Dan Barnes Welcome to Primary Markets TV Asia Pacific – your update on newly issued securities in the region. I’m Dan Barnes. This week is seeing three initial public offerings on the Australian Stock Exchange, from HomeCo Daily Needs Real Estate Investment Trust on the 23rd, Plexure Group on the 25th, and WA Kaolin on the 27th of November. There are no IPOs set up on the Hong Kong Stock Exchange over the next five days following a busy week last week, which saw 6 new issues. Likewise, Korea Exchange, which has had a very busy year so far for IPOs, is now having a quiet November. Singapore Exchange has one expected IPO on the 25th, which will be credit and risk information solutions firm, Credit Bureau Asia. Japan Exchange is looking busy. The new listings on JASDAQ for web marketing specialist Geo-code, and information services provider, MIT Holdings on the 25th, followed by Creema on the 27th, which is listing on the start up focused Mothers market. Creema is offering an online marketplace for artists and creators to offer work. On the fixed income side, we’ve seen withdrawal of several planned new issues in China, following bond defaults from some state-owned enterprises, including Yongcheng Coal & Electricity, Huachen Automotive Group, and reportedly Tsinghua Unigroup. This has led to a withdrawal of planned new issuance of bonds in China by 20 firms, according to Financial Times, as uncertainty about the level of support from regional or central government for those bonds is felt in the market. Joining me are Martina Garcia, head of International Market Strategy at the London Stock Exchange Group, and Santiago Braje, CEO of Katana. Guys, welcome to the show.
Martina Garcia Thank you.
Santiago Braje Thank you, Dan. It’s a pleasure to talk to you again.
Martina Garcia Martina, if we can start with you. We wanted to discuss today how issuers in Asia Pacific can get access to investors outside of the region, using Shanghai London Stock Connect. Could you initially tell us how the mechanism works for firms that are issued within the Asia-Pacific region?
Martina Garcia So this is the mechanism that is dedicated to issues that are listed in the Shanghai Stock Exchange, at least for the moment. So not all of them from the whole region of Asia Pacific. We have four issuers right now, the companies, and three of them since June, some very vibrant lately. The issuers need to be listed in Shanghai and needs to do a follow-on offering in the London Stock Exchange. The shares they list the GTR, the depository receipts, then they list in London are fungible with the shares in Shanghai. I mean, in that sense it’s a unique mechanism. The issuers need to have approval from the CSR system, from the Chinese regulator to issue a follow-on, and also from the FCA, because they are on the official list in the London market. They are traded as any other security in the international order book, and so the shares are traded according to the London rules.
Dan Barnes And of course, the challenge investors have had getting access to Asia, and China, has historically been because there are restrictions on which investors are allowed to access the market by the Chinese regulators, and also there are certain currency restrictions. So this is presumably a way of – assuming that the Chinese regulators approve of the firm – for them to move beyond those barriers.
Martina Garcia Totally. So there is no restrictions on currency or quotas. This is the GTR are denominated in dollars, mostly, which is also much, much easier. And it takes away an important cost in terms of foreign exchange. And you can hedge these securities, you can control some of them, you can settle them in T+2, which is very important for many of our members. And you don’t have any of the limitations that you will have trading Asia in the Chinese market.
Dan Barnes That’s really interesting, thank you. And then for investors who are interested in accessing the Chinese market in this way, the Shanghai Exchange, how do they actually trade on the London Stock Exchange? Because normally it goes through the central limits order book. Are the mechanisms much the same?
Martina Garcia Yes. The only difference is that the market opens at 9:00 a.m. rather than 8:00 a.m., and this is to make sure that there is no overlap with the Shanghai Stock Exchange market’s trading hours, and to allow the companies to have a disclosure window. So that’s the only difference with any of the international order book security.
Dan Barnes Santiago turning to you. In the fixed income markets, obviously, we’re constantly seeing bonds replaced as bonds reach maturity and new bonds are issued. And that can create opportunities for investors in terms of relative value of one bond against another. Could you explain to us first how a relative value trade works?
Santiago Braje So, as you say, the activity in the market being supply or idiosyncratic factors will change the prices, and therefore change the spread of the different issuers, and from a relative value perspective, you’re looking at how those spreads change in relation to each other. So with a broad perspective, you can see how one particular issue has spread, maybe changing against the index or the market as a whole. Or in a more refined strategy, you may be looking at how the spread of one issuer changes in relation to the spread of another. A relative value strategy will typically try to identify those spread dislocations, put on the trade when the dislocation happens, with the expectation that, that difference will revert to a previous level.
Dan Barnes That’s great, thanks very much. You’re a specialist in providing trade ideas and investment ideas for professionals in the market. Could you tell us where you’ve seen some examples of dislocations recently and how that’s created opportunities for investors?
Santiago Braje Yes, absolutely. So in the Chinese market where we have seen one of the biggest movers, has been Times China Holdings, where we have seen very sharp dislocations, but also it has been a bit of a roller coaster, because the spread there has swung by 200 bips or so, back and forth a couple of times over the last month. So clearly, there’s a lot of market activity and a lot of opportunity also on that name for those that are following closely. More recently, we have seen significant widening in Central Plaza Development, another Chinese real estate company that has been on a widening trend and you can identify this, particularly when you compare with others, so we’re looking at other issuers in the same sector with similar maturities. You can see that this issue of Central Plaza is moving faster in terms of its widening, while the general trend in the market is more stable or even towards some tightening in the sector. The other thing that’s very interesting, over the last few days, really one of the sharpest dislocations we have seen has been in Yunan Energy, where we have seen a spike in the 2022 bonds, that have gone from a level of under 400 bips, and now it’s trading over 650 bips. So that’s a very significant dislocation and one to keep an eye on.
Dan Barnes Santiago, Martina, that’s been fantastic. Thank you very much.
Martina Garcia A pleasure.
Santiago Braje Thank you very much.