FAR EAST HORIZON (BBB- (S)) – Strong Earnings Growth With Asset
Quality In Good Position
NET YTM is at 5.23% as at 13 January 2014
Market Recognition of Far East Horizon’s business
Far East Horizon is a listed company in Hong Kong Stock Exchange, specialising in the financial leasing business. It is a constituent of the Hang Seng composite, Hang Seng China-Affiliated Corporations, FTSE China and MSCI China index.
Support from Strong Parent Company
Sinochem Group is China’s earliest entrant in Fortune Global 500 and has entered the list for 23 times, ranking 119th in 2013. Credit rating agency S&P assigned its BBB- long-term and A-3 short-term rating to Far East Horizon. S&P said FRSEHK’s credit rating reflects a BB+ stand-alone credit profile for the company and factors in one notch for extraordinary parent support.
Financial Leasing Industry Maintains Rapid Growth
In 2012, 274 leasing companies were newly established and the total number of local financial leasing companies hit 560. In the first half of 2013, the number of firms was approximately 670 and the registered capital of the industry amounted to RMB 210 billion. It shows the recent spike in SHIBORs does not reflect a broad-based deteriorated in the shadow banking system. We believe the liquidity problem should be an opportunity rather than a threat for the financial leasing industry.
Niche Market Position and Focused Strategy
Far East Horizon engages its business in 8 main industries: healthcare, packaging, infrastructure construction, education, machinery, transportation, textile and electronic information. In 1H 13, the income contribution from each industry became more balanced.
Strong Earnings Growth With Asset Quality In Good Position
In the first half of 2013, the Group’s profit attributable to shareholders was US$165,940,000, a growth of 35.15% as compared to a year earlier. The write-off ratio of non-performing assets was 0.11% while the provision coverage ratio of the Group was 219.34% as of 30 June 2013.
Good Alternative To RMB Fixed Deposit
FRESHK 16 is trading at a premium of 100.548, slightly above par, and its net YTM was at 5.23%, far higher than the 12-month RMB reference interest rates offered by the major banks in Hong Kong
BOND HIGHLIGHT - FRESHK 5.45 12/11/2016
Table 1: Information SummaryIssuer Name FAR EAST HORIZON LTD
Announcement Date 12/04/2013
Currency CNY
Issuance Size CNY 700,000M
Issuance Price 100.00
Minimum Investment amount CNY 1,000,000
Incremental Amount CNY 10,0000
Maturity Date 12/11/2016
Call Schedule N/A
Call Price N/A
Coupon Date 11 June / 11 December
Rating at Issuance N.A
Source: iFAST Compilations
KEY FACTS
Company Background
Far East Horizon Ltd is a financial services provider. The Company specialises in providing
financing solutions through equipment-based financial leasing. Far East currently targets industries that include healthcare, education, infrastructure construction, shipping, printing and machinery industries.
Headquartered in Hong Kong, Far East Horizon has created a national customer service network whose business operation center is in Shanghai and which has a large number of offices in major cities including Beijing, Shenyang, Ji’nan, Zhengzhou, Wuhan, Chengdu, Chongqing, Changsha, Shenzhen, Xi’an, Harbin and Xiamen. Far East Horizon has also established professional operations platforms for the rental, trading, medical engineering and ship rental sectors. The company was listed on the Hong Kong Stock Exchange on March 30, 2011.
Purpose of the Issuance
The Company intends to use the net proceeds from the Drawdown Notes for the Company’s working capital and general corporate purposes.
COMMENTARY
Far East Horizon is a listed company on the Hong Kong Stock Exchange, specialising in the financial leasing business. It is a constituent of the Hang Seng composite, Hang Seng China-Affiliated
Corporations, FTSE China and MSCI China index. It is also a subsidiary of Sinochem Group (中國中化集 團), a Chinese state-owned conglomerate, ranking 119th on the Fortune 500 list. As a fast growing sector,
financial leasing firms play an important role in supporting the development of small and mid-sized enterprises across the country, especially for those without political background. This week, we would like to highlight FRESHK 16 as we believe this bond offers a good way to gain RMB exposure; it also offers attractive yield and can be regarded as an alternative to a RMB fixed deposit.
What is Financial Leasing?
Financial leasing service is one of the popular financing tools for SMEs to pay for assets. The lessee will select an asset and the lessor (financial leasing company) will buy that asset so that the lessee will have use of that asset during the lease. The lessee will pay a series of rentals or installments for the right to use that asset. It also has the option to acquire the ownership of the asset. The lessor will recover most or all of the costs of the assets while earnings interests from the rentals paid by the lessee.
Chart 1: Transactional Flow of a Financial Lease
Chart 2: Organisation Structure of Sinochem Group
Source: Sinochem Group Support from Parent Company
Founded in 1950, Sinochem group is the largest trading company and the first multinational conglomerate in China. Its core businesses span over energy, agriculture, chemicals, real estate and financial services. It is one of China’s four state-owned oil companies and the biggest agricultural input company (fertiliser, seed and pesticide) in China. Sinochem group currently owns more than 300 subsidiaries and several listed companies including Sinochem International (SH 600500), Sinofert (HK 297), Franshion Properties (HK 817) and Far East Horizon (HK 3360).
Sinochem Group is China’s earliest entrant in Fortune Global 500 and has entered the list for 23 times, ranking 119th in 2013 (see table 1). It also ranked third among the largest trading companies worldwide and 15th in China’s Top 500 enterprises list in 2013.
Table 2: Sinochem group’s ranking in Fortune 500 and China’s Top 500
Year Global 500 Largest
Companies Ranking Global Largest Trading Companies Ranking China’s Top 500 Enterprises 2007 299 5 11 2008 257 5 11 2009 170 3 10 2010 203 - 15 2011 168 - 17 2012 113 2 13 2013 119 3 15
Source: Sinochem Group and iFAST Compilations
Thanks to its parent company’s diversified portfolio of businesses and strong branding and networking, Far Eastern Horizon (HK, 03360) has evolved from a single financial services company to an integrated service provider in China over the past 20 years.
On 3 January 2014, credit rating agency, S&P, assigned its BBB- long-term and A-3 short-term rating to Far East Horizon. S&P said the credit rating reflects a BB+ stand-alone credit profile (SACP, which is one of the components of credit rating) for the company and factors in one notch for extraordinary parent support. We believe the strong background of its parent will help to support Far East Horizon’s business and lifted investors’ confidence on the bond.
Financial Leasing Industry Maintains Rapid Growth
Although this issuer has a BBB- rating, an investment grade status, concerns over Far East Horizon’s credit risks have mounted recently as the liquidity stress in China may increase the default rate. However, we believe the liquidity problem should be an opportunity rather than a threat for the financial leasing industry.
As widely regarded as a part of shadow banking system (“shadow banking” institutions typically refer to trust companies, brokerages, insurance companies and financial leasing companies), financial leasing companies perform a function to society by providing loans to SMEs and unprivileged borrowers who are denied by the mainstream banking system as banks are more willing to provide credit to state-owned and well-connected enterprises after the PBOC took steps to control the credit boom and tightened its monetary policy in 2010. Smaller private enterprises have to turn to other relatively expensive channels for financing. The spike of SHIBOR (Shanghai Interbank Offered Rate) in June 2013 was largely caused by concerns that banks were not able to refinance to roll over their maturing wealth management products (WMPs) (most of them are tied to the real estate developer’s activities and local government borrowings and regarded as an off-balance sheet vehicle for banks to lend).
According to China Leasing Alliance, in 2012, 274 leasing companies were newly established and the total number of local financial leasing companies hit 560. The annual financial lease value of new business was estimated at RMB 850 billion, representing a 30% year-on-year growth. In the first half of 2013, the financial leasing industry continued to maintain a high growth rate. The number of firms was approximately 670 and the registered capital of the industry amounted to RMB 210 billion. Therefore, the recent spike in SHIBORs does not reflect a broad-based deteriorated in the shadow banking system and the liquidity stress issue would probably further boost the growth of the financial leasing companies. Niche Market Position and Focused Strategy
Table 3: The Composition of The Company’s Revenue (In Thousand USD, for the Six Month Ended 30 June)
Business Segment 2013 1H % of Total 2012 1H % of Total YoY Change Leasing and advisory
segment 561,135 93.89% 491,529 88.70% 14.16% - Financial leasing and factoring (interest income) 387,382 64.82% 360,985 65.14% 7.31% - Advisory services (fee income) 173,753 29.07% 130,544 23.56% 33.10%
Trading and other segment 36,490 6.11% 62,635 11.30% (41.74%)
Total 597,625 554,164 7.84%
Business taxes and
surcharges (10,523) (13,806) (23.78%)
Revenue (after business
taxes and surcharges) 587,102 540,358 8.65%
Source: Company Data
As at end June 2013, the financing leasing and factoring service has continued to be the major driver of the company’s earnings, contributing 64.82% to total revenue in 1H 13. In particular, the company said the realised revenue in factoring business reached US$ 2,743,000 while the factoring business receivables amounted to US$ 78,807,000 for the year ended 30 June 2013 as it promoted the business among its existing client base.
In June 2012, International Far Eastern Leasing Co., Ltd., a wholly-owned subsidiary of Far East Horizon, obtained approval from the Ministry of Commerce of the PRC for the business scope expansion to include commercial factoring (a business that a company sells its account receivables to the financial leasing company at a discount) and related advisory services. We expect the new business will boost the financial leasing and factoring business and will help contribute to the company’s overall revenue.
Table 4: The Composition of The Company’s Revenue By Industries (In Thousand USD, for the Six Month Ended 30 June)
Business Segment 2013 % of Total 2012 % of Total YoY Change
Healthcare 125,946 21.07% 108,648 19.61% 15.92% Education 90,015 15.06% 77,195 13.93% 16.61% Infrastructure construction 107,147 17.93% 85,795 15.48% 24.89% Transportation 72,295 12.10% 53,774 9.70% 34.44% Package 80,895 13.54% 99,647 17.98% -18.82% Machinery 47,488 7.94% 63,184 11.40% -24.84% Textiles 14,636 2.45% 8,728 1.58% 67.69% Electronic Information 32,500 5.44% 27,600 4.98% 17.75% Others 26,703 4.47% 29,593 5.34% -9.77% Total 597,625 100.00% 554,164 100.00% 7.84%
Source: Company Data
Far East Horizon engages its business in 8 main industries: healthcare, packaging, infrastructure construction, education, machinery, transportation, textile and electronic information. In 1H 13, the income contribution from each industry became more balanced. The share of healthcare, education and infrastructure in total income grew while the share of packaging and machinery dropped from a year earlier. The figures show that the company’s exposure within selected industries is well diversified and its focused strategy will help control the quality of service as well as the risk management.
Strong Earnings Growth With Asset Quality In Good Position
1H 13 1H 12 YoY Change
Revenue 587,102 540,358 8.65%
Gross profit 385,802 286,226 34.79%
Profit Before Tax (EBT) 220,205 166,570 32.20%
Net Profit 165,853 122,488 35.40%
Source: Company Data
The net profit attributed to shareholders was US$241 million for 2012, representing a 40.5% year-on-year growth. In the first half of 2013, the Group also achieved healthy and rapid growth. The profit attributable to shareholders was US$165,940,000, a growth of 35.15% as compared to a year earlier.
Table 6: Asset Quality
30 Jun 2013 30 Jun 2012 31 Dec 2012 31 Dec 2011 31 Dec 2010
Non-Performing Assets Ratio (1) 0.77% 0.66% 0.73% 0.59% 0.97%
Provision coverage ratio (2) 219.34% 220.83% 215.21% 219.02% 120.42%
Write-off of non-performing
assets ratio (3) 0.11% 0.00% 0.00% 0.00% 0.15%
Overdue loans and lease
receivables (over 30 days) (4) 0.35% 0.34% 0.30% 0.08% 0.14%
Source: Company Data
(1) Non-performing assets ratio = balance of non-performing assets/net interest-earning assets; (2) Provision coverage ratio = provision for impairment of assets/balance of non-performing assets;
(3) Write-off of non-performing assets ratio = assets written-off/non-performing assets at the end of the previous year;
(4) Overdue loans and lease receivables (over 30 days) ratio = overdue loans and lease receivables (over 30 days)/net interest-earning assets
The Group’s asset quality remained favourable. The non-performing loans ratio was at 0.73% and the provision coverage ratio continued to remain at a healthy level of 214% in 2012. The non-performing assets ratio increased slightly from 0.73% from the end of the previous year to 0.77% as of 30 June 2013. The Group’s write-off amount of performing assets was US$70,000. The write-off ratio of non-performing assets was 0.11%. The provision coverage ratio of the Group was 219.34% as of 30 June 2013.
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