293,686 412,671 402,255 192,521 2,268 (1,064) 3,324 2,929 5,566 (1,332) 7,732 5,224 7,516 (2,513) 6,677 2,856 12,455 (2,681) 10,667 4,422 8,180 (1,403) 6,123 2,425 2010 2011 2012 H1-13
Sinoferts volume and margin (mt LHS, % RHS)

18 16 8 14 12 10 4 8 6 2 Gross margin (RHS) 6 Volume 10
119,441 154,742 203,841 220,724 237,411 33,207 27,497 45,744 42,109 24,889 54,863 63,369 44,369 70,665 66,560 49,521 79,307 72,437 57,051 89,236
Franshions revenue breakdown (HKD bn)

20 18 16 14 Others Hotel Leasing
(6,096) (29,442) (12,909) 4,628 (19,090) (89) (2,882) (3,658) (2,308)
HG CORPORATES
Revenue breakdown by business (HKD bn)

450 Others 400 350 300 250 200 150 100 50 0 2009 2010 2011 2012 H1-2013
EBIT breakdown by business (HKD bn)

16 Real estate 14 12 10 Others
Fertiliser
Oil and gas
8 6 4 2 0 -2 -4 2009 2010 2011
Real estate
Fertiliser Oil and gas
2012
H1-2013
377
Asia Credit Compendium 2014 SK Innovation Co. Ltd. (Baa2/Sta; BBB/Sta; BBB/Sta)

We maintain our Stable credit outlook on SKI. The company has a strong operating profile in refining, although the segments earnings will be under pressure due to structural overcapacity and KRW strength. The petrochemical segment will likely post earnings growth in 2014 on higher volumes, while the E&P segment is now an important profit contributor and helps to anchor SKIs overall cash flow. The company has improved its balance-sheet metrics in recent years and will likely be able to cover investment spending with CFO in 2013-14. We expect EBITDA of KRW 2.6-2.8tn in 2014, which would keep leverage around 3x and help SKI maintain its credit ratings.

Strong operating profile, but earnings volatility in refining: SKI benefits from large economies of scale its refining capacity is the fifth largest in Asia, and its Ulsan facility is the worlds third-largest single-site refinery. Upgrading facilities like the residue fluid catalytic cracking unit and the heavy oil upgrading unit enhances the refinerys complexity and profitability. SKI has more than 4,2 00 gas stations and a domestic market share of c.33% in refined product sales. That said, the refining segment is highly cyclical due to volatility in crude oil prices. In 2012, refining EBIT declined 77% to KRW 279bn on account of inventory losses. While earnings have improved somewhat in 2013 (9M-2013 EBIT was KRW 436bn), we expect GRMs to remain under pressure in 2013-14 due to rising capacity in China (SKI exports c.45% of its production) and KRW appreciation. Petrochemicals and lubricants: In petrochemicals, the integrated nature of operations and the diversified nature of SKIs product portfolio olefins, polymers and aromatics provide earnings stability. In 9M-2013, the segment posted EBIT of KRW 686bn, versus KRW 752bn in full year 2012, and we expect steady earnings in 2014. SKI is investing in additional paraxylene facilities in Ulsan and Incheon, with a capacity of 2.3mtpa. In the lubricant segment, SKIs extensive marketing network gives it a competitive advantage. However, margins are under pressure due to weak market conditions (9M-2013 EBIT was KRW 226bn, versus KRW 355bn in full year 2012). That said, the new lube base oil facility (with 13.3kbd capacity) coming onstream in 2014 will help improve earnings. E&P is now an important contributor to earnings: As part of its upstream integration strategy, SK Energy has acquired stakes in 24 E&P blocks in 16 countries. It had a 1P reserve base of 646mmboe as of December 2012, and daily production increased steadily to 72kboed in Q3-2013 from 20kboed in 2007. E&P is now an important component of earnings (EBIT contribution was 17% in 9M-2013), and given the further ramp-up in production levels, cash flow from this segment will likely grow in 2014. Earnings profile: SKIs earnings were under pressure in 2012 on account of lower margins in refining and lubricants. In 9M-2013, it achieved consolidated EBIT of KRW 1.47tn, similar to 9M-2012. While refining margins will likely remain under pressure, we believe volume growth in the petrochemical and E&P businesses will lead to KRW 2.6-2.8tn of EBITDA in 2014. Credit metrics have improved: SKIs balance sheet metrics have improved since 2009 (debt to capital at 35.3% in H1-2013, versus 53.4% in 2009), owing to the diversification of cash flow, scaling back of capex and lowering of debt. In 2012, it reduced debt by around 10% by using proceeds from the sale of its Brazilian E&P assets. While SKI plans annual capex of c.KRW 2tn in 2013-14, this will likely be adjusted to be broadly in line with CFO. The compa nys large cash holdings of KRW 3.6tn will help it fund any potential E&P acquisitions without adversely affecting its balance sheet strength. We expect leverage of around 3x in 2014, which should help the company maintain its credit ratings. Other considerations: SKI has a leading position in Koreas refining and marketing industry and is important for the domestic economy since it is among the few fuel suppliers in the country. In 2003, SKI received an emergency credit line from the government (through Korea Oil) after one of SK Groups affiliate companies faced financial stress. Moodys accords SKI a one -notch rating uplift, although S&P and Fitch do not provide it any uplift. Separately, SKI is not a pure holding company, since it directly owns the E&P assets that generate steady cash flow. Also, the holding companys debt is lower than its cash holdings, and we do not see any structural subordination risks for its USD bondholders.
HG CORPORATES
Company profile
SK Innovation Co. Ltd. (SKI) is a holding company for SK Groups energy businesses. Its 100%-owned subsidiaries are involved in refining and marketing (SK Energy Co. Ltd.), petrochemicals (SK Global Chemical Co. Ltd.) and lubricants (SK Lubricants Co. Ltd.), while the oil and gas E&P business is undertaken at the holding company level. SKI is the largest oil refining and marketing company in Korea at present, with a 1,115kbd capacity (40% share). Its petrochemical operations include 2.2mtpa of olefin and 4.6mtpa of aromatics capacity. Its lubricant business has a lube base oil capacity of 47.5kbd, while the E&P segment has a reserves base of 646mmboe. SKI is 33.4% held by SK Holdings Co. Ltd., which in turn is 31.8% held by the SK Group.
378
Asia Credit Compendium 2014 SK Innovation Co. Ltd. (Baa2/Sta; BBB/Sta; BBB/Sta)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) FFO/debt (%) EBITDA/interest (x) (26.2) 4.5 6.7 53.4 4.7 3.3 5.4 3.7 47.3 5.4 11.4 48.3 3.7 2.7 15.9 6.5 22.6 5.2 12.9 37.4 2.5 1.3 27.2 9.2 (34.8) 3.2 7.1 32.6 3.4 2.2 15.9 6.8 56.0 4.1 8.9 35.3 3.1 1.8 6.6 8.4 1,960 (1,094) 866 (195) 236 (873) (638) (198) 2,597 (1,951) 646 (199) 998 (1,888) (890) (264) 1,462 (1,467) (5) (298) 2,723 24,667 9,299 6,576 8,108 2,949 29,406 10,787 7,838 11,552 4,380 35,027 8,853 4,473 14,832 2,829 33,831 7,910 5,081 16,348 3,635 34,637 8,791 5,156 16,087 43,867 1,975 (538) 887 669 53,722 2,909 (450) 1,502 1,139 68,371 3,565 (388) 4,309 3,169 73,330 2,323 (340) 1,689 1,185 34,961 1,417 (169) 735 510 2010 2011 2012 H1-13
Profitability (KRW bn)

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2009 2010 2011 2012 H1-13 1 EBITDA margin (RHS) 4 Revenue 6
Debt metrics
60 5.0 4.5 50 Debt/EBITDA (RHS) 4.0 Debt/capital 3.5
40
HG CORPORATES
3.0 30 2.5 2.0 20 1.5 1.0 0.5 0 2009 2010 2011 2012 H1-13 0.0
10
Utilisation rates (%)

105 100 95 90 85 Petrochemical
EBIT contribution trend (KRW bn)

3,500 3,000 E&P 2,500 2,000 1,500 Lubricants Petrochemicals
80 75 70 65 60 Q1-11 Refining 1,000 500 0 -500 Q3-11 Q1-12 Q3-12 Q1-13 Q3-13 2009 2010 2011 2012 H1-13 Petroleum
379
Asia Credit Compendium 2014 SK Telecom Co. Ltd. (A3/Sta; A-/Sta; A-/Sta)

SK Telecom has maintained its leading position in the wireless market, with a subscriber share of over 50%. EBITDA margin improved in 2013 due to lower marketing spending and handset subsidies. Investment outlay will remain high, but the companys capex cycle peaked in 2012 and it should generate FCF in 2013-14. While the SK Hynix acquisition increased the companys business risk profile and raised concerns about managements risk tolerance, SK Telecom has undertaken a series of deleveraging initiatives since then to reduce leverage to 1.6x from 2.0x in Q1-FY12. We maintain our Stable credit outlook on SK Telecom and view it as a stable low-single-A credit.

Strong market position: SK Telecom has maintained a leading position in the wireless market, with a subscriber share consistently above 50% since 2002 (50.3% as of September 2013). Its key strengths are network quality, wide coverage and strong brand image. SK Telecoms st ake in SKB enables it to provide bundled products (wireless, fixed-line, broadband and pay-TV). Wireless data has been an important growth driver, and we believe SKBs data capacity will help increase data volumes. While KT Corp. previously had a lead in data, SK Telecom launched its 4G services ahead of this key competitor in July 2011. Also, in June 2013, it became the first wireless player globally to offer LTE-Advanced services (with higher data speeds than 4G). As a result, its proportion of 4G subscribers grew to 45% from 2% at end-2011, and ARPU increased 6.2% y/y to KRW 42,780 in Q3-2013. Separately, SKB had subscriber shares of 29% in broadband and 17% in fixed voice as of June 2013, and it plans to strengthen its footprint by better integrating with SK Telecom. EBITDA margins have stabilised: Given the highly saturated market (penetration rate of 105%), key players have competed fiercely to migrate customers to 4G from 3G services and have provided large handset subsidies. SK Telecoms EBITDA margins therefore declined between 2008 and 2012, as did its competitors. There have been regulatory interventions over excessive handset subsidies since then, and operators have refrained from actively competing for subscriber acquisitions in 2013. As a resul t, SK Telecoms reported EBITDA margin increased to 27.5% in H1-2013 from 25.2% in 2012. However, it is unclear whether pricing discipline will be maintained and the spending cuts will be sustained in the medium term. Capex has peaked: SK Telecom has sought to grow by rapidly adopting new technologies; this has resulted in large ongoing capex requirements. It bid c.KRW 1tn at Koreas first frequency bandwidth auction in 2011 and completed its nationwide 4G network rollout in April 2012. While competition is likely to remain stiff in the next few quarters, we believe annual capex will be around KRW 3tn, lower than the KRW 3.4tn spent in 2012. Diversification moves: In 2009, SK Telecom paid KRW 1.48tn to acquire the leased-line business of SK Networks and invested KRW 0.4tn in a 49% stake in Hana Card. In 2012, it bought a 21% stake in SK Hynix for KRW 3.4tn; this acquisition increased its business risk profile, given the volatility of semiconductor earnings and the lack of synergy with its telecom operations. SK Telecom has emphasised that SK Hynix will be its new growth engine, indicating managements increased risk tolerance. While SK Hynix raised KRW 2.3tn of equity and may not need direct assistance near-term, we believe SK Telecom would be willing to support it in the event of financial stress. Credit metrics should remain steady: SK Telecom has historically maintained a conservative financial profile, with capex funded through internal accruals in 2010 and 2011. However, financial metrics deteriorated in 2012 on the back of the SK Hynix acquisition (75% debt-funded), and leverage rose to 2x in Q1-FY12 from 1.3x in 2011. That said, the company has undertaken a series of deleveraging initiatives to boost its balance-sheet strength, including the sale of non-core assets such as its stake in POSCO and office buildings and the issuance of KRW 400bn of hybrid bonds. As a result, debt declined to KRW 6.95tn in Q3-2013 from KRW 8.06tn in Q1-2012. We expect the company to meet its capex requirements with CFO in 2013-14. Barring an acquisition, leverage will be 1.4-1.6x. SK Telecom has excellent liquidity, with KRW 1.94tn of cash and equivalents (against KRW 1.77tn of short-term debt) as of Q3-2013 and easy access to domestic and international capital markets.
380
HG CORPORATES
Company profile
SK Telecom Co. Ltd. (SK Telecom) is the dominant player in Koreas wireless market, with 27.2mn subscribers and a 50.3% subscriber share as of September 2013. As the first entrant in the wireless market, SK Telecom started operations with the most efficient frequency band (800 MHz) and has built a strong local franchise with a high-ARPU customer base. Its 50.6%-owned subsidiary, SK Broadband (SKB), holds the No. 2 position in all segments of the fixed-line business (fixed voice, fixed broadband and IPTV) and works closely with the parent by offering bundled and quadplay products. In February 2012, SK Telecom acquired a 21.05% stake in Hynix Semiconductor (now named SK Hynix), a leading manufacturer of semiconductor chips. SK Telecom is 25.2% owned by SK Holdings.
Asia Credit Compendium 2014 SK Telecom Co. Ltd. (A3/Sta; A-/Sta; A-/Sta)
Summary financials
2009 Income statement (KRW bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (KRW bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (KRW bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/ EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 2.2 31.7 10.0 35.4 1.5 1.3 51.4 10.5 (1.5) 29.3 12.9 32.7 1.3 1.0 52.2 12.0 (0.9) 28.3 11.9 31.7 1.3 0.7 55.2 15.1 (8.8) 25.2 8.7 34.7 1.7 1.3 44.2 10.0 10.1 27.5 8.5 34.5 1.6 1.2 49.7 11.2 5 10 25,000 15 30,000 2,933 (3,751) (818) (682) 4,103 (3,035) 1,067 (682) 6,115 (3,968) 2,147 (668) 3,883 (6,747) (2,864) (655) 1,344 (1,304) 40 (588) 20 35,000 25 954 23,206 6,773 5,819 12,345 1,627 23,132 6,019 4,392 12,408 2,725 24,366 5,916 3,191 12,733 1,495 25,596 6,842 5,347 12,855 1,825 25,436 7,045 5,220 13,376 -500 -1,000 2009 2010 2011 2012 H1-2013 14,555 4,611 (440) 1,400 1,247 15,489 4,540 (379) 2,326 1,842 15,926 4,500 (297) 2,241 1,613 16,300 4,106 (412) 1,551 1,152 8,277 2,279 (172) 1,029 821 500 0 Others Fixed-line 2010 2011 2012 H1-13
EBIT breakdown (KRW bn)

3,000 2,500 2,000 1,500 1,000
Wireless
Wireless subscribers and ARPU (mn LHS, KRW RHS)

30 ARPU (RHS) Subscribers 40,000 45,000
HG CORPORATES
0 2009 2010 2011 2012 9M-2013
20,000
Fixed-line and broadband subscribers (mn)

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2009 2010 2011 2012
Capital expenditure (KRW bn)

4,000 3,500
Broadband 3,000 Fixed-line 2,500 2,000 1,500 1,000 500 0 2010 2011 2012 WCDMA Others WiBro LTE
381
Asia Credit Compendium 2014 State Grid Corporation of China (Aa3/Sta; AA-/Sta; A+/Sta)

SGCC benefits from a virtual monopoly position in electricity T&D services in China and has generated strong cash flow despite low retail tariffs. It has maintained EBITDA margins of 13-15% since 2008 due to frequent tariff hikes. As a result, its leverage improved to 2.3x in 2012 from 3.9x in 2009, and RCF/debt increased to 39% from 23%. While SGCCs large annual capex of CNY 350bn and potential M&A investments of c.CNY 75bn from 2013 to 2015 will likely lead to negative FCF, we expect leverage to remain manageable in the 2.5x-3.0x range. SGCCs credit profile is also underpinned by its strategic importance to China and its 100% holding by SASAC. We have a Stable credit outlook on SGCC.

Strong business profile: SGCCs leading position in T&D services in China underpins its stable business profile. Its network covers 26 provinces, including Beijing and Shanghai (88% of Chinas territory) and serves a population of over 1.1bn. The company has generated strong cash flow despite low retail tariffs. SGCCs operational metrics are strong. Its grids have not faced a major blackout in the past 30 years, and it has maintained strong supply reliability of 99.94% for urban and 99.74% for rural power supply. The company has also acquired strong capabilities in ultra-high-voltage transmission and smart grid technology. Stable tariff regime: SGCC does not enjoy an automatic cost pass-through mechanism, which adds uncertainty to cash flow. However, it has maintained EBITDA margins of 13-15% since 2008. Its on-grid tariffs (purchase cost from power producers), retail sales price and T&D tariffs are fixed by the National Development and Reform Commission (NDRC). Chinas power producers have typically absorbed higher fuel costs, and the NDRC has increased retail prices broadly in line with upward revisions to on-grid tariffs. As a result, SGCC has been able to largely pass through on-grid tariff hikes to end customers, and its margins have not suffered despite volatility in fuel prices. Moreover, the NDRC has awarded regular T&D tariff hikes to SGCC to support its new investments in grid infrastructure. Regulated retail sales prices also include government levies and surcharges, which are used to subsidise SGCCs purchase of power from renewable energy sources that command higher on-grid tariffs than non-renewable energy sources. While Chinas evolving regulatory environment and the possible deregulation of power prices from 2016 onwards pose risks, we expect price deregulation to be gradual. Large capex and investment plan: SGCCs capex is related primarily to construction of the power grid network; Moodys expects SGCCs grid to accommodate 466GW of newly installed generation capacity by 2015 (its gridintegrated generation capacity was 880GW in 2012). We therefore expect annual capex to remain high at CNY 350bn from 2013 to 2015. SGCC also plans to increase its overseas assets to USD 30-50bn by 2020 from USD 8bn in 2012; it recently acquired some of Singapore Powers assets and ElectraNet Private Ltd.s assets in Australia, as well as assets in the Philippines, Brazil and Portugal. Strong financial profile: SGCCs financial profile is strong thanks to effective cost pass-through in recent years and prudent financial management. Leverage improved to 2.3x in 2012 from 3.9x in 2009, and RCF/debt increased to 39% from 23%. SGCCs annual cash flow from operations of CNY 300bn is inadequate to cover its annual capex needs of CNY 350bn, annual M&A investments of CNY 75bn and dividend payments of CNY 6.1bn. Its leverage will therefore gradually rise, although it is likely to remain comfortable between 2.5x and 3.0x. High strategic importance and government support: SGCC has high strategic importance due to its size, and plays a critical role in implementing the national energy strategy and providing reliable power supply. SGCC is 100% held by SASAC, and the government is unlikely to dilute its stake. From 2008 to 2012, the company received annual government capital injections of c.CNY 25bn. It also enjoys preferential tax rates or tax rebates for selected projects. SGCC is a large issuer in Chinas domestic bond market and accounted for 1.5% of all onshore outstanding bonds as of 2012. We therefore think the government will ensure that SGCC maintains a healthy liquidity profile. SGCC received a three-notch rating uplift from Moodys and a one-notch uplift from S&P to reflect sovereign support, and its ratings are equated with those of the China sovereign.
382
HG CORPORATES
Company profile
State Grid Corporation of China (SGCC) is the worlds largest utility in terms of revenue, and is engaged principally in the construction and operation of Chinas power grid. Its network covers 26 provinces and 88% of Chinas territory and serves a population of over 1.1bn. It has a critical role in implementing the national energy strategy and providing safe and reliable power supply. The company has strong capabilities in ultra-high-voltage transmission and smart grid technology. SGCC has also invested in power transmission projects in the Philippines, Brazil, Portugal and Australia. In 2012, it reported electricity sales volume of 3,254TWh and revenue of CNY 1.9tn, and had 850,000 employees. SGCC was established in 2003 and is 100% owned by SASAC.
Asia Credit Compendium 2014 State Grid Corporation of China (Aa3/Sta; AA-/Sta; A+/Sta)
Summary financials
2008 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) NA 13.8 6.8 49.4 3.6 3.0 24.4 6.4 1.9 12.7 2.0 50.2 3.9 3.3 22.5 6.3 39.8 14.6 5.4 46.1 2.9 2.4 28.9 8.6 7.0 14.4 4.7 43.5 2.8 2.4 32.7 8.5 11.4 14.2 5.2 39.1 2.3 2.0 38.5 9.2 0.05 0.00 Coal Hydro Wind Nuclear Others 0.15 0.10 165,696 218,514 234,432 262,918 289,484 (297,32 (325,90 (321,02 (411,31 (405,86 6) 2) 4) 0) 9) (131,63 (107,38 (148,39 (116,38 (86,592) 0) 8) 1) 6) (6,709) (10,630) (20,457) (5,121) (6,124) 0.25 0.20 0.40 0.35 0.30 93,226 99,897 108,048 97,418 97,878 500 1,657,37 1,850,75 2,077,52 2,268,31 2,333,53 5 3 4 3 2 563,814 630,260 651,024 682,000 626,411 470,589 530,363 542,976 584,582 528,533 1,002,96 578,064 625,988 792,930 918,269 3 0 Coal Hydro Wind Nuclear Others 1,141,52 1,260,04 1,531,82 1,665,85 1,882,99 3 9 7 2 9 157,344 160,412 224,330 240,111 267,578 (24,547) (25,379) (26,108) (28,335) (29,016) 11,667 3,844 9,346 1,165 45,072 30,841 54,340 109,029 36,492 77,717 1,000 1,500 2,500 2009 2010 2011 2012
Breakdown of electricity transmitted in 2012 (TWh)

3,000
2,000
On-grid tariffs by production source (CNY/kWh)
HG CORPORATES
T&D tariffs in China (CNY/MWh)

200 180 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
SGCCs debt-maturity profile, 2012 (CNY bn)

250
200
150
100
50
0 < 1Y 1Y-2Y 2Y-3Y 3Y-4Y 4Y-5Y > 5Y
383
Asia Credit Compendium 2014 Sun Hung Kai Properties Ltd. (A1/Sta; A+/Neg; A/Sta)

We maintain our Stable credit outlook on SHKP. Given its strong track record in property sales and operating investment properties, we expect it to remain active in the Hong Kong property market by participating in land auctions, while steadily extending its footprint into China. Liquidity remains ample, in our view, given its cash balance of HKD 16.5bn and ST debt of HKD 8.1bn as of June 2013. SHKP established a USD 7bn debt instrument programme in November for a 12-month period. We maintain our view that the impact of the ongoing lawsuit over SHKPs business and financial profile will be limited, but that SHKPs reputation will be affected.

Lower contribution from property sales dragged down revenue: Total revenue fell 21% to HKD 53.8bn in FY13, due to lower property sales in Hong Kong. Revenue from property sales more than halved to HKD 16.4bn in FY13 from HKD 35.9bn a year earlier, largely due to a challenging sales market in Hong Kong. SHKPs investment properties continued to deliver higher revenue on rental increases, high occupancy rates and contributions from new properties in China. As such, rental revenue rose 12% y/y to HKD 12.8bn. Revenue from its hotel business grew 9.5% to HKD 3.4bn on high occupancy and stable rates. Revenue from Hong Kong/China/others contributed 93%/6%/1%, respectively (FY12: 95%/4%/1%). Hong Kong remains a key focus: Contracted sales in Hong Kong amounted to over HKD 22bn in FY13, with contributions from projects including The Wings II, Century Gateway and Residence 88. SHKP bought seven new sites with a total GFA of 2mn sq ft, of which 1.3mn sq ft is for residential developments. These include two adjoining sites on the coast of North Point on Hong Kong Island. SHKP also expanded its holdings in Tseung Kwan O and the western part of Hong Kong Island. Its Hong Kong land bank totals 46.6mn sq ft, comprising 18mn sq ft of property under development. Of this, 15.2mn sq ft will be for sale and 2.8mn sq ft for investment purposes (50% will be retail). In addition, SHKP has over 27mn sq ft of farmland. It estimates that its land bank will be sufficient for five years of development. SHKPs investment property portfolio is one of the largest in Hong Kong; it reported occupancy of 95% as of June 2013. Retail malls contributed 51% of gross rental income in FY13, followed by 35% from office space. SHKP plans to continue to expand its investment portfolio footprint in Hong Kong (through the V City, YOHO and Nam Cheong Station projects). Sales in China gaining momentum: Contracted sales in FY13 amounted to HKD 10bn, compared with HKD 6bn in FY12 and HKD 2bn in FY11. Sales at Shanghai Arch were a key contributor, while a number of JV projects were also well received. A total of four residential projects, with 2mn sq ft of GFA, were completed during the year Taihu International Community Phase 5, The Riviera Phase 1A, The Woodland Phase 4B and Lake Dragon Phase 2A. SHKPs existing portfolio has performed well, with gross rental income (including JV projects) rising 28% y/y to HKD 2.1bn due to higher rents for new leases/renewals and completion of new projects. SHKP continues to expand its investment property portfolio, largely in Tier 1 cities like Shanghai and Guangzhou. Credit profile remains strong: Total debt fell to HKD 64.6bn as of June 2013, and SHKPs maturity profile strengthened following the issuance of longer -dated bonds during the year. However, interest costs were higher due to higher interest rates for longer-duration paper. Short-term debt remains low at just HKD 8.1bn, compared to a cash balance of HKD 16.5bn. As such, while total debt to capital dropped to 14.2% from 16.9% a year earlier, total debt to EBITDA rose to 3.2x from 2.1x due to lower revenue. EBITDA to interest fell to 8.2x from 16.6x. Despite the deterioration in credit metrics, ratios remained very healthy. In November 2013, SHKP established a USD 7bn debt instrument programme. Debt instruments will be issued under this programme within 12 months after 15 November 2013. Business as usual, despite ongoing legal proceedings: We maintain our view that the ongoing lawsuit could take months or even years to conclude, but that SHKP will be able to carry out its business operations as usual. SHKP remains one of the most solid Hong Kong developers in terms of asset quality, financial position and execution ability, in our view.
384
HG CORPORATES
Company profile
Listed on the HKSE since 1972, Sun Hung Kai Properties Ltd. (SHKP) is one of the largest property developers in Hong Kong. As of June 2013, its land bank of investment and development properties stood at 46.6mn sq ft (28.6mn sq ft of investment properties) in Hong Kong and 81.1mn sq ft in key cities in China, such as Beijing, Shanghai, Guangzhou and Shenzhen. In addition to large holdings of highquality investment and development properties in Hong Kong and mainland China, the company has investments in the telecommunications, information technology, transportation, infrastructure and logistics businesses, which generate stable recurring income.
Asia Credit Compendium 2014 Sun Hung Kai Properties Ltd. (A1/Sta; A+/Neg; A/Sta)
Summary financials
FY09 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income 34,234 14,940 (1,116) 12,448 10,356 33,211 14,457 (903) 34,933 30,039 62,553 22,166 (1,327) 56,147 48,097 68,400 34,034 (2,049) 57,133 51,120 53,793 20,039 (2,437) 44,289 40,329 FY10 FY11 FY12 FY13

80 70 60 50 40 30 20 10 0 FY10 FY11 FY12 FY13 Property Sales Property Rental Income Other Businesses Telecommunications Hotel Operation
Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) 30.5 43.6 15.6 2.8 2.3 13.4 (3.2) 43.5 14.5 3.1 2.6 16.0 53.3 35.4 16.2 2.7 2.4 16.7 53.5 49.8 16.9 2.1 1.7 16.6 (41.1) 37.3 14.2 3.2 2.4 8.2 10,018 (7,874) 2,144 (6,565) 9,547 (8,819) (359) (9,730) 9,467 18,119 By usage - Residential - Shopping centre - Office - Hotel - Industrial Total By location - Hong Kong - Kowloon - New Territories Total 1.1 3.5 10.6 15.2 0.7 1.2 0.9 2.8 6.3 10.7 11.6 28.6 8.1 15.4 23.1 46.6 13.9 0.2 1.1 15.2 1.4 0.4 0.6 0.6 2.8 0.9 10.6 10.0 3.5 3.6 28.6 14.8 12.0 8,143 8,204 7,898 14,338 16,471
309,815 354,946 413,197 467,570 512,896 42,025 33,882 45,388 37,184 60,435 52,537 71,266 56,928 64,630 48,159
226,920 268,025 312,195 350,959 390,529
Land bank in Hong Kong (GFA, mn sq ft)

Under development For sale For invt. Existing Total
(6,267) (10,486) 3,200 (4,750) 7,633 (3,353)
728 (10,089) (5,943) (7,491)
HG CORPORATES
10.6 3.9 5.3 46.6
Land bank in mainland China (GFA, mn sq ft)

Under construction By usage - Residential - Shopping centre - Office - Hotel Total By location - Beijing - Yangtze River Delta - Pearl River Delta - Chengdu Total 14.5 47.1 10.0 71.6 1.8 7.1 0.6 9.5 1.8 21.6 47.7 10.0 81.1 54.6 6.6 8.6 1.8 71.6 0.3 5.2 3.1 0.9 9.5 54.9 11.8 11.7 2.7 81.1 Completed Total

25
20
15
10
0 < 1Y 1 - 2Y 2 - 5Y > 5Y
Note: Financial year ending 30 June; Source: Company reports, Standard Chartered Research
385
Asia Credit Compendium 2014 Swire Pacific Ltd. (A3/Sta; A-/Sta; A/Neg)

We have a Stable outlook on Swire Pacific, based on its proven track record, sound financial management, and diversified businesses and geographical exposure. The property business remains the largest contributor, underpinned by a strong investment property portfolio. The aviation business operating environment remains challenging, while the marine services business has been strong due to new vessels and higher rates. The beverage and trading/industrial businesses reported stable results. Liquidity is sufficient, supported by a cash balance of HKD 8.2bn, HKD 14.5bn of committed but undrawn bank facilities, and HKD 8.2bn of uncommitted facilities. Credit metrics remain broadly stable.

Stable financial results from diversified businesses: Total revenue increased 8% y/y to HKD 23.8bn in H1-2013 and EBITDA grew 20% to HKD 6.0bn, thanks to improved margins. Revenue across business segments increased on a y/y basis, with the exception of the trading and industrial segment. Property division supported by strong investment property portfolio: The property division contributed HKD 5.7bn (+17% y/y), or 24%, of H1-2013 revenue. The increase was bolstered by positive rental reversions in the Hong Kong investment property portfolio and at TaiKoo Hui in Guangzhou and Taikoo Li Sanlitun in Beijing. Property trading income rose due to the sale of units at AZURA in Hong Kong. We believe the Hong Kong office market will remain weak, particularly in the Central district. However, the company expects office rents at Island East to remain firm due to high occupancy. It believes demand for retail space in Hong Kong will remain strong, especially in prime locations and wellmanaged malls. It also expects the retail market to be strong in Guangzhou due to strong retail sales, while the office market to remain soft due to oversupply. Aviation operating environment remains challenging: The aviation segments revenue rose 11% y/y to HKD 3.2bn in H1-2013. Cathay Pacifics core business continued to be affected by high jet fuel prices and low air cargo demand. However, the passenger business improved. While the operating environment remains tough, Cathay Pacific has lowered operating costs and improved financial performance. As such, the Cathay Pacific group reported a HKD 11mn profit, versus a HKD 419mn loss in H1-2012. HAECOs poor operating results in Hong Kong (fewer man-hours sold, limited capacity due to labour shortage) were offset by better operating results for its mainland China operations (on higher output). Beverages remain a key contributor: While revenue for the beverage segment was flat at HKD 7.3bn (+3% y/y), attributable profit (excluding non-recurring profit of HKD 69mn) rose 33% y/y to HKD 290mn on (1) lower material costs, (2) a favourable sales mix in mainland China, and (3) improved results in Hong Kong. Sales volume grew 1% to 476mn unit cases, with increased volume in mainland China, lower volume in Taiwan, and flat volumes in Hong Kong and the US. Marine services business reports strong growth: Marine services revenue grew 28% y/y to HKD 2.9bn, with growth in both charter-hire and non-charter-hire revenue. Attributable profit jumped 74% y/y to HKD 642mn. The business benefited from additional contributions from new vessels and higher day rates. While fleet utilisation fell 2ppt to 87%, average charter-hire rates increased by 30% to USD 25,100/day. Credit profile stayed firm: the company raised HKD 9.8bn of new debt in H12013, including two 10Y MTNs amounting to HKD 700mn under Swire Pacifics USD 5bn programme and a 7Y USD 500mn MTN under its USD 3bn programme. The remainder was made up of HKD, USD and CNY bank loans with maturities of three to five years. As such, total debt increased to HKD 55.9bn from HKD 50.4bn as of end-2012, comprising HKD 7.4bn of short-term debt and HKD 48.5bn of longterm debt. Liquidity is ample, in our view. Aside from a cash balance of HKD 8.2bn (HKD 6.1bn at end-2012), the company has HKD 14.5bn of committed undrawn bank facilities and HKD 8.2bn of uncommitted facilities. Credit metrics remained broadly stable given the higher top line. LTM EBITDA/interest held steady at 5.4x in H1-2013, versus 5.3x in 2012; total debt/LTM EBTDA rose to 4.0x from 3.9x; and total debt/capital rose to 18.1% from 16.9%.
HG CORPORATES
Company profile
Listed on the HKSE in 1986, Swire Pacific Ltd. is controlled by UKbased private company John Swire & Sons Ltd. It has five business divisions: property, aviation, beverages, marine services, and trading and industrial. As of June 2013, the property division had about 4.4mn sq ft of investment properties under construction, mainly in Chinas Tier 1 cities. It also held 20.9mn sq ft of highquality investment properties in Hong Kong, China, the US and the UK that generated stable recurring income. The bulk of this (14.1mn sq ft) is located in Hong Kong and includes Pacific Place, Taikoo Place and Cityplaza. The company listed its property division, Swire Properties, in February 2012.
386
Asia Credit Compendium 2014 Swire Pacific Ltd. (A3/Sta; A-/Sta; A/Neg)
Summary financials
2010 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income 29,201 8,317 (1,616) 40,527 38,252 36,286 9,301 (2,078) 34,185 32,210 49,040 12,929 (2,430) 23,787 17,527 22,075 5,047 (1,164) 11,249 8,420 23,776 6,031 (1,319) 9,067 6,608 2011 2012 H1-12 H1-13

60 Trading/Indus trial and Others
50
40
Marine Services Beverages
30
Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) 0.9 28.5 17.9 5.5 5.0 5.1 11.8 25.6 14.6 4.3 3.9 4.5 39.0 26.4 16.9 3.9 3.4 5.3 7.2 22.9 18.3 5.5 4.7 4.3 19.5 25.4 18.1 4.0 3.4 4.6 7,203 (8,798) (1,595) 9,548 9,143 2,134 (5,074) (2,940) (4,014) 5,934 (4,903) 1,031 (4,312) 4,180 3,707 6,080 7,744 8,207
20
Aviation
270,575 292,663 322,158 311,913 334,113 45,454 41,274 39,651 35,944 50,397 44,317 53,332 45,588 55,917 47,710
10
Property
0 2009 2010 2011 2012 LTM Jun-13
209,051 232,476 248,382 238,661 253,702
Investment property portfolio, Jun-13 (000 sq ft GFA)

Office Completed HK China US UK 10,409 2,030 2,424 3,330 743 932 259 208 541 52 14,117 6,344 Retail Hotels Resi. Total
(9,756) (10,187) (208) (1,044) (6,064)
(5,305) (10,151)
HG CORPORATES
259 208
Under and pending development HK China US Total (28) 922 982 14,315 105 1,111 505 7,475 354 218 2,714 63 41 102 799 140 2,428 1,807 25,303
Cathay Pacific and Dragonair Key operating highlights

H1-2012 Available tonne kilometres (ATK, mn) Available seat kilometres (mn) Revenue passengers carried (000) Passenger load factor (%) Passenger yield (HK cents) Cargo and mail carried (kt) Cargo and mail load factor (%) Cargo and mail yield (HKD) Cost per ATK (HKD) Cost per ATK without fuel (HKD) Aircraft utilisation (hours per day) On-time performance (%)

25
H1-2013 12,520 62,187 14,497 81.3 69.0 741 62.4 2.33 3.69 2.23 11.6 77.7
Change -3.3% -4.8% +1.3% +1.2ppts +4.4% -5.2% -7.8% -3.3% -0.8% +2.3% -3.3% +0.9ppts
12,944 65,351 14,312 80.1 66.1 754 64.3 2.41 3.72 2.18 12.0 76.8
20
15
10
0 < 1Y 1-2Y 2- 5Y > 5Y
387
Asia Credit Compendium 2014 Swire Properties Ltd. (A2/Sta; A-/Sta; A/Sta)

We have a Stable outlook on Swire Properties. Its H1-2013 financial results reflect its highquality investment portfolio in Hong Kong and the improving performance of its China investment properties. The Hong Kong portfolio enjoyed positive rental reversion in the office portfolio and higher turnover rents for retail mall space, and its China properties benefited from higher rentals. H1-2013 results were also boosted by the recognition of profits from the AZURA project in Hong Kong. Swire Properties has invested more resources in its US business, diversifying its operations. Liquidity remains ample, in our view, with HKD 3.6bn of cash and HKD 9.9bn of undrawn committed facilities. Credit metrics remain firm.

Revenue rose across segments: Revenue rose 17% y/y to HKD 5.8bn in H12013, helped by higher revenue from property investment (including hotels) and property trading. Investment revenue rose 7% y/y to HKD 4.7bn due to positive rental reversions in the investment property portfolio in Hong Kong, and at TaiKoo Hui in Guangzhou and Taikoo Li Sanlitun in Beijing. Higher property trading income was largely driven by the sale of units at AZURA in Hong Kong. Steady performance of Hong Kong investment properties: Gross rental income from the office portfolio increased 5% y/y to HKD 2.5bn H1-2013. This was helped by positive rental reversion, especially at the Island East offices. Occupancy was 98%. Lease expiries for the office portfolio are well spread out only 6.9% of the rental income in June 2013 will expire in H2-2013, and 16.7% will expire in 2014. Gross rental income from the retail portfolio rose 7% y/y to HKD 1.3bn. Occupancy is 100% across Swire Properties malls. 2.1% of the rental income in June is due to expire in H2-2013, 19.5% in 2014. The property at 23 Tong Chong Street in Quarry Bay, due for completion in 2014, is being redeveloped as serviced apartments. Total floor area upon completion will be approximately 75,000 sq ft. Investment properties in China perform well: Gross rental income from the mainland China investment portfolio rose HKD 132mn to HKD 784mn in H1-2013, thanks to improved rental performance at Taikoo Hui and Taikoo Li Sanlitun. Occupancy at the Taikoo Hui development in Guangzhou was 85% as of end-June due to challenging market conditions, while occupancy at the One INDIGO development in Beijing was a healthy 95%. Retail revenue continued to grow on positive rental reversions; occupancy was 94% at Taikoo Li Sanlitun South and 89% at Taikoo Li Sanlitun North. Helped by strong retail sales, the mall at TaiKoo Hui was 99% leased. At INDIGO, 78% of the retail space is trading and 88% of the space has been committed. US expansion: In January 2013, the company entered into an 85:15 JV with Bal Harbour Shops to develop the retail component of Brickell CityCentre in Miami, Florida. Swire Properties owns 100% of the office, hotel and residential portions of the development. In July, Swire Properties acquired a plot of land adjacent to the Brickell CityCentre development. Ample liquidity: Total cash rose to a high HKD 3.6bn at end-June 2013 from HKD 1.9bn at end-2012. As of 30 June, the company had HKD 9.9bn of undrawn committed bank facilities and HKD 1.3bn of uncommitted facilities. In comparison, it had HKD 5.3bn of ST debt and HKD 3.2bn of committed capex in H2-2013. Well-spread-out capital commitments: Swire Properties capital commitments amounted to HKD 14.8bn as of 30 June 2013, of which it expects HKD 3.2bn to be spent in H2-2013 and HKD 5.4bn/2.3bn in 2014/15. It expects to spend the remaining HKD 3.9bn in 2016 and beyond. In addition to capital commitments being well spread out over time, expenditure is well distributed across geographies. China/Hong Kong/ US account for 46%/36%/18%, respectively, of total capex. Credit profile remains strong: Credit metrics remained strong in H1-2013 given stronger EBITDA and a slight increase in debt to HKD 32.6bn from HKD 30.9bn. Total debt/capital rose marginally to 14.1% as of June 2013 compared with 13.8% at end-2012. Total debt/EBITDA was flat at 3.2x, and LTM EBITDA/interest was flat at 5.6x.
HG CORPORATES
Company profile
Listed by way of introduction on 18 January 2012 and 82% owned by its parent company, Swire Pacific, Swire Properties Ltd. is a developer and landlord of mixed-use commercial properties mainly in Hong Kong and mainland China. As of 30 June 2013, it had an investment portfolio of 14.3mn sq ft in Hong Kong and 6.0mn sq ft in mainland China. Swire Properties first ventured into China in 2001. It now has five major mixed-use projects, either in operation or under development in the top-tier cities, including Beijing, Guangzhou, Chengdu and Shanghai. Most of these projects are also under JV agreements. Besides its business in Asia, Swire Properties has a presence in the US (largely in Miami and Florida) and the UK.
388
Asia Credit Compendium 2014 Swire Properties Ltd. (A2/Sta; A-/Sta; A/Sta)
Summary financials
2010 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income 8,871 5,951 (1,535) 27,418 26,045 9,581 6,510 (1,852) 26,475 25,126 14,052 9,723 (1,749) 20,962 18,763 4,907 3,458 (849) 10,509 9,854 5,754 4,058 (954) 7,767 6,952 2011 2012 H1-12 H1-13

16 14 12 10 8 6 Property Trading Hotel Operations Others
Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) NA 67.1 19.3 6.4 6.2 3.9 9.4 67.9 14.1 4.4 4.3 3.5 49.4 69.2 13.8 3.2 3.0 5.6 4.6 70.5 16.0 5.3 4.6 4.1 17.4 70.5 14.1 3.2 2.8 4.3 2,912 (4,741) (1,829) 5,700 (5,265) 435 5,845 (3,004) 2,841 (2,567) 519 (1,465) (946) (1,057) 3,863 (1,437) (2,426) (2,227) Pacific Place Cityplaza TaiKoo Place Office Towers One Island East Techno Centres Others Total office Pacific Place Mall Cityplaza Mall Citygate Outlets Others Total retail 1,042 1,180 1,940 4,661 3,627 4 2 0 2010 2011 2012
Property Investment
205,712 218,234 236,943 232,358 245,291 37,878 36,836 28,880 27,700 30,861 28,921 35,196 30,535 32,603 28,976
LTM Jun-13
158,356 176,575 193,076 185,194 198,255
Investment properties in Hong Kong

GFA (100% basis, sq ft) 2,186,433 1,632,930 3,316,541 1,537,011 1,816,667 688,323 10,998,114 711,182 1,105,227 462,439 530,467 2,809,315 100% 100% 100% 100% 100% 100% 20% 20%/60%/100% Occupancy 97% 99% 99% 100% 100% 90% Attributable Interest 100% 100% 50%/100%
(9) (12,451)
HG CORPORATES
100% 100% 20%/50%/100%
Investment properties in mainland China (sq ft)

Total GFA Sanlitun Village, Beijing TaiKoo Hui, Guangzhou INDIGO, Beijing (office) Hui Fang Retail Podium, Guangzhou Others Total (completed) Dazhongli, Shanghai Daci Temple project, Chengdu Total (uncompleted) Overall 1,465,771 3,840,197 1,893,226 90,847 29,584 7,319,625 2,687,384 3,469,398 6,156,782 13,476,407 Investment properties 1,296,308 3,225,013 1,534,957 90,847 2,898 6,181,023 1,223,674 2,926,204 4,149,878 10,330,901 Hotels, trading and others 169,463 584,184 358,269 26,686 1,138,602 1,463,710 543,194

16 14 12 10 8 6 4 2 2,006,904 3,145,506 0 < 1Y 1-2Y 2-5Y > 5Y Bank and other borrowings Borrowings from Swire Finance
389
Asia Credit Compendium 2014 Thai Oil PCL (Baa1/Sta; BBB/Sta; NR)

Thai Oils credit profile is underpinned by its leading market position in Thailand, the high complexity of its refinery, its lower reliance on exports and its strong operational integration with the PTT Group. It also benefits from its downstream petrochemicals business, which provides earnings diversity and captive demand. While Thai Oils earnings may remain volatile given regional refining overcapacity, we think its budgeted capex of USD 1.4bn (2013-17) is conservative and can be internally funded. That said, we think Thai Oil has low headroom in its rating category, and an upward revision of capex plans or a large acquisition would be credit-negative. We maintain our Stable credit outlook on Thai Oil.

Strong refinery business: Thai Oil owns the largest refinery in Thailand, with a nameplate capacity of 275kbd, representing 28% of Thailands domestic capacity. Its refinery has a high Nelson Complexity Index of 9.7, which gives it the flexibility to diversify its crude intake towards cheaper sources and to skew its product mix towards light to middle distillates, which offer better spreads and margins. Moreover, Thai Oil sells over 85% of its refined products to domestic customers, which generates higher margins than exports. Thai Oils refinery business also benefits from a strong operational integration with its parent, PTT, which supplied 49% of Thai Oils crude oil requirement and bought c.47% of its products in 20 12 at prevailing market prices. Strong integration and its competitive cost position allow Thai Oil to run its refineries at high utilisation rates (102% in 9M-2013) even in an environment of weak refining margins. That said, all of Thai Oils refining capacity is at a single site, exposing it to operational risks. Downstream integration provides diversity: While Thai Oils nameplate capacity in petrochemicals is small relative to peers, its downstream integration provides earnings diversity. Thai Oils aromatics business sources over 90% of its platformate feedstock requirement from its refinery. While integration with its lube base oil business is slightly lower, Thai Oil aims to increase high-sulphur fuel oil (HSFO) and diesel production (feedstock for the lube oil business) under its budgeted capex plan to upgrade its refinery. The petrochemicals business contributed c.34% of Thai Oils EBITDA in 9M-2013. Volatile earnings: Despite its strong business position, Thai Oil is exposed to the cyclicality of the refining and aromatics businesses. GRM declined to USD 5.1/bbl in 9M-2013 from USD 5.4/bbl in 9M-2012; lower oil prices were offset by lower average selling prices of refined products. The decline was due to new capacity additions in China and the Middle East, and lower demand in Asia (the refinery business EBITDA rose 30%, due entirely to inventory gains). While the petrochemicals business recorded higher utilisation rates and better aromatic spreads, lube base oil spreads were lower, leading to flat EBITDA growth. We believe that lower oil prices and volatile aromatics and refining margins will prevent a major improvement in earnings in 2014. Conservative capex plan: Thai Oils capex plan of USD 1.4bn for 2013-17 is the most conservative among PTT Group companies, in our view. Even if we include potential projects worth USD 165mn that are under review, total capex is comfortable at USD 1.6bn. More importantly, spending is targeted at improving operational efficiencies, not developing greenfield projects. Stable financial profile: Despite earnings volatility, Thai Oil has been FCFpositive since 2008 and generates steady annual operating cash flow of THB 1520bn. Its credit metrics are also comfortable, with net debt/EBITDA at 1.1x and interest coverage at 6.1x. We believe that budgeted capex and annual dividend payouts (c.THB 6.5bn) can be easily managed given its internal accruals and cash balance of THB 58bn. That said, we think Thai Oil has low headroom in its rating category, and a negative earnings surprise, an upward revision of its capex plans, or a large acquisition would be credit-negative. PTT linkage: Thai Oil is the PTT Groups flagship refinery and has strong operational integration with its parent. PTT sources 35% of its refined petroleum products from Thai Oil, for sale through its retail network. While PTT has not provided financial support in recent years, we believe it would be forthcoming if required.
HG CORPORATES
Company profile
Thai Oil PCL is a leading integrated refining and petrochemical company in Thailand. It operates the countrys largest complex refinery, with a nameplate capacity of 275kbd, representing 25% of Thailands domestic capacity. In the petrochemicals business, Thai Oil is engaged in the production of aromatics, solvents and lube oil. In addition to its core businesses, Thai Oil is involved in support businesses such as power generation and marine transportation. Thai Oil is 49.1% owned by PTT PCL (PTT), and its business is significantly integrated with its parents, with a feedstock supply and product off-take arrangement.
390
Asia Credit Compendium 2014 Thai Oil PCL (Baa1/Sta; BBB/Sta; NR)
Summary financials
2009 Income statement (THB bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (THB bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (THB bn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 93.0 7.1 12.0 39.4 2.1 1.7 35.6 9.6 (26.8) 4.7 6.9 38.1 3.0 2.0 25.5 8.3 82.7 6.1 16.3 36.5 1.7 1.0 46.9 12.7 (29.4) 4.3 9.3 35.1 2.4 1.0 38.7 8.2 11.4 5.5 12.0 46.0 3.8 1.1 NA 6.1 12.9 (2.5) 10.4 (4.3) 11.8 (3.9) 7.9 (4.4) 15.5 (5.1) 10.4 (5.7) 20.8 (9.4) 11.4 (5.4) 13.9 (8.0) 5.9 (6.3) 9.2 137.7 43.4 34.2 71.7 14.0 146.6 44.0 30.0 76.8 19.3 155.1 45.7 26.4 85.0 28.3 170.7 46.8 18.5 90.7 57.8 214.5 80.0 22.2 93.9 284.1 20.2 (2.1) 14.5 12.1 318.4 14.8 (1.8) 12.3 9.0 446.2 27.1 (2.1) 20.5 14.9 447.4 19.1 (2.3) 14.4 12.3 306.6 16.9 (2.8) 11.7 10.4 2010 2011 2012 9M-13
Revenue and EBITDA split by division, 9M-13 (%)

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Revenue EBITDA Refinery Aromatics Others Lube base oil
Capex plan (USD mn)

700 600 500
HG CORPORATES
400 300 200 100 0 2013 2014 2015 2015+
GRM (incl. stock gain/loss, USD per bbl)

7.0 6.0
Cash cost of the groups refining business (USD per bbl)

2.5
2.0 5.0 4.0 3.0 2.0 0.5 1.0 0.0 2009 2010 2011 2012 H1-13
1.5
Net interest cost
1.0
Operating cost
0.0 2009 2010 2011 2012 H1-2013
391
Asia Credit Compendium 2014 Wharf Holdings Ltd. (NR; NR; A-/Sta)

We maintain our Stable outlook on Wharf. We like its track record in mall management, which it is replicating in China with its International Finance Square (IFS) projects. Times Square and Harbour City remain the groups flagship projects, generating stable recurring income. Wharf is active in tenant management and mall renovation. Management expects to comfortably generate recurring income of c.HKD 10bn from its existing businesses to fund capex on both greenfield and brownfield sites. This is in addition to its HKD 28.3bn cash balance, undrawn facilities of HKD 17.6bn, and available-forsale investments of HKD 3.5bn. Liquidity remains ample, in our view.

Revenue falls due to lower development profits: Revenue fell 18% y/y in H12013, largely due to lower recognition from development properties and the one-off sale of One Midtown in Hong Kong in 2012. Revenue from the investment portfolio remained robust, growing 10% y/y to HKD 6.0bn. Revenue from the logistics unit rose 3% to HKD 1.6bn on increased throughput, while CME business revenue was flat at HKD 1.9bn. Hong Kong contributed 58% of H1-2013 revenue and China contributed 42%. Given the decline in revenue, H1-2013 EBITDA fell 24% y/y to HKD 6.8bn. Investment properties continue to deliver: H1-2013 revenue from the Hong Kong investment portfolio rose 10% y/y to HKD 4.8bn, helped by strong retail sales and positive rental reversions on its office space. While Times Squares capacity fell 17% due to renovation, revenue rose 5% y/y to HKD 979mn. Revenue (exhotels) from Harbour City rose 15% to HKD 3.5bn, helped by an 18% increase in the retail sector. Revenue from investment properties in mainland China rose 12%, despite the closure of Shanghai Times Squares retail mall and apartments for renovation. Lower development profits on fewer completions: Revenue from Wharfs development properties came in at HKD 5bn, mostly contributed by China projects. Profit contributions also came from Crystal Park and Le Palais in Chengdu, Suzhou Times City, Changzhou Times Palace, and Wuxi Times City. Liquidity remains sufficient: Total debt rose 10% between end-2012 and endJune 2013 to HKD 81.6bn. Short-term debt rose sharply to HKD 17.6bn from HKD 5.3bn. The cash balance rose to HKD 28.3bn as of June 2013 from HKD 18.8bn at end-2012. Apart from its high cash balance, Wharf has undrawn facilities of HKD 17.6bn to meet its liquidity needs. It also had a portfolio of available-for-sale investments valued at HKD 3.5bn as of 30 June 2013 (HKD 3.9bn at end-2011). Steady credit profile: Due to lower EBITDA in H1-2013, EBITDA/interest coverage decreased to 5.3x from 7.4x in 2012, while total debt/LTM EBITDA increased to 6.1x from 4.8x. Total debt/capital was little changed at 23.1% in H12013 (22.5% as of end-2012). High capex needs for China business: Wharf estimates capex for development/investment properties in mainland China at HKD 55.8bn/HKD 26.6bn; of this, HKD 15.6bn/HKD 6.7bn has been authorised and contracted for. In Hong Kong, capex for property investment and development properties is lower, estimated at HKD 1.9bn and HKD 0.9bn, respectively; of this, HKD 1.5bn/HKD 0.9bn has been authorised and contracted for. China IFS projects to drive investment income growth: We believe recurrent rental income from Wharfs China investment properties will increase substantially following the completion of all IFS projects by 2016. Chengdu IFS is the next flagship project, comprising a mega mall, two grade-A office towers, a luxury residential tower and a five-star hotel. Scheduled for completion in H2-2013, the first phase of Chengdu IFS includes a 210,000sqm mall and a grade-A office tower. The retail mall is 92% pre-leased at above-budget rental rates. Full completion is expected in 2014. Strong contracted sales from mainland China projects: The groups development portfolio generated sales of CNY 16.3bn in 9M-2013 (+43% y/y). As such, we believe Wharf will easily achieve its full-year sales target of CNY 20bn (2012: CNY 15bn). An estimated 1.4mn sqm of residential GFA will be completed in 2013, up from 1.0mn sqm in 2012. As of June 2013, Wharf had a net order book (unbooked revenue) of CNY 19bn from its China development projects.
HG CORPORATES
Company profile
Wharf Holdings Ltd. (Wharf) is a Hong Kong-based conglomerate that is about 50% owned by Wheelock & Co. Ltd. Together with its subsidiaries and associates, Wharf invests in, develops, and manages property projects in Hong Kong (most prominently Harbour City and Times Square) and mainland China (where it has over 130mn sq ft of investment and development assets). It also develops and operates container terminals via its 68%-owned Modern Terminals Ltd., and is involved in the communications, media and entertainment (CME) business.
392
Asia Credit Compendium 2014 Wharf Holdings Ltd. (NR; NR; A-/Sta)
Summary financials
2010 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income 19,380 10,700 (827) 38,823 35,750 24,004 12,783 (1,627) 34,641 30,568 30,856 15,600 (2,108) 52,579 47,263 18,250 8,939 (979) 26,810 23,646 14,880 6,789 (1,292) 19,363 17,240 2011 2012 H1-12 H1-13

35 30 25 20 15 10 Property investment Property development CME (communications, media and entertainment) Logistics Investment and others
Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) 8.6 55.2 22.5 4.6 3.1 12.9 19.5 53.3 26.5 5.9 3.4 7.9 22.0 50.6 22.5 4.8 3.6 7.4 58.4 49.0 23.7 4.5 3.3 9.1 (24.1) 45.6 23.1 6.1 4.0 5.3 200 400 1,467 (40) 13,339 NA NA NA NA NA NA NA NA 600 1,000 16,900 32,528 18,795 19,034 28,269 5 0 -5 2009 2010 2011 2012 LTM Jun-13
242,768 317,973 368,998 334,297 391,168 49,589 32,689 75,993 43,465 74,420 55,625 72,202 53,168 81,572 53,303
170,649 210,874 256,906 232,573 271,695
China IP rental income* (HKD mn)

1,200 *Excludes Beijing Capital Times Square, which was sold in 2009
(3,774) (12,030) (14,809) (2,307) (12,070) (3,116) (3,837) (1,470) (4,117)
800
HG CORPORATES
0 2008 2009 2010 2011 2012 H1-13
Contracted sales in China (CNY bn)

25

20 18
20
16 14
15
12 10
10 9M 5
8 6 4 2
0 2009 2010 2011 2012 2013E

0 < 1Y 1-2Y 2-3Y 3-4Y 4-5Y > 5Y
393
Asia Credit Compendium 2014 Wheelock & Co. Ltd. (NR; NR; NR)

We have a Stable credit outlook on Wheelock. Earnings have been driven largely by contributions from Wharf, anchored by its two flagship projects Times Square and Harbour City and property sales, particularly in China. Property sales in Singapore/ Hong Kong via WPSL/WPL have also contributed. WPL was active in land acquisitions in Hong Kong, and total debt rose more than 15% between end-2012 and end-June 2013. This, coupled with lower EBITDA, led to a weakening of credit metrics. Despite its large capex requirements, we believe the company has sufficient liquidity to fund its obligations. As of June 2013, it had HKD 25.8bn of undrawn bank facilities and a cash balance of HKD 36.9bn.

Results driven largely by Wharf: Wheelocks revenue fell 12% y/y to HKD 17.4bn in H1-2013, largely due to lower development profits. Revenue from property development fell 31% y/y to HKD 6.9bn and made up 41% of the total, compared with HKD 10.1bn in H1-2012 (51% of the total). Revenue from investment property was flat y/y at HKD 5.8bn. Hong Kong contributed HKD 10.9bn, or 63% of H1-2013 revenue, and China contributed HKD 6.2bn (36%). EBITDA fell to HKD 8bn from HKD 9.8bn a year earlier. However, margins remained stable, with gross margin at 54.2% (H1-2012: 55.9%) and EBITDA margin at 46.0% (H1-2012: 46.2%). Wharf contributed HKD 6.1bn, or 83%, of the HKD 7.3bn EBIT recorded in H1-2013. Credit metrics deteriorated on lower EBITDA and higher debt: Total debt increased to HKD 119.1bn as of June 2013 (HKD 103.3bn at end-2012), mainly due to higher land costs for development projects. Short-term debt surged to HKD 17.8bn in H1-2013 from HKD 6.9bn at end-2012. However, the cash balance remains ample at HKD 36.9bn (up from HKD 30.0bn). Net debt on a group basis was HKD 82.2bn (2012: HKD 73.2bn), of which HKD 53.3bn is under Wharf and HKD 434mn is under WPSL. As a result of higher debt, the debt-to-capital ratio rose to 28.5% from 26.5% as of end-2012. However, total debt/EBITDA rose to 7.8x on lower EBITDA, a sharp jump from 6.1x at end-2012. While EBITDA/interest costs remains comfortable at 4.6x, it is far lower than the double-digit coverage ratio prior to 2012. Liquidity remains sufficient: The company had HKD 25.8bn of undrawn bank facilities (HKD 17.6bn under Wharf) as of June 2013. Wheelock also had a portfolio of financial investments valued at HKD 14.2bn as of 30 June 2013 (end-2012: HKD 14.8bn), mainly comprising blue-chip securities. Capex is concentrated in mainland development projects: Capex in H1-2013 for the development of investment properties and trading properties amounted to HKD 3.2bn and HKD 15.2bn, respectively. In addition, the group intends to spend HKD 28.5bn on investment properties and HKD 58.7bn on trading properties. Of the total HKD 108bn to be spent on the property business, 79% will be spent in mainland China. Wheelock is expected to spend HKD 1.7bn on its non-property businesses. WPL updates: WPL actively acquired land in H1-2013, spending HKD 8bn for four residential sites covering with GFA of 1.4mn sq ft. This brings its total development land bank under management in Hong Kong to 7.6mn sq ft. Land sites were acquired mainly through public tenders, and include Homantin (0.4mn sq ft of GFA/HKD 3.8bn), Tuen Mun So Kwun Wat (0.4mn sq ft of GFA/HKD 1.4bn) and Tseung Kwan O Lot 112 (0.6mn sq ft of GFA/HKD 2.5bn). WPL also plans to sell the remaining tower of One Bay East and One HarbourGate (office properties). WPSL updates: WPSL contributed HKD 732mn of after-tax profit in H1-2013, higher than the HKD 380mn recorded in H1-2012. Wheelock Place and Scotts Square Retail continue to generate stable recurring income, with occupancy of 94% and 95%, respectively, as of June 2013. Sales at the Ardmore Three luxury residential project have been slow: only 3.6% of the project was sold as of June 2013. WPSL won a tender for a residential site in Ang Mo Kio for SGD 550mn. The site has a total GFA of 696,300 sq ft and could potentially house around 700 units.
HG CORPORATES
Company profile
Wheelock & Co. Ltd. (Wheelock) is an investment holding company whose major investment is its 50.4% stake in the listed Wharf Holdings Ltd. (Wharf). In addition to this stake, Wheelock has a 76% stake in SGX-listed Wheelock Properties (Singapore) Limited (WPSL). WPSL is known for the quality of its residential properties (largely high-end), and it has two investment properties Wheelock Place and the newly completed Scotts Square along Singapores prime Orchard Road shopping belt. Wheelock also owns 100% of Wheelock Properties Ltd. (WPL), a Hong Kong-focused developer.
394
Asia Credit Compendium 2014 Wheelock & Co. Ltd. (NR; NR; NR)
Summary financials
2010 Income statement (HKD mn) Revenues EBITDA Gross interest expense Profit before tax Net income 24,186 12,716 (941) 42,335 20,194 34,558 19,128 (1,870) 44,122 22,866 33,124 17,006 (2,757) 55,703 26,935 19,716 9,808 (1,239) 28,661 13,572 17,398 8,005 (1,752) 21,753 10,845 2011 2012 H1-12 H1-13

40 35 30 25 20 15 10 5 0 2009 2010 2011 2012 LTM Jun-13 Property investment Investment and others CME Logistics
Property development
Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders' equity Cash flow (HKD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) EBITDA/interest (x) 17.6 52.6 25.4 5.2 3.0 13.5 50.4 55.4 28.9 5.0 2.8 10.2 (11.1) 51.3 26.5 6.1 4.3 6.2 20.1 49.7 26.6 4.5 3.2 7.9 (18.4) 46.0 28.5 7.8 5.4 4.6 10 Hong Kong 5 0 2009 2010 2011 2012 LTM Jun-13 3,391 (3,375) 11,584 NA NA NA NA NA NA NA NA 25 20 15 Mainland China 27,540 42,668 30,016 26,121 36,900
286,236 364,112 429,766 384,020 459,493 65,682 38,142 95,682 103,257 53,014 73,241 93,473 119,123 67,352 82,223
193,076 235,194 285,880 258,551 299,403
Revenue breakdown by geography (HKD bn)

40 35 30 Singapore
(4,039) (12,180) (15,110) (648) (15,555) (2,140) (2,707) (3,526) (3,902)
HG CORPORATES
Available loan facilities, Jun-13 (HKD bn)

Available facilities Wharf (excludes the following subsidiaries) Modern Terminals Harbour Centre Development Ltd. i-CABLE Wharf group Wheelock Properties (Singapore) Ltd. (WPSL) Wheelock and other subsidiaries Total 80.7 13.6 4.5 0.4 99.2 6.0 39.7 144.9 Total debt 66.0 11.7 3.8 0.1 81.6 3.5 34.0 119.1 Undrawn facilities 14.7 1.9 0.7 0.3 17.6 2.5 5.7 25.8

100 90 80 70 60 50 40 30 20 10 0 < 1Y 1-5Y > 5Y
395
Asia Credit Compendium 2014 Yuexiu Property Co. Ltd. (Baa3/Sta; NR; BBB-/Sta)

We initiate coverage of Yuexiu with a Stable credit outlook. Yuexiu holds c.15mn sqm of land bank with a focus in Guangzhou given its 49.8% ownership by the Guangzhou government. It also has substantial investment property holdings that generate stable recurring income. Yuexiu reported CNY 213mn of rental income from investment properties and CNY 98mn of dividend income from its 35%owned YXREIT in H1-2013. However, credit metrics are stretched given its portfolios high exposure to commercial property. Aggressive land expansion in 2013 will also pressure liquidity. That said, we take comfort from its strong contracted sales of CNY 13.4bn in 10M-2013. Total cash was high at CNY 10.7bn as of June 2013. The company also enjoys easy access to onshore and offshore capital markets.

High asset quality: Yuexiu had a total land bank of 14.5mn sqm as of June 2013. The share of commercial space in its property portfolio is larger than peers residential GFA accounted for 8.7mn sqm of the total, and commercial and other space made up the remaining 5.8mn sqm. About 56% (8.1mn sqm) of the companys land bank is located in the Pearl River Delta. Of this, 6.0mn sqm is in Guangzhou. Outside its home base, Yuexiu has substantial land reserves in Hangzhou (2.7mn sqm) and Wuhan (1.3mn sqm). In the Bohai Rim region, it has projects in Shenyang, Yantai and Qingdao (total of 2.3mn sqm). In addition to property development and sales, Yuexiu develops investment properties and injects the buildings into YXREIT after a specified stabilisation period. Yuexiu plans to increase its stake in YXREIT to about 50% by 2015 from 35% as of June 2013. Profitability reflects its portfolio composition: Revenue rose strongly in H1-2013, by 42.1% to CNY 6.1bn (CNY 5.5bn from property sales). However, EBITDA fell 6.5% to CNY 2.0bn. Gross profit margin was 40.9% (2012: 47.5%) and EBITDA margin was 32.2% (2012: 32.5%). Gross margin for property sales fell to 40.3% from 64.3% in 2012, but gross margin for property investment rose to 76.1% from 70.8%, and that for property management improved to 15.4% from 11.0%. Yuexiu had CNY 11.9bn of unrecognised sales on its balance sheet as of June 2013. Strong contracted sales: Yuexiu achieved CNY 13.356bn of contracted sales in 10M-2013, representing 92% of its full-year target of CNY 14.5bn (2012: CNY 12.3bn). The ASP was CNY 13,065psm, about 10% higher than the 2012 average of CNY 11,882psm. This is in line with the companys property portfolio composition. Aggressive land acquisition: Backed by strong liquidity from property sales and offshore fundraising, Yuexiu added seven land parcels to its land bank in 10M-2013 for a total of CNY 20bn (GFA of 2.8mn sqm) at an average land price of CNY 7,278 psm/GFA. Three of the seven plots are in Hangzhou, two are in Guangzhou, one is in Wuhan and one is in Foshan. Credit profile is stretched: Yuexiu raised USD 350mn 3.25% of 2018 bonds and USD 500mn 4.5% of 2023 bonds in January 2013, and reduced its average interest rate to 5.99% in H1-2013 from 7.32% in H1-2012. Total debt rose to CNY 24.3bn as of June 2013 from CNY 20.1bn at end-2012. Credit metrics weakened on higher debt and flat profitability. Total debt/LTM EBITDA rose to 9.5x in H1-2013 from 7.6x in 2012, LTM EBITDA/interest held at 1.5x, and total debt/capital increased to 49.3% as of June 2013 from 46.5% at end-2012. While the company maintained a high cash balance of CNY 10.7bn as of June 2013 (end-2012: CNY 9.3bn), capex for land increased substantially. In addition to the CNY 2.7bn of unpaid land premium carried forward from 2012, the company has to pay about CNY 10-12bn in land costs for its acquisitions in 2013. Planned construction capex for 2013 is CNY 9.4bn. Geographical distribution of land bank, Jun-13 (mn sqm)
7 6 5 4 3 2 1 0 Guangzhou Pearl River Delta (excl. GZ)
396
HG CORPORATES
Company profile
Listed on the HKSE in 1992, Yuexiu Property Co. Ltd. (Yuexiu) is 49.79% owned by Yue Xiu Enterprises (Holdings) Ltd., under Guangzhou Yuexiu Holdings Ltd., which is 100% owned by the Guangzhou municipal government. As of June 2013, it had a total land bank of 14.45mn sqm, including 7.08mn sqm of GFA under construction and 7.37mn sqm held for future development. The company also has substantial investment property holdings. In addition to the four investment properties it currently holds, Yuexiu held a 35.14% stake in Yuexiu REIT (YXREIT, Baa2/BBB) as of June 2013. Yuexiu spun off its commercial property portfolio as a REIT via a separate IPO in 2005 and injected its Guangzhou IFC into YXREIT in 2012.
Commerical
Residential
Bohai Rim
Hangzhou
Wuhan
Hainan
HK
Asia Credit Compendium 2014 Yuexiu Property Co. Ltd. (Baa3/Sta; NR; BBB-/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends & interest Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 123.7 21.1 50.2 12.8 2.3 327.1 15.3 20.2 52.0 15.6 1.5 123.8 171.3 32.3 51.4 7.1 2.6 57.9 (14.5) 32.5 46.5 7.6 1.5 135.7 (6.5) 32.2 49.3 9.7 2.4 114.6 (716) (350) (1,066) (246) (6,949) (1,451) (8,400) (4,890) (1,489) (6,380) (303) (3,738) (932) (4,670) (658) NA NA NA NA 6,173 36,954 12,593 6,420 12,515 7,473 50,781 17,736 10,264 16,346 6,128 61,213 21,782 15,655 20,629 9,263 69,997 20,131 10,868 23,120 10,707 78,515 24,318 10,868 23,120 4,671 987 (424) 1,350 (607) 5,634 1,137 (755) 2,001 919 9,569 3,086 (1,191) 8,364 5,236 8,120 2,638 (1,707) 4,635 2,482 6,059 1,952 (806) 3,906 2,341 2010 2011 2012 H1-13

10 100
EBITDA margin (RHS)
80
6 Revenue 4
60
40
20
0 2009 2010 2011 2012 LTM Jun-13
Debt metrics (x)

16
12
HG CORPORATES
4 LTM EBITDA/ interest 0 2009 2010 2011 2012 H1-13

25 Total debt/cap. (RHS) Total debt 100
Debt maturity, Jun-13 (CNY bn)

10
20
80
8 USD bonds
15
60
10
Total cash*
40
4 Bank loans
20
0 2009 2010 2011 2012 H1-13

0 < 1yr 1-2 yr 2-5yrs >5yrs
397
HG CORPORATES
398
Credit analysis High-yield corporates
Asia Credit Compendium 2014 PT Adaro Energy Tbk. (Ba1/Sta; NR; BB+/Sta)

AE is a strong credit, with a proven operational and financial track record thanks to the companys prudent management style. Profitability has been negatively affected by persistently weak coal prices, resulting in further deterioration in coverage ratios. Nonetheless, AE has maintained a strong credit profile and liquidity position, in our view. It managed to cut capex and acquisition spending substantially in 9M-2013 and reduced cash production costs to weather difficult market conditions. It reported strong positive FCF of USD 384mn in 9M2013, with a high cash balance of USD 618mn as of September 2013. In addition, AE lowered its total debt to USD 2.3bn, further optimising its debt maturity profile.

Profitability weakened on a substantial decline in coal prices in 9M-2013: The ASP of coal fell more than 20% to USD 58.2/t in 9M-2013 (Q1: USD 61.6/t; Q2: USD 56.9/t; Q3: 56.6/t) and is unlikely to fully recover in the near future. As a result, although coal sales volumes rose to 39.1mt in 9M-2013 from 33.9mt in 9M2012, revenue fell 12% y/y to USD 2.4bn in 9M-2013. AE also cut cash production costs by 9% y/y to USD 34.7/t in 9M-2013 on the back of cost-reduction initiatives and lower fuel costs (2012: USD 39/t; 2013F: USD 35-38/t). Its strip ratio fell to 5.8x in 9M-2013, compared with 6.4x in 2012. That said, profit margins deteriorated as the decline in coal prices outpaced cost savings EBITDA margin declined to 27.1% in 9M-2013 (2011: 37.3%; 2012: 30.4%). Diversified client base: About 20% of total volume sold in H1-2013 was to the domestic market. AEs key export markets are in Asia: India (22% of H1-2013 sales volume), Greater China (Hong Kong, China and Taiwan, 16%), Japan (12%), South Korea (8%) and Malaysia (7%). About 91% of its coal is sold to power companies, and about 7% of its sales are to cement producers. Liquidity position is robust; FCF is positive: As of September 2013, AE had total cash of USD 618mn, higher than the USD 500mn at end-2012. It recorded positive FCF of USD 384mn in 9M-2013, as it incurred only USD 133mn of capex. It estimates 2013 capex at USD 150-200mn, much lower than the USD 490mn in 2012 and USD 625mn in 2011. In May 2013, the company acquired 75% of Balangan, a greenfield thermal coal mine in South Kalimantan with total resources of 172.3mt, for USD 30.4mn (the IUP mining licence expires in 2029). It is scheduled to commence operations in 2014. Initial capex is estimated at USD 15mn, with potential annual production of up to 9mt. Credit profile remains strong, despite a slight deterioration: Backed by strong
Company profile
Listed on the IDX in 2008, PT Adaro Energy Tbk. (AE), through its 100%owned subsidiary PT Adaro Indonesia (AI), operates the largest single-site coal mine by production volume in South Kalimantan (921mt of reserves). AI holds coal-mining rights until 2022 via a first-generation Coal Contract of Work (CCoW) with the Indonesian government. AE produced 47.2mt of coal in 2012 and targets to produce 50-53mt in 2013. It has a wide customer base (53 customers in 15 countries) mostly state-owned power companies. Through its subsidiaries, AE also engages in operations such as overburden hauling and coal extraction, coal hauling, crushing, barging, and ship loading to ensure pit-to-port mining integration. The company has also entered the downstream business by investing in coal-fired power plants.
liquidity and a low capex plan, the company reduced total debt to USD 2.30bn as of September 2013 from USD 2.45bn at end-2012. It raised USD 380mn of a 7Y loan in May and repaid the outstanding amount of the USD 500mn of 5Y amortisation loan that it obtained in 2009. However, coverage ratios weakened, owing to the large drop in profitability. Total debt/LTM EBITDA increased to 2.7x in 9M-2013 from 2.2x in 2012, and LTM EBITDA/interest fell to 7.5x from 9.6x. Total debt/capitalisation fell to 46.1% as of September 2013 from 48.9% at end-2012. Moving into the downstream power-generation sector: AE has been partnering with established names in the utilities sector to build power points, so as to fully integrate its coal supply chain from pit to port and power generation. In addition to its 2x30MW mine-mouth power plant in South Kalimantan (100%-owned), the company is building a 2x1,000MW power plant in Central Java (34%-owned) and a 2x100MW plant in South Kalimantan (65%-owned). Ownership and business structure, Oct-13
Adaro Indonesia (issuer) Thermal coal producer 100%
HY CORPORATES
Adaro Energy
100%
Coal Trade International Marketing and trading
ICP (25%) Coking coal project (with BHP)
MIP (75%) South Sumatra
BEE (61%) South Sumatra
BEP (10.2%) East Kaliman -tan
AI (100%) Balangan (75%) South Kalimantan
SIS (100%) JPI (100%) SMS (35%) Service mining
MBP (100%) HBI (100%) Barging and ship loading
SDM (51.2%) Channel dredging contractor
MSW (100%) IBT (100%) Coal and fuel facility 2x 30MW Minemouth power plant
Bhimasena Power (34%) 2x 1,000MW power plant Power plants
South Kalimantan (65%) 2x 100MW power plant
Coal mining licence holder
Logistics
400
Asia Credit Compendium 2014 PT Adaro Energy Tbk. (Ba1/Sta; NR; BB+/Sta)
Summary financials
2009^ Income statement (USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 116.6 41.5 47.4 1.6 12.2 480.4 (19.6) 31.8 44.0 1.8 7.5 318.3 71.9 37.3 46.4 1.4 12.4 404.3 (23.8) 30.4 48.9 2.2 9.6 166.8 (29.2) 27.1 46.1 2.7 7.3 325.8 683 (106) 576 (73) 293 (245) 49 (96) 712 (625) 87 (151) 433 (490) (57) (226) 517 (133) 384 (75) 1,199 4,506 1,676 476 1,863 607 4,470 1,592 985 2,029 559 5,659 2,105 1,546 2,436 500 6,692 2,445 1,945 2,559 618 6,646 2,309 1,690 2,697 2,591 1,075 (88) 825 429 2,718 864 (115) 525 247 3,987 1,486 (120) 1,003 552 3,722 1,132 (118) 714 383 2,435 660 (90) 331 183 2010 2011 2012 9M-13
Profitability (USD mn LHS, % RHS)

4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2009^ 2010 2011 2012 LTM Sep-13 0 20 EBITDA margin (RHS) 60 Revenue 80 100
40
Coverage ratios (x)

5 LTM EBITDA/ int. (RHS) 4 12 15
2 Total debt/ EBITDA
0 2009^ 2010 2011 2012 9M-13
HY CORPORATES
Debt metrics (USD mn LHS, % RHS)

2,500 Total debt/cap. (RHS) Total debt 100
Debt maturity, Sep-13** (USD mn)

1,600 1,400 80 1,200 Bank loans Finance lease
2,000
1,500
60
1,000 800
1,000 Total cash* 500
40
600 400 200 Senior notes
20
0 2009^ 2010 2011 2012 9M-13
0 <1Y 1-2Y 2-3Y 3-4Y >4Y
*Excluding restricted cash; **estimate; ^calculated; Source: Company reports, Standard Chartered Research
401
Asia Credit Compendium 2014 Agile Property Holdings Ltd. (Ba2/Sta; BB/Sta; NR)

Agile underperformed peers in contracted sales in 2013 and will likely miss its full-year sales target of CNY 42bn (2012: CNY 33bn). In addition to the back-endloaded project launch schedule, sales of high-end/luxury projects are also negatively affected by HPR policies in top-tier cities. Liquidity is strong, with CNY 15.5bn of total cash as of June 2013, partly because the company raised USD 700mn of perpetual bonds and obtained HKD 5.6bn in loans in H1. Land acquisition picked up in 10M-2013, amounting to CNY 13.3bn (CNY 2.4bn for land replenishment at existing projects, CNY 853mn for tourism properties in Hainan and Yunnan, CNY 7.3bn for land in the Yangtze River area and CNY 2.8bn for projects in Guangdong).

Project delivery was decent in H1-2013, but profitability shrank: Revenue rose 28.4% y/y to CNY 15.2bn in H1-2013, backed by a 42.4% y/y increase in recognised GFA. The ASP of recognised sales was 9.8% lower y/y at CNY 10,192psm, but 11.2% higher than the 2012 average of CNY 9,166psm. That said, project development costs and sales/marketing expenses rose significantly, resulting in a small (2.7% y/y) increase in gross profit to CNY 5.5bn and a 3.7% decline in EBITDA to CNY 4.4bn. As such, gross profit margin fell to 36.2% in H12013 from 41.4% in 2012, and EBITDA margin shrank to 29.0% from 35.3%. Contribution from Clearwater Bay is significant: Revenue contribution from the high-end tourism project in Hainan, Clearwater Bay, grew substantially to CNY 3.7bn in H1-2013, accounting for 24.3% of total H1 revenue. This was higher than the 2012 total of CNY 3.2bn. The ASP was CNY 24.537psm. The project also contributed CNY 4.8bn (c.30%) to Agiles CNY 16.1bn of contracted sales in H1-2013. Contracted sales fall behind schedule: Agile sold CNY 29.65bn worth of property (total GFA of 2.6mn sqm) in 10M-2013 at an ASP of CNY 11,497psm. This represented y/y growth of 24.3%, but accounted for only 71% of its full-year target of CNY 42bn, underperforming peers. In addition to the back-end-loaded project launch schedule, sales of the companys high-end-tourism- and resortrelated projects have been negatively affected by policy controls. Liquidity is strong, but credit metrics deteriorated: Excluding the USD 700mn (c.CNY 4.4bn) 8.25% of perpetual bonds issued in January 2013, total debt rose to CNY 35.2bn as of June 2013 from CNY 27.0bn at end-2012. Agile obtained HKD 5.6bn of a 3Y syndicated loan in H1 (it drew down HKD 4.0bn in May and HKD 1.6bn in July). The loan helped to lower Agiles overall financing cost to 8.1% p.a. in H1-2013 from 8.7% in 2012. Credit metrics weakened on higher debt and lower EBITDA; total debt/capital rose to 50.9% as of June 2013 from 49.2% at end-2012. Total debt/LTM EBITDA increased to 3.4x in H1-2013 from 2.5x in 2012, and EBITDA/interest fell to 3.6x from 4.2x. That said, liquidity remained sound, with total cash of CNY 15.5bn (including restricted cash of CNY 5.5bn). Land acquisitions picked up significantly: Agile added 9mn sqm of GFA for a total attributable cost of CNY 13.3bn (CNY 1,606psm/GFA) in 10M-2013. This is much higher than the land cost of CNY 2.8bn in 2012 and CNY 1.6bn in 2011. Total land bank grew to 43.3mn sqm as of October 2013 from 34.9mn sqm at end2012. Average land bank cost remained low at about CNY 1,205psm/GFA (end2012: CNY 1,148psm/GFA). Evolving business model and expansion strategy face a test: Agile has expanded its land bank outside Guangdong province in recent years. An area of focus is developing a land bank for high-end tourism- and resort-related projects. In addition to Hainan (mainly Clearwater Bay), Agile added 4.7mn sqm of GFA in Yunnan for tourism property projects. The company also likes cities in the Yangtze River region. It added 3.6mn sqm of GFA for a total attributable cost of CNY 7.3bn in 10M-2013. Geographical distribution of land bank, Oct-13 (mn sqm)
18 15 12 9 6 3 0 Guangdong Western North & northeastern Central Yangtze River Hainan & Yunnan Pearl River
Company profile
Agile Property Holdings Ltd. (Agile) is an established land developer based in Guangdong province. As of October 2013, it had a total land bank of 43.3mn sqm from 86 projects across different Chinese cities, at various development and planning stages. Agile remains Guangdong-focused, although its proportion of land bank in the province is currently lower (c.41%) than a year ago (48%). The company has also expanded into tourism-/resort-related sectors in recent years it has 9.8mn sqm of land bank in Hainan province (it bought the bulk of the 9.2mn sqm for the Clearwater Bay project at an average of CNY 312psm/GFA) and 4.7mn sqm in Yunnan, which it bought at an average of CNY 202psm/GFA in 2012-13.
HY CORPORATES
Changzhou
Zhengzhou
Yunnan
Yangzhou
Hangzhou
Shenyang
Tianjin
Shanghai
Changsha
Chengdu
Hainan
Ningbo
Xi'an
402
Chongqing
Chuzhou
Nanjing
Wuxi
Zhenjiang
Asia Credit Compendium 2014 Agile Property Holdings Ltd. (Ba2/Sta; BB/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt# Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 57.7 30.8 44.5 2.9 6.4 274.9 97.6 39.5 50.5 2.6 6.3 203.0 33.0 47.0 48.1 2.0 6.1 95.7 (1.7) 35.3 49.2 2.5 4.2 155.5 (3.7) 29.0 50.9 3.4 3.6 184.1 2,982 (355) 2,627 (379) (2,549) (748) (3,298) (233) (3,388) (1,336) (4,724) (1,809) 428 (2,032) (1,603) (1,232) NA NA NA NA 6,128 44,178 12,080 5,952 15,073 10,681 69,878 20,758 10,077 20,335 7,328 81,778 22,031 14,703 23,757 9,629 15,548 13,331 4,104 (640) 3,663 1,865 20,520 8,110 (1,295) 11,034 5,976 22,945 10,788 (1,781) 11,623 4,105 30,074 10,608 (2,527) 10,531 5,000 15,216 4,415 (1,212) 4,875 2,293 2010 2011 2012 H1-13

40 35 30 25 20 15 10 20 5 0 2009 2010 2011 2012 LTM Jun-13 0 40 EBITDA margin (RHS) 60 Revenue 80 100
90,850 102,613 27,015 17,386 27,912 35,160 19,611 33,868
Coverage ratios (x)

8
6 LTM EBITDA/ interest 4
0 2009 2010 2011 2012 H1-13
HY CORPORATES

35 30 80 25 20 15 10 5 0 2009 2010 2011 2012 H1-2013 0 Total debt/cap. (RHS) 100
Debt maturity, Jun-13# (CNY bn)

18 CB 15
12 60 9 Senior notes
Total debt# Total cash*
40 6 20 Bank loans
Other borrowings
0 < 1 year 1-2 years 2-5 years >5 years
*Including restricted cash, #excluding USD 700mn of perpetual bonds issued in January 2013; Source: Company reports, Standard Chartered Research
403
Asia Credit Compendium 2014 Alliance Global Group Inc. (NR; NR; NR)
Analysts: Chun Keong Tan (+65 6596 8257), Zhi Wei Feng (+65 6596 8248)

We maintain our Stable outlook on AGI, given its strong balance sheet and diversified business model. Its businesses are driven by local consumption (F&B, property) and tourism (hotels, leisure and casinos), and Megaworld and Emperador are domestic market leaders. We see room for Travellers to contribute more, with proceeds from its listing being used for expansion. Megaworld has continued to deliver in both the sales and the leasing markets. We believe AGIs non-cyclical businesses the QSRs and F&B will generate the recurring income needed to support its credit profile and cash flow. We also like its strong balance sheet, which enables it to incur additional debt for new projects. Its credit profile remains firm.

Revenue continued to grow across business segments: Revenue for 9M-2013 rose 15% y/y to PHP 84.8bn, driven by revenue growth in all AGIs business segments. EBITDA rose 20% y/y to PHP 21.8bn, translating into a marginally higher EBITDA margin of 25.7% compared with 24.8% a year earlier. Strong balance sheet; net cash position maintained: AGI had cash on hand of PHP 83.2bn as of September 2013, substantially higher than the PHP 68.3bn as of end-2012. This was supported in part by Megaworlds USD 250mn 10Y bond issue in April and AGIs sale of Emperador shares via an IPO in September 2013. Total debt rose to PHP 73.5bn from PHP 61.1bn in 2012, but short-term debt fell to PHP 4.1bn from PHP 4.6bn. As such, AGIs balance sheet strengthened, with net cash of PHP 9.7bn compared with PHP 4.2bn in 2012. Credit metrics remained healthy. Total debt/capital fell to 30.2% from 30.8% as of end-2012, while total debt/EBITDA rose marginally to 2.5x from 2.6x. EBITDA/interest fell to 5.3x from 6.8x at end-2012. Megaworld Delivering on all fronts: Megaworld reported total revenue of PHP 26.7bn in 9M-2013, up 12% y/y. Together with its subsidiaries, Megaworld launched a total of 18 projects in 9M-2013 and sold PHP 56bn in reservation sales, +20% y/y. Core net income rose 15% y/y to PHP 6.6bn from PHP 5.7bn on strong residential sales and strong leasing income from its BPO and retail portfolio. Rental income jumped 20% y/y to PHP 4.3bn from PHP 3.6bn. Megaworld contributed c.33% of AGIs recurring net income and about 29% of its total revenue. Emperador Inc. (EMP) Market-leading position: EMP is a publicly listed company that is used as a backdoor listing vehicle for Emperador Distillers Inc. (EDI). EDI is a wholly owned subsidiary of EMP. AGI now owns 87.55% of EMP and booked a one-off PHP 2.9bn gain that it realised from the sale of EMP shares in Q3-2013. EDIs 9M-2013 revenue rose 22% y/y to PHP 20.6bn; this is commendable, given the excise-tax increase at the start of the year. According to the Nielsen Retail Index, EDI accounted for 97% of brandy volume and 48% of spirits volume in the Philippines. On the back of effective cost management, EBITDA rose 26% y/y to PHP 6.3bn. EMP contributed c.37% of AGIs recurring net income and about 23% of its total revenue. Travellers Poised for higher contribution: Revenue grew 15.6% y/y to PHP 27.1bn, but net profit was relatively unchanged at PHP 3.6bn due to higher expenses. Travellers was publicly listed on 5 November 2013, and the proceeds will likely be used for Phase 2 and 3 expansion at RWM. Travellers has already invested USD 845mn and will invest another USD 560mn upon completion of Phase 3 in 2017. The segment contributed c.15% of AGIs recurring net income and 30% of its total revenue, and we believe its contribution will increase upon completion of these projects. Segment contributions to revenue and net income, 9M-13 (PHP bn)
30 25 20 15 10 5 0 Real estate Tourism, entertainment and gaming F&B Quick-service restaurants Net profit Revenue
Company profile
Established in 1993, Alliance Global Group Inc. (AGI) is a leading conglomerate in the Philippines. Controlled by the Tan family, it has a variety of business interests, including (1) real-estate development and leasing residential, commercial, retail and hotel operations, mainly through 57%-owned Megaworld; (2) F&B, mainly through 88%-owned Emperador Inc.; (3) quick-service restaurants (QSRs) 49%-owned Golden Arches is the franchisee for McDonalds in the Philippines; and (4) integrated tourism through 44%-owned Travellers International Hotel Group (Travellers), a JV with Genting Hong Kong Ltd., AGI operates Resorts World Manila (RWM), an integrated entertainment and casino complex.
HY CORPORATES
404
Asia Credit Compendium 2014 Alliance Global Group Inc. (NR; NR; NR)
Summary financials
2009 Income statement (PHP mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (PHP mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (PHP mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 39.0 23.5 19.0 2.5 10.8 1,374 13.5 23.1 30.5 4.6 6.5 945 24.3 20.2 25.9 4.1 4.1 1,691 132.4 26.5 30.8 2.5 6.8 1,472 19.6 25.7 30.2 2.6 5.3 2,033 3,666 (2,242) 1,424 (2,719) (2,442) (5,161) (575) 6,969 15,823 8,951 31,145 47,264 49,148 68,301 83,221 32,706 7,702 (715) 8,792 4,796 37,817 8,739 (1,342) 12,081 6,909 53,650 10,863 (2,633) 18,114 11,608 95,095 25,241 (3,710) 12,120 13,904 84,824 21,810 (4,148) 23,062 14,362 2010 2011 2012 9M-13
Profitability (PHP bn LHS, % RHS)

120 Revenue 100 80 100
60
40 40 20
20
128,337 164,241 220,532 272,645 316,555 19,213 (11,933) 82,101 40,154 (7,110) 44,024 (5,124) 64,081 (4,220) 73,531 (9,690) 0 2009 2010 2011 2012 LTM Sep-13 0
91,714 126,005 143,757 170,282
Coverage ratios (x)

5 Total debt/EBITDA 12
(7,188) (13,419) (11,764) (219) (3,629) 2,404 (3,639) (2,813) (3,842)
10
8 3 6 2 EBITDA/ interest (RHS) 4
0 2009 2010 2011 2012 9M-13
HY CORPORATES
Debt metrics (PHP bn LHS, % RHS)

90 80 70 60 50 40 30 20 10 0 2009 2010 2011 2012 9M-13 0 20 Total debt/cap. (RHS) Total debt Total cash 100
Debt maturity, Sep-13* (PHP bn)

70 60 80 50 60 40 30 20 10 0 <6M 6-12M 1-5Y >5Y
Bonds
40
Loans and borrowings
*Based on contractual maturities rather than the actual carrying value of liabilities; Source: Company reports, Standard Chartered Research
405
Asia Credit Compendium 2014 PT Berau Coal Energy Tbk. (B1/Neg; BB-/Neg; NR)

BCE is a well-managed company with a simple capital structure. Its major credit overhang is the continuing dispute at the shareholder level. The companys profitability and credit metrics deteriorated in 9M-2013 due to a 19% y/y decline in the coal ASP to USD 60.4/t. However, production and sales volumes continued to grow. BCE is committed to costsaving initiatives it reduced cash costs to USD 38.1/t in 9M-2013 from USD 40.5/t in 9M-2012, and its strip ratio fell to 8.8x from 10.3x. With total cash of USD 392mn as of September 2013, BCE has sufficient liquidity to fulfil its operating and debt obligations. While the company intends to call and refinance the BRAUIJ 15/17 bonds to extend its debt maturity and lower borrowing costs, the plan has been consistently delayed by the overhang at the shareholder level.

Operational performance is in line: BCE is on track to achieve its full-year 2013 coal production target of 23mt (2014F: 26mt). Production volume increased 16% y/y to 17.5mt and sales volume rose 20% to 17.5mt in 9M-2013. However, the ASP fell 19% y/y to USD 60.4/t in 9M-2013 (Q1: USD 63.2/t; Q2: USD 59.8/t; Q3: USD 58.5/t). To support profitability, the company is committed to its cost-saving initiatives. It managed to reduce average cash costs after royalty payments of USD 38.1/t in 9M-2013 from USD 40.5/t in 9M-2012. The strip ratio was reduced to 8.8x from 10.3x. Total revenue fell a marginal 3% y/y to USD 1.1bn in 9M-2013, and EBITDA declined 30% to USD 205mn. As a result, EBITDA margin shrank to a low of 18.9% in 9M-2013, versus 24.7% in 2012 and 36.6% in 2011. However, EBITDA margin saw a q/q improvement of (Q1: 17.0%, Q2: 17.9%, Q3: 21.8%), in line with BCEs continued cost-saving efforts, while coal prices continued to weaken q/q. Weakening credit metrics, sufficient liquidity: Including finance leases, total debt stood at USD 981mn as of September 2013, consisting mainly of the USD 450mn 12.5% of 2015 bonds (callable since July) and USD 500mn 7.25% of 2017 bonds. Total cash was USD 391mn as of September 2013, similar to the USD 364mn at end-2012. BCE cut its full-year capex to USD 50mn from the originally planned USD 70mn. Capex for 2014 is likely to maintained at the current low level if the coal market remains weak. Credit metrics continued to deteriorate LTM debt/LTM EBITDA rose to 3.3x in 9M-2013 from 2.6x in 2012, and LTM EBITDA/LTM interest fell to 1.8x from 2.7x. Total debt/capital had jumped to 82.0% as of September 2013 from 80.2% at end-2012 as the company registered USD 120mn of accumulated losses on its balance sheet. Separation transaction at the shareholder level likely to be concluded by end-2013/early 2014: Bumi Plc published a circular to shareholders for a general meeting on 4 December to vote on a transaction to separate Bumi Plc from the Bakrie Group and Bumi Resources. However, the proposed meeting was postponed 17 December due to funding issues related to Samin Tan, further delaying the separation deal. If the proposed transaction goes through, Bumi Plc will sell its entire 29.2% stake in Bumi Resources for about USD 501mn to the Bakrie Group. Samin Tan, via entities he controls, will acquire a 23.8% stake in Bumi Plc from the Bakrie Group for USD 223mn, increasing his holding in Bumi Plc to 47.6%. If the transaction materialises, we believe it will be positive for BCE. With less negative news flow and a London Stock Exchange-listed holdco, investors will likely have more confidence in the companys corporate governance and transparency. This would also pave way for BCE to call its 2015 bonds to extend its debt maturity profile and eventually reduce funding costs. Ownership and business structure (Oct-13)
30% Public & others 11.9% PT Bukit Mutiara 3.4% PT Berau Coal Energy (Issuer of 2017s and guarantor of 2015s) 100% Berau Capital Resources Pte Ltd. (Issuer of 2015s) 100% Seacoast Offshore Inc. 100% Maple Holdings Ltd. 100% Winchester Investment 100% PT Armadian Tunggal 13% Sojitz Corporation 10% 51% 39% PT Berau Coal (concession holder) Aries Investment Ltd. 87% Bumi plc 84.7% 14% 41% 15% Borneo Bumi Rothschild Avenue, Argyle Street, Flaming Luck Public & others 100% PT Pelayaran Sanditia (shipping) PT Mutiara Tanjung (transportation) PT Manira Mitra (overland conveyor) PT Kirana Berau (power plant)
Company profile
Listed on the IDX in August 2010, PT Berau Coal Energy Tbk (BCE) is 84.7% held by Bumi Plc following a reverse takeover in April 2011. Bumi Plc is a London-listed holding company, held by Borneo Bumi (30% of voting shares), jointly controlled by Samin Tan and the Bakrie Group; Rothschild (15%); and the public and others (55%) as of October 2013. Voting rights of entities controlled by Samin Tan will increase to 48% if the separation transaction with the Bakrie Group is concluded, pending shareholder approvals. BCEs key asset is its holding of PT Berau Coal, the fifthlargest coal producer in Indonesia. With first-generation coal-mining rights until April 2025, Berau Coal operates on a concession area of 118,400ha in East Kalimantan, which comprises three active mining areas in Lati, Binungan and Sambarata.
HY CORPORATES
100%
Rognar Holding BV
406
Asia Credit Compendium 2014 PT Berau Coal Energy Tbk. (B1/Neg; BB-/Neg; NR)
Summary financials
2009^ Income statement (USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 95.5 37.4 60.5 2.0 11.1 66.3 13.6 32.2 68.7 2.5 3.4 867.2 78.9 36.6 63.0 1.3 5.6 435.7 (37.8) 24.7 80.2 2.6 2.7 (29.8) 18.9 82.0 3.3 1.7 228 (15) 213 (5) 186 (85) 101 218 (59) 159 (23) (47) (73) (120) (47) (49) (50) (99) 192 1,475 589 397 384 457 1,829 850 393 387 419 2,002 798 379 469 364 2,148 979 615 242 392 2,037 959 567 211 800 299 (27) 282 82 1,055 339 (100) 222 50 1,657 565 (109) 374 110 1,531 378 (142) 1 (181) 1,084 205 (120) 56 (40) 2010 2011 2012 9M-13

2,000 100
Revenue 1,500 EBITDA margin (RHS) 1,000
80
60
40 500 20
0 2009^ 2010 2011 2012 LTM Sep-13
Coverage ratios (x)

5 15
4 Total debt/ EBITDA 3
12
2 LTM EBITDA/ int. (RHS)
0 2009 2010 2011 2012 9M-13
HY CORPORATES
886.9 2,121.7

1,000 Total debt 800 Total debt/cap. (RHS) 600 Total cash* 400 40 60 80 100
Debt maturity, Sep-13 (USD mn)

500
400
300 2015 bonds#
2017 bonds
200
200
20
100 Finance lease <1 yr 1-2 yr 2-3 yr 3-4 yr >4 yrs
0 2009 2010 2011 2012 9M-13
*Excluding restricted cash; ^calculated; #assuming a call in 2014; Source: Company reports, Standard Chartered Research
407
Asia Credit Compendium 2014 PT Bumi Resources Tbk. (Ca/Sta; CC/Neg; NR)

Bumis credit profile and liquidity position are extremely weak, burdened by its unsustainably high debt. EBITDA fell 16.5% y/y to USD 397mn in 9M-2013 as the decline in coal prices outpaced cost savings. Bumi slashed capex to only USD 80mn, but incurred USD 263mn in interest costs and USD 136mn in taxes in 9M-2013, resulting in negative FCF of USD 198mn. The cash balance remained low, at USD 57mn of free cash and USD 98mn of restricted cash as of endSeptember 2013. While the CIC debt-to-equity swap would be positive if it materialised, liquidity pressure remains. Bumi has close to USD 1bn of debt maturing in the next 12 months. CFO is unlikely to improve in the near future given persistently low coal prices. Further asset-disposal plans (including its holdings in Arutmin) also remain uncertain.

Poor financial performance on a sharp fall in thermal coal prices: Bumis coal production volume is in line with targets: it plans to produce c.77-78mt of coal in 2013 (2012: 74mt; 9M-2013: 60mt). However, coal prices were weak in 9M-2013, averaging USD 66.8/t, much lower than the ASP of USD 82/t in 2012 and USD 92/t in 2011. As such, total revenue fell 4.2% y/y to USD 2.7bn in 9M-2013. While Bumi managed to reduce cash production costs to USD 41.9/t in 9M-2013 from USD 47.3/t in 9M-2012 and cut its strip ratio to 8.8x from 10.9x, profitability shrank as the drop in coal prices outpaced cost savings. Gross profit margin was 21.0% in 9M-2013 against 27.1% in 9M-2012, and EBITDA margin fell to 15.0% from 17.2%. Proposed CIC transaction will be a positive development if it materialises: Bumi announced in early October 2013 that China Investment Corp. (CIC) has agreed to swap USD 1.3bn of loan principal for stakes in the companys various entities, subject to approval from various parties. If the transaction goes through, CIC will hold c.10-15% of Bumi (representing USD 150mn worth of debt), 19% of KPC and IndoCoal Resources, and 42% of BRMS. This will ease Bumis debt burden and increase its funding sources, especially access to funding from Chinese banks. Bumi announced a consent solicitation for bondholders of the BUMIIJ 16/17 to approve its asset disposal plans at end-November. Separation from Bumi Plc will likely be decided in December: In July 2013, Bumi Plc agreed to divest its entire 29.2% interest in Bumi to the Bakrie Group for USD 501mn. According to a Bumi Plc announcement at end-October, Bumi Plc will hold an EGM in December for shareholders to vote on the proposed separation of Bumi from the London Stock Exchange-listed company. Liquidity concerns remain: Bumi had total debt of about USD 4.2bn as of September 2013 (ST debt of USD 1.2bn and LT debt of USD 3.1bn). While total debt will be lower at c.USD 3.1bn following the CIC loan-to-equity swap, Bumi still has close to USD 1bn in debt maturing in the next 12 months, including USD 375mn 9.25% of convertible bonds due in August 2014. In addition, annual interest expenses will remain high (USD 449mn in 9M-2013 and USD 621mn in 2012). In comparison, estimated EBITDA will likely fall to about USD 580mn p.a. or below (USD 680mn in 2012), assuming an ASP of USD 70/t (slightly higher than the 9M2013 average), a smaller contribution from KPC, and EBITDA margin of 18%. That said, credit metrics will likely improve from current levels. We expect total debt/LTM EBITDA to fall to about 5.4x, versus 7.1x in 9M-2013 and 6.3x in 2012. Coal-market weakness continues to affect debt-reduction plans: Bumi is also in discussions with potential buyers of its 70% stake in Arutmin. Bumi expects to sell the entire coal mine for a price exceeding the USD 1.5bn valuation and to receive about USD 800mn of cash after tax and other expenses. Arutmin produces about 30mt of coal p.a. currently (2012: 28mt); its concession expires in November 2019. Ownership and business structure, Oct-13
Bumi Resources Kaltim Prima Coal (KPC) coal Arutmin Indonesia coal IndoCoal Resources Fajar Bumi Sakti coal Pendopo Energi Batubara^ coal Darma Henwa contractor Gallo Oil oil exploration Bumi Capital issuer Bumi Investment issuer 65% 70% 70% 50% 85% 31% 100% 100% 100% C O A L Bumi Resources Minerals N O N C O A L Citra Palu Mineral^ gold Gorontalo Mineral^ gold, silver, copper Dairi Prima Minerals^ zinc, lead Bumi Mauritania^ iron ore Tamagot Bumi SA^ iron ore Konblo Bumi^ diamonds, gold Newmont Nusa Tenggara gold Sarkea Prima Minerals mining Bumi Japan marketing services În exploration stage 87% 97% 80% 80% 60% 90% 94% 18% 100% 100%
Company profile
Listed on the IDX, PT Bumi Resources Tbk. (Bumi) is Indonesias largest thermal coal producer and exporter, with target 2013 coal production of c.78mt. Bumi has two principal coal assets in Kalimantan (Borneo): a 65% stake (or 51% if the CIC transaction goes through) in KPC (formerly owned by Rio Tinto and BP) and a 70% stake in Arutmin (formerly owned by BHP Billiton). Tata Group has been a 30% shareholder in both coal mines since June 2007. In early 2010, Bumi reorganised all its non-coal assets under a new entity, Bumi Resources Minerals (BRMS) a holding company for its gold, silver, copper, iron ore, zinc and lead businesses inside and outside Indonesia. Listed on the IDX in December 2010, BMRS is 87% owned by Bumi (45% after the CIC deal).
HY CORPORATES
408
Asia Credit Compendium 2014 PT Bumi Resources Tbk. (Ca/Sta; CC/Neg; NR)
Summary financials
2009^ Income statement (USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents** Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (36.6) 20.4 71.8 5.1 4.0 11.7 65.6^ 25.3 74.9 5.3 1.1 302.6 67.6 31.0 79.3 3.4 1.9 8.9 (45.1) 18.0 91.6 6.3 1.1 7.1 (16.5) 15.0 100.4 7.1 0.9 4.8 246 (642) (396) (97) 116 (516) (400) (59) 137 (287) (150) (99) 240 (338) (98) (27) (118) (80) (198) 60 7,354 3,773 3,713 1,479 230 7,047 3,946 3,716 1,319 69 7,422 4,180 4,111 1,091 45 7,354 4,277 4,232 392 57 7,027 4,249 4,192 (18) 3,665 747 (187) 518 190 2,927 740 (652) 530 207 4,001 1,240 (661) 599 221 3,776 680 (621) (616) (666) 2,651 397 (449) (456) (378) 2010 2011 2012 9M-13

5,000 EBITDA margin (RHS) 4,000 Revenue 80 100
3,000
60
2,000
40
1,000
20
0 2009^ 2010 2011 2012 LTM Sep-13
Coverage ratios (x)

8 7 6 5 3 4 3 2 1 2009^ 1,000 Finance leases 2010 2011 2012 9M-13 2 LTM EBITDA/ int. (RHS) Total debt/ EBITDA 6
HY CORPORATES

5,000 Total debt/cap. (RHS) 4,000 Total debt 100 120
Debt maturity, Sep-13** (USD mn)
800
Convertible bonds
USD bonds
80 3,000 60 2,000 40 1,000 Total cash* 2009^ 2010 2011 2012 9M-13 200 Bank loans 0 Q4-13 2014 2015 2016 2017 New CIC loan 400 600
20
*Excluding restricted cash and short-term investments; **assuming the CIC transaction goes through; ^based on old GAAP; Source: Company reports, Standard Chartered Research
409
Asia Credit Compendium 2014 Central China Real Estate Ltd. (B1/Sta; BB-/Sta; NR)

CCRE has a good record in meeting project delivery and sales targets, despite its singleprovince concentration. The company sees continued expansion potential, helped by its diversified product range in more than 30 cities in Henan. Its total land bank grew to 18.7mn sqm as of September 2013 from 16.4mn sqm at end-2012 and 13.8mn sqm at end-2011. Contracted sales have also increased steadily; CCRE targets CNY 12.6bn in 2013 (2012: CNY 10.4bn; 2011: CNY 8.1bn). Contracted ASP was flat at CNY 6,600psm in 10M-2013 (2012: 2011: CNY CNY 6,550psm, 6,118psm). However, its partly debt-funded growth has resulted in weakening credit metrics. We think it is crucial for the company to balance its expansion plans and credit profile while maintaining high asset turnover.

Continued to seek expansion opportunities in Henan: While CCREs total land bank is concentrated entirely in Henan province, it continues to see growth potential in the province for its four main product lines Forest Peninsula, Green Garden, U-Town and Code One City targeted at different market segments. The company added 5.2mn sqm of land in 10M-2013 for a total attributable consideration of CNY 2.6bn or CNY 661psm/GFA. This is higher than the attributable land-purchase cost of CNY 1.9bn or CNY 527psm/GFA (total GFA of 4.1mn sqm) in 2012. Total land bank rose to 18.7mn sqm as of September 2013 from 16.4mn sqm at end-2012. The land cost of its total land bank remains low, at CNY 691psm/GFA as of September 2013, about 10.5% of the ASP of CNY 6,581psm for contracted sales in 9M-2013. Contracted sales results are in line with target: CCRE reported CNY 10.72bn of contracted sales in 10M-2013, representing 85% of its full-year sales target of CNY 12.6bn (up 22% from 2012 sales of CNY 10.4bn). The ASP was flat at CNY 6,602psm compared with the 2012 average of CNY 6,549psm. Most of CCREs buyers are end users first-time buyers accounted for 53% of total H1-2013 sales, upgraders comprised 38%, and investors the remaining 9%. Sound liquidity from sales and offshore debt-raising activity: CCRE raised USD 200mn 8% of 7Y bonds in January 2013 and USD 400mn 6.5% of 5Y bonds in June for refinancing and expansion needs. The company also obtained a 3Y dual-tranche term loan comprising HKD 780mn and USD 25mn in October. Total cash was CNY 6.0bn (CNY 5.2bn of free cash and CNY 754mn of restricted cash), and undrawn bank facilities totalled CNY 7.35bn as of June 2013. Profit margins were largely stable: Revenue was steady at CNY 3.0bn in H1-2013, but EBITDA fell 5% y/y to CNY 813mn. The ASP of recognised sales was CNY 5,438psm (H1-2012: CNY 5,234psm; 2012: CNY 5,667psm). Gross profit margin was 36.3% in H1-2013 (2012: 35.4%), and EBITDA margin was 26.7% (2012: 26.2%). Credit ratios weakened due to higher debt and flat LTM EBITDA: Total debt increased substantially to CNY 8.2bn as of June 2013 from CNY 6.6bn at end-2012, following the two offshore bond issues. Total debt/capital rose to 57.9% as of June 2013 from 53.9% at end-2012. Total debt/LTM EBITDA increased to 5.1x in H1-2013 from 4.0x in 2012, and LTM EBITDA/interest declined to 1.7x from 2.6x. Balancing expansion and credit profile is key: We like the companys development strategy of offering multiple product lines in one province to ensure brand recognition and economies of scale. CCRE has maintained its top position in terms of GFA sold in the province and grew its market share to 5.7% in H1-2013 from 4.5% in 2012. The success of this strategy is evident in its consistently satisfactory sales performance, regardless of market changes. That said, we think CCRE should continue to reduce leverage and gearing levels while seeking new business opportunities. Market share in Henan province (in terms of GFA sold, %)
5.1 4.5 3.1 3.3 3.7 5.7
Company profile
Established in 1992 and listed on the HKSE in 2008, Central China Real Estate Ltd. (CCRE) has a presence only in Chinas Henan province, the countrys second most populous province (population of more than 100mn). As of September 2013, it had a total land bank of 18.7mn sqm at an average cost of CNY 691psm/GFA in about 30 cities in Henan. Under its wellestablished Jianye () brand, CCRE provides a wide range of products to buyers in the mid to high-end market. The company brought in CapitaLand as a strategic investor in 2006, and CapitaLand holds a c.27% interest in CCRE. In 2008, the two developers entered into non-compete agreements in Henan and five neighbouring provinces.
HY CORPORATES
2008
2009
410
2010
2011
2012
H1-2013
Asia Credit Compendium 2014 Central China Real Estate Ltd. (B1/Sta; BB-/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure^ Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (31.3) 25.0 45.7 4.1 4.1 237.4 72.6 26.2 57.1 4.2 3.8 245.4 82.3 32.5 51.6 2.4 3.7 134.5 (22.9) 26.2 53.9 4.0 2.6 347.9 (5.2) 26.7 57.9 5.1 2.0 641.1 (105) (174) (279) (208) 1,542 (1,392) 150 (142) (121) (1,569) (1,690) (184) 562 (1,801) (1,238) (382) NA NA NA NA 2,872 10,147 2,793 (79) 3,320 3,907 15,433 5,015 1,108 3,772 3,908 19,478 5,279 1,371 5,042 4,922 24,348 6,570 1,648 5,623 5,979 27,139 8,173 2,195 5,950 2,740 686 (166) 651 405 4,516 1,183 (313) 1,095 545 6,638 2,156 (582) 1,818 668 6,346 1,663 (647) 1,846 823 3,050 813 (397) 754 357 2010 2011 2012 H1-13

7 6 80 5 4 3 2 20 1 0 2009 2010 2011 2012 LTM Jun-13 0 EBITDA margin (RHS) 60 Revenue 100
40
Coverage ratios (x)

2 LTM EBITDA/int.
0 2009 2010 2011 2012 H1-13
HY CORPORATES

8.5 Total debt 100

4
6.8
Total cash*
80
5.1
Total debt/cap. (RHS)
60 2 40 1 CB Senior notes
3.4
1.7
20
Other loans Bank loans < 1 yr 1-2 yrs 2-5 yrs > 5 yrs
0.0 2009 2010 2011 2012 H1-13
*Including restricted cash; încluding net acquisitions; Source: Company reports, Standard Chartered Research
411
Asia Credit Compendium 2014 China Fishery Group Ltd. (B1/Neg; B+/Neg; BB-/Neg)

CFG acquired a 99.8% stake in Copeinca in 2013 for a total of USD 793mn. Including the loan raised for the acquisition and Copeincas 2017 bonds, total debt increased significantly to USD 1.2bn as of September 2013. However, revenue declined marginally due to a lower TAC in Peru (CFG booked only a months revenue from Copeinca in FY13), lacklustre performance of its Contract Supply segment and a sharp drop in revenue at CF Fleet. As a result, credit metrics weakened notably in FY13. That said, we expect CFG to report some improvement in credit profile in FY14. In addition to a higher TAC in Peru, with contributions from Copeinca and improved cost efficiency, its Contract Supply and CF Fleet businesses are also likely to improve y/y. That said, ST refinancing pressure remains.

Copeinca acquisition is positive for CFGs Peruvian operations: CFG acquired a 99.8% stake in Copeinca, Perus second-largest fishing company, for a total of USD 793mn in 2013. CFG now has 16.9% of quota rights to the TAC of anchovies in north and central Peru (6.2% prior to the acquisition) and 14.7% in south Peru (11.7% initially). With revenue contribution from Copeinca (2012: USD 314mn), CFG will have a balanced revenue base comprising its Contract Supply segment (USD 361mn in FY13) and Peruvian operations (USD 166mn, with a months revenue contribution from Copeinca). In addition, the synergies of the two companies in Peruvian waters will help CFG improve operating efficiencies and lower costs. Revenue fell, but profitability remained high in FY13: Revenue fell 8% y/y to USD 555mn in FY13. Contribution from its Contract Supply business fell marginally to USD 361mn (FY12: USD 375mn) on lower ASPs and sales volumes. Revenue from the Peruvian fishmeal and fish oil business fell 7% y/y to USD 166mn (FY12: USD 179mn) mainly due to a substantial reduction in the TAC in the second fishing season starting October 2012 to 810,000mt from 2.5mt in the same fishing season a year ago. This is despite the 25% increase in the average fishmeal price to USD 1,660/t and the 73% increase in fish oil prices to USD 2,351/t. CFG booked a months revenue of USD 32mn from Copeinca. Its CF Fleet business reported the largest drop in revenue, of 44% y/y, to USD 28mn in FY13 (mostly from its newly established operations in Namibia). That said, profit margins remained high EBITDA margin rose to 41.4% in FY13 from 37.2% in FY12. Contribution from China grew further in FY13: Sales to China totalled USD 447mn in FY13, accounting for 80.5% of total sales (FY12: 58.6%). Sales to Japan and South Korea were USD 39mn (6.8% of total sales), versus USD 99mn in FY12. Credit metrics deteriorated, mainly due to the Copeinca acquisition: CFG raised USD 227mn via a rights issue and USD 354mn of a bridging loan for its Copeinca acquisition. In addition, it consolidated USD 250mn of 2017 bonds from Copeinca on its balance sheet. As such, total debt rose to USD 1.2bn as of September 2013 from USD 579mn a year ago. However, the company consolidated only a months revenue from Copeinca for FY13, which resulted in weaker credit metrics. Total debt/EBITDA rose to 5.3x in FY13 from 2.6x in FY12; EBITDA/interest coverage fell to 4.5x from 8.6x as CFG incurred higher interest expenses on a full-year coupon payment for the USD 300mn of 2019 bonds (issued in July 2012) and higher debt. Total debt/capital increased to 50.8% as of September 2013 from 41.5% as of September 2012. That said, credit ratios should improve in FY14. In addition to full-year revenue contribution from Copeinca and a higher TAC in Peru in 2014, CFG is also considering different options to retain Copeincas listing status on the Oslo Stock Exchange to strengthen the merged entitys capital and organisational structures. Operating liquidity is sufficient, but ST refinancing uncertainty remains: Total cash was USD 75mn as of September 2013. CFG recorded positive FCF of USD 121mn in FY13 it generated net operating cash flow of USD 284mn, spent USD 150mn as prepayment for its fourth supply agreement and incurred USD 13.8mn of capex. This was against ST debt of USD 669mn, including USD 57mn of inventory loans, USD 27mn of revolving loans, USD 99mn of term loans and USD 354mn of a bridging loan. CFG expects to refinance the bridging and term loans in the next six months. Maintenance capex is low at c.USD 30-40mn in FY14. Despite the positive developments in the company, we think that geopolitical risks and seasonality will continue to affect its financial and operational performance. Distribution of revenue by operation/market (total of USD 555mn in FY13)
China fishery fleet Peruvian fishmeal Contract supply 5.0% 29.9% 65.1% SEA Others Europe West Africa Janpan & Korea China 1.7% 3.6% 3.6% 3.7% 6.8% 80.5%
Company profile
Listed on the SGX in 2006, China Fishery Group Ltd. (CFG) is an integrated industrial fishing company specialising in wild fish catch and fishmeal processing. Through the Contract Supply segment, it has long-term rights to supplies of Alaska pollock in Russias North Pacific area. Following the Copeinca acquisition, it also has quota rights to 16.9% of the total allowable catch (TAC) of anchovies in the northern and central zones of Peru and 14.7% in the southern zone. CFG has 50 vessels and 12 fishmeal and fish oil processing plants for its Peruvian operations. Under the China Fishery (CF) Fleet segment, CFG owns and operates one factory vessel and six catcher trawlers in the South Pacific Ocean and along the coast of West Africa. CFGs main markets include China (80.5% of total FY13 revenue), Japan, South Korea, Southeast Asia, West Africa and Europe.
HY CORPORATES
412
Asia Credit Compendium 2014 China Fishery Group Ltd. (B1/Neg; B+/Neg; BB-/Neg)
Summary financials*
FY10 Income statement (USD mn) Revenue EBITDA Gross interest exp. Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure** Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 48.6 39.8 37.5 1.7 6.5 25.8 14.5 35.8 39.2 1.9 6.7 18.1 (8.6) 37.2 41.5 2.6 8.6 33.7 2.4 41.4 50.8 5.3 4.5 13.8 114 (140) (27) (2) 102 (181) (79) (9) 91 (79) 12 (37) 284 (164) 121 (16) 35 1,182 406 371 676 24 1,365 497 473 773 51 1,501 579 528 816 75 2,820 1,211 1,137 1,174 539 214 (33) 90 117 685 245 (36) 119 104 604 225 (26) 108 78 555 230 (51) 81 84 FY11 FY12 FY13

700 600 500 400 300 200 20 100 0 FY10 FY11 FY12 FY13 0 60 EBITDA margin (RHS) Revenue 80 100
40
Coverage ratios (x)

6 Total debt/EBITDA 10
4 6 3 EBITDA/ interest (RHS) 4
0 FY10 FY11 FY12 FY13
HY CORPORATES

1,300 Total debt 100

600 Finance leases Term loans
1,040
80
500
400 780 Total debt/cap. (RHS) 60 300 40 200 260 Total cash 0 FY10 FY11 FY12 FY13 0 20 Bridging loans Senior notes
520
100 Inventory loans < Sep-14 Revolving loans < Sep-15 < Sep-16 < Sep-17 > Sep-18
*Financial year ending 28 September; **including prepayments for charter hires and suppliers; Source: Company reports, Standard Chartered Research
413
Asia Credit Compendium 2014 China Metallurgical Group Corp. (Ba1/Sta; BB+/Sta; NR)

CMGCs dominant position and healthy order backlog in metallurgical projects provide good earnings visibility. While non-metallurgical projects had stretched its working capital requirements, the company has reduced its BT contracts since H2-2012. On the other hand, its overseas mining projects and equipment business face profitability pressure, while the property segment will exhibit strong earnings. Overall, we expect positive CFO in 2013-14 and the company to scale back annual capex to c.CNY 5-6bn. We therefore forecast that its credit profile will stabilise and that leverage will improve to c.8-9x in 2014. Accordingly, we change our credit outlook on CMGC to Stable from Negative.

Dominant position in metallurgical E&C: CMGC has been involved in the design and construction of nearly all medium-sized and large steel plants in China. Its reputation is based on strong technological capabilities, long-standing customer relationships and its ability to meet regulatory requirements. That said, new orders in the past year have mainly been for facility upgrades of existing plants, rather than new construction projects. As a result, MCCs overall E&C segment posted a 14.8% y/y decline in revenue in H1-2013, although its EBITDA margin improved by 1.1ppt to 7%. While the companys order backlog provides visibility for about a year and a half, we believe overall growth prospects are limited in 2014. Non-metallurgical projects carry higher risk: CMGC has also diversified into transportation, sports-stadium, business-complex and social-housing projects. Contribution from non-metallurgical projects grew to 58% of E&C revenue in 2012 (versus 32.4% in 2008). However, many of these projects are based on buildtransfer (BT) contracts with local governments, for which CMGC needs to provide upfront funding (it receives advance and progress payments for metallurgical projects). Also, given the poor financial health of local governments, CMGCs working-capital requirements had been stretched. That said, it has reduced its BT contracts since H2-2012, which in turn has helped balance sheet metrics. Other businesses: CMGC has invested in domestic and overseas iron, copper, nickel, lead and zinc assets as part of the governments strategy to secure mining resources. It receives strong support from policy banks, but its projects carry high risks and have encountered project delays, cost overruns and asset impairments. The resource segment posted losses of CNY 3.7bn in 2012 and CNY 562mn in H1-2013; segmental earnings should improve in 2014, given the disposal of its investment in Huludao Non-Ferrous Metal Group. The equipment manufacturing segment, too, posted losses in 2012 and H1-2013 due to sluggish demand and pricing pressure. On the other hand, MCCs property segment, which accounted for only 10.3% of revenue in H1-2013, posted a 55% increase in profit following the sale of ownership in some major development projects. Separately, CMGC has disposed of its paper manufacturing business, which should reduce overall debt. Balance sheet has stabilised: CMGC focused on its more profitable segments and controlled its expenses in H1-2013, which helped it post better EBITDA margins. We expect positive CFO in 2013-14 (versus a negative CNY 1.8bn in 2012), on account of lower working capital requirements, faster receivables collection, strong property sales and disposal of some loss-making businesses. CMGCs debt had increased materially to CNY 148bn in 2011 from CNY 91bn in 2009, and leverage was very high at 11.4x. However, it has since scaled back capex on mining projects and decreased its investment in BT projects; we expect spending of c.CNY 5-6bn in 2013-14 (CNY 10.7bn in 2011). Given the gradual improvement in earnings in 2014, we believe CMGCs credit profile will stabilise and leverage will likely come down to c.8-9x. While liquidity appears tight, with CNY 83bn of short-term debt, the company has strong access to funding markets on account of its SOE status. Strong government link: CMGC plays an important role in enhancing the competitiveness of Chinas steel industry, developing low-income housing and investing in overseas mining assets. It received funding support from state-owned banks and over CNY 3bn of government subsidies and capital injections during 2010-12. Also, the government demonstrated strong support by assisting CMGC with disposing of its two loss-making businesses: the paper business was sold to another SOE, and Huludao is undergoing a bankruptcy process.
414
Company profile
China Metallurgical Group Corp. (CMGC) is primarily an engineering and construction (E&C) company, with a dominant position in domestic steel plant construction. The E&C segment accounts for over 80% of CMGCs revenue; other businesses include equipment manufacturing, natural resources and property development. CMCG raised USD 5.1bn in 2009 by listing its core operating subsidiary, Metallurgical Corp. of China (MCC), which accounts for more than 90% of its assets and revenue, on the SSE and the HKSE. CMGC currently owns 64.18% of MCC. CMGC is 100% owned by the Chinese government through the State Council, and its 2012 revenue of c.USD 37.2bn places it among the top 10 E&C companies globally.
HY CORPORATES
Asia Credit Compendium 2014 China Metallurgical Group Corp. (Ba1/Sta; BB+/Sta; NR)
Summary financials
2010 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow (30,626) (18,377) Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 27.7 6.1 6.4 65.0 8.6 5.3 7.0 2.3 (1.9) 5.3 4.9 71.0 11.4 7.7 4.3 1.6 (16.4) 4.7 3.8 72.7 12.0 8.7 2.8 1.6 (46.9) 2.7 1.8 71.4 22.4 16.9 NA 0.7 43.4 5.8 2.5 70.4 17.2 14.2 NA 0.8 10 E&C 5 (13,785) (10,731) (44,411) (29,108) (333) (737) (1,789) (5,888) (5,110) (5,765) (7,687) (1,319) (9,006) (293) 15 20 Real estate Equipment mfg. 43,548 47,827 35,939 32,084 22,503 50 217,131 243,166 231,905 216,242 13,238 (5,812) 5,844 2,010 12,993 (8,264) 510 (2,583) 10,860 (6,740) (7,358) (5,085) 5,867 (8,831) (7,467) (6,952) 90,953 5,268 (4,719) 2,628 1,481 100 E&C 150 Equipment mfg. 200 2011 2012 2012* H1-13*
MCCs revenue by segment (CNY bn)

250 Others Real estate Resources dev.
318,063 360,199 336,513 326,235 330,819 113,196 148,362 130,085 131,502 128,601 69,648 100,535 61,076 60,464 94,146 48,822 99,418 106,098 52,802 53,986
0 2010 2011 2012 H1-2013
MCCs gross profit by segment (CNY bn)

25 Others
(7,677) (10,875) (278) (278)
0 Resources dev. 2010 2011 2012 H1-2013
-5
HY CORPORATES
MCCs borrowing profile (CNY bn)

100
MCCs capex breakdown (CNY bn)

14 12 Others Real estate
80 10 60 8 6 4 20 2 0 <1Y 1-2Y 2-5Y >5Y

*Data pertains to MCC; Source: Company reports, Standard Chartered Research
Resources dev.
40
Equipment mfg.
E&C
0 2009 2010 2011 2012 H1-2013
415
Asia Credit Compendium 2014 China SCE Property Holdings Ltd. (B2/Sta; B/Sta; NR)

China SCE achieved CNY 9.2bn of contracted sales in 10M-2013, 22% higher than the 2013 target of CNY 7.5bn. We expect contracted sales to exceed CNY 10bn in 2013. Backed by its solid sales results, land acquisition picked up strongly, with attributable land cost of CNY 6.6bn in 11M-2013, versus budgeted: CNY 3.5-4.0bn, based on CNY 7.5bn of sales. Total debt continued to grow, amounting to CNY 8.7bn as of June 2013, pressuring credit metrics, despite high revenue recognition in H1. Given the keen competition for land resources in top-tier cities and continued policy pressure, we believe China SCE, a small developer, should be more prudent about its expansion strategy, continue to deliver good sales results and stick to its project delivery schedule to ensure a stable credit profile and sound liquidity.

High revenue growth in H1-2013 reflected strong contracted sales in 2011-12: Total revenue surged to CNY 3.7bn in H1-2013, higher than the 2012 total of CNY 3.6bn (H1-2012: CNY 836mn). This was backed by the companys strong contracted sales performance in 2011-12 (2011: CNY 4.6bn; 2012: CNY 6.0bn). In comparison, revenue recognition has been volatile in recent years, given the companys small scale (land bank averaged 8mn sqm in 2009-12). Revenue hit a high of CNY 4.1bn in 2010 compared with CNY 586mn in 2009 and CNY 331mn in 2008, but fell to CNY 3.8bn in 2011 and CNY 3.6bn in 2012. Margin compression continued in H1-2013 gross profit margin shrank to 33.2% in H1-2013 from 42.7% in H1-2012, and EBITDA margin fell to 28.8% from 29.3%. In addition, the ASP of recognised sales fell to CNY 8,037psm in H1-2013 from CNY 8,400psm, down 4.3%. Contracted sales performed well: Contracted sales totalled CNY 9.2bn in 10M2013, higher than its full-year target of CNY 7.5bn (2012: CNY 6.016bn). ASP in 10M-2013 was CNY 10,778psm, much higher than the ASPs of CNY 8,987psm in 2012 and CNY 8,898psm in 2011. This may result in some improvement in profit margins in 2014-15 when these sales are booked. Sales from projects in Fujian (mostly in Xiamen and Quanzhou) contributed more than 90% of total sales. Liquidity improved on strong sales, but land acquisition is aggressive: Total cash stood at CNY 3.7bn as of June 2013 (free cash of CNY 3.3bn and restricted/pledged cash of CNY 385mn). This was higher than the CNY 3.1bn at end-2012. The company also lowered its ST debt to CNY 1.8bn from CNY 2.1bn. Backed by strong liquidity, attributable land cost for its land acquisitions jumped to CNY 6.6bn YTD as of 26 November. This is against a land budget of CNY 3.54.0bn for 2013 (based on CNY 7.5bn of contracted sales). Higher debt level pressured credit metrics: Total debt continued to grow to CNY 8.7bn as of June 2013 from CNY 7.0bn at end-2012 (end-2011: CNY 5.1bn). The company raised an additional USD 150mn in January 2013 by tapping its 2017 bonds, and obtained CNY 758mn of bank loans in H1. Total debt/capital rose to 53.5% as of June 2013 compared with 50.1% at end-2012 and 46.2% at end-2011. Total debt/LTM EBITDA fell to 4.8x in H1-2013 from 7.0x in 2012, but is still higher than the 4.0x reported in 2011. LTM EBITDA/interest improved to 3.0x (2012: 2.1x). The company had CNY 3.2bn of unrecognised sales as of June 2013. Projects in Fujian will continue to drive growth: Despite its small land bank size, China SCE () is a well-recognised brand among home buyers in Fujian. The company has also been growing its land reserve outside Fujian. However, sales contributions from these projects are still low. Given Chinas highly fragmented property sector, with many national, regional and local developers, we think it will be challenging for China SCE to build a good track record in the near term in local markets where it has recently expanded. The company will need to continue to deliver satisfactory contracted sales results, stick to its project development schedule and maintain a prudent land expansion strategy to ensure stable profitability and a sustainable credit profile. Land bank distribution by location, Jun-13 (total GFA of 9.8mn sqm)
Quanzhou Xiamen Zhangzhou Longyan Shenzhen Anshan Beijing Langfang Linfen Tangshan Nanchang 0 2.6% 8.5% 2.7% 2.8% 18.6% 0.4% 4.4% 5.0% 0.1% 3.2% 1,000,000
416
Company profile
Listed on the HKSE in February 2010, China SCE Property Holdings Ltd. (China SCE) is a Fujian province-focused developer. About 65.6% of its total land bank of 9.8mn sqm is located in Fujian, and much of its holding (5.1mn sqm or 51.8%) is in Quanzhou. Most of China SCEs projects outside Fujian are in the Bohai Rim region (including in Beijing, Langfang, Anshan, Linfen and Tangshan). The companys average land cost is low, at about CNY 1,113psm/GFA. China SCE is about 57.5% owned by its chairman.
HY CORPORATES
51.8% Fujian province (65.6%)
Outside Fujian province (34.4%)
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Asia Credit Compendium 2014 China SCE Property Holdings Ltd. (B2/Sta; B/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 267.3 32.9 47.7 10.9 1.8 106.7 616.1 33.4 36.7 2.0 11.1 240.9 (8.1) 33.7 46.2 4.0 3.0 147.8 (21.7) 27.4 50.1 7.0 2.1 148.1 3.4 28.8 53.5 4.8 2.8 212.2 745 (46) 699 (777) (74) (851) (100) (1,828) (130) (1,958) (124) (1,355) (313) (1,659) (92) NA NA NA NA 605 8,705 2,106 1,501 2,312 1,522 10,578 2,714 1,192 4,685 2,079 15,286 5,080 3,001 5,919 3,128 20,029 6,955 3,827 6,921 3,719 23,063 8,675 4,956 7,546 586 193 (105) 541 373 4,131 1,381 (124) 1,527 946 3,770 1,270 (426) 1,468 716 3,637 995 (471) 1,292 672 3,723 1,072 (379) 1,123 498 2010 2011 2012 H1-13

7 6 80 5 4 3 2 20 1 0 2009 2010 2011 2012 LTM Jun-13 0 EBITDA margin (RHS) 60 Revenue 100
40
Coverage ratios (x)

12
10
Total debt/EBITDA
0 2009 2010 2011 2012 H1-13
HY CORPORATES

10 100

6
80
5 Synthetic CNY
4 6 Total debt/cap. (RHS) 60 3 40 2 Total debt 2 Total cash* 0 2009 2010 2011 2012 H1-13
USD notes
20
Bank loans
0 < 1 yr 1 - 2 ys 2 - 5 yrs
417
Asia Credit Compendium 2014 China Shanshui Cement Group Ltd. (NR; B+/Neg; BB/Sta)

We maintain our Negative credit view on Shanshui, given the slow recovery of cement demand and prices, the capex needed to reach 110mtpa capacity by end-2014 and its short-term refinancing needs. EBITDA fell 22% y/y to CNY 1.5bn in H1-2013, and capex was high at CNY 1.6bn. Shanshui raised CNY 2.3bn via issuing domestic corporate bonds in H1-2013 and refinanced CNY 1bn of corporate bonds due in October via a new 1Y bond. Total cash was CNY 1.6bn as of June 2013, against CNY 4.3bn of debt due before June 2014 and CNY 1.5bn of CNH bonds due in July 2014. The company also had CNY 3.9bn of capital commitments (CNY 2.2bn contracted and CNY 1.7bn authorised but not yet contracted) as of June 2013, in line with planned capex of CNY 4bn for 2013 and CNY 2.0-2.5bn for 2014.

Poor H1-2013 financial performance despite expanded capacity: Shanshuis cement production capacity rose to 92.6mtpa as of June 2013 from 89.6mtpa at end2012. As a result, cement sales volume increased 9% to 23mt, while clinker sales held at 4.2mt. However, demand was weak, negatively affected by a slowing economy. This, coupled with oversupply in some markets, resulted in falling cement prices the cement ASP fell 11% y/y to CNY 250.5/t and the clinker ASP declined 18% to CNY 190.8/t at June 2013. The cement ASP was 13% lower y/y at CNY 243.7/t in Shandong; 9% lower in northeastern markets at CNY 274.0/t and 7% lower in Shanxi at CNY 218.6/t. Shandong remained the key market for Shanshui, contributing CNY 4.7bn of revenue (67% of total). Revenue contribution from plants in northeastern China totalled CNY 1.9bn (27%). Contribution from its newly expanded markets in Shanxi and Xinjiang remained low at CNY 452mn (6%). Profitability fell despite lower cost of sales in H1-2013: Cost of sales (excluding depreciation and amortisation) fell 1.4% y/y. The ASP of coal was CNY 577.2/t, down 17.5% y/y. However, profit margins continued to deteriorate on a much higher drop in cement selling prices in H1 gross profit margin fell to 22.7% (2011: 30.1%; 2012: 25.4%), and EBITDA margin declined to 21.2% (2011: 27.3%; 2012: 24.4%). Liquidity pressure remains, given its high capex and refinancing needs: Total cash rose to CNY 1.6bn as of June 2013 from CNY 1.1bn at end-2012, backed by Shanshuis fund-raising activity. It issued CNY 1.8bn 5.44% of 3Y domestic corporate bonds in January and CNY 500mn of 1Y domestic bonds in May. This was against CNY 2.4bn of bank loans and CNY 1.9bn of domestic corporate bonds due within the following 12 months to June 2014. In addition, it had a contracted capital commitment of CNY 2.2bn as of June 2013 (after capex of CNY 1.5bn in H1-2013). While the company has refinanced its CNY 1.9bn of domestic bonds with new 1Y bonds and undrawn bank facilities of about CNY 8bn, we think its liquidity remains tight in view of a slow market recovery, its debt maturities in 2014 (including CNY 1.5bn of CNH bonds due in July 2014) and capex needs for current projects under construction. Total capex for 2013 will remain at c.CNY 4bn, but capex for 2014 is likely to be lower at c.CNY 2.0-2.5bn. Credit metrics deteriorated: Total debt rose to CNY 15.0bn as of June 2013 from CNY 13.3bn at end-2012. This, coupled with a drop in profitability, resulted in weaker credit metrics in H1-2013 total debt/EBITDA rose to 4.3x from 3.4x in 2012, LTM EBITDA/interest coverage declined to 3.2x from 3.8x, and total debt/capital increased to 60.6% as of June 2013 from 58.6% at end-2012. Lowering capacity expansion while waiting for a market recovery: Shanshui targets 100.6mtpa of cement production capacity by end-2013 and 110mt by end2014 from projects currently under construction. Most of the capex for equipment purchases has already been incurred. The Chinese government has also made efforts to encourage industry consolidation and remove obsolete capacity. That said, cement prices have remained weak on a slow pick-up in demand. We believe these factors will continue to affect Shanshuis financial performance and pressure its credit profile. Cement production volume, selling price and unit cost mt (LHS), CNY/t (RHS)
50 40 30 20 10 0 2009
418
Company profile
Established in 2001 and listed on the HKSE in 2008, China Shanshui Cement Group Ltd. (Shanshui) is one of Chinas largest cement and clinker producers by production volume. It has leading market positions in Shandong and Liaoning provinces, and it has expanded to Shanxi, Inner Mongolia and Xinjiang in recent years. As of June 2013, Shanshui had cement production capacity of 92.6mtpa and clinker production capacity of 40.4mtpa. The company aims to increase its cement production capacity to 100mtpa by end-2013 and 110mtpa by 2014. The cement is sold under the (Shanshui Dongyue) brand. Shanshui has also established an extensive sales network via regional sales branches, local offices and third-party distribution outlets.
HY CORPORATES
Cement sales volume
300 ASP (RHS) 250 Unit cost of sales (RHS) 200 150 100
2010
2011
2012
H1-13
Asia Credit Compendium 2014 China Shanshui Cement Group Ltd. (NR; B+/Neg; BB/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure** Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 26.2 20.2 51.4 3.1 5.1 43.2 39.2 20.7 53.1 2.8 6.1 71.8 87.5 27.3 57.7 2.4 6.9 97.2 (14.3) 24.4 58.6 3.4 3.8 38.7 (21.7) 21.2 60.6 4.3 2.7 38.1 1,587 (2,155) (888) (170) 2,464 (2,901) (284) (238) 2,853 (3,409) (791) (340) 3,633 (4,380) (1,302) (573) NA NA NA NA 928 14,609 5,527 4,599 5,229 1,210 18,950 6,951 5,741 6,149 3,079 25,082 11,140 8,062 8,167 1,124 28,033 13,284 12,159 9,397 1,637 30,916 15,043 13,406 9,792 8,728 1,763 (346) 941 702 11,854 2,454 (403) 1,363 979 16,862 4,602 (666) 3,254 2,225 16,161 3,945 (1,039) 2,205 1,519 7,069 1,500 (553) 580 348 2010 2011 2012 H1-13

18 Revenue 15 80 100
12 EBITDA margin (RHS) 9 40 6 20 60
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

5 Total debt/LTM EBITDA 10
2 LTM EBITDA/ int. (RHS)
0 2009 2010 2011 2012 H1-13
HY CORPORATES

15 100

8
12 75 9 Total debt/cap. (RHS) 50 6 Total debt 25 3 Total cash* 0 2009 2010 2011 2012 H1-13 0 0 < 1 yr 1-2 yrs 2-5 yrs > 5 yrs 2 Loans and borrowing 4 CNY corp bonds 6 Senior notes
CNH
*Including restricted cash; **including net acquisitions; Source: Company reports, Standard Chartered Research
419
Asia Credit Compendium 2014 CIFI Holdings Group Ltd. (B2/Sta; B/Sta; B+/Pos)

CIFI is a small-scale developer targeting mass-market buyers in Chinas top-tier cities. While demand in this market segment is strong, competition is also keen, limiting profitability. CIFI has been aggressive in the land market in 2013, backed by strong liquidity from contracted sales (2013 sales target of CNY 14-15bn) and offshore debt and equity raising. Land acquisitions totalled CNY 15.7bn in 11M-2013, although the attributable amount is lower given CIFIs strategy of partnering with strong developers like Shanghai Greenland and Henderson China. The companys credit profile is in line with its B2/B credit rating. Continued strong delivery on contracted sales and project development are key to maintaining sound liquidity and improving credit ratios.

Niche developer targeting the mass market in top-tier cities: CIFI had a small attributable land bank of about 6.5mn sqm as of June 2013. Most of its projects are in Tier 1 and 2 cities (86% of total land bank), targeting the mass-market segment. As such, we believe CIFIs land bank has high saleability, underpinned by continued population growth in top-tier cities. Strong contracted sales: CIFI achieved CNY 12.7bn of sales at an ASP of CNY 10,500 psm in 10M-2013, representing 90.5% of its full-year target of CNY 14bn. The company also reported strong sales growth in 2012 sales rose to CNY 9.5bn from CNY 5.4bn in 2011. However, ASPs have stayed at about CNY 9,500-10,000 psm, reflecting the companys mass-market concentration and priced-to-sell strategy. Profitability is low, in line with portfolio composition: Revenue surged in 2012 to CNY 8.1bn from CNY 4.0bn in 2011 and CNY 4.2bn in 2010. The momentum continued in H1-2013, when revenue totalled CNY 4.8bn (H1-2012: CNY 2.0bn, H22012: CNY 6.1bn). Despite a slight improvement, profit margins remained low compared to peers in H1-2013 gross profit margin was 25.3% (2012: 23.7%) and EBITDA margin was 19.3% (2012: 17.3%). We expect the companys profit margins to remain at about 25-30%. Credit metrics are weak but liquidity is sound: Total debt rose to CNY 12.2bn as of June 2013 from CNY 8.9bn at end-2012. CIFI issued USD 275mn of 12.25% of 2018 bonds in April and tapped the market with USD 225mn of additional bonds at 104 in September. The company also raised HKD 636mn and USD 75mn from a dualcurrency loan at a spread margin of 5.65% in July. These fund-raising activities helped to reduce ST debt to CNY 2.4bn as of June 2013 from CNY 3.4bn at end-2012, and its average funding cost to 8.6% p.a. in H1-2013 from 10.2% in H1-2012. Its credit metrics are in line with its B2/B-rating total debt/LTM EBITDA was 6.1x in H1-2013 (2012: 6.3x), LTM EBITDA/interest coverage was 2.7x (2012: 2.0x), and total debt/capital was 61.2% as of June 2013 (2012: 56.1%). Aggressive approach to land market backed by strong liquidity: In addition to offshore debt, CIFI raised HKD 390mn by issuing new shares to RRJ Capital in October. Strong liquidity from contracted sales and funds raised in the offshore capital markets prompted the company to expand aggressively in the land market in 2013. Attributable premium from land acquisitions in 11M-2013 was CNY 11.7bn (total worth of CNY 15.7bn), via four JV projects with Shanghai Greenland and one with Henderson China. The company bought a CNY 720mn site in Beijing and a CNY 2.1bn prime site in Shanghai in November. High sales and asset turnover are key: Given its large expansion appetite, CIFI will need to meet its revenue growth target of 30-40% p.a. through strong contracted sales to generate sufficient cash flow to support land expansion (c.50% of its contracted sales proceeds are earmarked for land use each year) and maintain a stable credit profile. Land bank distribution by location (000 sqm, Jun-13)
Others Changsha Chongqing Tangshan Langfang Tianjin Beijing Hangzhou Jiaxing Zhenjiang Hefei Suzhou Shanghai 0 3.9% 8.1% 4.3% 4.1% 4.6% 7.8% 1.9% 1.4% 8.5% 10.7% 200 400 600 800 1,000 Yangtze River Delta 13.6% 1,200 1,400 14.8% Western Bohai Rim 16.3%
Company profile
CIFI was established in 2000 and listed on the HKSE in November 2012. Headquartered in Shanghai, the company focuses in building small to medium-sized residential units targeting mass-market buyers in top-tier cities. As of June 2013, the company had a total land bank of 7.65mn sqm (attributable GFA of 6.54mn sqm) with 22% of the total in Tier 1 cities, 64% in Tier 2 cities and 14% in Tier 3 cities. The company has a substantial presence in Tianjin (1.2mn sqm, or 16.3% of its total land bank) and Shanghai (1.0mn sqm, 13.6% of land bank). Of its land acquisitions in 2013, the company has four JV projects with Shanghai Greenland and one with Henderson China. CIFI is c.69.8% owned by its founders (Lin Zhong, Lin Wei and Lin Feng).
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420
Asia Credit Compendium 2014 CIFI Holdings Group Ltd. (B2/Sta; B/Sta; B+/Pos)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) NA 25.0 52.2 3.3 3.7 175.6 102.0 31.9 60.4 3.0 4.7 164.1 (22.9) 25.5 68.0 7.6 1.8 135.0 37.7 17.3 56.1 6.3 2.0 136.8 175.3 19.3 61.2 6.1 2.1 300.0 367 (7) 360 (3) (1,207) (39) (1,246) (10) (3,124) (139) (3,263) (26) (86) (45) (131) NA NA NA NA 1,360 7,521 2,135 775 1,955 2,178 11,387 3,975 1,797 2,609 2,596 19,225 7,752 5,156 3,644 4,613 26,857 8,865 4,253 6,941 7,072 32,973 12,202 5,130 7,730 2,631 657 (179) 711 342 4,162 1,327 (283) 1,447 887 4,008 1,023 (577) 2,205 1,337 8,144 1,408 (704) 2,840 1,937 4,829 934 (452) 1,397 854 2010 2011 2012 H1-13

12 Revenue 10 80 100
8 60 6 EBITDA margin (RHS) 40
20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

8 Total debt/EBITDA 6 3 4 LTM EBITDA/ int (RHS) 2 1 2 5
0 2009 2010 2011 2012 H1-13
HY CORPORATES

15 Total debt 12 80 100

4
2018 bonds** 3 Bank and other loans 2
60
6 Total cash*
40 1 20
0 2009 2010 2011 2012 H1-13
0 < 1 yr 1-2 yr 2-3 yr 3-4 yr 4-5 yr > 5 yrs
*Including restricted cash; ** total of USD 500mn of 2018 bonds, USD 275mn issued in April and USD 225mn in September; Source: Company reports, Standard Chartered Research
421
Asia Credit Compendium 2014 CITIC Pacific Ltd. (Ba2/Neg; BB/Neg; NR)

Delays and cost over-runs in the Sino Iron project have led to a serious deterioration in the companys balance sheet. Even assuming a ramp-up in production, the projects cash flow after interest and tax will be inadequate to cover capex in 2014-15. The steel and property businesses are also unlikely to post material improvements in earnings in 2014. So while EBITDA levels will increase, we expect leverage to remain very high and debt to capital at c.60%. We do not expect its credit profile to stabilise near-term, and maintain our Negative credit outlook. That said, potential sales of non-core businesses will offer CitPac some financial flexibility, while its CITIC Group linkage will ensure ongoing access to funding.

Iron ore project has been a drag on credit profile: CitPac is implementing the worlds largest magnetite iron ore project in Australia (Sino Iron), with 2bt of reserves and annual production capacity of 24mt (six lines). However, Sino Iron has faced serious delays and cost over-runs; currently, Line 1 has started shipments, Line 2 is under load commissioning, and over 85% of the civil work has been completed for Lines 3-6. We expect only 4mt of shipments in 2014, with the majority of the lines unlikely to be operational before 2016. CitPac has incurred more than USD 9bn on Sino Iron (initial estimate: USD 2.5bn), and the amount of remaining capex is uncertain (could be over USD 2bn). Given that iron ore prices will remain under pressure (average of USD 120/t in 2014) and the initial cash cost of production will be high (over USD 80/t), we believe Sino Irons cash flow after interest and tax will be inadequate to cover capex in 2014-15. Separately, the company is in dispute with Mineralogy (the mine owner) over royalty payments, and with Metallurgical Corp. of China (its primary EPC contractor) over cost escalations, which increase uncertainty about Sino Irons future earnings. Steel and property businesses: CitPac is the largest speciality steel manufacturer in China (capacity of c.9mt). While segmental EBIT increased 72% y/y in H1-2013 due to volume increases and lower input costs, the weak steel market in China will keep earnings under pressure in 2014. The China property segment posted a 53% y/y decline in EBIT in H1-2013 due to soft market conditions. The near-term outlook for property is affected by its poor sales pipeline: most of its new office properties will be completed starting 2015. Other businesses: CitPacs infrastructure, telecom and trading businesses generate relatively steady income (29% of EBIT in 2012) and help offset the cyclicality of the steel and property sectors. However, CitPac considers these to be non-core assets and has indicated a willingness to dispose of them if suitable opportunities arise. It has raised over HKD 10bn since 2008 through such asset divestments. As of June 2013, the net asset value of non-core operations was HKD 36.2bn, which provides CitPac some financial flexibility. Leverage to remain high: In H1-2013, consolidated EBITDA declined by 17% y/y on account of weakness across businesses. The Sino Iron project will start generating earnings in 2014, and contributions from the other segments will be steady. However, given the high interest costs, CFO in 2014 will only be c.HKD 2.5-3bn. CitPacs debt increased to HKD 125.1bn in June 2013 from HKD 65.7bn in 2009; as a result, leverage is currently very high at 26.5x, while interest coverage (including capitalised interest) is only 1x. Even assuming a ramp-up in iron ore production, financial metrics are unlikely to improve materially before 2015, and FCF generation at the consolidated level will be possible only by 2016, in our view. We expect debt to capital of around 60% in 2014 (56.2% in H1-2013). That said, the company is unlikely to face a liquidity risk, owing to potential asset disposals and ongoing access to funding markets. Corporate governance and parental support: Weaknesses in CitPacs internal control systems were evidenced by HKD 15bn of losses on unauthorised leveraged FX contracts in H2-2008. That said, the CITIC Group exhibited strong financial support by taking over the majority of CitPacs leveraged FX contracts, offering a USD 1.5bn standby liquidity arrangement and increasing its stake to 57.6% from 29%. In July 2011, CitPac sold its interest in the CITIC Guoan cable-TV business to CITIC Group for HKD 4.2bn, and in 2013, it raised HKD 773mn by transferring some of its stake in CITIC Telecom to its parent. The rating agencies accord CitPac a three-notch rating uplift on account of its linkage with CITIC Group.
422
Company profile
CITIC Pacific Ltd. (CitPac) is a Hong Kong-listed conglomerate. Its core businesses include special steel manufacturing, iron ore mining and processing, and property development in China. These businesses accounted for c.70% of CitPacs assets as of June 2013. Its other business interests comprise power generation, a coal mine, harbour tunnels (eastern and western cross-harbour tunnels in Hong Kong), telecom (CITIC Telecom), trading (Dah Chong Hong) and logistics services. CitPac was one of the first Chinese companies to list and invest outside China. It is currently 57.6% held by CITIC Group, which is wholly owned by the State Council of the Chinese government.
HY CORPORATES
Asia Credit Compendium 2014 CITIC Pacific Ltd. (Ba2/Neg; BB/Neg; NR)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow 1,793 3,302 2,776 739 912 (8,121) (7,209) (1,095) 80% 60% 40% 20% Steel 0% -20% -40% Revenue Net income Assets Iron ore 21,303 24,237 30,930 32,821 33,685 500 1.5 46,409 4,841 (2,528) 7,926 5,950 70,614 6,026 (3,208) 12,410 8,893 96,890 8,087 (4,338) 13,478 9,233 93,272 5,324 (5,595) 9,595 6,954 41,291 2,961 (2,965) 5,166 4,463 1,000 3.0 1,500 Net income 4.5 2,000 2010 2011 2012 H1-13
Steel business (HKD mn LHS, mt RHS)

2,500 Production (RHS) 7.5
6.0
155,741 193,169 229,739 247,386 258,401 65,675 44,372 65,239 83,683 101,683 119,606 125,104 59,446 74,218 70,753 85,038 86,785 88,890 91,419 97,561
0 2008 2009 2010 2011 2012 H1-2013
0.0
Breakdown by segment, H1-13 (% of total)

100% Others Dah Chong Property
Capex and investments (17,393) (22,576) (17,978) (18,447) Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (8.5) 10.4 3.0 52.2 13.6 9.2 (2.3) 1.9 24.5 8.5 3.0 55.0 13.9 9.9 0.4 1.9 34.2 8.3 3.4 56.6 12.6 8.7 1.2 1.9 (34.2) 5.7 1.1 59.4 22.5 16.3 (3.0) 1.0 (15,600) (19,274) (15,202) (17,708) (547) (1,459) (1,872) (2,103)
(16.8) 7.2 1.9 56.2 26.5 19.3 (0.9) 1.0
HY CORPORATES
Capex breakdown (HKD bn)

30 Mainland ChinaProperty Others

50 Subsidiaries
25
40
20 30 15 Iron ore 20 10 10 Steel 0 2009 2010 2011 2012 H1-2013

CITIC Pacific
0 2013 2014 2015 2016 2017 > 2018
423
Asia Credit Compendium 2014 Country Garden Holdings Co. Ltd. (Ba2/Sta; BB/Pos; NR)

Cogard reported strong revenue growth of 61% y/y to CNY 26.9bn in H1-2013. It outperformed peers in contracted sales CNY 79.7bn in 10M-2013 (much higher than its full-year target of CNY 62bn). Strong sales and improved asset turnover help Cogard maintain a solid liquidity position and a stable credit profile, despite higher debt to support land-bank growth and property development. It raised CNY 5.2bn of net bank loans, issued USD 750mn of 10Y bonds and fully repaid outstanding convertible bonds in H1. In September, it issued a further USD 750mn of 7.5Y bonds at a low coupon of 7.25% p.a. Saleable resources remained high: it had 3.5mn sqm of completed but unsold GFA and 18.2mn sqm of GFA with construction permits as of June 2013.

Asset turnover accelerated: Cogard booked CNY 26.9bn of revenue in H1-2013, up 61% y/y. Meanwhile, completed but unsold inventory fell to 3.5mn sqm as of June 2013 from 3.8mn sqm at end-2012. Profitability remained low, reflecting the companys mass-market focus. Gross profit margin was 33.9% in H1-2013 (2012: 36.6%; 2011: 34.5%), while EBITDA margin was 26.0% (2012: 28.7%; 2011: 28.4%). We attribute the marginal decline in profitability in H1-2013 partly to the companys strategy of marketing its projects at competitive prices to maintain high sales levels and strong cash inflow in 2011-12. Contracted sales outperformed peers: Cogard achieved CNY 64.7bn of contracted sales in 9M-2013, exceeding its full-year sales target of CNY 62bn (2012: CNY 47.6bn). The strong sales performance was underpinned by the companys large available-for-sale resources and end-user market focus with affordable selling prices, which averaged CNY 6,500psm. Solid liquidity position: Cogard successfully issued USD 750mn 7.5% of 10Y bonds in January 2013 and USD 750mn 7.25% of 7.5Y bonds in September. Cash was high as of June 2013, totalling CNY 21.5bn (CNY 15.2bn of free cash and CNY 6.3bn of restricted cash), compared with CNY 16.9bn (CNY 11.8bn of free cash and CNY 5.1bn of restricted cash) at end-2012. Credit metrics held steady: Total debt increased to CNY 45.6bn as of June 2013 from CNY 36.9bn at end-2012. Of this, short-term debt was low at CNY 6.8bn. Credit metrics held largely steady thanks to the strong pick-up in asset turnover. Total debt/capital rose to 52.3% as of June 2013 from 48.7% at end-2012, and total debt/LTM EBITDA increased to 3.4x in H1-2013 from 3.1x in 2012. LTM EBITDA/interest coverage remained unchanged at 3.9x in H1-2013 as the company managed to reduce its average interest rate for bank and other borrowings to 7.76% in H1-2013 from 8.18% in 2012. It is challenging to maintain a high asset-turnover model: Cogard has a proven track record in developing mass-market township projects in Guangdong province and has successfully replicated the model to other cities across all key regions in the country. However, we think the market environment is increasingly challenge for the company to sustain its high asset-turnover model with competitive prices target the low-end housing markets, oversupply in lower-tier cities will continue to limit sales potential, and continued demand for land in top-tier cities will push up land prices and pressure developers profitability. Cogard had a total land bank of about 63mn sqm from 134 projects (132 projects in China and two in Malaysia) as of June 2013. Land reserves in its home base of Guangdong accounted for c.42% of the total (26.25mn sqm; 70 projects). Cogard also has substantial exposure in Anhui (7.07mn sqm; nine projects), Jiangsu (6.14mn sqm; nine projects), Liaoning (5.62mn sqm; six projects), Hubei (5.06mn sqm; 10 projects) and Hunan (4.02mn sqm; eight projects). Distribution of land bank by location and development status, Jun-13 (mn sqm)
Guangdong (42%) Anhui (11%) Jiangsu (10%) Liaoning (9%) Hubei (8%) Hunan (6%)
7.1 6.1 5.6 5.1 4.0 26.3
Company profile
Listed on the HKSE in 2007, Country Garden Holdings Co. Ltd. (Cogard) is a leading integrated property developer focused on large-scale township residential projects in suburban areas of key Chinese cities. Its one-stop business model (for Guangdong projects only) encompasses property development, construction, installation, fitting, sales/marketing and management. This enables Cogard to maintain competitive prices in the mass-market segment. Originating in Guangdong province, the company has expanded rapidly in recent years and achieved wide geographical coverage. Of its total land bank of 62.7mn sqm (including 132 projects in China and two projects in Malaysia) as of June 2013, 42% (70 projects) was in Guangdong province.
HY CORPORATES
Pending master planning (53%) With construction permits (29%) Pending construction permits (11%) Completed but unsold (6%) Completed & pre-sold, pending delivery (2%)
1 3.5 18.2
33.4
6.6
Inner Mongolia (6%) 4.0 Others (7%) 4.2
424
Asia Credit Compendium 2014 Country Garden Holdings Co. Ltd. (Ba2/Sta; BB/Pos; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (32.9) 21.9 45.2 4.6 3.4 259.1 87.3 27.9 44.2 2.8 5.3 150.1 36.8 28.4 49.1 2.9 4.0 191.6 21.8 28.7 48.7 3.1 3.9 185.4 25.2 26.0 52.3 3.4 3.7 315.3 (721) (708) (1,429) (191) 852 (2,099) (1,247) (277) (2,386) (2,823) (5,208) (1,605) (2,351) (3,906) (6,262) (81) NA NA NA NA 8,424 63,940 17,770 9,346 21,541 9,853 12,393 16,860 21,512 17,586 3,847 (1,126) 3,386 2,190 25,804 7,207 (1,369) 6,720 4,291 34,748 9,860 (2,449) 9,607 5,813 41,891 12,012 (3,097) 11,542 6,853 26,944 6,997 (1,912) 7,136 4,316 2010 2011 2012 H1-13

60 Revenue 50 80 EBITDA margin (RHS) 100
40
60
30 40 20 20
82,081 107,310 136,522 154,886 20,118 10,265 25,418 28,966 16,573 30,067 36,913 20,053 38,884 45,637 24,125 41,657
10
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

5 6
LTM EBITDA/int. (RHS)
2 1
0 2009 2010 2011 2012 H1-13
HY CORPORATES

50 100

14 12 Senior notes
40
80 10 60 8 6 4 20 2 Bank loan
30
20
Total debt Total cash*
40
10
0 2009 2010 2011 2012 H1-13

0 H2-13 2014 2015 2016 2017 2018 2019-21 2023
425
Asia Credit Compendium 2014 Evergrande Real Estate Group Ltd. (B2/Sta; BB-/Sta; BB/Sta)

Evergrande reported CNY 91.3bn of contracted sales in 10M-2013 and is likely to exceed its full-year target of CNY 100bn. Land-bank expansion has continued YTD, with a focus on top-tier cities. Liquidity remains sound thanks to strong sales and fund-raising activity. Total cash grew to CNY 42bn as of June 2013. In addition to CNY 5.5bn of net bank loans, it secured CNY 10.1bn of trust loans and CNY 6bn of a perpetual capital instrument in H1. It also issued USD 1.5 bn of 5Y bonds in October to refinance CNY 5.5bn of 2014 bonds and other high-cost loans. Credit metrics weakened in H1-2013 on higher debt and a moderate increase in revenue recognition. We believe the company needs to maintain a high sales and asset turnover model and follow a prudent land strategy, so as to sustain sound liquidity and a stable credit profile.

Low but stable profit margins: Evergrande reported a 13.3% y/y increase in revenue to CNY 42.0bn and an 8.1% increase in EBITDA to CNY 9.2bn in H1-2013. The ASP of recognised sales was largely stable at CNY 5,980psm compared with the 2012 average of CNY 5,972psm. Profit margins were low, reflecting the companys strategy of offering competitive selling prices to maintain sales volume, targeting the mass to mid-end buyers in lower-tier cities. Gross profit margin was 27.3% in H1-2013 (2012: 27.9%) and EBITDA margin was 21.8% (2012: 20.2%). Contracted sales turned around only in October: Contracted sales increased substantially in October, totalling CNY 16.6bn compared with the monthly average of CNY 8.3bn in 9M-2013. With total contracted sales of CNY 91.3bn in 10M, Evergrande is likely to exceed its full-year sales target of CNY 100bn. The ASP of sales in 10M-2013 was CNY 6,632psm, c.5% higher than the CNY 6,293psm in 2012. The company has low pricing power, given the oversupply in lower-tier cities. In addition, it needs to maintain high sales turnover to ensure sound liquidity in view of its large capital commitment for construction and land expenses. Land expansion continues: Land bank stood at 144.6mn sqm as of June 2013, versus 140mn sqm at end-2012. Evergrande added 14.6mn sqm of GFA to its land reserves for a total of CNY 24.6bn in H1-2013. In comparison, it delivered 6.9mn sqm of GFA and sold 6.6mn sqm of GFA via contracted sales in H1. The average cost of its overall land bank is still low, at about CNY 800psm/GFA, but the average price for its H1-2013 acquisitions was higher at CNY 1,687psm/GFA. In 11M-2013, Evergrande made eight major land acquisitions for a total of CNY 30bn (CNY 6,523psm/GFA) in top-tier cities, including three in Beijing and one each in Chongqing, Hangzhou, Hefei, Guangzhou and Tianjin. This is in line with its strategy of increasing its land holdings in Tier 1 and Tier 2 cities and reducing its land bank proportion in Tier 3 cities. In October, Evergrande agreed to buy back the 49% stake in its Qidong project (that it sold in 2011) for USD 550mn. Credit metrics weakened in H1-2013: Total debt and interest expenses continued to grow. As such, total debt/LTM EBITDA rose to 5.5x in H1-2013 from 4.6x in 2012, and LTM EBITDA/interest fell to 2.1x from 2.3x. Excluding the CNY 6.0bn of a perpetual loan it raised in June 2013, total debt rose to CNY 75.8bn as of June 2013 from CNY 60.3bn at end-2012 (including the net increase in bank borrowings of CNY 5.5bn and additional trust loans of CNY 10.1bn). The perpetual loan provides an average distribution of 9.2-11.0% p.a. in the first two years, with a step-up mechanism to 12-20% in the third, fourth and fifth years. Liquidity is sound, and refinancing of 2014 CNY bonds is complete: Total cash was CNY 42bn as of June 2013 (CNY 33bn of free cash and CNY 9bn of restricted cash). The company had CNY 15.6bn of land premium payable in H2-2013 for its land acquisitions prior to June 2013. Full-year construction capex is estimated at about CNY 40bn. Evergrande issued USD 1.5bn 8.76% of 2018 bonds in October to refinance the CNY 5.5bn of 2014 notes and some of its high-cost trust loans. Measured expansion, and continued high sales and asset turnover are key: Evergrande will need to maintain a high sales and asset turnover model and slow its pace of land expansion in order to sustain its stable credit profile and sufficient liquidity. Contracted sales and revenue recognition, Jun-13 (CNY bn)
120 100 80 60 40 20 0 2007 2008
426
Company profile
Listed on the HKSE since November 2009, Evergrande Real Estate Group Ltd. (Evergrande) is one of Chinas largest developers in terms of land-bank size. As of June 2013, the company had total land reserves of 144.6mn sqm in 262 projects across 140 cities (mainly Tier 2 and Tier 3 cities), targeting buyers in the mass to upper-midrange markets. A total of 197 projects have obtained pre-sale permits, and a total of 11.6mn sqm of GFA remained unsold as of June 2013. By construction status, 37.mn sqm of GFA from 201 projects was under construction. The average land cost is low, at about CNY 800psm/GFA. The company is about 63% owned by its chairman. Evergrande declared CNY 2.3bn of dividends for 2012 at an EGM in October 2013.
HY CORPORATES
Contracted sales Revenue
2009
2010
2011
2012
LTM Jun-13
Asia Credit Compendium 2014 Evergrande Real Estate Group Ltd. (B2/Sta; BB-/Sta; BB/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity 14,378 19,952 28,204 25,190 41,973 5,723 199 (1,207) 1,446 1,046 45,801 10,521 (2,107) 14,093 7,589 61,918 16,074 (3,988) 20,375 11,382 65,261 13,180 (5,785) 16,490 9,171 41,952 9,159 (3,391) 11,301 6,237 2010 2011 2012 H1-13

75 Revenue 60 80 100
45
60
30
40
15
EBITDA margin (RHS)
20
63,071 104,452 179,023 238,991 274,587 14,176 (202) 13,157 31,160 11,208 21,366 51,727 23,523 34,131 60,274 35,084 41,691 75,819 33,845 58,001 0 2009 2010 2011 2012 LTM Jun-13 0
Coverage ratios (x)

Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%)
2,194 (11,672) (92) (858)
(3,632) (9,076)
(5,465) (7,969)
NA NA NA NA
70 60 50 40
2,102 (12,529) (12,709) (14,389) (105) (1,902) (2,801)
(36.4) 3.5 51.9 71.2 0.2 226.1
NM 23.0 59.3 3.0 5.0 285.0
52.8 26.0 60.2 3.2 4.0 275.8
(18.0) 20.2 59.1 4.6 2.3 132.4
8.1 21.8 56.7 5.5 2.7 148.5 0 2009 2010 2011 2012 30 20 10
0 H1-13
HY CORPORATES

80 100

35 30 USD senior notes Synthetic CNY Trust loans
64
80 25
48
60
20 15 10 Bank loan
32
40
16
Total debt
Total cash*
20
5 0 2009 2010 2011 2012 Jun-13 0 0 < 1yr 1-2 yrs 2-5 yrs > 5 yrs
*Including restricted cash, **estimate; Sources: Company reports, Standard Chartered Research
427
Asia Credit Compendium 2014 First Pacific Co. Ltd. (NR; NR; NR)

We have a Stable outlook on Firpac. We like its diversified businesses that target the major economies in Southeast Asia (especially the Philippines), which have robust domestic consumption and infrastructure improvement needs. MPIC reported a sharp increase in revenue in H1-2013, with doubledigit growth across most businesses. Profit margins at Indofood were under pressure on lower CPO prices affecting its agribusiness. Contributions from PLDT remained stable. In addition to the Padcal Mine resuming operations, investments via MPIC and the acquisition of PacificLight should boost earnings. As such, we expect a turnaround in 2014, despite deterioration in its credit profile in H1-2013.

Credit profile deteriorated, but we expect a turnaround in 2014: Total debt rose to USD 5.2bn as of June 2013 from USD 4.4bn at end-2012, partly due to the company issuing USD 400mn of 10Y bonds in April. Proceeds from the additional debt have been used for investing in PacificLight Power (PacificLight), loans to Philex and other business acquisitions. In addition to lower EBITDA, credit metrics deteriorated across the board. Total debt/capital was 41.5% as of June 2013, versus 37.9% six months earlier; total debt/LTM-adjusted EBITDA edged up to 4.2x in H1-2013 from 2.9x in 2012, and LTM-adjusted EBITDA/interest was 3.2x, compared with 5.3x in 2012. However, we expect a marked improvement in 2014, due to a turnaround in Philexs performance, continued growth in MPIC, increased contribution from MPICs new investments and the maiden contribution from PacificLight. Firpac also tapped the equity market in H2-2013 to raise capital. In July 2013, it completed a one-for-eight rights issue, raising more than USD 500mn to finance potential acquisitions and investments. This will likely to help to lower its gearing ratio by end-2013 on an improved capital base. PLDT is the largest revenue contributor: PLDT contributed 42% (USD 105.2mn, +11% y/y) of Firpacs net profit from operations in H1-2013 (2012: 42%, USD 193mn). Revenue rose 2% y/y to PHP 81.1bn due to an increase in non-SMS data revenue (21% of total service revenue) offset by a decline in service revenue from national long distance, cellular international voice and satellite revenue (19% of total). Its cellular SMS, cellular domestic voice and local exchange revenue (60% of total) remained stable. EBITDA margin in H1-2013 was 49%. Indofood Hit by lower CPO prices and a weaker currency: Indofood registered sales growth in three of its four main businesses in H1-2013: CBP, Bogasari and distribution. As a result, revenue rose 3% y/y to USD 2.8bn (9% y/y in IDR terms). However, EBIT margin was lower at 10.9%, versus 14.5% in H1-2012, due to lower CPO prices affecting the agribusiness and higher spending on advertising and promotions. Net profit contribution to Firpac was flat at USD 90.5mn (H1-2012: USD 90.4mn), accounting for 36% of the total USD 250mn. Following the purchase of its 29.3% stake in China Minzhong for USD 158.4mn in February 2013, Firpac acquired more shares in September 2013 to bring its total stake to over 60%. MPIC Actively seeking investment: MPIC contributed USD 369mn (+16% y/y) of revenue and USD 53mn (+11% y/y) of net profit from operations in H1-2013, helped by improved performance across its infrastructure portfolio (water and electricity distribution, toll roads and hospital services) and new acquisitions. As such, its contribution to Firpacs net profit from operations was 21% of the total, up from 19% in 2012. MPIC has been active on the investment front, investing in various infrastructure projects (toll roads, rail, water business and health care). Philex Resuming production at Padcal: Net profit from operations fell 80% y/y to USD 3mn (H1-2012: USD 16mn) as the Padcal Mine reopened in March 2013 after a seven-month suspension. This reversed the net loss suffered in H2-2012. Overall revenue for Philex was down 40% y/y to USD 104.5mn as lower metal prices offset higher grades. Philex has also conducted a rights issue in H2-2013 to raise USD 300mn to help finance loan repayments and capex, thereby easing funding needs. Venturing into the power business: Firpac has an effective 68% stake in FPM Power Holdings, which purchased 70% of PacificLight in March 2013. Due to commence commercial operations in Q1-2014, PacificLight is Singapores first power plant fully fuelled by LNG. It has vesting contracts for 30% of its off-take, and the remainder is available for retail contracts and merchant deliveries. Ownership structure (economic interest as of August 2013)
First Pacific Co. Ltd.
25.6% 55.8% 50.1% 31.2% 68.1%
Company profile
Founded in 1981, First Pacific Co. Ltd. (Firpac) is a Hong Kong-based investment management and holding company. Its principal business interests in Southeast Asia relate to telecommunications, infrastructure, consumer food products and natural resources. Its core holdings include (1) a 25.6% stake in Philippine Long Distance Telephone Company (PLDT), a leading telecom service provider in the Philippines; (2) a 55.8% stake in Metro Pacific Investment Corp. (MPIC), which specialises in infrastructure development in the Philippines; (3) a 50.1% indirect interest in Indofood, a leading food processing company in Indonesia; and (4) a 31.2% stake in Philex, a company engaged in the exploration and mining of mineral resources in the Philippines.
HY CORPORATES
PLDT
Metro Pacific
Indofood
Philex*
FPM Power
*Two Rivers Pacific Holdings Corp., a Philippines-based affiliate of First Pacific Co. Ltd., holds an additional 15.0% interest in Philex and a 5.4% economic interest in Philex and Philex Petroleum 428
Asia Credit Compendium 2014 First Pacific Co. Ltd. (NR; NR; NR)
Summary financials
2009 Income statement (USD mn) Revenue Adjusted EBITDA^ Contribution from ops* Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios Adj. EBITDA growth (%) Adj. EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA^ (x) Net debt/EBITDA^ (x) EBITDA^/interest (x) 72.4 28.3 47.7 3.3 2.5 4.1 21.5 29.1 38.0 2.5 1.4 4.6 10.1 26.2 34.9 2.5 1.2 5.4 0.4 24.9 37.6 2.9 1.5 5.3 (33.0) 17.0 41.5 4.2 2.8 3.2 59 (390) (331) (211) 820 (514) 306 (247) 643 (562) 81 (266) 976 (863) 113 (259) 146 (443) (298) (158) 937 1,539 1,875 12,612 3,695 1,820 2,175 1,808 3,926 1,112 335 (273) 804 661 4,640 1,351 474 (296) 979 776 5,684 1,487 512 (274) 1,313 1,097 5,991 1,493 463 (282) 1,060 830 3,124 531 250 (165) 296 254 2010 2011 2012 H1-13

7,000 Revenue 6,000 5,000 4,000 3,000 2,000 20 1,000 0 2009 2010 2011 2012 LTM Jun-13 0 60 Adj. EBITDA margin (RHS) 80 100
40
9,397 10,914 3,685 2,749 3,439 1,900
13,880 15,240 4,365 2,190 5,235 3,426 6 EBITDA/ interest 5
9,397 10,914 12,612 13,880 15,240
Coverage ratios (x)
Total debt/EBITDA
2 2009 2010 2011 2012 H1-13
HY CORPORATES

6,000
Debt maturity, Jun-13 (USD mn)

100 2,500
5,000
80
2,000
4,000
Total debt
60
1,500
3,000 40 2,000 20 500 1,000
1,000
Total cash
0 2009 2010 2011 2012 H1-13
0 <1Y 1-3Y 3-5Y >5Y
Âdjusted to reflect dividend contributions from associates; *contribution from operations represents recurring profit contributed to the group by its operating companies; Source: Company reports, Standard Chartered Research
429
Asia Credit Compendium 2014 Franshion Properties China Ltd. (Ba1/Sta; BB/CWP; BBB-/Sta)

Franshion continued to report strong property trading revenue and contracted sales thanks to its land-bank expansion in recent years. Sales revenue totalled HKD 11.1bn in H1-2013 (H1-2012: HKD 3.8bn). The company reported CNY 11.8bn from contracted sales and CNY 6.2bn from land sales in 10M-2013. However, capex for land acquisitions and project development has increased, causing total cash to fall to HKD 9.9bn as of June 2013 from HKD 13.5bn at end-2012. The company was also active in the offshore capital market in 2013 to meet its funding needs. Credit metrics improved in H12013 on a significant increase in sales revenue. Revenue from investment properties was stable. Franshion has slowed the pace of land expansion since mid-2013.

Solid H1-2013 financial results, with more contribution from property sales: Revenue more than tripled to HKD 11.1bn in H1-2013 from HKD 3.8bn in H1-2012, underpinned by HKD 9.2bn of revenue from property sales, compared with HKD 1.7bn in H1-2012. Recurring revenue from office leasing and hotel operations was stable, contributing HKD 1.67bn in H1-2013 (H1-2012: HKD 1.61bn). Profit margins remained high gross profit margin was 43.5% in H1-2013 (2012: 41.9%), and EBITDA margin was 38.3% (2012: 35.1%). This is in line with the companys focus on the high-end segment in top-tier cities. Strong contracted sales backed by increased development land bank: Franshion recorded strong property sales of CNY 11.8bn in 10M-2013 at an ASP of CNY 25,214psm. This is against its full-year sales target of CNY 13bn. In addition, land sales from its primary land development projects totalled CNY 6.2bn in 10M-2013 (exceeding the full-year target of CNY 5bn). The company reported a total CNY 17.948bn from property and land sales in 10M-2013, 16% higher than sales of CNY 15.5bn in 2012. High-quality investment portfolio generates decent recurring income: Franshion owns prime office towers and five-star hotels in major Tier 1 and Tier 2 cities. We expect revenue from these investment properties of around HKD 3.2bn p.a., given keen competition in the two property sectors. The balance sheet value of the companys investment properties totalled HKD 20.3bn as of June 2013. Land and project development capex is high, but liquidity is sufficient: Total cash fell to HKD 9.9bn as of June 2013 from HKD 13.5bn at end-2012, mainly on land acquisitions. Land acquisitions totalled CNY 6.8bn in 9M-2013. The company also made two big-ticket purchases in December 2012 of a Suzhou site (CNY 2.3bn) and a 50% stake in a Shanghai project (CNY 2.8bn). Franshion has also been selected as the second investor for primary land development of Meixi Lake International Service and Technology Innovation City Phase II (total investment of CNY 17.4bn). Given the high funding needs, Franshion has also been active in the offshore capital market. It raised USD 200mn 6.4% of 2022 bonds via a private placement in August and issued USD 300mn 5.375% of 2018 bonds in October. It also announced in August that funds managed by Warburg Pincus had agreed to subscribe to a 20% share in a project company holding the newly acquired Suzhou project for USD 79mn payable in cash and a fee of USD 2.95bn upon closing the transaction. Credit metrics held stable: Total debt rose slightly to HKD 31.8bn as of June 2013 from HKD 28.3bn at end-2012. Credit metrics remained stable thanks to the significant increase in sales revenue recognition in H1 total debt/LTM EBITDA fell to 3.6x in H1-2013 from 4.7x in 2012, and LTM EBITDA/interest rose to 4.9x from 3.5x. Total debt/capital stood at 43.7% as of June 2013 compared with 45.0% at end-2012. Ownership structure and portfolio composition, Jun-13
Sinochem Corporation
100%
Company profile
Established in Hong Kong in 2004 and listed on the HKSE in 2007, Franshion Properties China Ltd. (Franshion) is 62.9% owned by the Sinochem Group, one of the 21 SOEs approved by the SASAC to engage in real estate business, and one of the six SOEs approved by the SASAC for hotel operations. Franshion has three major business segments: property development, property leasing and hotel operations. As of June 2013, it held (1) a development portfolio of about 6mn sqm, (2) 350,471 sqm of leasable GFA from four IG office developments and (3) 3,106 guest rooms from seven hotels (441,385 sqm). The company is also involved in primary land development in Changsha and Sanya.
HY CORPORATES
Sinochem Hong Kong

62.9%
Public and others

37.1%
Franshion Properties China Ltd. (817 HK)
Development properties (6mn sqm of GFA, excluding the primary land development projects)
Investment portfolio (350,471 sqm of leasable GFA, incl. Sinochem Tower, Jin Mao Tower, Beijing Chemsunny World Trade Centre)
Hotels (3,106 rooms from 7 hotels in Beijing, Shanghai, Nanjing, Shenzhen, Sanya)
430
Asia Credit Compendium 2014 Franshion Properties China Ltd. (Ba1/Sta; BB/CWP; BBB-/Sta)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow (3,830) Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 59.6 42.9 47.9 6.1 3.8 73.3 (3.4) 41.2 40.6 7.0 2.8 177.0 (1.0) 40.1 45.2 9.5 1.9 208.9 128.0 35.1 45.0 4.7 3.5 150.4 170.5 38.3 43.7 3.6 4.6 137.9 (184) (4,014) (370) 928 (139) 788 (229) (7,713) (225) (7,938) (846) (80) (335) (415) (367) NA NA NA NA 7,802 40,143 16,512 8,710 17,947 13,322 51,355 18,235 4,914 26,719 12,592 69,771 25,199 12,607 30,547 13,464 9,930 6,321 2,709 (704) 2,474 1,174 6,348 2,616 (932) 3,064 1,714 6,592 2,641 (1,372) 4,097 2,344 17,176 6,022 (1,721) 6,723 3,378 11,132 4,266 (931) 4,403 2,235 2010 2011 2012 H1-13

25 100
20
80
15 EBITDA margin (RHS) 10 Revenue 5
60
40
20
82,502 101,847 28,275 14,811 34,503 31,789 21,859 40,909 0 2009 2010 2011 2012 LTM Jun-13 0
Debt metrics (x)

10 5
0 2009 2010 2011 2012 H1-13
HY CORPORATES

35 Total debt/cap. (RHS) 100

15
28
80
12
21 Total debt 14 Total cash* 7
60
40
20
0 2009 2010 2011 2012 H1-13

*Including restricted deposits; Source: Company reports, Standard Chartered Research
0 < 1yr 1-2 yrs 2-5 yrs > 5 yrs
431
Asia Credit Compendium 2014 PT Gajah Tunggal Tbk. (B2/Sta; B+/Sta; NR)

GT reported a marginal increase in sales and stable profitability in 9M-2013. Lower export sales were offset by higher domestic demand. The company issued USD 500mn of 7.75% of 2018 bonds (its only debt) and repaid USD 435mn of 2014 bonds to extend its debt maturity and avoid the 225bps coupon step-up in July from 8%. Liquidity is strong. GT reported positive FCF of IDR 228bn in 9M-2013 thanks to reduced capex. While some margin compression is likely due to the weakening Indonesian rupiah, we do not expect large rises in raw-material costs in the near future. This will help GT to maintain a stable credit profile and sound liquidity if it keeps capex at a similar level to 2013. GT can pass on most of the increases in its raw-material costs to customers, albeit with a time lag of a few months.

Dominant position in the domestic market: GT has maintained a dominant position in Indonesias tyre market. The company reported 4.1% y/y growth in domestic sales to IDR 6.2tn in 9M-2013. However, export sales fell 15.0% to IDR 2.9tn. Sales to Western markets (the Americas and Europe) fell 11.8% to IDR 1.7tn, and those to the Middle East fell 41.1% to IDR 404mn. In contrast, sales to Asia rose 4.8% to IDR 666mn. The contribution from domestic sales rose to 67.8% of the total in 9M-2013 (2012: 64.0%) at the expense of exports (9M-2013: 32.2%, versus 2012: 36.0%). Stable profitability in 9M-2013: Total revenue fell 2.9% y/y to IDR 9.1tn in 9M-2013 as export sales declined. The company continued to benefit from weak rubber prices. Raw-material costs (c.70% of total cost of sales) fell 11.1% to IDR 5.0tn; they include natural rubber (35% of total COS), synthetic rubber (23%), tyre cord (14%), carbon black (12%) and others (16%). Profit margins remained decent in 9M-2013 gross margin rose to 20% (2012: 19.4%), and EBITDA margin held steady at 16.6% (2012: 16.8%). Credit profile deteriorated slightly in 9M-2013: The company raised USD 500mn of 7.75% of 2018 bonds in February 2013 and redeemed USD 435mn of 2014 bonds (with a coupon step-up of 225bps scheduled in July 2013). As such, total debt rose slightly to IDR 5.7tn as of September 2013 from IDR 4.0tn at end2012. Total debt/LTM EBITDA edged up to 2.6x in 9M-2013 from 1.9x in 2012, LTM EBITDA/interest fell to 4.3x from 5.7x, and total debt/capital rose to 49.6% as of September 2013 from 42.0% at end-2012. Liquidity is strong: Total cash and available-for-sale investments rose to IDR 1.9tn (c.USD 169mn) as of September 2013 from IDR 1tn at end-2012. GT generated positive FCF of IDR 228bn in 9M-2013 on lower capex of IDR 673bn (9M-2012: IDR 1.4tn), raised a net IDR 675bn from bond issuance, and made IDR 9bn of dividend payments (limited to 5% of net profit). We expect neutral to slightly positive FCF in 2013, depending on its Q4 capex (GT lowered its full-year 2013 capex plan to about USD 110-120mn from USD 140-150mn at the start of the year). 2014 capex is likely to hold steady at about USD 120mn, including USD 50mn for maintenance, USD 40mn for truck and bus radial tyres (TBR), and USD 30mn for R&D. Negative impact on profitability from weakening IDR: We expect profit margins to be negatively affected by continued Indonesian rupiah (IDR) depreciation the currency weakened c.11% in August-September. While GT sources rubber domestically, rubber prices are USD-linked. Every 5% fall in the IDR against the USD translates into a 100bps decline in gross profit margin. While the company does not hedge its FX exposure, export sales account for about 32% of total sales. It has maintained sufficient USD deposits to service its interest and other expenses. Of total cash and deposits, GT had the equivalent of IDR 1.4tn in USD as of September 2013. We also do not expect significant cost pressure from increases in rubber and other raw-material prices in the short term. In addition, the company is generally able to pass on about 80-90% of such price increases to its customers, with a time lag of three to six months. Ownership structure (Sep-13)
Denham Pte Ltd. (wholly owned by GITI Tire) 49.7% Michelin (France) 10.0% PT Gajah Tunggal Tbk Tyre business Synthetic rubber Tyre cord 25.6% PT Polychem Indonesia Tbk (Chemicals textile) 99.0% PT Prima Sentra Megah (External synthetic rubber and tyre cord) Public 40.3%
Company profile
Established in 1951 and listed on the IDX in 1990, PT Gajah Tunggal Tbk. (GT) is the largest integrated tyre producer in Southeast Asia. It produces many types and sizes of radial, bias and motorcycle tyres, as well as tyre cords and synthetic and processed rubber that are key components in making tyres. Based on the domestic replacement market size in 2012, GT had market shares of 49% for bias tyres, 24% for radial tyres and 50% for motorcycle tyres. Exports accounted for 36% of its sales in 2012 (9M-2013: 32%). Its manufacturing facilities are strategically located in Tangerang, c.30km west of Jakarta, Indonesia. As of September 2013, GITI Tire, through its wholly owned Denham Pte Ltd., controlled a 49.7% stake in GT; Michelin owned a 10.0% share, and the remainder was held by the public.
HY CORPORATES
Divisions of PT Gajah Tunggal Tbk.
432
Asia Credit Compendium 2014 PT Gajah Tunggal Tbk. (B2/Sta; B+/Sta; NR)
Summary financials
2009 Income statement (IDR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (IDR bn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (IDR bn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 66.3 18.9 60.2 2.7 3.6 NM 10.8 16.9 52.4 2.3 4.5 NM (15.1) 11.9 46.4 2.7 4.3 965.3 50.2 16.8 42.0 1.9 5.7 494.3 4.2 16.6 49.6 2.6 4.3 NM 1,147 (336) 812 1,021 (749) 271 (59) 309 (807) (498) (45) 1,714 (1,872) (158) (35) 689 (445) 244 (94) 1,273 8,877 4,044 2,771 2,671 1,515 10,372 3,876 2,362 3,527 1,058 11,554 3,831 2,773 4,431 1,000 12,870 3,971 2,971 5,478 1,926 14,542 5,672 3,746 5,759 7,936 1,500 (420) 1,274 905 9,854 1,661 (367) 1,120 831 11,841 1,410 (331) 856 684 12,579 2,117 (372) 1,457 1,132 9,109 1,509 (272) 961 778 2010 2011 2012 9M-13
Profitability (IDR bn LHS, % RHS)

14,000 12,000 80 10,000 8,000 6,000 4,000 20 2,000 0 2009 2010 2011 2012 LTM Sep-13 0 Revenue 60 EBITDA margin (RHS) 100
40
Coverage ratios (x)

6 EBITDA/ interest 5
Total debt/EBITDA
1 2008 2009 2010 2011 2012 9M-13
HY CORPORATES
Debt metrics (IDR bn LHS, % RHS)

5,000 Total debt/cap. (RHS) 80 100
Debt maturity, Sep-13 (IDR bn)

6,000 USD bonds
4,000
Total debt
5,000
4,000 3,000 60 3,000 2,000 Total cash* 40 2,000 20
1,000
1,000
0 2009 2010 2011 2012 9M-13
0 <1Y 1-2Y 2-3Y 3-4Y >4Y
*Including short-term investments; Sources: Company reports, Standard Chartered Research
433
Asia Credit Compendium 2014 Glorious Property Holdings Ltd. (Caa2/Neg; CCC+/Neg; NR)

Glorious has performed poorly in terms of contracted sales and project delivery in the past two years. Its liquidity is tight and its credit profile is weak. Trading of its shares and bonds was recently suspended due to the proposed privatisation by its controlling shareholder, raising concerns about future transparency and corporate governance. This is in addition to its already-weak operations and financial condition. However, the company issued USD 250mn of 13.25% of 2018 bonds, and had CNY 2.9bn of cash and CNY 19.8bn of undrawn bank facilities as of June 2013. Glorious also has decent land bank exposure in top-tier cities at a low average land cost of CNY 1,309 psm/GFA. We believe these factors partly mitigate the risks.

Contracted sales underperformed significantly versus peers and own target: Glorious reported CNY 5.3bn of sales in 10M-2013, less than half of its full-year target of CNY 11bn (2012: CNY 10.9bn). The ASP was CNY 11,236psm, 31% higher than the 2012 average of CNY 8,576psm. Sales from projects in Shanghai accounted for 46% of total sales, at an ASP of CNY 26,653psm. This was followed by sales in the Yangtze River area, accounting for 29% of total sales, at an ASP of CNY 8,695psm. Sales from projects in northeastern China (Changchun, Shenyang and Harbin) made up 18% of total sales, at a low ASP of CNY 6,025psm. While the ASPs achieved in different cities/regions are mostly in line with market rates, sales progress has been slow, despite its decent land bank size of 15.8mn sqm. Profitability fell sharply in H1-2013: Revenue totalled CNY 3.0bn in H1-2013 (H12012: CNY 1.3bn), backed by strong growth of GFA delivered to 404,453 sqm from 85,688 sqm. However, the ASP fell 53% to CNY 7,301psm from CNY 15,663psm, and the cost of sales jumped to CNY 2.7bn from CNY 789mn. As a result, profitability declined significantly gross profit margin fell to 17.1% (H1-2012: 37.1%), and EBITDA margin thinned to a breakeven level of 0.9% (H1-2012: 22.1%). The company has low pricing power for projects in the areas it has recently expanded into (especially in northeastern China), despite high upward cost pressure. Extremely tight liquidity and weak credit metrics: Including restricted cash of CNY 1.9bn, total cash was CNY 2.9bn as of June 2013, lower than the CNY 3.3bn at end-2012. Total debt rose to CNY 17.4bn as of June 2013 from CNY 15.8bn at end-2012. The company issued USD 250mn 13.25% of 2018 bonds in February and reduced CNY 934mn of bank loans and other borrowings. ST debt remained high at CNY 8.1bn as of June 2013, compared with CNY 6.1bn at end-2012. That said, Glorious had CNY 19.8bn of undrawn bank facilities as of June 2013. Higher debt, coupled with much weakened profitability, resulted in a further deterioration in credit metrics in H1-2013 total debt/capital rose to 46.9% as of June 2013 from 44.8% at end-2012, total debt/LTM EBITDA increased to 16.7x in H1-2013 from 12.1x in 2012 and LTM EBITDA/interest fell to 0.5x from 0.7x. Quality land bank at reasonable cost to mitigate risk: Glorious has a 15.8mn sqm high-quality land bank in Tier 1 and Tier 2 cities at a low average cost of CNY 1,309 psm/GFA. The average land cost in Shanghai was CNY 1,799 psm/GFA as of June 2013. Glorious has added two new land parcels in Nanqiao New Town in Shanghai in H2-2013 for a total of CNY 2.7bn (CNY 15,300 psm/GFA). Trading suspension: On 21 October 2013, Glorious announced suspending trading of its shares and bonds pending an announcement of a possible privatisation of its controlling shareholder. According to details of the proposed privatisation released on 21 November, the offer price is HKD 1.80/share compared to the last traded share price of HKD 1.24/share. In comparison, its IPO price was HKD 4.40/share in 2009. Glorious controlling shareholder plans to raise a bank loan for the HKD 4.6bn cash needed to fund the privatisation. We note that total market capital of HKD 9.6bn (CNY 7.6bn) represented 39% of total shareholders equity of CNY 19.4bn on the balance sheet as of 30 September. However, we believe the privatisation will reduce the companys transparency. Geographical distribution of land bank, Jun-13 (15.8mn sqm)
Shenyang & Harbin Dalian Changchun Tianjin Beijing Wuxi & Suzhou Nanjing Hefei Nantong Shanghai 0
434
Company profile
Established in 1996 and listed on the HKSE in 2009, Glorious Property Holdings Ltd. (Glorious) is a mediumsized property developer targeting buyers in the mid to high-end market. As of June 2013, the company had a total land bank of about 15.8mn sqm across 12 Chinese cities (mostly Tier 1 and Tier 2 cities) at a land cost of c.CNY 1,309 psm/GFA. The land bank is concentrated in two key regions: the Yangtze River Delta (64% of total land bank) and the northeastern and Bohai Rim (36%) regions. Glorious holds a substantial high-quality land bank in Tier 1 cities Shanghai (13%) and Beijing (10%). It also has significant exposure in Nantong (35%), Tianjin (16%) and Hefei (11%). The company is about 68.39% owned by Zhang Zhi Rong.
HY CORPORATES
1.0% 2.5%
Bohai Rim and northeastern China 7.6% 9.6% 15.8% Yangtze River 10.5% 12.6% 34.6% 3,000,000 4,000,000 5,000,000 6,000,000
1.6%
4.2%
1,000,000
2,000,000
Asia Credit Compendium 2014 Glorious Property Holdings Ltd. (Caa2/Neg; CCC+/Neg; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow (3,030) Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 90.9 40.2 36.6 2.8 2.1 335.0 13.4 39.5 47.4 4.9 2.1 97.2 11.6 32.8 44.8 4.7 1.7 34.0 (58.4) 15.6 44.8 12.1 0.7 54.2 (91.1) 0.9 46.9 16.7 NM 36.0 (152) (3,182) (7,319) (265) (7,583) (234) (1,393) (828) (2,220) (44) (814) (858) NA NA NA NA 6,052 26,368 6,848 1,835 11,847 5,835 42,326 13,786 9,635 15,292 3,166 50,704 14,886 13,865 18,345 3,300 52,627 15,784 12,484 19,442 2,930 55,029 17,350 14,419 19,668 6,171 2,481 (1,194) 3,686 2,366 7,114 2,813 (1,350) 5,962 3,609 9,585 3,141 (1,831) 4,021 2,209 8,385 1,306 (1,853) 1,869 1,082 2,953 26 (1,233) 241 225 2010 2011 2012 H1-13

8 Revenue 6
80
60
40
20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

18 Total debt/LTM EBITDA 2 3
15
12
LTM EBITDA/int. (RHS) 0 2008 2009 2010 2011 2012 H1-13
HY CORPORATES

18 Total debt 60

10 Others borrowings
15 Total debt/cap. (RHS)
8 40 6
12
9 4 6 Total cash* 20 2 Bank loans Senior notes
0 2009 2010 2011 2012 H1-13
0 1yr 1-2yr 2-5yr >5yr
*Including restricted cash, **including trust loans; Source: Company reports, Standard Chartered Research
435
Asia Credit Compendium 2014 Greentown China Holdings Ltd. (B2/Pos; B+/Sta; NR)

We initiate coverage of Greentown with a Stable credit view. The company faced a tight liquidity situation in 2008-12, owing to aggressive land expansion and pressure on sales and pricing power from policy changes and elevated building costs, given its continued effort to maintain high product quality. Although profit margins remain compressed, its credit profile and liquidity have since improved. With strong contracted sales in 2012-13, revenue visibility for 2013-15 is high. In addition, Greentown will continue to benefit from its partnerships with Wharf and Sunac in terms of reducing funding costs, penetrating new markets and enhancing its marketing ability. sales and

Solid contracted sales performance: Greentown has achieved strong sales growth in 2013. Contracted sales totalled CNY 51.1bn (attributable sales of CNY 26bn) in 10M-2013. This represents 93% of its full-year target of CNY 55bn (2011: CNY 35.3bn; 2012: CNY 54.6bn). The ASP was CNY 19,067psm in 10M-2013, similar to the 2012 average of CNY 19,891psm, reflecting its focus on mid-range to high-end buyers in top-tier cities. Greentown is generally able to achieve a price premium over neighbouring projects, backed by its strong brand name recognition for high-quality products. The good sales performance also suggests that the company has recovered from the tight liquidity situation it faced in 2008-12. High revenue visibility: Revenue was CNY 10.2bn in H1-2013, compared with CNY 12.6bn in H1-2012. The ASP of sales was CNY 14,843psm, down 81% y/y. As such, profitability remained under pressure as Greentown recognised sales concluded in the past few years when it was experiencing a liquidity crunch it had to offer competitive selling prices to move sales, while incurring high development costs to ensure product quality. Gross profit margin was 30.0% in H1-2013 (2011: 33.7%, 2012: 30.3%), and EBITDA margin was 22.0% (2011: 25.7%, 2012: 24.9%). That said, the company had unrecognised contracted sales of CNY 82.4bn (attributable: CNY 45.6bn) as of June 2013. Of this, it expects to recognise about CNY 40.8bn (attributable: CNY 25.7bn) in H2-2013, CNY 32.4bn in 2014 and CNY 9.2bn thereafter. Liquidity is strong and credit profile continued to improve: Including restricted cash, total cash rose to CNY 10.4bn as of June 2013 from CNY 7.9bn at end-2012. In addition to cash flow from contracted sales, the company issued USD 400mn 8.5% of 2018 bonds in January and an additional USD 300mn at 102.5 to yield 7.864% in March. It also raised USD 400mn of a 3Y loan jointly with Sunac at LIBOR+3.88% p.a. for a project acquisition in July and USD 100mn of a 3Y loan at LIBOR+4% for general working capital purposes. Total debt was CNY 24.7bn as of June 2013, compared with CNY 21.4bn at end-2012. Greentown managed to reduce its ST bank loans and other borrowings to CNY 7.5bn as of June 2013 from CNY 15.0bn at end-2012. Credit metrics held largely stable despite higher debt and continued weakness in profitability. Total debt/LTM EBITDA was 2.9x in H12013 (2011: 5.7x, 2012: 2.4x), LTM EBITDA/interest was 2.3x (2011: 1.6x, 2012: 2.5x) and total debt/capital was 46.1% (2011: 64.4%, 2012: 43.7%). Leveraging the strengths of JV partners: In addition to capital injections from JV partners to ease liquidity pressure, Greentown has benefited from its partnerships with Wharf (in terms of reducing funding costs) and Sunac (improving sales turnover). Greentown has also been active in the land market jointly with Wharf, Sunac, and Poly Real Estate. Of the CNY 14.3bn of known land purchases in 9M2013, attributable land cost was low, at about CNY 4.4bn. Geographical distribution of saleable GFA, Jun-13
10 8 6 4 2 0 Shanghai Shandong Hangzhou Zhejiang Xinjiang Jiangsu Beijing/ Tianjin Hainan Henan Hunan Anhui Hebei Liaoning
Company profile
Established in Hangzhou in 1995 and listed on the HKSE in 2006, Greentown China Holdings Ltd. (Greentown) is well known for its high-quality housing products in China. Targeting mid- to high-end buyers, the company had a total land bank of 41.39mn sqm (attributable GFA of 21.96mn sqm) from 99 projects as of June 2013. Greentown raised a total of HKD 5.1bn from Wharf Holdings in June 2012, comprising HKD 2.55bn from a share placement and HKD 2.55bn from the issuance of perpetual convertible callable securities. The company also set up a 50:50 JV with Sunac China in June 2012 and transferred nine projects to the JV for CNY 3.36bn. Greentown has since been active in the land market with its JV partners. Greentown is 25.16% owned by its chairman. Wharf is the second largest shareholder (24.36%), with two board members.
HY CORPORATES
436
Asia Credit Compendium 2014 Greentown China Holdings Ltd. (B2/Pos; B+/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (5.1) 13.1 64.6 19.9 0.6 139.2 64.0 16.8 70.2 18.2 0.7 124.8 201.2 25.7 64.4 5.7 1.6 37.1 56.3 24.9 43.7 2.4 2.5 51.8 (16.7) 22.0 46.1 2.9 2.3 134.9 2,628 (677) 1,951 (441) (8,516) (585) (9,101) (638) (2,425) (569) (2,994) (625) 3,083 (1,078) 2,006 (351) NA NA NA NA 11,782 14,973 5,884 7,898 10,392 8,727 1,142 (1,853) 1,570 1,012 11,161 1,873 (2,662) 3,000 1,532 21,964 5,641 (3,553) 6,701 2,575 35,393 8,814 (3,481) 10,257 4,851 10,214 2,252 (995) 3,620 1,855 2010 2011 2012 H1-13

35 Revenue 100
28
80
21
60
14
EBITDA margin (RHS)
40
20
75,476 125,359 127,977 107,707 117,580 22,673 10,891 12,449 34,047 19,074 14,453 31,925 26,042 17,643 21,373 13,475 27,488 24,652 14,261 28,829 0 2009 2010 2011 2012 LTM Jun-13 0
Coverage ratios (x)

20 4
15
10
0 2009 2010 2011 2012 H1-13
HY CORPORATES

35 30 80 25 20 15 10 5 0 2009 2010 2011 2012 H1-13

100 13 12 11
Total debt 60
10 9 8 7 6 Bank loans & others Senior notes
Total cash*
40
5 4
20
3 2 1
0 < 1yr 1-2 yrs 2-5 yrs
437
Asia Credit Compendium 2014 Guangzhou R&F Properties Co. Ltd. (Ba3/Sta; BB-/Sta; BB/Pos)

R&F first received Ba2/BB/BB corporate ratings from all three rating agencies in October. It achieved CNY 34.4bn of contracted sales in 10M-2013, on track to meet its full-year target of CNY 42bn. Credit metrics weakened in H1-2013 on higher debt and flat EBITDA (mainly due delivery to a back-loaded schedule in H2-2013). While liquidity is manageable, with total cash of CNY 19.3bn, R&F needs to refinance CNY 2.6bn of CNH bonds in April 2014 and CNY 5.5bn of onshore corporate bonds in October 2014. Land acquisitions have remained high, totalling CNY 12.7bn in 10M2013, but the average cost of its land bank was still low at CNY 1,500psm/GFA as of June 2013. The company made its first land purchase in Malaysia in November 2013 for MYR 4.5bn (GFA of 3.5mn sqm).

Revenue recognition remains back-end-loaded: Revenue increased 20.7% y/y to CNY 10.2bn in H1-2013, but EBITDA was flat at CNY 2.9bn. The GFA of recognised sales totalled 972,900sqm in H1-2013, 84% higher than in H1-2012 but 47% lower than in H2-2012. R&F maintains its delivery target of 2.84mn sqm for 2013. Its ASP fell a significant 33.1% to CNY 9,300psm in H1-2013 from CNY 13,902psm in H1-2012, versus the 21.9% decline in average land and construction costs. As a result, profitability fell gross profit margin was 36.2% in H1-2013, versus 40.8% in 2012, and EBITDA margin was 28.1%, versus 35.3%. Contracted sales are in line with target: R&F achieved CNY 34.4bn of contracted sales in 10M-2013, up 30% y/y and representing 82% of its full-year target of CNY 42bn (2012 sales: CNY 34.2bn). The ASP for 10M-2012 sales was CNY 12,109psm, versus the 2012 average of CNY 11,505psm. We believe this will help R&F maintain decent profit margins despite higher land and development costs. The companys average land cost is still low at about CNY 1,500psm/GFA; this amounts to about 12% of the contracted-sales ASP in 10M-2013. Liquidity is manageable, but refinancing needs will have to be addressed: R&F had total cash of CNY 19.3bn (free cash of CNY 13.1bn and restricted cash of CNY 6.1bn) as of June 2013. The company plans to receive CNY 41.7bn of cash in 2013 (CNY 38.0bn from sales and rental income and CNY 3.7bn from its issuance of the 2020 bonds) and incur construction capex of CNY 14bn, land-purchase costs of CNY 13bn and SG&A, tax and interest expenses of CNY 14bn. Land acquisitions totalled CNY 12.7bn in 10M-2013 (part of the consideration is payable in 2014-15). R&F has CNY 2.6bn of synthetic CNY notes due in April 2014 and CNY 5.5bn of onshore corporate bonds maturing in October 2014. In July 2013, R&F managed to extend the maturity of a CNY 3.2bn loan from Ping An Trust to 2015 from 2014 at a lower all-in cost of c.11% p.a. Credit metrics deteriorated on higher debt and flat EBITDA: Total debt climbed to CNY 45.8bn as of June 2013 from CNY 35.6bn at end-2012. The company issued USD 600mn 8.75% of 7Y bonds and added CNY 4.7bn of trust loans in H1. This, coupled with flat EBITDA, resulted in weaker credit metrics in H1-2013. Total debt/LTM EBITDA increased to 4.3x in H1-2013 from 3.3x in 2012, while LTM EBITDA/interest coverage fell to 3.3x from 3.9x. Total debt/capital rose to 63.2% as of June 2013 from 57.0% at end-2012. Quality land bank, with a decent investment property portfolio: R&F held a high-quality land bank of 34.5mn sqm worth estimated total sales of CNY 371bn as of July 2013, mostly in Tier 1 and Tier 2 cities. This represents about five years of contracted sales, assuming a 20% p.a. increase in sales. Average land cost was low at c.CNY 1,500psm, at about 12% of the recognised ASP in 10M-2013. Geographical distribution of attributable land bank, Jul-13 (34.5mn sqm)
Investment properties Shenyang Harbin Datong Taiyuan Tianjin Beijing and vicinity Changsha Wuxi Nanjing Hangzhou Shanghai and vicinity Guiyang Xian Chengdu Chongqing Hainan Fuzhou Meizhou Huizhou Guangzhou 0.3% 2.1% 2.0% 3.8% Bohai Rim and northeastern 9.6% Yangtze River and central Western 8.7% 5.8% 9.7%
438
Company profile
Established in 1994 and listed on the HKSE in 2005, Guangzhou R&F Properties Co. Ltd. (R&F) is a national developer targeting the mid to highend market. It had a total attributable land bank of 34.5mn sqm (sales value of c.CNY 371bn) as of July 2013. Its development portfolio is well diversified in top-tier cities across key regions the Pearl River Delta and southern regions (13.0mn sqm/sales value of CNY 161bn), the Bohai Rim and northern regions (10.0mn sqm/CNY 116bn), the western region (5.9mn sqm/CNY 37bn), the Yangtze River Delta area (1.6mn sqm/CNY 37bn), and the central region (3.3mn sqm/CNY 20bn). In addition to developing residential properties, R&F has built a decent investment property portfolio (710,000sqm at a book value of CNY 9.1bn as of June 2013), comprising two shopping malls, two office buildings and six fivestar hotels.
HY CORPORATES
8.0% 7.3% 7.7%
0.7% 1.1% 1.1% 1.7% 0.5% 0.7% 1.6% 0.8%
14.1% Pearl River and southern
12.6%
Asia Credit Compendium 2014 Guangzhou R&F Properties Co. Ltd. (Ba3/Sta; BB-/Sta; BB/Pos)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 14.1 25.9 58.9 5.2 3.3 114.9 69.9 32.5 58.2 3.5 5.0 127.6 21.7 35.6 55.5 2.9 5.1 89.4 9.9 35.3 57.0 3.3 3.9 178.3 0.2 28.1 63.2 4.3 1.6 204.9 4,573 (292) 4,281 (924) 1,973 (1,351) 621 (1,482) 658 (462) 196 (2,027) (2,316) (859) (2,949) (1,659) NA NA NA NA 7,887 66,344 24,390 16,503 17,019 9,168 77,417 27,854 18,686 19,999 9,026 84,159 28,379 19,353 22,732 12,862 19,261 18,196 4,714 (1,416) 4,859 2,900 24,642 8,006 (1,607) 8,070 4,351 27,370 9,741 (1,910) 9,168 4,842 30,365 10,710 (2,772) 10,042 5,502 10,191 2,861 (1,802) 2,513 1,449 2010 2011 2012 H1-13

35 EBITDA margin (RHS) 28 80 100
21
Revenue
60
14
40
20
98,587 115,682 35,632 22,770 26,830 45,817 26,556 26,695 0 2009 2010 2011 2012 LTM Jun-13 0
Coverage ratios (x)

6 LTM EBITDA/int. (RHS) 6
0 2009 20 18 16 2010 2011 2012 H1-13
HY CORPORATES

50 Total debt Total debt/cap. (RHS) 80
40
60
14 12
30 Total cash* 40
10 8 6 CNY bonds
Corp bonds
Trust loan
20
20 10
4 2
USD bonds Bank borrowing
0 2009 2010 2011 2012 H1-13
0 < 1 yr 1-2 yrs 2-5 yrs > 5 yrs
*Including restricted cash, **estimate; Source: Company reports, Standard Chartered Research
439
Asia Credit Compendium 2014 Hopson Development Holdings Ltd. (Caa1/Sta; CCC+/Sta; NR)

Hopson is a weak credit. It significantly underperforms peers with similar land bank sizes and target markets in terms of asset turnover and contracted sales. The company has kept its cash level at c.HKD 4-5bn, but ST debt has been consistently high at c.HKD 10-15bn in the past twoand-half years. Coverage ratios are extremely weak given low asset turnover and high debt obligations. Even so, Hopson has maintained decent profitability. Unused onshore bank facilities of HKD 36bn are sufficient to cover its ST bank loans. The company also had HKD 2.2bn of availablefor-sale assets as of June 2013, although HKD 1.6bn has been used as collateral for bank loans. Asset coverage is solid, with saleable resources of c.CNY 70bn, thanks to its prime land bank in Chinas top-tier cities.

Weak contracted sales: Hopsons contracted sales totalled CNY 10.26bn in 10M2013, c.69% of its full-year target of CNY 15bn (2012: CNY 11.6bn). While this represented y/y growth of 13% at a stable ASP of CNY 17,201psm (compared to CNY 17,260psm in 2012), it significantly underperformed peers. Most developers with similar portfolio compositions and target markets have achieved satisfactory sales results, in line with or exceeding their targets, despite strict home-purchase restrictions in top-tier cities. Hopson started to report sales results on a monthly basis at the beginning of 2013. Project delivery and revenue recognition remained slow: Revenue fell 3.0% y/y to HKD 5.0bn in H1-2013. GFA recognised rose 5.2% to 262,861sqm, but ASP fell 11.7% to CNY 13,234psm. Profitability declined notably in H1-2013 on lower ASP and higher development and marketing costs. That said, profit margins are largely in line with or higher than peers: gross margin was 37.1% in H1-2013 (2012: 42.7%), and EBITDA margin was 23.0% (2012: 25.8%). Liquidity is tight: Including restricted cash, total cash fell slightly to HKD 5.2bn as of June 2013 from HKD 5.6bn at end-2012. ST debt remained high at HKD 12.0bn (32% of total debt), although this was lower than the end-2012 balance of HKD 15.5bn. We think the company should be able to refinance its ST bank loans given its unutilised bank facilities of HKD 35.9bn as of June 2013. Cash flow from property sales, together with the cash balance, should be sufficient to cover operational and debt obligations. The companys cash level is likely to diminish in the coming months given weak sales performance, although it may slow construction to ease liquidity pressure. Credit metrics weakened further in H1-2013: Hopson raised USD 300mn (c.HKD 2.3bn) of 9.875% of 2018 bonds in January and reduced its bank loans by HKD 1bn in H1-2013. As such, total debt rose by HKD 1.2bn to HKD 38.0bn as of June 2013. The high debt level, combined with slow asset turnover and declining profitability, resulted in a continued deterioration in credit metrics in H1 total debt/LTM EBITDA rose to a high of 18.3x (2012: 14.4x), LTM EBITDA/interest remained below the 1x mark at 0.6x (2012: 0.8x), and total debt/capital held steady at 44.5% as of June 2013, compared to 45.0% at end-2012. Available-for-sale financial assets: Hopson recorded HKD 2.2bn of available-forsale financial assets as of June 2013, mainly comprising its equity investment (c.4.99% shareholding) in Beijing Rural Commercial Bank Co., Ltd., made in 2011. Of this, HKD 1.6bn was used to help the company to secure bank loans. Solid land bank composition and valuation: The company has about 33mn sqm of prime land bank in Tier 1 cities and surrounding areas. Based on its 2.1mn sqm of completed but unsold GFA and 5.9mn sqm of GFA under construction, the company has about CNY 62-78bn of saleable resource, assuming an ASP of CNY 12,000-15,000psm and an efficiency ratio of 65%. Land bank and geographical distribution (mn sqm, as of Jun-13)
10 8 6 4 2 0 Guangzhou Huizhou
440
Company profile
Established in 1992 and listed on the HKSE in 1998, Hopson Development Holdings Ltd. (Hopson) is a large property developer focused on the upper-mid to high-end market, with most of its land bank in the Tier 1 cities. It has also successfully expanded into nearby cities with affluent populations, such as Tianjin and Dalian in the Bohai Rim region near Beijing; Ningbo and Hangzhou in the Yangtze River area near Shanghai; and Huizhou and Zhongshan in the Pearl River area near Guangzhou. As of June 2013, its total land bank was 32.97mn sqm: 2.08mn sqm (6%) of completed and unsold space, 5.90mn sqm (18%) under construction, and 24.99mn sqm (76%) for future development.
HY CORPORATES
Residential
Shopping arcade
Office
Carparks
Hotels
Beijing
Tianjin
Shanghai
Ningbo
Asia Credit Compendium 2014 Hopson Development Holdings Ltd. (Caa1/Sta; CCC+/Sta; NR)
Summary financials
2009 Income statement (HKD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (HKD mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (HKD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (5.7) 30.2 34.9 4.8 3.0 105.0 26.2 29.8 36.7 5.5 3.4 70.1 (51.1) 26.1 44.5 15.0 1.0 19.2 22.2 25.8 45.0 14.4 0.8 28.1 (29.4) 23.0 44.5 18.3 0.7 36.2 3,819 (1,491) (8,905) (1,311) (4,752) (641) (5,393) (301) (361) (623) (984) (62) NA NA NA NA 6,715 70,654 16,349 9,634 30,499 2,697 3,648 5,589 5,151 11,225 3,394 (1,148) 8,792 5,800 14,379 4,284 (1,268) 8,843 5,889 8,008 2,093 (2,374) 2,197 1,430 9,927 2,558 (3,128) 4,249 2,983 4,967 1,143 (1,557) 2,735 2,124 2010 2011 2012 H1-13

15 100
12
Revenue EBITDA margin (RHS)
80
60
40
20
91,161 109,897 117,481 122,561 23,719 21,022 40,993 35,348 31,700 44,066 36,791 31,202 44,995 38,032 32,881 47,491 0 2009 2010 2011 2012 LTM Jun-13 0
Coverage ratios (x)

15
2,328 (10,216) (303)
10
0 2009 2010 2011 2012 H1-13
HY CORPORATES

40 35 30 25 20 15 10 5 0 2009 2010 2011 2012 H1-13
*Including restricted cash; Sources: Company reports, Standard Chartered Research

100 18
Total debt
80
15
USD bonds
12 60 9 40 6 Total cash* 20 Bank loans
0 < 1 yr 1-2 yrs 2-5 yrs > 5 yrs
441
Asia Credit Compendium 2014 PT Indika Energy Tbk. (B1/Sta; NR; B+/Sta)

Despite continued increase in production and sales volumes, and marginal cost savings, Kideco reported weaker financials in 9M-2013 as coal prices fell 17% y/y to USD 59/t. IEs non-coal subsidiaries mostly reported increased revenue and improved EBITDA margins. Liquidity remained robust thanks to its issuance of USD 500mn of 2023 bonds in January and lower capex. This also enabled IE to redeem its 2016 bonds in November. That said, credit metrics deteriorated as cash dividends received from Kideco were low at USD 77mn in 9M-2013 (2013: USD 108.1mn; 2012: USD 161mn). Given Kidecos low net profit of USD 202mn in 9M-2013, we expect IE to receive lower cash-dividend income in 2014.

9M-2013 financial performance reflects weakness in the coal market: Kideco produced 27.9mt (+9% y/y) and sold 28.0mt (+8% y/y) of coal in 9M-2013, on track to meet its full-year production target of 37mt. However, its ASP fell 17% y/y to USD 58.8/t from USD 70.7/t in 9M-2012. Its strip ratio was marginally lower, at 6.5x, versus 6.7x, and cash costs (including royalties) edged down 4% to USD 43.5/t from USD 45.3/t. As such, Kideco recorded a 10% fall in revenue to USD 1.8bn in 9M-2013, and net profit totalled USD 202.4mn, down sharply by 40.8% y/y. This will negatively affect the cash dividends IE receives from Kideco in 2014. Kidecos dividend payout ratio was 88.1-99.6% in 2006-12. At a dividend payout ratio of 88.1% in 2012, IEs share in proportion to its 46% stake in the coal mine totalled USD 154mn (versus net profit of USD 380mn in 2012). The Santan mine reported an operating loss for 9M-2013, as the ASP of coal (USD 74.9/t) fell below the cash cost (USD 79.3/t). To minimise the loss, IE cut coal sales volumes to 1.37mt in 9M-2013 (by 21% y/y). Higher contribution from non-Kideco subsidiaries: Revenue contributions from lEs other subsidiaries increased 24% y/y to USD 413mn in 9M-2013. Tripatras total revenue rose 55% y/y to USD 218.2mn, mainly from engineering, procurement and construction services (EPC) projects with ExxonMobil the Cepu project (USD 143.2mn) and Pertamina-Medco E&P Tomori Sulawesi project (USD 46.2mn). MBSS revenue totalled USD 112.1mn, up 9% on higher coal volume transported. However, Petroseas revenue fell 6% to USD 272mn, mainly due to lower contributions from contract mining. USD 230mn of 2016 bonds were called in November: Liquidity was strong, with total cash and short-term investments amounting to USD 654mn as of September 2013, compared with USD 421mn at end-2012. IE raised USD 500mn 6.375% of 2023 bonds in January and earmarked part of the proceeds for redeeming the USD 230mn 9.75% of 2016 bonds callable in November. FCF remained positive. Including cash paid to suppliers, capex totalled USD 57mn in 9M-2013, compared with the fullyear budget of USD 70-80mn (2012: USD 212.5mn). Excluding the INDYIJ 16, total debt was USD 1.1bn (USD 1.3bn as of September 2013). Credit metrics deteriorated despite the debt reduction. Total debt/adjusted LTM EBITDA was 5.1x (4.2x, if the 2016 bonds are excluded) in 9M-2013, compared with 3.2x in 2012, and adjusted LTM EBITDA/interest coverage fell to 2.7x from 4.4x. Total debt/capital rose to 56.3% as of September 2013, versus 51.2% at end-2012. An integrated coal mining and service provider: IE signed a cooperation agreement with China Railway Group in October for coal development and infrastructure projects to support minimum coal production of 10mt p.a. in Papua and Central Kalimantan. The estimated value of the engineering, procurement, construction, operation and maintenance contracts of these projects is c.USD 6bn. The company plans to continue its power-plant development. Ownership structure and product range, Sept-13
100% 90%
Company profile
Listed on the IDX, Indika Energy (IE) is an energy holding company engaged in energy resources, services and infrastructure. Under energy resources, its key assets include a 46% stake in PT Kideco Jaya Agung (Kideco, Indonesias third-largest coal mine) and a 49.3% stake in PT Santan Batubara. In 2012, IE acquired a majority stake in two coal assets PT Mitra Energi Agung (MEA, 60%) and PT Multi Tambangjaya Utama (MTU, 85%). IE expects the four mines to produce 40mt of coal in 2013. Under energy services, IE provides EPC services through Tripatra, and mining services through Petrosea. IEs energy infrastructure unit has a 20% stake in PT Cirebon Electric Power (CEP), a 660MW power plant, and a 51% stake in PT Mitrabahtera Segara Sejati (MBSS), a coal transport company it acquired in April 2011.
HY CORPORATES
PT INDIKA ENERGY Tbk

100% 100% 69.8%
PT Indika Inti Corpindo
100%
100%
100%
10%
PT Indika Indo Resources

60% 85%
PT Tripatra PT Tripatra Engineering EPC

100% 95% PT Kuala 5%
PT Petrosea Tbk PT Santan Batubara PT Tirta Kencana Cahaya PT POSB Infra Kal Petrosea Kal
PT Indika Infrastruktur Investindo

5%
Indika Power Investments

15%
PT Indika Energy Infrastructure MBSS PT Indika Logistic & Support Services PT LPG Distribusi Indonesia
51%
MEA
46% PT Kideco
MTU
Pelabuhan Cotrans Asia
Tripatra Pte Ltd

100%
49%
5%
PT Cirebon Electric Power PT Cirebon Power Services
15%
99.8%
Jaya Agung
100% PT Citra 90%
45%
Tripatra Investment
46%
47%
Indah Prima
46% Sea Bridge
99.6%
West Kalimantan via - PT Sindo Resources - PT Melawi Rimba
Shipping
Twinstar Shipping
99.8% 99.8%
ENERGY INFRASTRUCTURE
Indo Integrated Energy I, II Indo Energy Finance (bond issuers)
100%
ENERGY RESOURCES 442
ENERGY SERVICES
Asia Credit Compendium 2014 PT Indika Energy Tbk. (B1/Sta; NR; B+/Sta)
Summary financials
2009 Income statement (USD mn) Revenue EBITDA* Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents** Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow* Capital expenditure Free cash flow Dividends Key ratios EBITDA* growth (%) EBITDA* margin (%) Total debt/capital (%) Total debt/EBITDA* (x) EBITDA*/interest (x) Total cash/ST debt (%) 115.2 59.2 49.4 3.9 4.9 1390.3 41.3 48.3 48.6 2.8 3.7 957.3 22.5 41.3 53.3 4.0 3.3 151.9 35.4 44.3 51.2 3.2 4.4 115.5 (30.2) 28.3 56.3 5.1 2.4 202.5
#

2010 2011 2012 9M-13 900 100
239 142 (29) 86 70
414 200 (54) 100 85
593 245 (75) 154 128
750 332 (75) 105 69
634 180 (74) (1) (7)
720 Adj. EBITDA margin (RHS) Revenue
80
540
60
360
40
372 1,243 556 184 569
415 1,254 556 141 587
500 2,021 984 484 861
421 2,347 1,074 653 1,025
654 2,571 1,286 632 996
180
20
0 2009 2010 2011 2012 LTM Sep-13
Coverage ratios (x)

6
122 (10) 112 (42)
117 (109) 8 (67)
267 (235) 31 (16)
234 (237) (3) (43)
102 (29) 73 (26) 4 5
Total debt/ adj. EBITDA*
3 LTM EBITDA*/ int.
1 2009 2010 2011 2012 9M-13
HY CORPORATES

1,400 1,200 80 1,000 800 600 400 20 200 0 2009 2010 2011 2012 9M-13 0 Total debt/cap. (RHS) Total cash** Total debt 100
Debt maturity, Sep-13^ (USD mn)

600
500
400 60 300 40 200
USD bonds^^
Finance leases Bank loans
100
0 <1Y 1-2Y
#
2-3Y
3-4Y
4-5Y
>5Y
*EBITDA and net operating cash flow for all periods are adjusted to include dividends, mainly from Kideco; **including ST investments; capex excluding cash paid to suppliers and employees recorded under cash flow from operating activities; êstimate; ^Îndika called USD 230mn of 2016 bonds in Nov-13; Source: Company reports, Standard Chartered Research
443
Asia Credit Compendium 2014 PT Indosat Tbk. (Ba1/Sta; BB+/CWP; BBB/Sta)


Indosat reported a marginally smaller cellular subscriber base of 53.8mn and lower ARPU of IDR 27,500 in 9M-2013. While revenue grew 9.4% y/y, EBITDA margin shrank further to 44.8% (2012: 45.6%). Total cash fell to IDR 2.3tn as of September 2013 from IDR 3.9tn at end-2012 as FCF fell to IDR 175bn in 9M-2013 from IDR 1.9tn and the company reported a net cash outflow of IDR 1.7tn for debt repayment. Credit profile remained solid total debt/LTM EBITDA was 2.4x and gross interest coverage was 4.9x. Total debt/capital rose slightly to 59.4% as of September 2013 as Indosat incurred a net loss due to FX losses in 9M-2013. Capex will remain high at c.IDR 8tn in 2014, mainly for network modernisation, as its data business remains the key growth segment.

Cellular and data businesses continue to record strong growth: Revenue increased 9.4% y/y to IDR 17.8tn in 9M-2013. Rising voice, SMS and data usage helped revenue from the cellular business grow 7.6% y/y to IDR 14.5tn, accounting for 81% of the total. The contribution from the fixed data business grew a strong 17.9% y/y to IDR 2.4tn (14% of the total), driven by growth in internet and leased circuit services from government and enterprise projects. However, EBITDA growth fell to a low of 3.9%, causing EBITDA margin to decline to 44.8% in 9M-2013 from 47.1% in 9M-2012 and 47.2% in 9M-2011. This was mainly due to increases in interconnection expenses, government levies for frequency fees and 3G spectrum fees, and higher staff costs. Despite continued revenue and EBITDA growth, Indosat recorded a net loss of IDR 1.7tn in 9M-2013 owing to a net FX loss of IDR 2.3tn. Cellular subscribers and ARPU fall: Indosats cellular subscriber base fell to 53.8mn as of September 2013 from 58.5mn at end-2012. ARPU was IDR 27,500, marginally lower than the 2012 average of IDR 27,800. This reflects the competitive nature of the market. That said, the company recorded continued growth in data usage, offsetting the negative impact of declines in ARPU and the subscriber base. Solid credit profile despite higher capex: Total debt grew slightly to IDR 25.7tn as of September 2013 from IDR 25.1tn at end-2012, mainly due to a weak IDR (USD-denominated debt accounted for c.49% of total debt). Total cash fell to IDR 2.3tn from IDR 3.9tn. Cash capex totalled IDR 7.9tn in 9M-2013 (2012: IDR 5.8tn) on network modernisation, capacity expansion and system enhancement for the internal business. This is against budgeted full-year capex of c.IDR 8tn. As such, FCF fell to IDR 175bn in 9M-2013 (9M-2012: IDR 1.9tn). Total debt/LTM EBITDA was 2.4x in 9M-2013 (2012: 2.5x) and LTM EBITDA/interest remained at 4.9x. Total debt/capital rose to 59.4% as of September 2013 from 56.4% at end-2012 as the company booked a net loss in 9M-2013. Near-term focus and capex plans: Indosat has been in a high capex cycle since 2012 as it modernises its network to increase system capacity in view of keen market competition for data business. 2014 capex will remain at the same level as in 2013, at around IDR 8tn or higher given recent IDR depreciation against the USD (USDdenominated capex is estimated at about USD 400-500mn). About 85% of total capex will go towards the cellular data business, which is Indosats main growth segment given Indonesias still-low data penetration. Given its high capex needs, the company is unlikely to deleverage in the next one to two years. Further tower disposal under study: Indosat disposed of 2,500 towers to Tower Bersama under a sale-and-leaseback agreement in 2012. While the company has classified its tower assets as non-core, it has not yet decided what to do with the remaining towers, and is currently exploring options that would offer more favourable terms and structure than the 2012 sale-and-leaseback contract. Ownership structure (Sep-13)
Qatar Telecom (Qtel Asia) 65.0% Government of Indonesia 14.29% PT Indosat 99.83%
PT Interactive Vision Media (pay-TV)
Company profile
Established in 1967 and listed on the IDX in 1994, PT Indosat Tbk. (Indosat) is an integrated telecommunications and information services provider in Indonesia, offering cellular, fixed voice and fixed wireless services. It also provides multimedia, internet and data communication (MIDI) services through its subsidiaries. Indosat ranks second by subscriber base among Indonesias eight cellular operators. It had 53.8mn GSM subscribers and operated 23,207 base transceiver stations (BTS) as of September 2013. Indosat finished its 3G migration process in October 2013. Qatar Telecom (Qtel) has owned 65.0% of Indosat since 2008 (there is also a cross-default clause in Qtels debt). The Indonesian government holds 14.3%, and the balance is widely held by the public.
HY CORPORATES
SKAGEN Funds 5.46%
Public 15.25%
99.85%
PT Indosat Mega Media (Multimedia)
84.08%
PT Starone Mitra Telekomunik asi (Telco)
72.36%
PT Aplikanusa Lintasarta (Data communication)
39.80%
PT Artajasa Pembayaran Elektronis (Telco)
50.65%
PT Lintas Media Danawa (IT service)
100%
Indosat Palapa Company BV (Issuer)
444
Asia Credit Compendium 2014 PT Indosat Tbk. (Ba1/Sta; BB+/CWP; BBB/Sta)
Summary financials
2009 Income statement (IDR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (IDR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (IDR bn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (5.5) 46.6 58.2 2.9 4.7 66.2 9.7 48.5 56.9 2.5 4.2 48.5 (1.9) 45.7 55.9 2.6 5.3 45.9 8.7 45.6 56.4 2.5 4.9 91.1 3.9 44.8 59.4 2.4 4.9 42.5 4,051 (10,700) (6,649) (949) 6,849 (6,535) 313 (771) 7,320 (6,058) 1,262 (353) 6,989 (5,789) 1,200 (450) 8,053 (7,878) 175 (201) 2,836 55,041 25,474 22,638 18,288 2,075 52,818 24,063 21,988 18,236 2,224 53,164 24,099 21,875 18,997 3,917 55,225 25,090 21,173 19,395 2,309 54,373 25,696 23,387 17,527 18,824 8,774 (1,873) 2,232 1,555 19,797 9,593 (2,272) 1,082 724 20,577 9,411 (1,790) 1,182 933 22,419 10,234 (2,077) 462 487 17,799 7,966 (1,621) (2,202) (1,675) 2010 2011 2012 9M-13

25,000 EBITDA margin (RHS) 20,000 Revenue 80 100
15,000
60
10,000
40
5,000
20
0 2009 2010 2011 2012 LTM Sep-13
Coverage ratios (x)

7
6 LTM EBITDA/ interest
3 Total debt/EBITDA
1 2009 2010 2011 2012 9M-13
HY CORPORATES

30,000
Debt maturity*, Sep-13 (IDR bn)

100 8,000
Total debt
24,000
80 6,000
Debt in USD
18,000
60 4,000
Debt in IDR
12,000
40 2,000
6,000
Total cash
20
0 2009 2010 2011 2012 9M-13

*Excluding finance leases; Source: Company reports, Standard Chartered Research
0 Q4-13 2014 2015 2016 2017 2018 2019 2020 2022
445
Asia Credit Compendium 2014 International Container Terminal Services Inc. (NR; NR; NR)

We maintain our Stable outlook on ICTSI. While the company has high industry concentration, we like its strong track record and its ability to diversify geographically, imprinting its expertise across the globe, while it continues to seek acquisition and development opportunities. ICTSIs major terminals generate stable recurring cash flow, and it has maintained stable profitability thanks to effective cost management. It plans to continue to acquire small to medium-sized terminals in gateway ports in the Middle East, Africa and other emerging markets. While this will result in a continued increase in capex, we expect its liquidity and credit metrics to remain firm.

Revenue grew on higher volumes and new terminals: Revenue from port operations (fees for cargo handling, wharfage, berthing, storage and special services) rose 19% to USD 625mn in 9M-2013 thanks largely to volume growth in Asia and the Americas. Revenue from Asia grew 34% to USD 339mn on contributions from its new terminals in Pakistan and Indonesia, higher volumes, tariff rate adjustments at some terminals and stronger revenue from ancillary services/storage. Revenue from EMEA and the Americas was 4% and 5% higher y/y, respectively. Overall, Asia makes up 54% of total port revenue, while the Americas contributed 35% and EMEA made up the remaining 11%. EBITDA for 9M-2013 grew strongly, by 26% y/y, to USD 285mn, translating into EBITDA margin of 46% compared with 43% a year earlier. Excluding the impact of new terminals and the cessation of its Syria operations, EBITDA growth would have been 12% y/y. Volume growth remains healthy: ICTSI handled consolidated volume of 4.6mn TEUs in 9M-2013, up 13% from 4.1mn TEUs in 9M-2012. The increase in volume was mainly due to growth in international and domestic trade, new shipping-line customers and contribution from a new terminal. Key terminals reported a combined 4% q/q increase in volumes. Asia was the main driver of volume, growing 23% y/y to reach 3.8mn TEUs and contributing 61% of total volume. Volumes in the Americas grew 3% y/y to 1.2mn TEUs, while volumes in EMEA slipped 4% to 0.6mn TEUs. Stable credit metrics remain firm: Total debt rose to USD 966mn from USD 781mn at end-2012, partly due to issuance of the two bonds (2023s: USD 400mn, and 2025s: USD 207.5mn) via its MTN programme in January and September 2013. As a result of the longer-dated bond issues, only 7% of its debt is short-term and compares favourably to the USD 277mn cash at hand. Given the higher debt levels, total debt/capital rose marginally to 40.7% from 39.6%. Total debt/LTM EBITDA was marginally higher at 2.6x (2012: 2.5x) and EBITDA/interest fell to 3.7x (2012: 4.0x). Rising capex: Capex amounted to USD 358mn (+12% y/y) in 9M-2013 against a full-year budget of USD 550mn. This was mainly allocated for the completion of its terminal development projects in Mexico and Argentina, and the ramp-up of construction activities in Colombia and Davao, southern Philippines. In February 2013, ICTSI successfully tendered for a 30-year contract to operate and maintain a terminal in Honduras; it will spend USD 150mn over five years on this port development. Pipeline of new ports and port management contracts: ICTSI had ongoing port development projects in Mexico, Colombia and Argentina as of September 2013, and it recently concluded negotiations to manage and operate ports in Nigeria and Honduras and develop and manage a port in Davao. The project in Mexico testserviced its first vessel in August 2013 and is expected to officially commence operations before end-2013. The projects in Honduras and Argentina are expected to commence commercial operations in November 2013 and January 2014, respectively. Breakdown of volume by geography (mn TEUs)
6 4 2 0 2008 2009
446
Company profile
Established in December 1987, International Container Terminal Services Inc. (ICTSI) is engaged in acquiring, developing, managing and operating container ports and terminals worldwide. As of 30 September 2013, it was involved in 27 terminal concessions and portdevelopment projects in 19 countries, including seven in the Philippines, two terminal-operating concessions in Indonesia and one each in Brunei, Japan, China, the US, Ecuador, Brazil, Poland, Georgia, Madagascar, Croatia, Pakistan and India. ICTSI also has an active programme to acquire new terminal concessions in Asia; Australia; the Indian Subcontinent; Europe, the Middle East, and Africa (EMEA); Europe and the Americas.
HY CORPORATES
Asia
Americas
EMEA
2010
2011
2012
9M-12
9M-13
Asia Credit Compendium 2014 International Container Terminal Services Inc. (NR; NR; NR)
Summary financials
2009 Income statement (USD mn) Revenue* EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin* (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (10.6) 35.3 45.6 2.5 3.5 691.8 41.0 42.2 50.3 2.6 3.7 691.2 13.6 34.6 40.9 2.3 3.8 746.7 9.3 31.5 39.6 2.5 4.0 74.4 26.4 40.1 40.7 2.6 3.7 403.0 141 (119) 22 (16) 226 (125) 101 (17) 265 (228) 38 (23) 294 (466) (171) (31) 227 (358) (130) (49) 125 1269 434 309 517 345 1,599 638 292 630 458 1,943 651 194 940 189 2,405 781 594 1,191 277 3,111 966 689 1,410 498 176 (50) 80 52 587 248 (66) 137 98 813 281 (74) 171 131 975 307 (77) 192 144 712 285 (77) 166 139 2010 2011 2012 9M-13

1,000 Revenue 800 EBITDA margin (RHS) 80 100
600
60
400
40
200
20
0 2009 2010 2011 2012 LTM Sep-13
Coverage ratios (x)

5 EBITDA/ interest
3 Total debt/EBITDA
0 2009 2010 2011 2012 9M-13
HY CORPORATES

1,200 Total debt/cap. (RHS) 80 Total debt 60 600 40 400 Total cash 20 100

900 800 700 600 500 400 300 200 100
1,000
800
200
0 2008 2009 2010 2011 2012 9M-13

*Includes construction revenue; Source: Company reports, Standard Chartered Research
0 2013 2014 2015 2016 >2017
447
Asia Credit Compendium 2014 Kaisa Group Holdings Ltd. (B1/Sta; B+/Sta; NR)

Kaisa reported contracted sales of CNY 19.3bn in 10M-2013, 88% of its full-year target of CNY 22bn. Backed by strong liquidity from sales, the company expanded its land bank aggressively in Tier 1 and Tier 2 cities. Land premium amounted to CNY 9.7bn in 10M2013, accounting for 90% of the total consideration. The average land cost was CNY 16,721psm/GFA in Tier 1 cities and CNY 2,780psm/GFA in Tier 2 cities. While supply-demand dynamics remain supportive in top-tier cities, we believe sales growth will continue to be limited by HPRs in effect there. In addition, high land costs will pressure profitability. Shenzhen is among the top-tier cities that released stricter HPRs in Q4-2013 to curb high price appreciation.

Longer debt maturity and lower funding costs: Kaisa issued USD 550mn 10.25% of 2020 bonds in January 2013, USD 550mn 8.875% of 2018 bonds in March and CNY 1.8bn of 2016 CNH bonds in April. The proceeds were mainly used to redeem CNY 2.8bn 8.5% of 2014 synthetic Chinese yuan (CNY) bonds, USD 650mn 13.5% of 2015 bonds and USD 120mn 13.5% of an exchangeable loan. This refinancing activity helped the company to extend the average life of debt to 3.6 years in H1-2013 from 2.2 years in H1-2012 and reduce funding costs to 8.4% p.a. from 10.2% p.a. Good contracted sales: Contracted sales totalled CNY 19.3bn in 10M-2012, 88% of its full-year sales target of CNY 22.0bn (2012: CNY 17.3bn). Shenzhen projects contributed the most, accounting for 29% of the 10M total, followed by sales in other cities in the Pearl River Delta region (22%). This is in line with the companys strategy to refocus on Tier 1 and Tier 2 cities (especially its home base) since early 2012. As a result, the ASP of 10M-2013 sales rose significantly to CNY 9,479psm, up 41% from the 2012 average of CNY 6,730psm. Strong revenue recognition in H1-2013: Revenue jumped to CNY 7.0bn in H12013 from CNY 2.3bn in H1-2012. While recognised GFA soared to 997,124sqm from 283,362sqm, the ASP of recognised sales declined 10% y/y to CNY 6,853psm from CNY 7,605psm, reflecting the companys enlarged land bank and sales in lower-tier cities in 2010-11. Profit margins improved gross profit margin was 36.4% (2012: 32.5%) and EBITDA margin was 26.0% (2012: 21.2%). Credit metrics are still under pressure: Total debt rose to CNY 19.6bn (CNY 3.7bn of ST debt and CNY 15.9bn of LT debt) as of June 2013 from CNY 15.5bn at end2012. While the high revenue recognition helped to reduce leverage (total debt/LTM EBITDA fell to 5.2x in H1-2013 from 6.1x in 2012), the gearing ratio deteriorated total debt/capital increased to 54.6% as of June 2013 from 50.7% at end-2012, and net debt/equity climbed to 82.4% from 67.2%. LTM EBITDA/interest edged down to 1.3x from 1.5x, as the reduction in interest costs following the refinancing activity was not fully reflected in the financials. Aggressive land expansion, especially in H1-2013: Kaisa added about 2.4mn sqm of GFA to its land bank in 10M-2013 for a total attributable consideration of CNY 10.7bn (CNY 8.7bn in H1-2013). In comparison, land acquisitions totalled CNY 4.5bn in 2012, CNY 6.0bn in 2011 and CNY 6.7bn in 2010. The average land cost of most of the land purchases in Tier 1 and Tier 2 cities was about CNY 4,549psm/GFA. The company spent CNY 5.6bn for land purchases in Tier 1 cities (average cost: CNY 16,721psm/GFA) and CNY 4.1bn for projects in Tier 2 cities (average cost: CNY 2,780psm/GFA). Of the three projects in the lower-tier cities, one project is in Dongguan (adjacent to Shenzhen) and one each are in Huludao and Nanchong, where the company has other projects. That said, Kaisas liquidity remains sound. Total cash rose to CNY 6.2bn (CNY 5.6bn of free cash and CNY 577mn of restricted cash) from CNY 5.4bn at end-2012. Geographical distribution of land bank (mn sqm, Jun-13)
6 5 4 3 2 1 0 Dongguang Zhuzhou Shanghai Guangzhou Changzhou Shenzhen Hangzhou Changsha Chengdu Zhuhai Foshan Wuhan Jiangyin Anshan Others Huizhou Yingkou Others Nanchong Huludao Chongqing Pearl River Yangtze River Central Bohai Rim and northeastern Western
Company profile
Founded in 1999 and listed on the HKSE in 2009, Kaisa Group Holdings Ltd. (Kaisa) is a Shenzhenbased developer with a total land bank of 24.8mn sqm as of June 2013 (of this, 8.4mn sqm was under construction). Kaisa has 59 projects across 28 cities in five key regions 9.2mn sqm (37.2%) in the Pearl River Delta region, 8.7mn sqm (35.1%) in the Bohai Rim and northeastern regions, 2.3mn sqm each (9.4%) in central and western China, and 2.2mn sqm (8.9%) in the Yangtze River Delta area. By city type, 28% of its land bank is in Tier 1/2 cities with the remaining 72% in Tier 3/4 cities. About 60% of Kaisas land acquisitions in 9M-2013 were in Tier 1 cities, 30% in Tier 2 cities and the rest in lower-tier cities, in line with its strategy to shift focus back to top-tier cities since early 2012.
HY CORPORATES
448
Asia Credit Compendium 2014 Kaisa Group Holdings Ltd. (B1/Sta; B+/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 64.9 19.9 49.7 7.0 1.7 99.8 161.6 31.4 44.2 3.3 5.1 278.0 (5.8) 21.2 53.3 5.9 1.8 217.0 10.4 21.2 50.7 6.1 1.5 169.9 198.1 26.0 54.6 5.2 1.1 168.8 288 (25) 262 1,238 (34) 1,204 (4,029) (543) (4,572) (703) (605) (918) (50) NA NA NA NA 3,727 17,982 6,547 2,819 6,629 4,870 26,423 7,927 3,058 9,993 4,486 41,705 13,644 9,158 11,949 5,352 57,953 15,467 10,114 15,054 6,175 72,672 19,600 13,425 16,295 4,672 931 (551) 953 548 7,756 2,435 (482) 5,346 3,637 10,835 2,295 (1,145) 2,825 1,901 11,955 2,532 (1,642) 3,269 2,072 7,016 1,825 (1,633) 1,764 1,025 2010 2011 2012 H1-13

15
80
12 60 9 40 6 Revenue 20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

12 LTM EBITDA/int. (RHS) 6
10
0 2009 2010 2011 2012 H1-13
HY CORPORATES

20 100

6
16 Total debt
80
4 12 Total debt/cap. (RHS) Total cash* 60 3 40 2 20 Bank loans CBs CNH USD bonds
0 2009 2010 2011 2012 H1-13
0 < 1 yr 1-2 yr 2-3 yr 3-4 yr 4-5 yr > 5 yr
*Including restricted cash, **estimate; Source: Company reports, Standard Chartered Research
449
Asia Credit Compendium 2014 PT Kawasan Industri Jababeka Tbk. (NR; B+/Sta; B+/Sta)

KIJA has reduced its reliance on property sales as its main revenue stream, following the opening of the Bekasi power plant. While the volatile IDR has affected industrial land sales, we expect sales in other segments to pick up. In addition, USD-IDR has stabilised, and more clarity is likely after the elections in 2014. We believe KIJAs dry-port operations will continue to grow and contribute to recurring income. We like that KIJA is considering partially hedging its USD exposure. Expansion in Central Java, a second power plant and increasing dry-port capacity are in the works. KIJAs strong recurring income should help offset any impact of the weak local property market. We maintain our Stable outlook on KIJA.

Higher revenue due to higher property sales and higher recurring income: Revenue for 9M-2013 jumped 94% y/y to over IDR 2.011tn, helped by higher property sales and a sharp jump in recurring income, mainly from its power-plant and dry-port operations. Property sales made up 49% of 9M-2013 revenue, compared with 80% in 9M-2012 as plans to ramp up recurring revenue bore fruit. While property sales were healthy in H1-2013 (+42% y/y, 85% of the 9M-2013 total), they slowed substantially (-37% y/y) in Q3 on IDR volatility. Structural issues relating to local SMEs and lower commodity prices also contributed to slower sales. EBITDA grew 47% y/y in 9M-2013 to IDR 723bn, but EBITDA margin fell to 36% from 48% y/y due to the increased contribution from the (lower-margin) recurring income business. Despite weaker Q3 property sales, KIJA is maintaining its IDR 2tn revenue target, as it expects slower sales of its industrial land bank to be offset by improved sales in the residential and commercial segments. Net profit hit by a weakening IDR: KIJA made a IDR 322bn FX loss in financing activities in 9M-2013, particularly due to extreme volatility in USD-IDR and the time lag in revenue recognition. This was despite the natural hedge afforded by its USDdenominated recurring revenue and USD coupons. KIJA booked a net loss of IDR 247bn in Q3-2013. As a result, 9M-2013 net profit was just IDR 89bn, down from IDR 281bn a year earlier. Management is considering hedging part of its USD interest costs in addition to the natural hedge. Credit metrics remain firm: Total debt rose to IDR 2.5tn as of September 2013 from IDR 2.05tn as of end-2012 due to an increase in bank loans for workingcapital purposes. As such, total debt/capital rose to 38.9% from 34.5% at end2012. Given stronger EBITDA, EBITDA/interest rose to 3.7x from 3.0x in 2012, while total debt/EBITDA fell to 2.7x from 3.0x. New bond issue delayed due to weak market conditions: In mid-2013, KIJA planned a USD 350mn bond issue, partly in exchange for its existing 2017 bond (USD 175mn, 11.75%), to reduce funding costs. The new issue has been delayed due to weak market conditions. Clear expansion plans: In addition to continuing its sales at Cikarang, KIJA will look to expand in Kendal (Central Java) via its 51:49 JV with Sembcorp. Phase 1 will comprise 860ha over a total planned area of 3,000ha, and KIJA will model Kendal after Cikarangs success. Management also believes there is great potential to increase its dry-port operations at the massive 130ha logistics park and given the captive market of over 2mn TEU of existing industrial players (current capacity: 250k TEU). Revenue from its dry-port operations rose to IDR 44.1bn in 9M-2013, up from just IDR 7.6bn a year earlier. Management expects full-year revenue to reach IDR 62bn and double to IDR 120bn in 2014. Phase 2 of the power plant will cost another USD 120-125mn, of which USD 25-30mn will be equity. This new 130MW plant is scheduled to contribute to revenue only from 2016 onwards. Marketing, accounting and total sales backlog (industrial and residential, IDR bn)
1,600 1,400 1,200 1,000 800 600 400 200 0 Cumulative sales backlog Accounting sales
Company profile
PT Kawasan Industri Jababeka Tbk. (KIJA) was established in 1989, and was Indonesias first publicly listed industrial estate developer when it was listed on the IDX in 1994. Its flagship development is the 5,600ha Kota Jababeka in Cikarang. This fully integrated township (comprising industrial, residential, commercial, educational, entertainment and health-care developments) houses an estimated population of over 1mn and is located along the Bekasi-Cikampek corridor. The township is supported by infrastructure services provided by PT Jababeka Infrastruktur, a wholly owned subsidiary of KIJA. It plans to develop a tourism project in Tanjung Lesung (1,500ha) and has a JV project in Central Java with Sembcorp.
HY CORPORATES
Marketing sales 2009 2010 2011 2012 9M-13
450
Asia Credit Compendium 2014 PT Kawasan Industri Jababeka Tbk. (NR; B+/Sta; B+/Sta)
Summary financials
2009 Income statement (IDR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (IDR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (IDR bn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (41.9) 18.9 45.1 17.8 0.5 NA 53.2 19.0 43.0 11.1 0.8 NA 326.6 42.2 29.9 3.1 2.9 NA 41.2 48.8 34.5 3.0 3.0 NA 46.7 36.0 38.9 2.7 3.7 NA (33) (242) (276) 101 (148) (47) 462 (561) (99) 655 (895) (240) 674 (683) (9) 44 3,194 1,320 1,277 1,606 80 3,336 1,259 1,178 1,669 127 5,597 1,497 1,369 3,502 242 7,078 2,046 1,805 3,882 317 7,849 2,509 2,192 3,949 393 74 (163) 47 16 597 113 (140) 93 62 1,148 484 (165) 363 326 1,401 683 (229) 458 380 2,011 724 (193) 157 89 2010 2011 2012 9M-13

2,500 EBITDA margin (RHS) 2,000 80 Revenue 100
1,500
60
1,000
40
500
20
0 2009 2010 2011 2012 LTM Sep-13
Coverage ratios (x)

20 18 16 14 12 10 8 6 4 2 0 2009 2010 2011 2012 9M-13 EBITDA/ interest Total debt/EBITDA
HY CORPORATES

3,000 Total debt/cap. (RHS) 2,500 80 100
Debt maturity, Sep-13 (IDR bn)

2,500
2,000
2,000 Total debt 1,500 40 1,000 20 Total cash 0 2009 2010 2011 2012 9M-13
60
1,500
1,000 Lease payable 500 Bank loan
USD bonds
500
0 On demand or within a year 2-5Y
451
Asia Credit Compendium 2014 KWG Property Holding Ltd. (B1/Neg; B+/Neg; NR)

We revise KWGs credit outlook to Negative. The companys leverage increased substantially in H1-2013: total debt increased to CNY 20.1bn as of June 2013 as KWG took advantage of the lowinterest environment to secure low-cost funding with longer maturity. However, revenue recognition stayed flat in H12013. As a result, total debt/LTM EBITDA rose to a high of 8.7x and total debt/capital increased to 55.1%. That said, we think revenue recognition will pick up in H2-2013 in view of high cumulative pre-sales (CNY 12.2bn) carried forward from June 2013 that will be recognised in H2-2013 and thereafter. Improved delivery in H2-2013 should help to normalise KWGs credit metrics by end-2013 to levels similar to end-2012.

Contracted sales are in line with target: KWG achieved CNY 11.9bn of contracted sales in 9M-2013, 75% of its full-year target of CNY 16.0bn (2012: CNY 12.2bn). The ASP of properties sold was stable at CNY 13,428psm, compared with the 2012 average of CNY 13,095psm. Sales were well distributed among the seven cities Guangzhou projects contributed 25% of total H1-2013 sales, followed by Shanghai (22%), Suzhou (20%), Chengdu (17%), Beijing and Tianjin (12% combined) and Hainan (4%). Revenue is likely to skew more towards H2: Revenue was flat y/y at CNY 4.6bn in H1-2013, and EBITDA declined 25.3% to CNY 1.2bn. Although the GFA of recognised sales rose to 477,141sqm in H1 (up 26% y/y), the ASP fell 21% to CNY 9,293psm. However, the ASP is higher at CNY 11,272psm if we include sales contributions from jointly controlled entities (CNY 1.587bn in H1-2013). Profitability was largely stable in H1-2013 gross profit margin fell to 35.9% (2012: 36.5%) and EBITDA margin was 26.4% (2012: 28.1%). The company reported CNY 8.4bn of unrecognised sales as of June 2013. Credit profile weakened substantially on low revenue and high debt: Total debt rose further to CNY 20.1bn as of June 2013 from CNY 16.2bn at end-2012. The company issued USD 300mn of 8.625% of 2020 bonds in January. It also obtained CNY 2.5bn of a 13Y fixed-asset operation bank loan. Consequently, its credit profile deteriorated significantly in H1-2013 total debt/LTM EBITDA rose to 8.7x in H1-2012 from 5.9x in 2012, and LTM EBITDA/interest fell to 1.3x from 1.7x. Total debt/capital rose to 55.1% as of June 2013 from 51.3% at end-2012. Land acquisitions picked up, backed by liquidity from offshore bonds and sales: Attributable land premium totalled CNY 4.9bn in 9M-2013. Acquisitions were mainly in top-tier cities (including Guangzhou, Suzhou and Beijing) where the company has presence. KWG also ventured into two new cities Hangzhou, the provincial capital of Zhejiang (a Tier 2 city), and Nanning, the provincial capital of Guangxi (a Tier 3 city). However, its investment in land in Hangzhou and Nanning was low at CNY 275mn and CNY 652mn, respectively. Liquidity remained sound, with CNY 8.3bn of total cash as of June 2013 (including free cash of CNY 7.0bn), versus CNY 6.4bn at end-2012. Quality land bank at a reasonable cost: KWG had a total land bank of 9.4mn sqm in three Tier 1 and four Tier 2 cities as of August 2013. The average cost of its overall land bank was relatively low, at about CNY 2,960psm/GFA 22% of the ASP achieved for its contracted sales in 9M-2013 (the land cost of its 9M-2013 acquisitions averaged CNY 2,925psm/GFA). While sales (especially to the high-end segments) are likely to be affected by the strict HPRs in the top-tier cities, we are comfortable with the economic and property-market fundamentals in these markets. Geographical distribution of land bank (9.4mn sqm as of Aug-13)
Guanzhou Shanghai Beijing Chengdu Suzhou Hainan Tianjin 0
452
Company profile
Established in 1995 and listed on the HKSE in 2007, KWG Property Holding Ltd. (KWG) had 9.4mn sqm of prime land in seven top-tier cities as of August 2013, targeting buyers in the mid to high-end market. Geographically, KWG is Guangzhou-focused, with projects in the city accounting for 48% of its total land reserves. KWG has also established a strong presence in other major markets in recent years, including in Chengdu (12% of land reserves), Suzhou (10%), Hainan (8%), Tianjin (8%), Shanghai (9%) and Beijing (5%). In order to diversify its income base, KWG is in partnership with Sun Hung Kai Properties for developments in Guangzhou and Foshan; with Hongkong Land in Chengdu; with Shanghai Greenland and R&F in Shanghai; and Shimao in Beijing.
HY CORPORATES
48.2% 8.6% 4.8% 12.4% 10.4% 7.9% 7.7% 1 2 3 4 5
Asia Credit Compendium 2014 KWG Property Holding Ltd. (B1/Neg; B+/Neg; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 101.7 27.3 45.4 7.4 2.5 140.7 112.8 33.2 51.5 5.0 3.5 298.2 51.3 37.0 50.3 3.7 3.2 157.6 (27.3) 28.1 51.3 5.9 1.7 207.9 (25.3) 26.4 55.1 8.7 1.3 230.4 (398) (611) (1,009) (78) 4,318 (688) 3,630 (145) 466 (531) (65) (318) 1,011 (1,017) (6) (636) NA NA NA NA 3,611 28,565 8,645 5,034 10,408 6,804 40,034 12,332 5,528 11,594 5,373 44,586 13,834 8,461 13,693 6,444 48,864 16,191 9,747 15,353 8,288 55,517 20,083 11,795 16,351 4,267 1,163 (457) 1,269 720 7,466 2,475 (704) 2,508 1,282 10,123 3,745 (1,166) 3,980 2,103 9,676 2,723 (1,618) 3,766 2,406 4,645 1,227 (921) 1,851 1,357 2010 2011 2012 H1-13

12 Revenue 10 80 100
8 60 6 EBITDA margin (RHS)
40
4 20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

10
4 LTM EBITDA/int.
0 2009 2010 2011 2012 H1-13
HY CORPORATES

25 100

14 12 80 10 60 8 6 4 20 2 Bank loans Senior notes
20
Total debt Total debt/cap. (RHS)
15
10 Total cash* 5
40
0 2009 2010 2011 2012 H1-13

0 < 1yr 2-5 yrs > 5 yrs
453
Asia Credit Compendium 2014 PT Lippo Karawaci Tbk (Ba3/Sta; BB-/Sta; BB-Sta)

We maintain our Stable outlook on LippoK. We like the companys large operating scale and business diversification. LippoK also has clear LT business plans. In addition to its strong track record, LippoK has consistently achieved its operating and financial goals. Its recurring income stream has grown steadily in recent years, mitigating the potential negatives of the cyclical property development business. As a pioneer in the REIT business in Indonesia, LippoK can capitalise on its property assets to fund capex and the expansion needs of its property trading business. It also enjoys stable recurring fees from managing the REIT portfolio. LippoK is targeting IDR 600-800mn of capex in 2014. Credit metrics remain strong.

Broad-based growth across business segments: LippoKs revenue saw strong 25% growth to IDR 4.8tn in 9M-2013, helped by growth across all business segments. Property sales revenue rose 11% to IDR 2.1tn in 9M-2013 (c.43% of the total), while total recurring revenue grew 38% to IDR 2.7tn. Health-care revenue jumped 47% y/y to IDR 1.8tn and was the largest contributor to recurring revenue. It made up 38% of total recurring revenue in 9M-2013, and 67% of recurring revenue from the health-care business, malls and hotel management, and REITs. We believe recurring revenue mitigates the effects of the cyclical nature of the property development business and increases income visibility. EBITDA grew 18% to IDR 1.3tn in 9M-2013, resulting in EBITDA margin of 27.7%. Integrated business model; largest diversified land bank: LippoKs integrated business model, which encompasses development, management and capital recycling via its REITs vehicles, is the one of the largest in Indonesia. The company holds 8,045ha of residential/urban development land with development rights, of which it has sold 4,910ha. It also has 26 hospitals in the pipeline, which brings the total number of hospitals to be constructed by 2017 to 40. LippoK also currently owns/operates 31 malls and has another 14 malls in the pipeline. It owns/manages eight hotels with 1,665 rooms and has four hotels/858 rooms in the pipeline. Given its strong growth plans, capex incurred during 9M-2013 almost doubled y/y to IDR 1.2tn from IDR 619bn in 9M-2012. Successful listing of Siloam Hospital: Siloam Hospital was listed on the IDX in September 2013. Including the overallotment exercise, Siloam raised about IDR 1.46tn, which it plans to use to purchase medical equipment, develop new hospitals, partially repay debt from LippoK and acquire new hospitals/health-care-related businesses. Credit metrics remain firm: Following the issuance of USD 130mn of 7Y bonds in January 2013 (partly for refinancing purposes), total debt rose to IDR 7.4tn as of September 2013 from IDR 6.0tn at end-2012. Given the higher debt, total debt/capital rose to 35.0% in 9M-2013 from 34.4% in 2012, total debt/EBITDA rose to 4.0x from 3.6x and EBITDA/LTM interest fell to 3.5x from 3.7x. Almost all of its debt will expire only in 2019-20. As of September 2013, LippoK had IDR 3.3tn of unrestricted cash and IDR 5.1tn of available-for-sale (AFS) financial assets, compared with IDR 3.3tn of cash and IDR 4.2tn of AFS financial assets at end-2012. Clear long-term goals: Management has been clear and consistent in setting goals for all its businesses from 2010 to 2015. These include building a USD 7.5bn AUM/REIT group, scaling up its hospital operations to USD 3.5bn in five years, growing revenue from USD 3bn to USD 8bn and globalising its investor base. Its pipeline is strong across its residential, hospital and retail development businesses. LippoK targets 29% revenue growth in 2014 to IDR 8.6tn. Ownership structure, Sep-13
Lippo-related companies 27.3% PT Lippo Karawaci Tbk Development revenue Residential and urban development - Lippo Village - Lippo Cikarang - Tanjung Bunga - San Diego Hills Memorial Park - Kemang Village - St Moritz - City of Tomorrow - Park View Apartments - The Nine Residence - Holland Village Hospitals - Siloam Hospitals Recurring revenue Commercial - Retail malls - Aryaduta Hotels - Town management Asset mgt - REIT - Mall and hotel management Public 72.7%
Company profile
Established in 1990 and listed on the IDX in 1996, PT Lippo Karawaci Tbk (LippoK) is one of the largest listed property companies in Indonesia in terms of market capitalisation, revenue and asset value. In addition to its property business, including (1) urban and township development (development and sale of residential, commercial, retail and light industrial properties) and (2) retail mall investments, LippoK has diversified into services businesses, to ensure recurring income. It has business units focusing on health care, hospitality, and property and portfolio management (including management services for shopping malls, hotels and REITs). The Lippo Group, controlled by the Riady family, holds a majority stake of 27.3% in LippoK.
HY CORPORATES
454
Asia Credit Compendium 2014 PT Lippo Karawaci Tbk (Ba3/Sta; BB-/Sta; BB-Sta)
Summary financials
2009 Income statement (IDR bn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (IDR bn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (IDR bn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 6.8 23.5 35.3 4.8 1.6 NA 41.6 27.3 29.2 4.0 1.8 NA 26.8 25.8 28.5 3.5 2.6 NA 55.8 27.4 34.4 3.6 3.7 NA 16.4 27.7 35.0 4.0 3.5 NA 152 (165) (13) (653) (331) (983) (50) 410 (424) (15) (100) 1,560 (952) 608 (186) (1,190) (1,163) (2,352) 1,533 12,128 2,884 1,350 5,289 3,660 16,155 3,376 (284) 8,179 2,175 18,259 3,753 1,579 9,409 3,337 24,869 6,014 2,677 11,470 3,276 31,037 7,435 4,158 13,779 2,565 603 (379) 527 388 3,125 854 (481) 719 525 4,190 1,083 (419) 985 708 6,160 1,686 (453) 1,577 1,060 4,782 1,325 (446) 1,357 913 2010 2011 2012 9M-13

8,000 Revenue 7,000 6,000 5,000 4,000 3,000 2,000 20 1,000 0 2009 2010 2011 2012 LTM Sep-13 0 40 EBITDA margin (RHS) 80 100
60
Coverage ratios (x)

5
Total debt/EBITDA
3 EBITDA/ interest 2
1 2009 2010 2011 2012 9M-13
HY CORPORATES

8,000 7,000 6,000 5,000 4,000 3,000 2,000 20 1,000 0 2009 2010 2011 2012 9M-13
Debt maturity, Sep-13* (USD mn)

100 450 400
Total debt
80
350 300
60 Total cash 40
250 200 150 100 50
0 2012 2013 2014 2015 2016 2019 2020
455
Asia Credit Compendium 2014 Longfor Properties Co. Ltd. (Ba2/Sta; BB/Sta; NR)

We like Longfors cautious approach to expansion: most of its acquisitions were concluded at relatively low prices when the property market was weak. The company slowed land acquisition substantially in May-October 2013 (CNY 1.6bn), in contrast to its high land purchases of CNY 22bn in 2012 and CNY 11bn in 4M-2013. Contracted sales are in line with its target, totalling CNY 40.2bn in 10M-2013 or 88% of the full-year target of CNY 46bn. Longfor extended its debt maturity to 4.6 years at a lower cost of 6.35% in H1-2013, backed by its strong credit profile. Liquidity is sound, with CNY 13.2bn of cash as of June 2013. The company raised a HKD 7.7bn 4Y loan at H+3.1% in July and will likely call its USD 750mn of 9.5% of 2016 bonds in April 2014.

Project delivery schedule was skewed in H2-2013: With recognised GFA of 1.4mn sqm (up 26% y/y) and an ASP of CNY 10,340psm (down 18% y/y), Longfor reported only a marginal increase in revenue to CNY 15.2bn in H1-2013 (H1-2012: CNY 14.6bn). Meanwhile, EBITDA fell 32% to CNY 4.2bn on higher land, development and sales costs. As such, its profit margins shrank significantly in H12013 gross margin fell to 31.9% (2012: 40.1%), and EBITDA margin declined to 27.9% (2012: 34.6%). However, we expect revenue recognition to increase substantially in H2-2013, given the companys project delivery schedule. Longfor had planned 1.6mn sqm of project completion in H1-2013 and 4.1mn sqm in H2. Contracted sales are in line with target: Sales totalled CNY 40.23bn in 10M2013, representing 87.5% of its full-year target of CNY 46bn (2012: CNY 40.1bn). Its ASP was CNY 12,679psm, 32% higher than the 2012 average of CNY 9,600psm. This is in line with the YTD price appreciation in the top-tier cities and will help the company sustain decent profitability in the next one to two years. Land acquisitions slowed substantially in H2-2013: Longfor bought CNY 22bn worth of land in 2012, and the momentum continued in the first four months of 2013, with total land acquisitions amounting to CNY 10.7bn in 4M-2013. However, its acquisitions slowed substantially thereafter, with only CNY 1.6bn of land purchases in May-October. This reflects the companys cautious stance following land price appreciation on keen competition among developers so far this year. Optimised debt maturity structure with a lower cost of funds: Longfor successfully extended its debt maturity to 4.7 years at a lower average interest rate of 6.35% p.a. in H1-2013. It issued USD 500mn 6.75% of 10Y bonds in January (mainly for refinancing purposes) and raised HKD 7.7bn from a 4Y syndicated loan at HIBOR+3.1% p.a. in July 2013. Total debt rose slightly to CNY 34.2bn as of June 2013 from CNY 32.8bn at end-2012. As such, while its gearing ratio (total debt/capital) fell marginally to 49.2% as of June 2013 from 50.2% at end-2012, coverage ratios weakened mainly due to lower EBITDA in H1-2013. Total debt/LTM EBITDA rose to 4.4x from 3.4x in 2012, and LTM EBITDA/interest fell to 3.2x from 4.7x in 2012. However, with the increase in expected completions in H2, we expect the ratios to improve from their mid-year levels. Sound liquidity: Total cash fell to CNY 13.2bn as of June 2013 from CNY 18.6bn at end-2012 as the company incurred high land acquisition costs in 2012 and 4M2013. That said, we believe the company will maintain a solid liquidity position, in view of its prudent approach since mid-2013. Investment portfolio is growing well: GFA from existing investment projects totalled 548,000sqm at an average occupancy of 98.2%, generating recurring revenue of CNY 304mn in H1-2013. The company also has more than 1.5mn of investment property under construction in Chengdu, Beijing, Hangzhou, Chongqing and Changzhou. Geographical distribution of attributable land bank, Jun-13 (mn sqm)
6 5 4 3 2 1 0 Chengdu Shanghai Changzhou Ningbo Wuxi Hangzhou Quanzhou Shenyang Shaoxing Suzhou Xiamen Yantai Qingdao Chongqing Dalian Xian Yuxi Kunming Beijing Yangtze River Southern Bohai Rim/ northeastern Western China
Company profile
Listed on the HKSE in November 2009, Longfor Properties Co. Ltd. (Longfor) was established in Chongqing in 1994. It has since become a leading national developer, focusing on the uppermid to high-end markets in top-tier cities. It had total attributable land bank of 37.8mn sqm at June 2013. Its land bank in the Bohai Rim region grew to account for 36.9% of total attributable GFA, larger than GFA in its home-base in western China (36.1%). Land bank in the Yangtze River Delta area made up 20.8% of the total, and the three cities it recently expanded into (Xiamen, Quanzhou and Changsha) made up 6.2%. Longfor is also growing its investment property portfolio. It had 548,000sqm of commercial space from existing projects at a high occupancy rate of 98.2% in H1-2013 and another 1.5mn sqm of space under construction.
HY CORPORATES
456
Asia Credit Compendium 2014 Longfor Properties Co. Ltd. (Ba2/Sta; BB/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 496.8 23.0 42.5 3.7 4.3 196.7 66.5 28.9 49.9 4.0 5.1 362.3 93.7 35.0 49.9 2.8 5.5 405.7 14.3 34.6 50.2 3.4 4.7 364.3 (31.7) 27.9 49.2 4.4 3.3 243.2 5,303 7,681 8,490 9,782 5,063 7,298 42,445 9,766 2,468 13,239 10,363 71,714 17,324 6,962 17,366 14,527 18,611 13,171 11,374 2,618 (611) 4,061 2,209 15,093 4,360 (859) 7,068 4,130 24,093 8,444 (1,541) 11,444 6,328 27,893 9,655 (2,071) 11,302 6,301 15,231 4,243 (1,292) 6,244 3,846 2010 2011 2012 H1-13

30 Revenue 100
25
EBITDA margin (RHS)
80
20 60 15 40 10 20
97,260 125,426 134,090 23,967 9,440 24,095 32,837 14,226 32,577 34,150 20,979 35,293
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

6 LTM EBITDA/ interest
(4,661) (12,245) (11,047) (16,132) (10,754) 642 (98) (4,564) (349) (2,557) (706) (6,351) (953) (5,691) (1,083)
0 2009 2010 2011 2012 H1-13
HY CORPORATES

35 30 80 25 20 15 10 5 0 2009 2010 2011 2012 H1-13 0 Total debt Total cash* 60 Total debt/cap. (RHS) 40 100

25 Senior notes 20 Corp. bonds 15
10 Bank loans
20
0 < 1 yr 1-3 yrs 3-5 yrs > 5 yrs
457
Asia Credit Compendium 2014 MIE Holdings Corp. (NR; B+/Sta; B/Sta)

Despite continued weakness in oil prices, MIE reported decent production and sales results in 9M-2013. Credit metrics remained steady in H1-2013, despite higher debt and lower EBITDA. Planned capex for 2013 is c.USD 337mn, similar to the CNY 1.8bn spent in 2012. MIE is reducing capex for Jilin oilfields but increasing spending for new wells in Emir-Oil in Kazakhstan and SGE in Shanxi. Liquidity is manageable, partly supported by the issuance of USD 200mn of 5Y bonds in January. MIE had c.CNY 320mn of cash as of June 2013, against low ST debt of CNY 60mn. That said, its good operating and financial results were undermined by negative news reports linking the company to allegations of corruption among senior PetroChina officials. MIE has since made an announcement and denied all allegations.

Operational performance is in line with expectations: Sales volume of crude oil increased to 2.6mmb in H1-2013 from 2.4mmb in H1-2012. While contribution from China oilfields dipped to 1.98mmb in H1-2013 (H1-2012: 2.04mmb), sales from EmirOil in Kazakhstan rose 63.4% to 0.62mmb. This is in line with the companys plan to deploy more capex in Kazakhstan at the expense of China oilfields. As such, net daily production rose 57% y/y to 3,966bbl in Emir-Oil, but fell 17% to 9,604bbl at its Jilin oilfields in 9M-2013. Overall net production was 4% higher at 14,678bbl per day in 9M-2013. On the other hand, oil prices weakened further to USD 97.3/t in 9M-2013 (H1-2012: USD 114.6/t; H2-2012: USD 102.2/t; H1-2013: USD 99.2/t). Weaker oil and gas prices pressured financial performance: Revenue fell 7.3% y/y in H1-2013, and EBITDA fell 7.2% to CNY 950mn on larger falls in oil and gas prices than the increase in sales volume. The average realised oil price fell 13.5% y/y to USD 99.17/bbl in H1-2013 (down 12% to USD 105.6/bbl in China and 10% to USD 79.0/bbl in Kazakhstan). Average cash lifting costs were slightly higher at USD 8.44/bbl (USD 9.3/bbl in China and USD 5.7/bbl in Kazakhstan). However, profit margins were decent gross profit margin was 68.2% in H1-2013 (2012: 68.6%) and EBITDA margin was 29.9% (2012: 31.1%). Credit profile weakened slightly: While liquidity is sufficient, with CNY 320mn of cash as of June 2013 against CNY 60mn of ST debt, the decline in earnings, coupled with higher debt, weakened credit metrics. Total debt increased to CNY 3.7bn as of end-June 2013 from CNY 3.4bn at end-2012 as MIE raised USD 200mn 6.875% of 2018 bonds in February (mainly to repay its Minsheng Bank loan). Total debt/LTM EBITDA rose to 2.0x in H1-2013 (2012: 1.7x), LTM EBITDA/interest coverage fell to 5.0x in H1-2013 (2012: 6.9x), and total debt/capitalisation increased to 51.1% as of June 2013 from 49.4% at end-2012. Capex in China oilfields fell but increased in Emir-Oil and SGE: MIE had planned to drill 97 wells in China in 2013 (fully completed in 9M-2013); 11 wells in Kazakhstan (9M-2013: 8 wells; 9M-2012: 5 wells); and 32 wells for SGE operations (9M-2013: 22 wells; 9M-2012: 4 wells). Of total budgeted 2013 net capex of USD 337mn, USD 125mn (37%) is planned for Emir-Oil; USD 85mn (25%) for SGE; and USD 117mn (35%) for China oilfields. In comparison, capex for China oilfields was USD 193mn in 2012. Headline risk undermines sound operational performance: Four senior executives from PetroChina were under investigation for alleged corruption in early September. The privatisation of the three Jilin oilfields under MIE was subsequently questioned in local media reports. While MIE has denied dealings or relationships with the officials under investigation, headline risk remains in view of the ongoing investigation at PetroChina level. Ownership and main business structure, Jun-13*
Far East Energy Ltd. (FEEL) 53.4% TPG 8.7% Ever Union 7.2% Public 30.7%
Company profile
Listed on the HKSE since December 2010, MIE Holdings Corp. (MIE) is an independent upstream oil company. It operates four oil blocks in China under separate long-term production-sharing contracts (PSCs) with PetroChina: three in Jilin with PSCs expiring in 2024 (Daan), 2028 (Moliqing) and 2028 (Miao3); and one in Hebei with the PSC expiring in 2027 (Kongnan). In September 2011, MIE successfully expanded outside China by acquiring Emir-Oil, an upstream oil and gas company in Kazakhstan, for USD 159.6mn. EmirOils exploration licence expires in January 2015, and its production licences expire in 2030-38. In 2012, MIE acquired Sino Gas & Energy (SGE), which holds interests in two gas PSCs in Shanxi province: a 64.75% interest in Linxing PSC and a 49% interest in Sanjiabei PSC.
HY CORPORATES
100%
Asia Power (Cayman
MIE Holdings Ltd. (1555 HK) G C 100%

Pan-China Resources (BVI)
100% 100%
MIE (Cayman Islands)
MIE New Ventures (Cayman Islands) 1% 99% Two Netherlands-based SPVs
Sino Gas & Energy (Australia)
Kongnan production-sharing contract with PetroChina
3 Productionsharing contracts with PetroChina
100%
Emir-Oil (Kazakhstan)
*Other assets include the companys 50% stake in White Hawk Petroleum (Nevada) and its 85% interest in Condor (Nevada). Working interests of assets under the two companies vary from project to project and from well to well
458
Asia Credit Compendium 2014 MIE Holdings Corp. (NR; B+/Sta; B/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) (29.2) 70.1 51.8 1.6 14.5 313.4 46.7 66.5 39.7 1.1 13.8 714.7 38.8 58.9 45.4 1.5 7.1 NA 16.8 55.8 49.4 1.7 6.9 847.1 (7.2) 58.4 51.1 2.0 4.2 533.7 (70) (881) (952) 1,015 (910) 105 (137) 1,218 (1,242) (24) (77) 1,148 (1,821) (673) (95) 773 (973) (200) (124) 321 3,726 1,345 953 1,253 710 4,227 1,291 512 1,960 767 7,426 2,463 1,930 2,963 508 8,912 3,388 2,861 3,464 320 9,145 3,687 3,307 3,522 1,167 818 (56) 184 110 1,805 1,200 (87) 583 421 2,827 1,666 (234) 1,400 1,106 3,486 1,947 (283) 837 541 1,628 950 (225) 300 166 2010 2011 2012 H1-13

3.5 3.0 2.5 2.0 1.5 1.0 20 0.5 0.0 2009 2010 2011 2012 LTM Jun-13 0 EBITDA margin (RHS) 80 Revenue 100
60
40
Coverage ratios (x)

2.5 Total debt/LTM EBITDA 25
2.0
20
1.5
15
1.0
10
0.5
0.0 2009 2010 2011 2012 H1-13
HY CORPORATES

4 100

4
80
3 Total debt Total debt/cap. (RHS)

60
2018 bonds
2
40
Total cash*
20
1 Bank borrowings
2016 bonds
0 2009 2010 2011 2012 H1-13
0
< 1Y 1-2Y 2-5Y
459
Asia Credit Compendium 2014 Mongolian Mining Corporation (Caa2/Neg; B-/CWN; NR)

MMC reported poor financial performance in H1-2013 due to the sharp fall in coking coal prices on weak demand amid a sector downturn. In addition, the company has high cash needs for interest payments and loan amortisations. It is also facing a liquidity crunch, given that its cash balance and operating cash flow are unlikely to meet its debt obligations. While MMC has managed to postpone the maturity of its promissory notes and some loan amortisations to 2014, we do not think it will be able to make the necessary payments next year without further rescheduling debt repayments and/or divesting part of its high-quality coal assets. Asset sales may still be challenging. Weak current market conditions will also pressure asset value.

Production and sales targets were revised: MMC produced 7mt of coal (2012: 9.42mt) and sold 4.6mt of washed coking coal in 9M-2013, versus its original fullyear sales target of c.6mt and its revised sales target of 4.5-5mt. Despite a small rise in coal prices of about USD 1-2/t, the company has kept its ASP for coal low, at USD 89-90/t. The marginal price discount enables it to achieve cash sales instead of credit sales to maintain good cash flow. Profitability was hit by the sharp fall in coking coal prices: Revenue rose 6% y/y to USD 248mn in H1-2013 on higher sales volume, especially of washed hard coal (2.2mt in H1-2013, versus 1.3mt in H1-2012). However, coal prices fell 26% y/y to USD 98.7/t. While transportation costs declined to USD 17.6/t in H1-2013 from USD 24.9/t in H1-2012, cash mining costs rose to USD 29.4/t from USD 21.4/t. EBITDA fell 34% y/y to USD 44.6mn in H1-2013, but reversed a loss of USD 7.2mn in H2-2012. Profitability remained weak gross profit margin was 11.4% in H1-2013 (2012: 11.4%, H1-2012: 26.7%, H2-2012: -3.3%), and EBITDA was 18.0% (2012: 12.7%, H1-2012: 28.9%, H2-2012: -3.0%). High liquidity pressure from debt obligations: CFO is weak and its cash balance is low (c.USD 100mn as of September 2013). MMC also has high debt obligations. In addition to an estimated annual interest expense of about USD 74mn, the company also needs to make loan amortisation payments, and has USD 105mn of outstanding promissory notes maturing in 2014. In H1-2013, the company has managed to redeem the remaining USD 85mn of CBs in April and successfully postponed some loan amortisations and the maturity of the promissory notes to 2014. Given the current market conditions, we believe MMC will have to negotiate further postponing and/or restructuring the bank loans. Credit profile is weak: Total debt was slightly lower at USD 935mn as of June 2013 than the USD 1.0bn at end-2012. Credit ratios deteriorated substantially in H1-2013, negatively affected by the companys poor financial performance. Total debt/LTM EBITDA shot up to 25x (2011: 3.4x, 2012: 16.8x), EBITDA/interest coverage was 1.1x (2011: 9.0x, 2012: 0.9x), and total debt/capital remained at 57.3% as of June 2013. Moodys downgraded MMC to Caa2 from Caa1 with a negative outlook on 20 November after it put the company on rating review for downgrade on 15 August 2013. Coal demand and prices will remain under pressure: MMC holds high-quality coal assets and has successfully increased its coal production and processing capacity, while improving cost efficiency. However, its operational and financial plans are negatively affected by the severe market downturn. We expect coking coal prices to remain at the current low levels in the coming months. Demand will stay weak given the oversupplied steel sector, coupled with the slowdown in economic growth in China. This will in turn pressure the valuation of MMCs coal assets and make it difficult for the company to attract a strategic investor and capitalise on its coal and infrastructure assets. This is despite the positives of the new foreign investment law in Mongolia. Coal reserves and resources, Dec-13 (mt)
800 600 400 200 0 UHG deposit
460
Company profile
Listed on the HKSE in October 2010, Mongolian Mining Corporation (MMC) is the largest hard coking coal producer in Mongolia. It owns and operates an open-pit coking coal mine at the Ukhaa Khudag (UHG) deposit (within the Tavan Tolgoi coal formation) and the Baruun Naran (BN) coking coal deposit, both in the South Gobi region. MMC holds a 30-year mining licence (starting from August 2006) for the UHG mine. As of December 2012, the UHG mine had 315mt of coal reserves and 701mt of resources, and the BN mine had 165mt of reserves and 337mt of resources, representing mine life of 28 years. The company also has 15mtpa of coal processing capacity. It completed the paved road linking its UHG and BN mines at end-2012.
HY CORPORATES
Resources
Reserves
BN Deposit
Asia Credit Compendium 2014 Mongolian Mining Corporation (Caa2/Neg; B-/CWN; NR)
Summary financials
2009 Income statement (USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) NA 29.5 43.8 1.7 10.2 9.8 294.4 28.1 25.7 3.2 7.4 785.6 112.6 30.6 42.2 3.4 9.0 54.6 (63.8) 12.7 57.3 16.8 0.9 170.2 (33.7) 18.0 57.3 25.0 1.1 90.6 (6) (59) (65) 63 (220) (157) 1.4 (292) (291) (112) (284) (397) NA NA NA NA 2 113 34 32 44 675 1,053 251 424 727 228 1,628 562 334 769 284 2,177 1,009 725 752 129 2,051 935 806 695 67 20 (2) 14 10 278 78 (11) 83 60 543 166 (18) 155 119 474 60 (69) 1 (3) 248 45 (39) (23) (25) 2010 2011 2012 H1-13

600 100
500
80
400 60 300 EBITDA margin (RHS) 40
200
100
Revenue
20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

20
10
8 15 6 10 4 5 LTM EBITDA/int. (RHS) 2009 2010 2011 2012 H1-13
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1,200 100
Debt maturity, Jun-13 (USD mn)

600
1,000
Total debt
80
500
800 60 600 Total debt/cap. (RHS) 40 400 Total cash 20
400 Senior notes Promissory notes
300
200
200
100 Bank loans
0 2009 2010 2011 2012 H1-13

0 < 1 yr 1-2 yrs 2-4 yrs >4 yr
461
Asia Credit Compendium 2014 Shimao Property Holdings Ltd. (Ba3/Sta; BB-/Sta; BB+/Sta)

In addition to strong contracted sales, Shimao reported high revenue growth, improved profitability and stable credit metrics in H1-2013. S&P and Fitch both upgraded Shimaos credit rating by one notch. The company issued USD 800mn of 7Y bonds and raised a USD 570mn, 4Y syndicated loan, using most of the proceeds to refinance existing debt to lower interest costs and extend debt maturity. Liquidity was sound, with total cash of CNY 18.9bn as of June 2013. However, the company is aggressive in the land market. Shimao, together with its 64%-owned Shanghai Shimao and other JV partners, bought CNY 30bn of land in 10M2013 (2012: CNY 5.4bn). We think it should take a more prudent approach to land expansion and continue to pursue its aggressive sales and delivery strategy.

Marginal improvement in profit margins: Revenue rose 22% y/y to CNY 16.7bn in H1-2013, and EBITDA was 32% higher at CNY 4.5bn, following a 10% increase in the ASP of recognised sales to CNY 11,059psm and a 13% increase in GFA booked to 1.4mn sqm. As such, profit margins recovered from their lows in 2012 when the company recognised sales concluded in 2010-11 (Shimao adopted an aggressive sales strategy to reduce unsold stock and improve liquidity during this two-year period). Gross profit margin was 35.5% in H1-2013 (2012: 33.5%), and EBITDA margin was 27.2% (2012: 24.0%). Contracted sales continued to outperform peers: Shimao achieved CNY 55.6bn of sales in 10M-2013, exceeding its full-year target of CNY 55.0bn (2012: CNY 46.1bn). The ASP of 10M-2013 contracted sales was CNY 12,866psm, 14% higher than the 2012 average of CNY 11,278psm. This was in line with the large price increases in the top-tier cities where Shimao has a major presence. We believe the higher ASP will help ensure stable profitability in 2014-15. Stable credit metrics and strong liquidity: Shimao issued USD 800mn of 2020 bonds in January 2013 and secured a 4Y syndicated loan of USD 570mn in July. Most of the proceeds are being used to repay high-cost debt (including the USD 350mn 8% of 2016 bonds). Total debt rose to CNY 45.62bn as of June 2013 from CNY 41.0bn at end-2012, and total cash was CNY 18.9bn. The company also had about CNY 20bn of unused bank facilities as of June 2013. Total debt/capital edged up to 51.0% as of June 2013 from 50.0% at end-2012, and net debt/equity rose to 60.8% from 55.9%. Coverage ratios improved marginally in H1 on higher profitability. EBITDA/interest increased to 2.2x in H1-2013 from 2.1x in 2012, and total debt/LTM EBITDA fell to 5.7x from 6.0x. S&P raised Shimaos corporate rating to BB from BB- and its senior unsecured debt rating to BB- from B+ in May, and
Company profile
Listed on the HKSE since 2006, Shimao Property Holdings Ltd. (Shimao) has expanded from a Yangtze River Delta region-focused developer to a national player with residential, commercial and hotel properties in prime locations in 36 cities. As of June 2013, it had a total land bank of 46.5mn sqm (attributable GFA of 37.2mn sqm). It has a decent investment property and hotel portfolio valued at CNY 47.5bn, and has also built up a substantial portfolio of tourism properties (attributable GFA of 6.4mn sqm or 17% of total). Of the rest, 28% is located in the Yangtze River Delta region, 18% in the Bohai Rim area and northeastern China and 14% in the western, southern and central regions. Shanghai Shimao and JV projects constitute 23%.
Fitch upgraded both the corporate and bond ratings to BB+ from BB in July. Land acquisitions picked up substantially in 2013 after a low in 2012: Together with Shanghai Shimao and its JV partners, the company bought CNY 30bn worth of land in 10M-2013, versus a low CNY 5.4bn worth in 2012. While this was supported by strong contracted sales in the 20 months from 2012 to 10M-2013 (totalling CNY 102bn), we think the company should be more prudent in land expansion, given increased capex on construction and land acquisition. Challenging environment for investment properties: Revenue contribution was CNY 696mn in H1-2013, marginally lower than the CNY 717mn achieved in H12012. We attribute this to keen competition in the oversupplied commercial property and hotel sectors. The investment portfolio (including hotels) was valued at CNY 47.5bn as of June 2013. Geographical distribution of attributable land bank, Jun-13 (mn sqm)
8 6 4 2 0 Northeastern Jiangsu and Shanghai Southern and Central JV Projects Hangzhou Bohai Rim Shanghai Shimao Western Tourism Property Ningbo
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462
Asia Credit Compendium 2014 Shimao Property Holdings Ltd. (Ba3/Sta; BB-/Sta; BB+/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 112.5 25.8 44.6 4.7 3.8 133.0 46.9 29.6 53.2 5.3 3.9 146.4 24.3 30.8 54.9 5.3 2.6 93.4 (14.5) 24.0 50.0 6.0 2.1 146.2 32.2 27.2 51.0 5.7 2.3 175.5 3,974 (1,365) 2,609 (754) (3,708) (1,254) (4,962) (1,180) (4,062) (2,591) (6,652) (1,382) 8,394 (4,275) 4,280 (556) NA NA NA NA 7,479 66,528 20,527 13,608 25,517 13,729 13,994 18,098 18,945 17,032 4,396 (1,143) 5,710 3,511 21,789 6,458 (1,676) 8,570 5,233 26,031 8,027 (3,040) 10,752 5,723 28,652 6,866 (3,225) 10,165 5,765 16,677 4,533 (1,941) 5,953 3,398 2010 2011 2012 H1-13

35 30 25 20 15 10 20 5 0 2009 2010 2011 2012 LTM Jun-13 0 95,669 117,243 130,828 152,536 34,072 21,933 29,954 42,561 30,249 35,018 40,994 22,896 40,927 45,552 26,607 43,788 60 Revenue 40 100
EBITDA margin (RHS)
80
Coverage ratios (x)

4 3 3 LTM EBITDA/int. (RHS) 2
0 2009 2010 2011 2012 H1-13
HY CORPORATES

50 Total debt 100

18 16
40
80
14 12
30 Total debt/cap. (RHS) 20 Total cash*
60
10 8 6 Bank borrowings
Senior notes
40
10
20
4 2
0 2009 2010 2011 2012 H1-13

0 < 1 yr 1-2 yrs 2-5 yrs > 5 yrs
463
Asia Credit Compendium 2014 SM Investments Corp. (NR; NR; NR)


We have a Stable credit view on SMIC. The company has continued to expand both its cyclical (banking and property) and defensive (retail operations and mall ownership) businesses. In addition to its scale and diversity, synergies among its core businesses support its credit profile, in our view. These synergies include its retail business anchor tenants at its malls; its banking business leveraging the geographical reach of its retail/malls and tying up with the property business; and the proximity of its retail malls to its residential projects. We believe the merger of its mall and property operations will enhance its ability to undertake mixed-use developments more efficiently.

Banking and mall businesses drove revenue: Revenue grew 13% y/y in 9M-2013 to PHP 172.1bn, driven primarily by increases in SMICs banking and mall businesses. Including net earnings of associates, revenue from the retail segment grew 13% y/y to PHP 127bn, accounting for 69% of total revenue. Net income of PHP 18.5bn in 9M-2013 (+14.2% y/y) was skewed towards banks, which contributed 49% of total net profit (see page 164 for details on BDO Unibank Inc.) Mall operations, retail operations and property development made up 20%, 19% and 12% of net income, respectively. EBITDA grew 22% to PHP 37bn (9M-2012: PHP 31bn), and EBITDA margin was higher at 21.6% (9M-2012: 20.6%). Stable credit profile: Total debt increased marginally to PHP 226.9bn as of September 2013 from PHP 221bn as of end-2012. However, helped by the USD 150mn placement and the partial conversion of bonds to equity, total debt/capital fell to 43.5% in 9M-2013 from 45.6% in 2012. Total debt to EBITDA also strengthened to 4.4x from 4.9x, while EBITDA/interest rose to 4.2x from 3.8x. Cash balance remains ample at PHP 55.3bn. Capex in 9M-2013 was significantly lower y/y at PHP 9.7bn compared with PHP 34.5bn a year earlier. Retail Continued growth in merchandise sales: Merchandise sales grew 13% y/y in 9M-2013 (9M-2012: 8.5%) largely due to the opening of new stores. As of September 2013, SMICs retail subsidiaries had 233 stores: 47 department stores, 38 SM supermarkets, 89 SaveMore stores, 38 hypermarkets and 21 Walter Mart supermarkets. Another eight stores are due to open in Q4, following the opening of 15 stores in 9M-2013. Net profit for 9M-2013 was relatively flat at PHP 4.0bn. Mall operations Stable growth locally, expanding into China: SM Prime owns 47 malls in the Philippines and five malls in China. Rental revenue for 9M-2013 grew 12% y/y to PHP 20.9bn partly due to the opening of new malls. Excluding new malls and expansions, same-store rental growth was 7%. Rental revenue from its five malls in China increased 14%, largely due to improved mall productivity and lease renewals for its first three malls. The China malls contributed 11% of overall revenue. Average occupancy at these three malls is c.93%. With the opening of SM City BF in Paranaque and the expansion of SM Megamall in Q4-2013, SM Prime will have 48 malls domestically and five in China with an estimated GFA of 7.0mn sqm. It plans to add another two malls in the Philippines and one in China in 2014. Property Sales remain robust: Revenue from real estate sales of PHP 15.2bn was 5.7% lower y/y due to the timing of new projects and expansion launches. However, owing to better cost control, net margin improved to 22% from 20%, resulting in a net income of PHP 3.3bn, flat y/y. As of September 2013, SMDC had a total of 14 ongoing residential condominium projects across Metro Manila, with two projects scheduled to come onstream in Q4. SMDC has total land bank of 133.1ha, of which 30.7% is within Metro Manila. We believe the merger of its mall and property operations, while credit-neutral, will enhance SMDCs ability to undertake mixed-use developments more efficiently. Net income profile, Sep-13
100% 80% 60% 40% 20% 0% 2009
464
Company profile
SM Investments Corp. (SMIC) is one of the largest conglomerates in the Philippines and is the holding company of the SM Group of Companies, engaged in five core businesses: shopping mall development and management (SM Prime Holdings), retail (SM Department Stores, SM Supermart, SM Hypermart and SaveMore stores), financial services (BDO Unibank Inc. and China Banking Corp.), real estate development and tourism SM Land, SM Development Corp. (SMDC), Costa Del Hamilo Inc. and hotels (SM Hotels and Conventions Corp.). SMIC was incorporated in the Philippines in 1960.
HY CORPORATES
Retail Malls Property Banks 2010 2011 2012 9M-12 9M-13
Asia Credit Compendium 2014 SM Investments Corp. (NR; NR; NR)
Summary financials
2009 Income statement (PHP mn) Revenue Adj. EBITDA^ Gross interest expense Profit before tax Net income 154,124 171,732 193,866 213,432 172,102 31,311 (7,525) 25,885 16,025 34,731 (8,589) 30,279 18,440 40,075 45,285 37,118 (8,928) 31,025 18,464 2010 2011 2012 9M-13
Profitability (PHP bn LHS, % RHS)

250 100
200 Revenue 150
EBITDA margin (RHS)
80
(9,302) (11,930) 35,693 21,225 40,946 24,674
60
100
40
Balance sheet (PHP mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (PHP mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios Adj. EBITDA growth (%) Adj. EBITDA margin (%) Total debt/capital (%) Total debt/Adj. EBITDA (x) Adj. EBITDA/interest (x) Total cash/ST debt (%) 17.4 20.3 42.8 4.0 4.2 751.7 10.9 20.2 43.3 4.3 4.0 302.0 15.4 20.7 42.2 4.1 4.3 161.8 13.0 21.2 45.6 4.9 3.8 131.0 18.4 21.6 43.5 4.4 4.0 93.0 3.0 2009 2010 2011 2012 9M-13 3.5 EBITDA/ interest (RHS) 23,185 8,913 16,116 26,053 30,595 4.5 43,547 66,961 56,114 60,738 55,308 50 20
341,644 407,384 452,775 564,588 597,132 124,045 150,776 163,524 220,986 226,890 80,498 83,815 107,411 160,248 171,582 0 2009 2010 2011 2012 LTM Sep-13 0
Coverage ratios (x)

5.0 Total debt/EBITDA
165,725 197,817 223,970 263,278 294,241
(23,854) (27,304) (34,661) (89,051) (22,495) (669) (18,391) (18,545) (62,998) (5,949) (6,224) (7,762) (8,421) 8,100 (7,294)
4.0
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Debt metrics (PHP bn LHS, % RHS)

250 Total debt/cap. (RHS) Total debt 100
Debt maturity*, Sep-13 (PHP bn)

140 120 80 100
200
150
60
80 60 40
100 Total cash 50
40
20 20
0 2009 2010 2011 2012 9M-13
0 <1Y 1-2Y 2-5Y >5Y
Încludes dividends received; *based on contractual undiscounted payments; Source: Company reports, Standard Chartered Research
465
Asia Credit Compendium 2014 SOHO China Ltd. (Ba1/Sta; BB+/Sta; NR)

While shifting a business model is a long and challenging process, with a likely deterioration in credit metrics and liquidity position, we take comfort in SOHOs high-quality asset portfolio in two Tier 1 cities. Contracted sales were only CNY 3bn in 8M-2013, in line with the companys strategy to expand its investment portfolio. Liquidity is strong, with total cash of CNY 15bn as of June 2013, sufficient to cover land and construction capex and debt obligations. SOHO spent CNY 5.1bn to acquire land in 9M-2013 and obtained USD 415mn and HKD 4.263bn of 4Y loans in September at low interest rates to refinance existing debt. Credit metrics were decent in H1-2013. The company had c.CNY 10bn of unrecognised sales on its balance sheet as of June 2013.

A leading commercial property developer focused on Beijing and Shanghai: SOHO has successfully established its SOHO China brand name over its more than 15 years of operation, focusing on sales of strata-titled office space in prime locations for SMEs to set up operations in the two Tier 1 cities. Revenue recognition has been volatile, reflecting its small portfolio size. Profitability has been high thanks to strong demand and price appreciation in recent years. Gross profit margin was 54.1% in H1-2013 (2012: 58.8%), and EBITDA margin was 46.6% (2012: 55.2%). Strong liquidity will continue to support the companys business plans: As of June 2013, SOHO had CNY 15.0bn of total cash: CNY 14.1bn of free cash and CNY 891mn of restricted bank deposits. Of its total property portfolio, only 568,000sqm of space is earmarked for sale (total value of c.CNY 26bn, assuming an ASP of CNY 45,000psm). The company may also look for en-bloc sales of these projects or other non-core investment properties to maximise capital efficiency. However, recurring income from existing investment properties is currently negligible, totalling CNY 86mn in H1-2013. The company bought one land parcel each in Shanghai and Beijing in 9M-2013, for a total of CNY 5.1bn. Credit profile has remained strong: Total debt fell to CNY 19.6bn as of June 2013 from CNY 23bn at end-2012 as the company repaid about CNY 3bn of bank loans in H1-2013. The company also obtained USD 415mn and HKD 4.263bn from 4Y loans in September at an interest rate of LIBOR plus 3.2%, mainly for debt repayment. Total debt/LTM EBITDA fell to 2.1x in H1-2013 from 2.7x in 2012, and LTM EBITDA/interest coverage stayed high at 7.2x. Total debt/capital was low at 38% as of June 2013 compared with 42% in 2012. Change in business focus from property trading to investment is essential: Given the diminishing new supply of prime commercial land in Shanghai and Beijing and keen competition among developers for limited land resources, SOHO decided to shift its business model to build-to-hold from build-to-sell in 2012. In addition to the maintenance and management issues of strata-titled buildings, SMEs demand for offices has been declining in the past one and a half years, in line with the slowing economy, especially the mining sector, and the tight lending environment. High-quality assets will mitigate execution risks: Compared with established international commercial property developers (especially those in Hong Kong), SOHO does not have experience in managing IG offices catering to MNCs and financial institutions. In addition, it must compete with local and foreign players for limited resources, and its investment portfolio is still under development (completed lettable GFA of 262,882sqm and 1.1mn sqm under construction). We believe execution risks will be partly mitigated by the companys prudent financial management track record and its high-quality assets in Tier 1 cities. Land prices appreciated in both Beijing and Shanghai in 2013 on limited supply. Investment property portfolio, Jun-13 (000 sqm)
350 280 210 140 70 0 Tiananmen South SOHO Century Plaza SOHO Fuxing Plaza Sky SOHO Hongkou SOHO Bund SOHO Guanhualu SOHO II SOHO Hailun Plaza Bund 8-1 Wangjing SOHO Peaks (Twr 3) SOHO Tianshan Plaza Galaxy SOHO Gubei Land
Total attributable GFA in Beijing: 0.438mn sqm Total attributable GFA in Shanghai: 1.45mn sqm
Company profile
Founded in 1995 and listed on the HKSE in October 2007, SOHO China Ltd. (SOHO) is a commercial property developer focused on the development, sale/leasing and management of prime offices and complementary retail and high-end hotel properties in Beijing and Shanghai. Although SOHO was engaged primarily in selling stratatitled commercial space for most of its operating history, it shifted its business model to build-to-hold from build-to-sell in 2012. Based on its existing portfolio under development, SOHO expects to hold about 1.9mn sqm (attributable) of prime office space in Shanghai (1.5mn sqm) and Beijing (438,000sqm) as long-term investment property. Of its total land bank, GFA from completed investment property is currently low at c.262,882sqm.
HY CORPORATES
466
Asia Credit Compendium 2014 SOHO China Ltd. (Ba1/Sta; BB+/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 216.3 46.3 32.2 2.4 9.9 1680.3 148.2 46.8 34.7 1.2 14.1 686.8 (73.0) 40.5 37.0 5.9 2.9 654.3 267.1 55.2 42.0 2.7 8.0 562.5 157.8 46.6 38.0 2.1 1.8 339.1 2,978 (1,353) 1,625 (519) 12,790 (59) 12,731 (1,660) (4,230) (479) (4,709) (1,452) 5,062 (545) 4,517 (1,189) NA NA NA NA 9,242 37,756 8,278 (963) 17,443 17,725 47,930 10,618 (7,107) 19,979 14,489 59,680 13,624 (865) 23,218 22,062 80,578 23,004 942 31,710 15,031 77,157 19,609 4,578 31,976 7,413 3,434 (348) 5,659 3,300 18,215 8,523 (602) 8,700 3,636 5,685 2,302 (802) 6,862 3,892 15,305 8,449 (1,053) 18,195 10,585 2,478 1,154 (635) 3,588 2,094 2010 2011 2012 H1-13

20 Revenue 16 80 100
60
40
20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

6 16 14 12 4 LTM EBITDA/int. (RHS) 10 8 6 Total debt/LTM EBITDA 4 2 0 2009 2010 2011 2012 H1-13
HY CORPORATES

25 Total debt Total cash* 100

10
20
80
8 CB
15
60
10
40
4 Bank loans Senior notes
20
0 2009 2010 2011 2012 H1-13
0 < 1 yr 1-2 yrs 2-5 yrs > 5 yrs
*Including pledged deposits; **estimate; Source: Company reports, Standard Chartered Research
467
Asia Credit Compendium 2014 Star Energy Geothermal (Wayang Windu) Ltd. (B2/Sta; NR; B+/Sta)

SEGPL successfully issued USD 350mn 6.125% of 2020 bonds in March to replace its USD 350mn 11.5% of 2015 bonds. This enables it to extend its debt maturity and amortisation schedule and reduce interest costs. It also incurred USD 31mn of refinancing costs and repaid USD 85mn of shareholders loans. As such, total cash fell USD 104mn in 9M-2013 to a low of USD 35mn as of September 2013. That said, we think liquidity is sufficient in the next 12 months FCF will remain positive, interest cost is lower at USD 21.4mn p.a. (down USD 18.8mn a year), and maintenance capex for Units 1 and 2 is low at c.USD 10-15mn p.a. SEGPLs credit profile is sound. The company reported improved coverage ratios in 9M2013. While gearing increased slightly on a net loss, we expect it to edge down in 2014.

Stable revenue and profitability from Units 1 and 2: Despite the planned overhaul period of about two weeks, revenue was steady at USD 93.2mn in 9M2013 (9M-2012: USD 92.4bn) and EBITDA rose 7% y/y to USD 71.9mn thanks to continued efficiency improvements. EBITDA margin increased to 77.2% (2012: 71.8%). However, SEGPL reported a net loss of USD 5.6mn in 9M-2013, mainly due to a USD 21mn loss from exercising the call option of the 2015 senior notes. Liquidity remains sound despite a much lower cash level: Total cash fell to USD 35.4mn as of September 2013 from USD 124mn (including restricted cash of USD 20.2mn for its interest reserve account) as of end-2012. SEGPL issued USD 350mn 6.125% of 2020 bonds to call the USD 350mn 11.5% of 2015 bonds in March and repaid USD 85mn of shareholders loans in May. It also made a USD 31.2mn one-off payment for bond redemption and issuance. Meanwhile, FCF turned to a positive USD 12.5mn in 9M-2013. The company recorded net operating cash inflow of USD 17.2mn in 9M-2013, versus an outflow of USD 13.3mn in 9M2012. Interest paid fell to USD 35.6mn from USD 43.3mn in 9M-2012 following issuance of the new bonds with a lower coupon rate. Capex was low at USD 4.6mn in 9M-2013 (9M-2012: USD 29.8mn). We believe the company has sufficient liquidity for the next 12 months FCF will remain positive, maintenance capex for Units 1 and 2 is estimated at c.USD 10-15mn in 2014, and investment for Unit 3 is likely to be low at the initial development stage. Credit profile remained steady: SEGPL successfully extended the maturity of its USD bonds to 2020 from 2015 with a first amortisation of USD 30mn in 2017 (via two semi-annual payments of USD 15mn each). Interest payments on the new bonds are substantially lower at USD 21.44mn p.a. than the USD 40.25mn previously. The USD bonds are also the companys only debt, as the remaining USD 17.2mn of shareholders loans is subordinate to the USD bonds. As such, coverage ratios improved in 9M-2013 on lower debt and higher EBITDA. Total debt/EBITDA fell to 3.8x in 9M-2013 from 4.0x in 2012, and LTM EBITDA/interest increased to 2.5x from 1.9x. However, total debt/capital increased to 90.8% as of September 2013 from 89.6% at end-2012 as shareholders equity fell to USD 35.4mn from USD 40.2mn after the company booked a USD 5.6mn loss in 9M2013. We believe this will reverse in 2014. Mitsubishi Corp. is a 20% shareholder: Mitsubishi Corp., one of the largest turbine manufacturers in the world, bought a 20% interest in SEGPL in October 2012. The acquisition marked the Japanese companys first entry into Indonesias power industry and its first operation of a geothermal power plant in the country. We believe Mitsubishi Corp.s involvement will enhance SEGPLs existing operations and Mitsubishi Corp.s ability to buy equipment such as turbines and obtain project funding for feasible projects. Star Energy Investment Ltd. acquired Ashmore Funds entire indirect interest in SEGPL in December 2012. Ownership structure, Sep-13
DGA SEG B.V. (100% owned by Mitsubishi Corp.) 20% Star Energy Group Holdings Pte Ltd. (Singapore) (Owned and controlled by Prajogo Pangestu) 80% 100% Star Energy Oil & Gas (Singapore) 75-100% Various other oil and gas operations
Company profile
Star Energy Geothermal (Wayang Windu) Ltd. (SEGPL) owns and operates two geothermal power plants in Indonesia, with gross installed generation capacity of 227MW. Operations at Unit 1 (110MW) began in 2000, and Unit 2 (117MW) was completed in March 2009. Under joint operation contracts with Pertamina Geothermal Energy (PGE), SEGPL has exclusive rights to explore, develop and utilise geothermal resources in Wayang Windu until 2036. PGE has appointed SEGPL as its exclusive contractor to build, own and operate power plants in the area, and to sell up to 400MW of electricity to PLN under a longterm off-take contract. SEGPL postponed the development of Unit 3 (60MW) in mid-2012 due to unsatisfactory drilling results.
HY CORPORATES
Star Energy Geothermal Pte Ltd. (Singapore) 100% - PT Star Energy Geothermal Halmahera - PT Star Energy Geothermal Indonesia Star Energy Geothermal (Wayang Windu) Ltd. (The issuer)
468
Asia Credit Compendium 2014 Star Energy Geothermal (Wayang Windu) Ltd. (B2/Sta; NR; B+/Sta)
Summary financials
2009 Income statement (USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 79.1 74.7 93.1 3.6 2.5 NM 23.1 79.1 92.1 3.8 1.5 NM 2.4 78.5 89.8 3.8 1.8 NM (5.6) 71.8 89.6 4.0 1.9 NM 6.6 77.2 90.8 3.8 2.5 NM 38 (91) (53) 38 (20) 18 61 (58) 3 18 (40) (22) 17 (5) 13 3 504 266 263 20 127 610 350 223 30 141 646 350 209 40 119 644 350 231 40 35 532 350 315 35 99 74 (30) 30 13 115 91 (61) 2 (11) 119 93 (53) 37 11 123 88 (47) 22 1 93 72 (26) 14 (6) 2010 2011 2012 9M-13

140 Revenue 120 100 80 60 40 20 20 0 2009 2010 2011 2012 LTM Sep-13 0 60 EBITDA margin (RHS) 80 100
40
Coverage ratios (x)

5 Total debt/EBITDA
0 2009 2010 2011 2012 9M-13
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400 350 80 300 250 200 150 100 20 50 0 2009 2010 2011 2012 9M-13
*Excluding restricted cash; Source: Company reports, Standard Chartered Research

100 250
200
Total debt 60 150
Total cash*
40
100
50
Senior notes
0 2014 2015 2016 2017 2018 2019 2020
469
Asia Credit Compendium 2014 Sunac China Holdings Ltd. (B1/Sta; B+/Sta; BB-/Sta)

We revise Sunacs credit outlook to Stable from Negative. The company maintained sound liquidity and had largely stable credit metrics thanks to its solid sales performance (contracted sales of CNY 38.9bn and subscription sales of CNY 7.8bn in 10M-2013), issuance of USD 500mn of 5Y bonds and the placement of 300mn new shares with net proceeds of CNY 1.6bn. That said, its land expansion appetite has remained large, with total attributable land premium of CNY 21bn for acquisitions in 9M2013. We believe Sunac will need to maintain its aggressive sales and project delivery model, owing to its large capital commitments. We think it should also take a measured approach towards land expansion. Any slowdown in sales and project delivery will negatively affect its liquidity and credit ratios.

Contracted sales remained strong thanks to an aggressive sales strategy: Sunacs pre-sales continued to grow strongly, totalling CNY 46.6bn (CNY 38.9bn of contracted sales and CNY 7.8bn of subscription sales) in 10M-2013. This compares with the full-year target of CNY 46bn (2011: CNY 19.2bn; 2012: CNY 35.6bn). The ASP was CNY 21,460psm in 10M-2013, 21% higher than the 2012 average of CNY 17,800psm, reflecting Sunacs high-end focus in top-tier cities. This is also in line with the large price increases YTD in these cities (especially in Shanghai and Beijing). We believe the company will therefore be able to report good revenue growth in 2014-15, with decent profit margins. As of June 2013, Sunac recorded CNY 19.4bn of unrecognised sales on its balance sheet (2011: CNY 5.8bn; 2012: CNY 15.1bn). Profitability weakened: Revenue doubled to CNY 8.6bn in H1-2013 from CNY 4.2bn in H1-2012. The 50:50 Sunac-Greentown JV contributed CNY 4.0bn or 46% of this revenue. The ASP of recognised sales increased substantially to CNY 27,938psm from CNY 16,017psm. However, gross profit fell to 20.8% from 32.0%. This was mainly due to low gross margin of 8.9% from JV projects with fair-value adjustments. Excluding the valuation surplus included in the cost of sales, gross profit margin in H1-2013 would have been higher at 30.2%. Liquidity is strong: In addition to robust sales, the company received CNY 1.6bn in net cash flow from a share placement in January 2013 and raised USD 500mn 9.375% of 5Y bonds in March. Total cash was CNY 14.5bn (free cash of CNY 10.9bn and restricted cash of CNY 3.6bn) as of June 2013, versus CNY 12.3bn at end-2012. Meanwhile, ST debt fell to CNY 6.6bn from CNY 11.8bn. Aggressive land strategy: Land premium attributable to Sunac for acquisitions in 9M-2013 hit a record high of CNY 21bn, compared with CNY 12.4bn in 2012. The company made a few large acquisitions in top-tier cities, including the purchase of two land parcels in Beijing (attributable land price of CNY 6.4bn), one in Tianjin (CNY 5.3bn) and two in Shanghai (CNY 4.5bn). The average land cost for 9M2013 land purchases was high at CNY 8,356psm/GFA. Credit ratios were largely stable: Total debt rose to CNY 24.8bn as of June 2013 from CNY 21.7bn at end-2012, mainly following issuance of the USD bonds. Credit metrics were largely stable thanks to higher income and a larger capital base. Total debt/capital fell marginally to 63.3% as of June 2013 from 64.4% at end-2012, total debt/LTM EBITDA rose to 5.1x in H1-2013 from 4.8x in 2012 (but net debt/LTM EBITDA was flat at 2.1x) and LTM EBITDA/interest declined to 2.1x from 2.5x. Net gearing (net debt/equity) fell to 71.8% as of June 2013 from 78.9% at end-2012. High asset turnover and measured expansion are key to credit metrics: Sunac has accumulated a total of 16.5mn sqm of high-quality land in top-tier cities, including in Shanghai, Beijing, Tianjin and Chongqing. The company adopts an aggressive marketing strategy to maintain strong cash flow from sales. It also works well with its JV partners. We believe Sunac will need to continue its high asset turnover model (in terms of revenue recognition and sales) and manage its land expansion appetite to ensure a sound credit profile and liquidity position. Geographical distribution of attributable land bank (10.9mn sqm as of Jun-13)
Chongqing Changz Suzhou Hangzhou Wuxi Shanghai Beijing Tianjin 0 6.3% 4.5% 5.5% 6.7% 1,000,000 18.6% 24.9% 2,000,000 3,000,000 4,000,000 31.8%
Company profile
Sunac China Holdings Ltd. (Sunac) started operations in Tianjin in 2003 and was listed on the HKSE in 2010. Targeting the mid to high-end market segments, Sunac had a total land bank of 16.5mn sqm (attributable GFA of 10.9mn sqm) as of June 2013, mainly in Chongqing (32% of total), Tianjin (25%) and Wuxi (19%). The company also has a decent presence in Shanghai and Beijing (combined attributable GFA of 1.3mn sqm). It has JV projects with established property developers, including Franshion Properties, Poly Real Estate, China Railway, Gezhouba, Greentown, Shimao and Wharf. The company is c.47.7% owned by its chairman and CEO, Sun Hongbin.
HY CORPORATES
1.6%
470
Asia Credit Compendium 2014 Sunac China Holdings Ltd. (B1/Sta; B+/Sta; BB-/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash*/ST debt (%) NA 24.8 58.8 2.2 5.6 286.0 120.8 39.4 55.0 2.2 6.2 398.0 13.0 28.0 61.0 3.9 3.0 171.6 52.2 21.7 64.4 4.8 2.5 104.1 31.8 15.5 63.3 5.1 1.0 220.6 1,527 (2) 1,525 (1,740) (3) (1,743) (191) (2,877) (451) (3,328) 7,692 (5,277) 2,415 (236) 487 (3,463) (2,976) 1,936 9,717 2,671 735 1,871 4,249 15,750 5,693 1,444 4,664 3,867 33,613 11,575 7,707 7,406 12,263 70,934 21,725 9,462 11,994 14,495 80,433 24,828 10,332 14,400 4,795 1,188 (212) 1,342 825 6,654 2,624 (423) 2,597 1,542 10,604 2,965 (990) 3,528 2,356 20,843 4,513 (1,830) 4,685 2,607 8,563 1,330 (1,322) 1,429 752 2010 2011 2012 H1-13

30 Revenue 25 80 100
20 60 15 EBITDA margin (RHS)
40
10 20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

6 Total debt/LTM EBITDA 7 6 5 4 3 3 2 LTM EBITDA/int. (RHS) 2 1 0 2009 2010 2011 2012 H1-13
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25 Total debt 20 Total debt/cap. (RHS) Total cash* 80 100

11 10 9 8
15
60
7 6 5
Senior notes
10
40
4 3 Bank loans and others**
20
2 1
0 2009 2010 2011 2012 H1-13
0 < 1yr 1-2 yrs 2-5 yrs
*Including restricted cash, **including trust loans; Source: Company reports, Standard Chartered Research
471
Asia Credit Compendium 2014 Texhong Textile Group Ltd. (Ba3/Sta; BB-/Sta; NR)

Texhong has fully recovered from the sharp fall in cotton prices in Q2-2011 and profit margins have normalised. The company benefits from its ability to source low-cost cotton from the international market. However, yarn selling prices have remained weak. Texhong resumed its expansion plans in early 2013 to increase production capacity in its existing markets in China and Vietnam, and to venture into new markets such as Turkey and Uruguay. To fund its higher capex and working-capital needs, the company issued USD 200mn of 2019 bonds in January. Despite higher debt, credit metrics were largely healthy. While execution risk remains given its expansion plans, we take comfort from the companys long track record in managing market cycles.

Positive profit alert for 2013: Texhong announced on 8 November that it expects to achieve a significant y/y increase in profit in 2013 based on unaudited financials in 10M-2013. The company continues to benefit from its ability to source low-cost cotton from the international market thanks to its overseas operations, although yarn selling prices have remained weak in China. Profitability has normalised: The company reported an 8.5% y/y increase in revenue to CNY 3.6bn in H1-2013 backed by a 9.0% increase in yarn sales volume to 119kt and a 3.5% increase in the average yarn price to CNY 26,184/t. Profit margins improved further in H1-2013 as the company continued to benefit from the cotton price differential between China and overseas markets. Gross profit margin rose to 21.4% (2010: 23.9%; 2011: 8.1%; 2012: 15.3%), and EBITDA margin was 17.5% (2010: 20.5%; 2011: 5.4%; 2012: 12.2%). Credit metrics were stable despite higher debt: Texhong issued USD 200mn 6.5% of 2019 bonds in January to fund its working capital and expansion plans. As such, total debt rose to CNY 3.2bn as of June 2013 from CNY 1.8bn at end-2012. Of this, ST debt was low at CNY 278mn (including CNY 56mn of finance leases), and LT debt mainly comprised its two USD bonds (c.CNY 2.4bn). Credit metrics remained sound, despite higher debt. Total debt/capital rose to 53.0% as of June 2013 from 40.0% at end-2012, total debt/LTM EBITDA was 2.7x in H1-2013 (2012: 2.0x), and LTM EBITDA/interest was 7.7x (2012: 6.3x). We expect these ratios to improve in H2-2013 and 2014, as the company will likely book higher revenue upon completion of capacity expansion at its China and Vietnam plants. Sound liquidity, but capex is high: Texhong incurred c.CNY 1bn of capex in H12013: CNY 455mn in China, CNY 566mn in Vietnam and CNY 8mn in Turkey. The company also recorded a capital commitment of CNY 690mn as of June 2013: CNY 621mn for plant construction and CNY 69mn for acquiring land-use rights. This was against total cash of about CNY 1.0bn as of June 2013 (end-2012: CNY 552mn). The company plans to downsize capacity increases at its Shandong plant to 60,000 spindles in 2014 from the original plan of 120,000 spindles (completion scheduled for Q1-2014), but increase total capacity at the second phase of its northern Vietnam plant to 258,000 spindles from 230,000 (completion scheduled for Q2-2014). However, due to the slow application and approval process, completion of its fibre-yarn production base in Uruguay is delayed to 2015 (total investment of CNY 400mn including land and construction). Risk remains, and prudent inventory management is key: Inventory rose to CNY 2.1bn as of June 2013 from CNY 1.4bn at end-2012, on higher advance purchases of overseas cotton. The company plans to hold inventory for five months of production, considering its expansion schedule. While we believe Texhong will be able to weather any market volatility given its long operating history and good track record, we think the company should manage its expansion plans and inventory strategy prudently to avoid any sudden change in market conditions. Sales volume of yarns and ASP* (kt LHS, CNY/t RHS)
200 ASP - stretchable core-spun yarn (RHS) 35,000 30,000 25,000 100 20,000 50 15,000 10,000 2008 2009
472
Company profile
Established in 1997 and listed on the HKSE in December 2004, Texhong Textile Group Ltd. (Texhong) is one of Chinas leading manufacturers and suppliers of core-spun and other yarns. It has 11 production bases in China and one in Vietnam, with total production capacity of 1.84mn spindles (1.11mn in China and 0.73mn in Vietnam). The company is also building a new production base in northern Vietnam. In addition to its expansion plans, Texhong is in the process of optimising its product mix to achieve total production of 440,000 tonnes of yarn by Q2-2014. About 87.6% of the companys products were sold to customers in China in 2012. Of its 1,600 customers, 1,400 are domestic clients and 200 are from overseas.
HY CORPORATES
150
Sales volume
0 2010 2011 2012 H1-13
Asia Credit Compendium 2014 Texhong Textile Group Ltd. (Ba3/Sta; BB-/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 55.5 11.4 39.8 2.1 8.9 55.4 140.1 20.5 35.9 1.1 15.9 93.4 (66.8) 5.4 47.2 5.0 2.3 322.9 142.0 12.2 40.9 2.0 6.3 257.2 84.8 17.5 53.0 2.7 7.3 344.3 318 (129) 189 (27) 401 (349) 52 (143) (162) (460) (622) (199) 783 (656) 127 NA NA NA NA 392 3,298 984 592 1,487 569 4,909 1,240 670 2,209 463 4,930 1,856 1,392 2,072 530 5,625 1,770 1,218 2,558 958 7,609 3,172 2,215 2,813 4,008 466 (52) 318 286 5,472 1,119 (70) 950 841 6,873 371 (162) 83 61 7,341 899 (143) 557 487 3,609 633 (87) 502 447 2010 2011 2012 H1-13

8 100
EBITDA margin (RHS)
80
Revenue 4
60
40 2 20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

8 7 6 5 4 3 2 1 0 2009 2010 2011 2012 H1-13 Total debt/LTM EBITDA 0 LTM EBITDA/int. (RHS) 10 15 20
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3.2 Total debt/cap. (RHS) 2.4 75 100

1.5 Finance lease 1.2
0.9 1.6 Total debt 0.8 Total cash* 25 0.3 Bank and other borrowings < 1yr 1-2 yrs 2-5 yrs > 5 yrs 50 0.6 Senior notes
0.0 2009 2010 2011 2012 H1-13
0.0
*Excluding pledged bank deposits; **estimate; Source: Company reports, Standard Chartered Research
473
Asia Credit Compendium 2014 Vedanta Resources Plc (Ba1/Neg; BB/Neg; BB+/Sta)

Vedanta faces operating challenges in its India businesses, including regulatory headwinds in iron ore and aluminium/power, and lower zinc, copper and aluminium prices. However, strong cash flow from Cairn has helped anchor its overall credit profile. Also, the creation of Sesa Sterlite has marginally reduced the mismatch between cash flow and debt at the holdco level. Vedanta has also lowered its net debt by USD 1.6bn in the past 18 months and has put in place a new policy to address liquidity and refinancing risks. While its financial metrics are still somewhat weak for its ratings, we expect consolidated FCF in FY14-FY15 to alleviate ratings pressure. Hence, we our Stable credit maintain outlook on Vedanta.

Oil and gas cash flow anchors the credit: Cairn posted a 3% y/y increase in gross production to 213kboed in H1-FY14, although EBITDA declined 13% y/y to USD 1.12bn due to marginally lower oil prices and a higher share of profit oil (30% versus 20%). The company expects to ramp up production to 225kboed by end-FY14, and we expect annual EBITDA of USD 2.2-2.3bn in FY14-FY15, given higher oil prices and a weak INR. Cairn accounted for 50% of Vedantas EBITDA in H1-FY14 and helps anchor the overall credit profile, given the weaknesses in the other businesses. Cairn intends to pay out 20% of its net income as dividends and recently announced plans for a USD 900mn share buyback, which will increase SSLs stake and dividend inflows. Poor profitability in other segments in H1: EBITDA from the non-oil segments declined 15% y/y in H1-FY14 on lower commodity prices and regulatory issues. The bright spot was the zinc segment, which posted a 10% increase in EBITDA due to 18% higher zinc and lead volumes. The India/Australia copper segment posted 29% lower EBITDA due to temporary plant closure, and Zambia copper operations posted 45% lower EBITDA due to lower volumes and lower LME prices. The iron ore segment posted an EBITDA loss of USD 18mn versus a profit of USD 116.5mn. The power segment was affected by lower volumes, although generation should increase with new capacities coming onstream. Regulatory issues persist: The ban on Vedantas iron ore mining in India continued in H1-FY14; Vedanta expects its Karnataka mines to restart operations soon, and the company has been allowed to sell 4mt of iron ore inventory from the Goa mines. Vedanta has not been able to obtain final approval for its Niyamgiri bauxite mines or its 1.25mt Jharsuguda smelter. It is also still waiting for government approval to increase its stakes in Hindustan Zinc and Balco; it has shareholder approval to spend USD 3.9bn on the two stakes. Restructuring lowers complexity in corporate structure: The holdco had USD 8.1bn of debt as of H1-FY14, and its capitalisation and debt serviceability is poor, given meagre dividend inflows. The formation of SSL will transfer USD 3.9bn of debt to the SSL level and reduces cash flow mismatch and subordination risks. However, the routing of dividends from the opcos to the holdco is still a bit unclear; we believe the group may use SSL as a future funding vehicle. Investment appetite and refinancing risks: While Vedanta has been opportunistic in its acquisitions, we expect it to now adopt a prudent approach, given low commodity prices and operating risks in India. We assume capex of USD 4.0-4.5bn during FY14-15, although investment in the Liberia iron ore and Gamsberg zinc projects and backward integration in aluminium and copper need monitoring. Given the rating agencies concerns about liquidity and refinancing, Vedanta has decided to (1) refinance debt three months in advance; it has already tied up funding for the USD 500mn bond redemption in January 2014, (2) maintain a holdco cash balance of three months of net cash flow requirements, and (3) maintain a line of credit at the holdco level (currently USD 100mn). Financial profile to improve marginally: Vedanta has lowered its net debt by USD 1.6bn in the past 18 months, and its leverage is 3.3x, versus 4.2x at endFY12. We expect FY14 EBITDA to decline by c.10%, although earnings will improve c.15-18% in FY15 on the back of higher volumes in Cairn, iron ore and power. We forecast annual FFO of USD 3.0-3.5bn in FY14-FY15 and FCF generation at the consolidated level. This will lead to a gradual improvement in leverage to c.3x in FY15, although significant pricing pressure or a large acquisition could place pressure on Vedantas ratings.
474
Company profile
Vedanta Resources Plc (Vedanta) is a London-listed holding company with operations spanning oil and gas (Cairn), zinc and lead, silver, iron ore, copper, aluminium, and power. Most of its operations are in India, and it has combined these businesses into a listed entity named Sesa Sterlite Ltd. (SSL). Vedanta has also invested in Australia, Ireland, South Africa, Zambia, Liberia, Namibia and Sri Lanka. Its current capacity (including projects under construction) is 225kboed of oil and gas, 1.6mtpa of zinc, 16mn oz of silver, 16.8mt of iron ore, 2.2mtpa of aluminium, c.750kt of copper, and over 5,000MW of power generation. Vedanta is about 64.9% owned by its chairman, Anil Agarwal, and his family through Volcan Investments Ltd.
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Asia Credit Compendium 2014 Vedanta Resources Plc (Ba1/Neg; BB/Neg; BB+/Sta)
Summary financials
FY10 Income statement (USD mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (USD mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (USD mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) 42.4 29.0 10.7 41.6 3.6 0.4 15.2 4.4 55.4 31.2 12.5 41.5 2.7 0.6 19.8 5.1 12.9 28.7 8.9 47.9 4.2 2.5 9.1 4.3 21.4 32.6 7.2 46.8 3.4 1.8 15.0 4.1 (16.2) 34.1 6.3 49.5 3.3 1.9 13.2 3.4 0.0 -1.0 FY10 FY11 FY12 FY13 H1-FY14 1.0 3.0 2.0 1,397 1,803 1,640 2,903 1,860 (1,210) 651 (277) 4.0 7,239 7,777 6,885 7,982 8,135 43,836 16,605 8,471 16,935 6.0 5.0 2 0 FY10 FY11 FY12 FY13 7,931 11,427 14,005 14,990 2,296 (528) 1,842 602 3,567 (703) 2,683 771 4,026 4,888 6,164 2,104 (661) 261 (217) 8 6 4 FY11 FY12 FY13 H1-FY14
Revenue breakdown by region (USD bn)

16 14 12 10 India Asia - others Middle East China Africa Other Far East Asia Europe
(946) (1,194) 1,745 60 1,706 157
24,060 28,985 45,478 45,950 8,174 934 9,753 16,955 16,593 1,976 10,070 8,611
11,452 13,754 18,420 18,861
EBITDA breakdown by business (USD bn)

Zinc India Iron ore Copper - Zambia Power Zinc International Copper - India/Australia Aluminium Oil and gas
(2,663) (3,616) (10,814) (2,233) (1,265) (1,813) (9,174) (186) (217) (364) 670 (411)
HY CORPORATES
Debt and cash by entity, H1-FY13 (USD bn)

30 Vedanta Sesa Sterlite Standalone Zinc India Balco KCM Zinc International Cairn India Talwandi Sabo
Debt maturity profile, H1-FY13 (USD bn)

7.0 6.0 5.0 Vedanta Plc. Convertible Subsidiaries
25
20 4.0 15 3.0 2.0 1.0 0.0 0 Debt Cash

Note: Fiscal year ends 31 March; Source: Company reports, Standard Chartered Research
10
FY14
FY15
FY16
FY17
FY18
FY19 and later
475
Asia Credit Compendium 2014 West China Cement Ltd. (B1/Neg; B+/Neg; BB-/Sta)

We revise WCCs credit outlook to Stable from Negative. The company has lowered its expansion appetite and embarked on a cash-preservation strategy since end-2012 to weather the challenging market conditions. Its debt maturity profile improved after it issued CNY 800mn of 3Y medium-term notes (MTNs) at a low coupon of 6.1% in March 2013 to refinance its ST debt. As of June 2013, ST debt fell to CNY 677mn from CNY 1.3bn at end2012. LT debt mainly comprised the USD 400mn bonds maturing in January 2016. EBITDA rose to CNY 486mn, backed by a 27% y/y increase in sales volume to 8.1mt in H1, but capex was low at CNY 252mn (full-year target of CNY 400-500mn). Credit metrics were largely stable. That said, WCC made a dividend payment of CNY 91mn in H1, despite reduced capex and cost-saving efforts.

Weathering difficult market conditions in H1-2013: WCC suspended expansion plans, and total cement production capacity remained unchanged at 23.7mtpa as of June 2013 compared with end-2012 levels. Meanwhile, its cement sales volume continued to increase on higher capacity to 8.1mt in H1-2013 (H1-2012: 6.4mt; H22012: 7.9mt). However, pressure on the ASP continued on oversupply in Shaanxi province. The ASP fell to CNY 233/t in H1-2013 (H1-2012: CNY 234/t, H2-2013 CNY 240/t). Despite cost savings following higher operational efficiencies and lower coal prices (CNY 480/t in H1-2013 versus CNY 586/t in H1-2012), profit margins fell further. Gross profit margin was 17.6% or CNY 43/t (H1-2012: 19.0% or CNY 47/t); EBITDA margin was 24.7% (H1-2012: 25.2%); and net profit margin was 8.5% or CNY 21/t (H1-2012: 9.3% or CNY 24/t). Cash-preservation strategy worked well: WCC issued CNY 800mn 6.1% of 3Y MTNs in March to refinance its onshore ST bank loans and for working capital purposes. ST debt fell substantially, to CNY 677mn as of June 2013 from CNY 1.3bn at end-2012. The company generated CNY 486mn of EBITDA in H1-2013, up 21.4% y/y, but cut capex to CNY 252mn compared with CNY 429mn in H12012. Outstanding capital commitments fell to CNY 790mn as of June 2013 from CNY 1.2bn at end-2012. Including restricted cash of CNY 150mn, total cash rose to CNY 555mn as of June 2013 from CNY 519mn at end-2012. This, together with operating cash flow, is sufficient to cover the companys capex needs and debt obligations in H2-2013. Planned capex for 2013 is about CNY 400-500mn; this will remain the same in 2014. Stable credit metrics: Total debt was CNY 4.0bn as of June 2013 compared with CNY 3.9bn at end-2012. Total debt/capital was 44.9% as of June 2013, versus 44.4% at end-2012; total debt/LTM EBITDA fell to 4.1x in H1-2013 from 4.3x in 2012; and LTM EBITDA/interest coverage held at 3.3x. We expect the companys credit profile and liquidity to remain stable or improve marginally in H2-2013. WCC will likely achieve its full-year sales target of about 19mt. Cement prices in Shaanxi have been largely flat YTD, although there was a marginal price increase of about CNY 10-20/t in early November. That said, WCC may keep its selling prices competitive to ensure growth in sales volume. The company reduced its inventory turnover days to 53 in H1-2013 from 57 in H1-2012, but receivable days rose to 24 from 19, suggesting the company was willing to offer longer credit periods to move sales. Government infrastructure projects will drive demand increase: The oversupply issue is largely under control, owing to continued efforts by both the government and market players to reduce obsolete capacity and slow expansion. However, any increase in demand will depend on how fast planned government infrastructure projects are implemented in the coming years. Cement production volume, selling price and unit cost (mt LHS; CNY/t RHS)
16 14 12 10 8 6 4 2 0 2009 2010 2011 2012 H1-13 100 Unit cost of sales (RHS) 200 150 Production volume ASP (RHS) 300 250
Company profile
Listed on the HKSE in August 2010, West China Cement Ltd. (WCC) is a leading cement producer in Shaanxi province. Its cement is sold under the (Yao Bai) trademark. WCCs cement production capacity totalled 23.7mtpa as of June 2013 21.1mtpa in Shaanxi province and 2.6mtpa in Xinjiang. The company is currently building a 1.5mt plant in Ili, Xinjiang, with completion scheduled for 2014, and it plans to add its first plant in Guiyang, Guizhou. It targets total production capacity of 27mtpa by end-2015. WCC also holds mining rights to a number of limestone quarries, as limestone is a principal raw material for cement production. To reduce electricity consumption, the company had installed residual heat recovery systems at 12 of its 16 production lines as of June 2013; one more is due for installation in H2-2013.
HY CORPORATES
476
Asia Credit Compendium 2014 West China Cement Ltd. (B1/Neg; B+/Neg; BB-/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure** Free cash flow** Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 111.2 42.8 56.0 2.5 5.7 26.9 84.8 40.5 25.3 1.0 9.3 34.7 (16.5) 31.4 44.2 3.3 4.3 82.1 (9.7) 25.7 44.4 4.3 3.2 29.4 21.4 24.7 44.9 4.1 3.3 59.7 620 (850) (231) 867 (1,600) (733) 642 (2,438) (1,796) (150) 1,090 (1,358) (267) (60) 156 (213) (57) (91) 346 3,674 1,649 1,303 1,295 374 5,546 1,211 837 3,574 530 8,421 3,312 2,782 4,179 369 10,299 3,869 3,500 4,847 404 10,411 4,009 3,604 4,927 1,517 649 (115) 375 330 2,961 1,199 (129) 1,058 925 3,190 1,002 (231) 763 662 3,524 904 (284) 459 365 1,967 486 (146) 216 168 2010 2011 2012 H1-13

4 100
Revenue
80
60 2 EBITDA margin (RHS) 40 1 20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

5 10
3 LTM EBITDA/int. (RHS)
0 2009 2010 2011 2012 H1-13
HY CORPORATES

4 100
Debt maturity, Jun-13^ (CNY bn)

3.5 3.0
Corp bonds
75
2.5 2.0

2
Total debt
50 1.5
USD bonds
1 25 1.0 0.5 0 2009 2010 2011 2012 H1-13 0.0 < 1 yr 1-2 yrs 2-5 yrs
Total cash*
0
Bank loans
*Including restricted cash; **including net acquisitions; êstimate; Source: Company reports, Standard Chartered Research
477
Asia Credit Compendium 2014 Yanlord Land Group Ltd. (Ba3/Sta; BB-/Sta; NR)

Yanlord has been focusing more on improving sales and maintaining a solid credit profile than on land expansion in the past two years. Contracted sales totalled CNY 11.8bn in 10M-2013, 91% of its fullyear target. Total cash grew to CNY 5.4bn as of September 2013 from CNY 3.6bn at end-2012 thanks to the issuance of CNY 2bn 5.375% of 2016 bonds in May. The company only made one land acquisition in the past two years, for total consideration of CNY 2.9bn in October. Credit metrics weakened, albeit marginally, on higher debt and lower-than-expected delivery as some project completions were delayed. We think Yanlord needs to replenish and rebalance its land bank. It should also continue its sales efforts and closely follow its construction schedule to ensure sound liquidity and stable credit ratios.

Contracted sales improved on increased saleable resources: Yanlord recorded CNY 11.8bn of sales in 10M-2013, against a full-year target of CNY 13bn. This was supported by a high available-for-sale stock, including CNY 13.9bn worth of new launches planned for 2013 and unsold stock of CNY 8.6bn carried forward from 2012. In addition, property prices in major Tier 1 and 2 cities have appreciated in 2013. The ASP of 10M-2013 sales was about CNY 25,650psm, 11% higher than the 2012 average of CNY 23,089psm. Revenue and GFA recognition are likely fall below target in 2013: Revenue totalled CNY 6.6bn in 9M-2013, up 15% y/y. Recognised GFA fell 5% y/y to 251,697 sqm, but the ASP rose 17% y/y to CNY 23,962psm. However, profit margins remained under pressure on rising construction and sales/marketing expenses. Gross margin was 33.5% in 9M-2013 (2012: 36.4%), and EBITDA margin was 25.9% (2012: 31.2%). The company lowered its 2013 revenue estimate to CNY 11.8bn as it slowed the construction of certain projects. Its GFA completion target is now 460,000 sqm, versus the initially planned 600,000 sqm. Credit metrics weakened marginally: Total debt increased to CNY 15.8bn as of June 2013 from CNY 13.1bn at end-2012. The company issued CNY 2bn 5.375% of 2016 bonds in May 2013 and raised about CNY 810mn from net bank loans. Total debt/LTM EBITDA rose to 4.9x in 9M-2013 from 4.1x in 2012, LTM EBITDA/interest fell to 2.4x from 2.8x, and total debt/capital increased to 37% as of September 2013 from 32.9% at end-2012. Liquidity remains sound: Total cash rose to CNY 5.4bn as of September 2013 from CNY 3.6bn at end-2012 thanks to improved contracted sales and measured capex. The company made its first land acquisition in two years it bought a prime site on Sino-Singapore Nanjing Eco Hi-Tech Island in Nanjing for CNY 2.877bn (CNY 7,447psm/GFA) in October. It paid CNY 1.077bn of the land premium, and the remaining CNY 1.8bn is payable in 2014. Yanlord is also looking to acquire land in Chengdu. More saleable resources expected in 2014: Yanlord plans to launch about CNY 26bn worth of property in 2014. This, together with unsold inventory from 2013, will result in total saleable resources of about CNY 35bn for 2014. The company therefore believes that it will be able to achieve CNY 15bn of contracted sales in 2014. Construction capex is estimated at about CNY 9bn, while SG&A expenses will largely be stable at about CNY 700mn in 2014. Land premia payable for its latest land acquisition in Nanjing is CNY 1.8bn. Land replenishment and rebalancing needs: Yanlords total land bank was 4.9mn sqm as of September, down from 5.2mn sqm at end-2012 and 5.6mn sqm at end-2011. Meanwhile, the value of completed but unsold stock on its balance sheet increased to CNY 5.7bn as of September 2013 from CNY 4.6bn at end-2012. This suggests that some of its projects are not performing. We therefore believe that Yanlord will need to replenish and rebalance its land bank in 2014-15. Land-bank distribution by location and development status, Sep-13
GFA under construction: 1.75mn sqm
Shenzhen Tangshan Tianjin Chengdu Zhuhai Suzhou Nanjing Shanghai 7.1% 12.4% 8.9% 11.4% 26.0% 8.5% 8.4% 17.3% Shenzhen Tangshan Tianjin Chengdu Sanya Zhuhai Suzhou Nanjing Shanghai 3.2% 7.4% 14.3% 3.0% 19.7% 9.5% 11.5% 10.4%
Company profile
Established in 1993 and listed on the SGX in 2006, Yanlord Land Group Ltd. (Yanlord) is a high-end property developer in China, with a total land bank of 4.9mn sqm as of September 2013. It focuses on the high-end market in major Tier 1 and Tier 2 cities across key regions: the Yangtze River Delta region (Shanghai, Nanjing and Suzhou); the Pearl River Delta region (Zhuhai and Shenzhen); western China (Chengdu); the Bohai Rim area (Tianjin and Tangshan); and Hainan (Sanya). Yanlord has high land-bank exposure in Shanghai (18%), Tianjin (16%) and Zhuhai (15%). The company has partnered with established developers based in Singapore, including GIC Real Estate, Surbana Land Pte Ltd., Sembcorp Industrial Parks Ltd. and Ho Bee Holdings.
HY CORPORATES
GFA planned: 2.54mn sqm

21.0%
478
Asia Credit Compendium 2014 Yanlord Land Group Ltd. (Ba3/Sta; BB-/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 59.0 50.6 30.8 1.8 8.4 543.4 (5.5) 48.2 38.2 3.4 5.1 299.5 (32.4) 26.8 40.6 6.8 2.1 90.3 33.6 31.2 32.9 4.1 2.8 139.4 1.9 25.9 37.0 4.9 1.9 204.6 3,347 (11) 3,336 (458) (7,378) (773) (8,152) (656) (6,021) (268) (6,289) (818) 2,176 (161) 2,016 (501) 577 (102) 475 (555) 6,577 32,402 6,869 292 15,404 5,820 44,813 12,272 6,452 19,830 4,279 51,920 16,427 12,149 24,031 3,556 54,299 13,078 9,523 26,683 5,728 58,029 15,772 10,344 26,844 7,451 3,769 (450) 4,309 1,496 7,384 3,562 (702) 4,514 1,948 8,987 2,408 (1,170) 3,137 1,482 10,302 3,216 (1,159) 4,137 1,823 6,569 1,704 (881) 1,564 1,688 2010 2011 2012 9M-13

12 100
10
EBITDA margin (RHS) Revenue
80
60 6 40 4 20
0 2009 2010 2011 2012 LTM Sep-13
Coverage ratios (x)

10
LTM EBITDA/int.
0 2009 2010
**
HY CORPORATES
2011
2012
9M-13

18 Total debt 15 100
Debt maturity, Sep-13 (CNY bn)

8 7 80 6 5 4 40 3 CB 2 20 1 0 0 < 1yr 1-2 yrs 2-5 yrs > 5 yrs Bank loans
12
60
Senior notes
Total cash*
0 2009 2010 2011 2012 9M-13
*Including restricted cash; **estimate; #calculated; Source: Company reports, Standard Chartered Research
479
Asia Credit Compendium 2014 Yanzhou Coal Mining Co. Ltd. (Ba1/Sta; BB+/Sta; BBB-/Neg)

Yanzhou enjoys a solid operational profile in China. However, the sharp decline in coal prices since Q2-2012 has impacted profitability. Importantly, the high cost base of its Australian operations led to an EBIT loss in H1-2013. Large investments in recent years have been debt-funded, and leverage deteriorated to 6x in H1-2013 from 2.2x in 2011. While coal demand has picked up somewhat, prices will likely remain low in the next 12-18 months. Given annual investment spending of CNY 78bn in 2013-14, we expect only a gradual improvement in leverage to 5.0-5.5x in 2014. We maintain our Negative credit outlook on Yanzhou and will closely monitor full-year 2013 results for any signs of stabilisation in its credit metrics.

Solid operational profile offset by pricing pressure in China: Yanzhou has a good operating track record, as its mines are located close to the main consuming regions in east China and are connected to major railway grids and ports. Its Shandong mines are very cost-competitive (CNY 270/t in 9M-2013), while its premium-quality (high calorific value and low ash) coal output helps it enjoy a higher ASP than the national average. It also has long-term relationships with large customers like Huadian Power, Baosteel and POSCO. While it is ramping up production in Shanxi and Inner Mongolia, the Shandong mines will continue to contribute more than 50% of revenue in 2014-15. Although the company took a number of steps to lower production costs in 9M-2013, the decline in coal prices across regions (14.5-25.6%) led to significant profitability pressure. Also, the coaltrading operations have a low gross margin (1.3% in 9M-2013) and require large working capital; Yanzhou has therefore been trying to lower trading volumes. Higher risks in Australia: YA has undertaken large acquisitions since 2009 (AUD 3.3bn to acquire Felix Resources, AUD 500mn to acquire two operating mines, and a merger with Gloucestor Coal), and its output grew to 14.2mt in 2012 from 1.6mt in 2009. However, since the merger in 2012, YA has suffered from a sharp drop in coal prices (down 12.6% y/y in 9M-2013) and a high cost structure. Adjusting for one-off items, YA posted an EBIT loss of CNY 613mn in H1-2013 (versus a profit of CNY 326mn in H1-2012). That said, the company has been undertaking costimprovement measures (centralising procurement, reducing workforce and selling excess railway and port capacity quota), and profitability should improve gradually in H2-2013 and 2014. In July 2013, Yanzhou offered to privatise YA by buying the remaining 22% minority stake; the proposed privatisation does not involve any cash payments and is therefore neutral for the credit profile. Profitability affected in 2013: While Yanzhous coal volumes rose 6.8% in H12013, revenue declined 10.8% to CNY 25.2bn due to pricing pressure. Importantly, despite cost-cutting initiatives, EBITDA margin declined 560bps to 14.8%, and EBITDA declined 35% y/y to CNY 3.7bn. Given the further decline in coal prices in Q3-2013, we expect 2013 earnings to remain weak. Although coal demand has gradually picked up in recent months, prices will likely remain low in the next 12-18 months. We expect 2014 EBITDA to increase by 5-8%. Financial metrics have deteriorated: Yanzhous large investments in recent years have largely been debt-funded, and debt/capital rose to 50.4% in H1-2013 from 1% in 2008. Also, given the profitability squeeze since last year, leverage increased to 6x in H1-2013, versus 2.2x in 2011. The company has issued CNY 5bn of MTNs in H2-2013; while part of the funds will be used to repay existing debt, leverage will likely remain elevated in 2013. The company expects to spend CNY 7-8bn annually on capex and investments in 2013-14 (versus CNY 9.2bn in 2012). We believe leverage will therefore remain high at 5.0-5.5x in 2014, while debt to capital will be c. 50%; further pressure on coal prices or a large acquisition will alter our base-case scenario of an improvement in metrics in 2014. That said, Yanzhou has strong liquidity, with CNY 10.7bn of cash against CNY 8.4bn of short-term debt as of June 2013. Also, c.63% of its debt is due after five years, and given its SOE status, it has an undrawn banking facility of CNY 85bn. Linkage with Shandong government: Yanzhou is among the largest SOEs in Shandong, with a workforce of nearly 50,000, and it accounts for more than 10% of provincial SOEs revenue and assets. It was one of the first coal companies to expand overseas and will play an important role in the consolidation of Chinas coal sector. We therefore see a relatively high likelihood of government support.
480
Company profile
Yanzhou Coal Mining Co. Ltd. (Yanzhou) is involved in coal mining (including washing, processing and trading) and is among the top 10 coal producers in China. It has 12 operating mines in Shandong, Inner Mongolia, and Shanxi. It entered Australia in 2004, and its listed subsidiary Yancoal Australia (YA) currently has 14 mines (nine operating and five in the exploration stage). Yanzhou had coal resources of 13.6bt and coal reserves of 5.9bt at end-2012; it produced 31.7mt of coal in H1-2013. Around 80% of its sales are in China, and the remainder in Australia, Korea and Japan. Yanzhou is listed in Shanghai, Hong Kong and New York. It is 52.9% owned by the Yankuang Group, an SOE that is 100% owned by the Shandong SASAC.
HY CORPORATES
Asia Credit Compendium 2014 Yanzhou Coal Mining Co. Ltd. (Ba1/Sta; BB+/Sta; BBB-/Neg)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capex & investments Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Operating ROCE (%) Total debt/capital (%) Total debt/EBITDA (x) Net debt/EBITDA (x) RCF/debt (%) EBITDA/interest (x) (29.1) 34.7 13.6 42.8 3.0 1.4 17.8 159.1 79.2 37.9 18.2 37.2 1.7 1.0 44.2 21.3 21.3 33.1 18.3 44.3 2.2 1.1 32.7 18.6 (39.2) 16.3 6.5 45.5 4.3 2.6 7.8 6.1 (35.4) 14.8 3.5 50.4 6.0 4.6 NA 4.4 6,523 (20,938) (14,415) (2,015) 5,399 17,992 6,564 (9,187) (2,622) (2,851) (512) (5,465) (5,978) (130) 12,054 62,433 21,853 9,799 29,254 9,424 72,756 22,194 12,770 37,438 17,710 16,094 10,698 20,677 7,176 (45) 5,686 4,117 33,944 12,858 (603) 12,477 9,281 47,066 15,596 (839) 12,521 8,928 58,146 9,484 (1,544) 6,346 6,219 25,241 3,728 (940) (4,336) (2,073) 2010 2011 2012 H1-13
Saleable coal production (mt)

70 Australia 60 50 40 30 China 20 10 0 2008 2009 2010 2011 2012 97,152 122,253 119,204 34,458 16,748 43,325 40,996 24,902 49,091 44,978 34,280 44,234
Coal sales by region (CNY bn)

60 Australia 50 Japan
(3,870) (18,832) 1,529 (1,231) (841) (2,904)
Others South Korea
40
30
20
China
10
0 2009 2010 2011 2012 H1-2013
HY CORPORATES
Capex split (CNY bn)

13 12 11 10 9 8 7 6 5 4 3 2 1 0 2012
Source: Company reports, Moodys, Standard Chartered Research
Debt maturity profile, Jun-13 (CNY bn)

30 Yancoal International Others 25 Yancoal Australia Senior notes
20
15 Ordos Neng Hua 10 Heze Nenghua Company 0 2013B < 1Y 1-2 Y 3-5 Y
Secured bank debt
5 Unsecured bank debt > 5Y
481
Asia Credit Compendium 2014 Yuzhou Properties Co. Ltd. (B2/Sta; B/Sta; NR)

Yuzhou achieved CNY 9.2bn of contracted sales in 10M-2013, exceeding its upwardly revised target of CNY 9bn. The company has also continued its efforts to optimise its debt maturity profile and reduce funding costs. It issued HKD 1.5bn of 10% of 6Y bonds to China Life in July and printed USD 300mn of 8.75% of 5Y bonds in September 2013. It redeemed HKD 1bn of 10% of 3Y bonds issued in 2010 and plans to call the 2015 bonds in December. However, credit metrics weakened in H1-2013 due to higher debt and lower profitability. Revenue recognition has been volatile in the past few years, especially on a half-yearly basis. This reflects Yuzhous relatively small scale and limited projects. We expect the situation to improve in the coming years, backed by continuous sales in 2012-13 on an enlarged land bank.

Volatile revenue recognition reflects relatively small scale: Yuzhou reported CNY 1.0bn of revenue in H1-2013, similar to CNY 955mn in H1-2012 but much lower than CNY 3.1bn in H1-2011 and CNY 2.9bn in H2-2012. Recognised GFA totalled 102,815sqm in H1-2013. In comparison, the company plans three major project completions in Q4-2013, with total GFA of 690,986sqm. The ASP of recognised sales was CNY 9,479 psm in H1-2013 (H1-2012: CNY 10,718; H2-2012: CNY 6,961). These fluctuations in recognised GFA and ASP mainly reflect the companys small project base. We expect the company to report more stable revenue going forward, as contracted sales remained strong in 2012 (CNY 6.5bn) and 10M-2013 (CNY 9.6bn). Weaker profitability on lower ASP, higher land and construction costs: Gross profit margin was 32.0% (H1-2012: 45.1%; H2-2012: 37.9%), and EBITDA margin shrank to 18.6% (H1-2012: 34.2%; H2-2012: 32.7%). Contracted sales performed well: Yuzhous contracted sales totalled CNY 9.6bn in 10M-2013, exceeding its revised full-year target of CNY 9bn. The ASP of sales rose to CNY 10,616 psm, 18.6% higher than the 2012 average of CNY 8,951psm. This is in line with high price appreciation in Chinas top-tier cities, including Xiamen and Shanghai, and will support profit margins when the projects are delivered in 2014-15. Active in the offshore capital markets: Yuzhou raised HKD 521mn and USD 35mn 3Y dual-currency loans at a spread margin of 5.75% in April 2013. The company also issued HKD 1.5bn of 10% of 6Y bonds to China Life in July and USD 300mn of 8.75% of 5Y bonds in September. Meanwhile, it redeemed the HKD 1bn of 10% of 3Y bonds issued in 2010 to China Life in July, and plans to call the USD 250mn of 12.5% of 2015 bonds in December. These funding activities have helped the company to extend its debt maturity profile at lower cost. Liquidity is sound, but credit metrics deteriorated: Total debt was CNY 8.2bn as of June 2013, up from CNY 7.5bn at end-2012. Total debt/LTM EBITDA rose to 7.1x in H1-2013 from 5.8x in 2012, and LTM EBITDA/interest fell to 1.5x from 2.0x. Total debt/capital increased to 57.4% as of June 2013 from 55.2% at end-2012. That said, liquidity remained decent total cash rose to CNY 4.6bn from CNY 3.7bn six months earlier. Yuzhou received CNY 4.4bn of cash proceeds from contracted sales and raised about CNY 720mn of net debt in H1. It spent CNY 1.37bn on land acquisitions, CNY 1.42bn on construction capex, and CNY 1.5bn for SG&A, interest, tax and other payments. Low land cost, moderate expansion YTD: Yuzhou bought four pieces of land in 7M2013 for a total consideration of CNY 3.7bn (CNY 1,867 psm/GFA). This is in line with the companys budgeted land capex of CNY 3.3bn for 2013. It had a total of 8.4mn sqm of saleable GFA in its land bank at an average cost of CNY 1,476 psm/GFA, or about 14% of the ASP achieved for 10M-2013 contracted sales. Land bank distribution by location (total saleable GFA of 8.4mn sqm, Jun-13)
Zhangzhou Longyuan Quanzhou Fuzhou Xiamen Bengbu Hefei Shanghai Tianjin
Company profile
Established in Xiamen, Fujian province in 1994 and listed on the HKSE in November 2009, Yuzhou Properties Co. Ltd. (Yuzhou) is a developer focused on Fujian province. It had a total saleable land bank of 8.4mn sqm from 38 projects as of June 2013. Of this, more than half (27 projects, or 56.3% of its land bank) are located its home base of Fujian. Within the province, the company has the largest exposure in Xiamen, with 2.5mn sqm of land from 21 projects, followed by Quanzhou (1.3mn sqm from two projects). Outside Fujian, Yuzhous largest land holding 2.0mn sqm in three projects is in Hefei, the capital of Anhui province, accounting for 24% of total saleable GFA. The company also has 517,000sqm of land in five projects in Shanghai.
HY CORPORATES
3.0% 3.7% 15.7% 3.5% 30.3% 8.0% 24.3% 6.2% 5.4%

Outside Fujian Fujian Province
482
Asia Credit Compendium 2014 Yuzhou Properties Co. Ltd. (B2/Sta; B/Sta; NR)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents** Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 35.5 45.1 36.8 2.5 7.3 200.7 81.2 38.2 49.8 2.9 9.1 263.3 0.7 42.7 49.6 3.4 3.2 146.5 (21.5) 33.1 55.2 5.8 2.0 150.4 (41.2) 18.6 57.4 7.1 0.5 156.9 382 (53) 330 1,088 (169) 920 (159) (726) (82) (808) (224) 1,624 (342) 1,282 (125) NA NA NA NA 1,572 11,142 2,229 657 3,829 2,733 14,593 4,780 2,047 4,824 1,957 18,253 5,557 3,600 5,656 3,729 22,278 7,509 3,781 6,091 4,631 26,015 8,226 3,596 6,116 1,992 899 (123) 1,797 1,101 4,266 1,628 (178) 1,858 964 3,839 1,640 (507) 2,018 942 3,894 1,287 (642) 1,033 726 1,032 192 (395) 166 153 2010 2011 2012 H1-13

5 100
Revenue
80
60
40
20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

8 7 6 5 4 3 2 2 1 0 2009 2010 2011 2012 H1-13 LTM EBITDA/ int (RHS) 0 4 6 Total debt/EBITDA 8 10
HY CORPORATES

10 100

4
80 3
China Life 2013 bonds*
2017 bonds
Total debt Total debt/cap. (RHS)
60 2 40 2015 bonds^ 1 Bank loans
Total cash*
20
0 2009 2010 2011 2012 H1-13
0 < 1 yr 1 - 2 ys 2 - 5 yrs > 5 yrs
*Including restricted cash; **Yuzhou redeemed the 2013 bonds and issued HKD 1.5bn of 6Y bonds to China Life in July; ^Yuzhou issued USD 300mn of 5Y bonds in September and plans to call the 2015 bonds in December; Source: Company reports, Standard Chartered Research
483
Asia Credit Compendium 2014 Zoomlion Heavy Industry Science and Technology Co. Ltd. (NR; BB+/Sta; BBB-/Sta)

Zoomlion reported a sharp drop in revenue in 9M-2013 amid an industry downturn. However, it maintained profitability and proactively managed its liquidity and credit profile. It reduced capex to only CNY 600mn in H12013 and used its free cash to reduce debt. Zoomlion was therefore in a net cash position as of June 2013 total debt fell CNY 2.8bn in H1 to CNY 17.5bn, with low ST debt of CNY 4.0bn. Cash was still high at CNY 17.9bn. That said, working capital pressure has persisted on higher receivables and flat inventory. We expect Zoomlion to report flat financial results in 2014, given that a pickup in construction activity has a lagged effect on the heavy construction machinery sector. We also see headline risk easing.

Poor financial performance in 9M-2013: Revenue fell 26% y/y to CNY 28.9bn in 9M-2013. However, the y/y declines have narrowed each quarter (Q3: -12.6%, Q2: -18.9%, and Q1: -48.6%). That said, construction machinery demand has remained weak without any sign of recovery. While we expect a pick-up in infrastructure FAI in 2014, any positive impact of a recovery in the construction sector will filter through to the heavy construction machinery sector only about six to nine months later. As such, we expect flat financial results in 2014. Revenue contribution from concrete machinery segment fell sharply in H1: The concrete machinery segment contributed CNY 8.9bn of revenue in H1-2013, down 47% y/y, and accounted for 44% of total H1 revenue. In comparison, the revenue contribution from crane machinery was only 6% lower y/y at CNY 6.6bn or 33% of total H1 revenue. Zoomlion maintained profitability, despite the difficult market conditions that led to falling demand and cost pressure gross profit margin was 32.1% in H1-2013 (2012: 32.3%) and EBITDA margin was 18.8% (2012: 20.0%). Working capital pressure remains: Zoomlions inventory was largely stable at slightly above CNY 11bn both in 2012 and H1-2013. Receivables under the finance lease fell to CNY 17.3bn (including the current and non-current portions) as of June 2013 from CNY 19.7bn at end-2012. However, total receivables grew to CNY 22.1bn from CNY 17.5bn. Liquidity and credit profile remain robust: Despite a significant 47% y/y decline in EBITDA to CNY 3.8bn, capex was low at CNY 600mn, resulting in neutral FCF in H1-2013. The company reduced total debt to CNY 17.5bn as of June 2013 from CNY 20.3bn at end-2012 (it reduced ST debt to CNY 4.0bn from CNY 9.6bn). As such, total cash fell to CNY 17.9bn in H1 from CNY 20.1bn at end-2012. While its credit profile weakened due to the large fall in income, the ratios were still decent total debt/LTM EBITDA was 2.8x in H1-2013 (2012: 2.1x), LTM EBITDA/LTM interest was 7.6x (2012: 12.7x) and total debt/capitalisation was 29.2% as of June 2013 compared with 33.0% at end-2012. Negative headline risk has been lifted: Zoomlion faced allegations by a local media reporter of inflating trade invoices. As a result, its share price fell more than 58% to a low of HKD 4.98/share on 10 July from its YTD high of HKD 11.98/share on 2 January. The reporter was arrested in October for damaging Zoomlions commercial reputation; he admitted accepting bribes to publish untruths about the company. We believe this will ease headline risk. Ownership structure and key products, Jun-13
Hunan SASAC
16.26%
Company profile
Listed on the SSE in 2000 and the HKSE in 2010, Zoomlion Heavy Industry Science & Technology Co. Ltd. (Zoomlion) is a leading construction machinery manufacturer. Through different business lines concrete machinery, crane machinery, environmental and sanitation machinery, road construction machinery and earthworking machinery Zoomlion offers more than 900 models of machinery and equipment covering 98 different product types in 13 product categories. It also provides finance lease services to its customers. Concrete and crane machinery are its core products, making up c.78% of its total revenue in 2012. Zoomlion increased its stake in CIFA (an Italian machinery manufacturer) to 100% in December 2012 from 59.3%. Zoomlion is also expanding its overseas distribution network and R&D centres. .
HY CORPORATES
A-share shareholders
65.21%
H-share shareholders
18.53%
Zoomlion Heavy Industry Science & Technology Co. Ltd. (000157 CH/1157 HK)
Key products Concrete machinery Zoomlion ranks second in the concrete machinery segment; this market contributed about 49% of revenue in 2012 and 44% in H1-2013. Zoomlions major products in this segment include truck-mounted and trailer-mounted concrete pumps and concrete mixers. The market leader in this segment is Sany Heavy Industry Co. Ltd. Crane machinery Ranked the second in this business segment, Zoomlions crane sales contributed c.29% of revenue in 2012 and 33% in H1-2013. Major products include truck cranes (market leader: XCMG) and crawler cranes (market leader: Yuwa). Zoomlion has leading technology in the tower crane product segment and manufactures the worlds largest self-climbing tower crane (the D5200). Zoomlion bought an additional 40.68% stake in CIFA for USD 235.8mn in December 2012 and increased its holding in the company to 100%.
484
Asia Credit Compendium 2014 Zoomlion Heavy Industry Science and Technology Co. Ltd. (NR; BB+/Sta; BBB-/Sta)
Summary financials
2009 Income statement (CNY mn) Revenue EBITDA Gross interest expense Profit before tax Net income Balance sheet (CNY mn) Cash and equivalents* Total assets Total debt Net debt Shareholders equity Cash flow (CNY mn) Net operating cash flow (1,830) Capital expenditure Free cash flow Dividends Key ratios EBITDA growth (%) EBITDA margin (%) Total debt/capital (%) Total debt/EBITDA (x) EBITDA/interest (x) Total cash/ST debt (%) 53.4 16.6 65.2 4.1 9.3 40.2 79.1 19.2 36.5 2.6 15.3 231.4 62.7 21.7 27.0 1.3 19.6 264.5 (4.6) 20.0 33.0 2.1 12.7 208.4 (47.0) 18.8 29.2 2.8 8.4 448.5 (902) (2,898) (152) (190) (1,173) (1,363) (711) 1,399 (1,582) (183) (1,657) 2,250 (1,834) 416 (1,927) 671 (578) 93 3,439 33,875 14,174 10,735 7,552 18,758 63,042 15,797 (2,961) 27,435 16,002 71,543 13,138 (2,864) 35,595 20,084 88,934 20,313 229 41,149 17,906 88,864 17,542 (364) 42,533 20,762 3,452 (372) 2,828 2,419 32,193 6,182 (403) 5,416 4,588 46,323 10,058 (513) 9,602 8,173 48,071 9,598 (756) 8,858 7,529 20,165 3,784 (451) 3,606 3,006 2010 2011 2012 H1-13

50 100
40
Revenue
80
30
EBITDA margin (RHS)
60
20
40
10
20
0 2009 2010 2011 2012 LTM Jun-13
Coverage ratios (x)

5 50
40
Total debt/EBITDA
30
20
1 LTM EBITDA/ interest (RHS) 0 2009 2010 2011 2012 H1-13
10
HY CORPORATES

24 100

7 6 80
20 Total debt/cap. (RHS) Total debt Total cash*
5 60 4 3 2 20 1 0 0 < 1 yr 1-2 yrs Bank loans
Corp bonds
16
12 40 8
USD bonds
0 2009 2010 2011 2012 H1-13
2-5 yrs
> 5 yrs
485
Glossary of abbreviations
AGM ARPU ASP AUM bbl bboe bcf bcm boe BoP BPO BT bt BT/BOT C/A CASA CB CDO CFO cm CNH CNY COS CWN DM E&P EGM EM EPC F&D FAI FCF FCPT FDI FFO GFA GRM GST GWh ha HG HKD HKSE holdco HPR HY ICT IDR IDX IG INR IPP IPTV JPY JV kbd kboed km KRW KSE kt kWh LDR LGIV annual general meeting average revenue per user average selling price assets under management barrel(s) billion barrels of oil equivalent billion cubic feet billion cubic metres barrels of oil equivalent balance of payments business process outsourcing build-transfer billion tonnes build-transfer/build-operate-transfer current account current account and savings convertible bond collateralised debt obligation cash flow from operations cubic metre offshore Chinese yuan Chinese yuan cost of sales credit watch negative developed-market exploration and production extraordinary general meeting emerging-market engineering, procurement and construction finding and development fixed-asset investment free cash flow fuel cost pass-through foreign direct investment funds from operations gross floor area gross refining margin goods and services tax gigawatt hour hectares high-grade Hong Kong dollar Hong Kong Stock Exchange holding company home purchase restriction high-yield information and communications technology Indonesian rupiah Indonesia Stock Exchange investment-grade Indian rupee independent power producer Internet protocol television Japanese yen joint venture thousand barrels per day thousand barrels of oil equivalent per day kilometre Korean won Korea Stock Exchange thousand tonnes kilowatt hour loan-to-deposit ratio local government investment vehicle LKR LME LNG LPG LT LTE LTM mcm MHz mmb mmbd mmboe mmbtu mmscmd MNC mt MTM MTN mtpa MW MWh MYR NBFC NGO NII NIM NLA NPL NYSE opco PBT PHP PPP PSC psf psm RCF REIT RFD ROA ROE RWA RWN RWP SASAC sf/sq ft SGD SGA SGX SME SOE sqm SSE ST SZSE t T&D tcf TEU THB USD VND VoIP Sri Lankan rupee London Metals Exchange liquid natural gas liquid propane gas long-term Long Term Evolution last 12 months million cubic metres megahertz million barrels million barrels per day million barrels of oil equivalent million British thermal units million metric standard cubic meters per day multinational corporation million tonnes mark-to-market medium-term note million tonnes per annum megawatt megawatt hour Malaysian ringgit non-banking financial company non-governmental organisation net interest income net interest margin net lettable area non-performing loan New York Stock Exchange operating company profit before tax Philippine peso pre-provision profits production-sharing contract per square foot per square metre retained cash flow real estate investment trust review for possible downgrade return on assets return on equity risk-weighted asset rating watch negative rating watch positive State-owned Assets Supervision and. Administration Commission square foot Singapore dollar selling, general and administrative Singapore Stock Exchange small and medium-size enterprise state-owned enterprise square meters Shanghai Stock Exchange short-term Shenzhen Stock Exchange tonnes transmission and development trillion cubic feet twenty-foot equivalent unit Thai baht US dollar Vietnamese dong Voice over Internet Protocol
486
Contributors contact details

Credit Research Team
Kaushik Rudra Global Head of Credit Research +65 6596 8260 Kaushik.Rudra@sc.com Standard Chartered Bank, Singapore
Credit strategy Shankar Narayanaswamy Head of Credit Strategy +65 6596 8249 Shankar.Narayanaswamy@sc.com Standard Chartered Bank, Singapore Sandeep Tharian Senior Credit Strategist +44 20 7885 5171 Sandeep.Tharian@sc.com Standard Chartered Bank, United Kingdom
Asian sovereigns & high-grade corporates Bharat Shettigar Senior Credit Analyst +65 6596 8251 Bharat.Shettigar@sc.com Standard Chartered Bank, Singapore Jaiparan Singh Khurana Credit Analyst +65 6596 7251 Jaiparan.Khurana@sc.com Standard Chartered Bank, Singapore
High-yield corporates Feng Zhi Wei Senior Credit Analyst +65 6596 8248 Zhi-Wei.Feng@sc.com Standard Chartered Bank, Singapore Chun Keong Tan Credit Analyst +65 6596 8257 Tan.Chun-Keong@sc.com Standard Chartered Bank, Singapore
Financials Victor Lohle Senior Credit Analyst +65 6596 8263 Victor.Lohle@sc.com Standard Chartered Bank, Singapore Simrin Sandhu Senior Credit Analyst +65 6596 6281 Simrin.Sandhu@sc.com Standard Chartered Bank, Singapore
Nikolai Jenkins Credit Analyst +65 6596 8259 Nikolai.Jenkins@sc.com Standard Chartered Bank, Singapore
487
Asia Credit Compendium 2014 Economics Research Asia

David Mann Head of Regional Research, Asia +65 6596 8649 David.Mann@sc.com Standard Chartered Bank, Singapore Chong Hoon Park Regional Head of Research, Korea +82 2 3702 5011 ChongHoon.Park@sc.com Standard Chartered First Bank Korea Limited Samiran Chakraborty Regional Head of Research, India +91 22 6115 8820 Samiran.Chakraborty@sc.com Standard Chartered Bank, India Anubhuti Sahay Senior Economist +91 22 6115 8840 Anubhuti.Sahay@sc.com Standard Chartered Bank, India Sayem Ali Senior Economist +92 21 3245 7839 Sayem.Ali@sc.com Standard Chartered Bank (Pakistan) Limited Fauzi Ichsan Senior Economist +62 21 2555 0117 Fauzi.Ichsan@sc.com Standard Chartered Bank, Indonesia Chidambarathanu Narayanan Economist +852 3983 8568 Chidambarathanu.Narayanan@sc.com Standard Chartered Bank (Hong Kong) Limited Jeff Ng Economist +65 6596 4194 Jeff.Ng@sc.com Standard Chartered Bank, Singapore Tony Phoo Economist +886 2 6603 2640 Tony.Phoo@sc.com Standard Chartered Bank (Taiwan) Limited Edward Lee Regional Head of Research, South East Asia +65 6596 8252 Lee.Wee-Kok@sc.com Standard Chartered Bank, Singapore Stephen Green Regional Head of Research, Greater China +852 3983 8556 Stephen.Green@sc.com Standard Chartered Bank (Hong Kong) Limited Kelvin Lau Senior Economist +852 3983 8565 Kelvin.KH.Lau@sc.com Standard Chartered Bank (Hong Kong) Limited Usara Wilaipich Senior Economist, Thailand +662 724 8878 Usara.Wilaipich@sc.com Standard Chartered Bank (Thai) PCL Betty Rui Wang Economist +852 3983 8564 Betty-Rui.Wang@sc.com Standard Chartered Bank (Hong Kong) Limited Eric Alexander Sugandi Economist +62 21 2555 0596 Eric.Alexander-Sugandi@sc.com Standard Chartered Bank, Indonesia Samantha Amerasinghe Economist +44 20 7885 6625 Samantha.Amerasinghe@sc.com Standard Chartered Bank, United Kingdom Wei Li Economist +86 21 6168 5017 Li.Wei-CN@sc.com Standard Chartered Bank (China) Limited
Lan Shen Junior Economist +86 10 5918 8261 Lan.Shen@sc.com Standard Chartered Bank (China) Limited
488
Asia Credit Compendium 2014 Disclosures Appendix

Recommendations structure Standard Chartered terminology Positive Issuer Credit outlook Stable Negative Impact Improve Remain stable Deteriorate We expect the fundamental credit profile of the issuer to <Impact> over the next 12 months Definition
Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may or may not include price targets.
Credit trend distribution as at 3 December 2013 Coverage total (IB%) Positive Stable Negative Total (IB%) 5 205 73 283 (20.0%) (24.4%) (21.9%) (23.7%)
Additional information, including disclosures, with respect to any securities referred to herein will be available upon request. Requests should be sent to scer@sc.com.
489

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Kaushik Rudra Head of Credit Research
05:00 GMT 04 December 2013
490

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Asia Credit Compendium 2014

All rights reserved. Standard Chartered Bank 2013

Asia Credit Compendium 2014

Asia Credit Compendium 2014

Asian bond valuations All about credit selection

Credit analysis (in alphabetical order)

Asia Credit Compendium 2014

Glossary of abbreviations Contributors contact details

Asia Credit Compendium 2014

This page is intentionally blank.

Asia macroeconomic overview

Asia Credit Compendium 2014

Asia Supportive global growth, at last!

Figure 1: Asia ex-Japan* macroeconomic forecasts Improved global backdrop in 2014

Asia Credit Compendium 2014 Balance of payments

Asia Credit Compendium 2014

Asia Charts of the year

Figure 4: Credit growth has generally eased in Asia

10 year average 2013F

Credit growth, % y/y

20 15 SG 10 5 0 0 2 4 6 8 10 12 Nominal GDP growth, % y/y US HK US MY SG MY TH HK ID CN TH IN

Figure 7: Inflation to remain manageable in 2014 % (annual averages)

Figure 8: Lending growth is recovering in ASEAN % y/y

2014F 2013F 2015F

0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Asia Credit Compendium 2014

Asian credit fundamentals Greater differentiation warranted

We expect 2014 to be a lacklustre year for Asian credit

US economic prospects remain the key driver of Asian credit markets

Treasury carry Treasury delta Credit delta

Source: Standard Chartered Research

Asia Credit Compendium 2014

External vulnerability is also an important determinant

Positive 25 50 75 100 125 150

Source: Bloomberg, Standard Chartered Research

Asia Credit Compendium 2014

Chinas increasing importance in Asian credit

Growing macro and corporate leverage is a concern

Asia Credit Compendium 2014

Risks to our call for range-bound spreads

Figure 5: Rising macro leverage in Asia Corporate debt to GDP (%)

Figure 6: Profitability pressure and rising leverage x (LHS), % (RHS)

UK Japan Asia ex-Japan USA EE & ME

2.0 1.8 1.6 1.4 1.2 1.0

US growth is likely to remain soft in the near term

Softer data is likely to keep UST yields range-bound

Figure 8: Key US forecasts

2014 2.4 1.6 6.8 -2.5 0-0.25 0.25 3.40

2015 2.8 1.9 6.4 -2.9 0-0.25 0.50 3.80

FFTR rate, % USD 3M LIBOR, %

10Y UST yield, %

Source: Bloomberg, Standard Chartered Research

*End-November 2013; Source: Standard Chartered Research

Asia Credit Compendium 2014

Europe and Japan are likely to continue monetary easing

Source: Federal Reserve, ECB, BoE, BoJ, Standard Chartered Research

Source: CEIC, Standard Chartered Research

Asia Credit Compendium 2014

Vulnerabilities to reappear when Fed starts QE tapering in 2014

Source: Standard Chartered Research

Asia Credit Compendium 2014

Asian economic growth is likely to pick up in 2014