“Meeting minutes” convertible debt, can still hold?

2022-06-23 0 By

Core view: In the medium to long term, we believe there is still room for interest rates to fall, and the bond market will remain liquid amid a glut of money and a shortage of goods.As a flexible asset that can be allocated with fixed income funds, cb still has a strong appeal, and there is limited space for cb valuation compression.In the short term, the rising capital interest rate, the equity market, especially the correction of small and mid-cap indexes, including concentrated strong redemption, will disturb investor sentiment, bring selling pressure to cb, and the valuation of CB may further compress.Although valuations have experienced a sharp compression, the 35.28% level is still high in the 87% quartile since 2017 and remains a cause for caution.On February 14, 2022, China Securities Convertible bonds fell by 3.01% on a single day, marking the second largest one-day decline since 2017.The biggest faller yesterday was dongcai Zhuan 3, down 13 per cent with the main stock.We first from the point to the surface from a bond set out to look at the cause and influence of dongcai violent decline.From the perspective of convertible bonds, the selling pressure of forced redemption does have a certain impact on the main stocks in the short term. Although Dongcai Zhuan 3 has announced the forced redemption before, as of today, the bond balance is still 11.732 billion yuan, with a large scale of existence and 74.25% of unconverted shares. However, dongcai’s free floating offer is 7.675 billion yuan, and the delisting date of the convertible bonds is March 1.Within 10 trading days, there will be some pressure to transfer shares.Return to share itself, DongCai accounts for income from everyday funds on a commission basis than the big, fast growth has been consistent market perception, are generally willing to give the key to the valuation, but since 2022, the rights and interests of less than expected, market volatility has a profound education, to a certain extent caused the new fund launches slowing, and even the increase of redemption,The impact on the consignment business of the fund is also gradually deduced in advance.In addition, the fluctuations of stock funds also promote the cognition of investors, and they will choose multiple types of funds and other financial products in a more balanced way.Equity market performance affects fund subscription, further affecting the market for dongcai performance expectations.Dongcai PB is far more than other brokerages because of the growth of fund consignment business, once the return to the industry to fight the traditional business, the market may be the first to kill valuation.In fact, the problems arising from fund redemption are also the concerns of the current cb market. The cb market with high valuation needs to be on guard against redemption.Before 2021, the overall market has a positive feedback process, which is manifested as good performance of equity – large increase of cb – increase of subscription – capital promotion – increase of CB, forming the overrise of CB.However, once the equity market goes down, especially when cb retractions are large, it is easy to lead to negative feedback in the opposite direction, that is, poor performance of equity – redemption – selling pressure – further decline, forming cb overfall.We can observe the financial situation from the change of the size of the fixed income + fund.In January 2022, the net increase of “fixed income +” fund (mixed second-level debt base + partial debt mixed fund) was 34.755 billion yuan, significantly lower than the net increase of 220.721 billion yuan in December 2021.In January 2021, the figure was 74.889 billion yuan.The slowing growth of fixed-income + funds suggests a lack of confidence among investors.Convertible bond volatility caused by capital outflow, most of the performance of rapid valuation down.On February 14, 2022, CSBS fell 3.01% in a single day, the second largest one-day decline since 2017.The first one-day drop was 3.53 percent on Feb. 3, 2020.But there is a significant difference, as the Shanghai Composite index fell 7.72% on February 3, 2020.Yesterday, the Shanghai Composite Index fell 0.98%, and the decline of convertible bonds was much greater than that of the underlying stocks, which showed a significant compression of the premium rate of equity conversion.The average conversion premium dropped from 37.14 percent to 35.28 percent, a one-day compression of 186 percentage points.Although the majority of convertible bonds have shown significant valuation compression, the compression degree (percentage) of high-priced bonds is more severe.What investors are most concerned about is the reason for the sharp compression of cb valuation and whether the subsequent compression will continue.We have to analyze this problem from the historical compression of cb valuation.The compression of the premium ratio of convertible bonds is no more than the following three situations: (1) The main stock falls slightly, the convertible bond falls sharply — active compression;② Stocks rise, convertible bonds fall — active compression;(3) Stocks rise, small rise in convertible bonds – passive compression.Of these, the third scenario is undoubtedly the least damaging way to digest high valuations.What happened yesterday was the first and worst of all.On the one hand, the conversion premium rate is related to the continuous inflow of capital, on the other hand, it also represents the expectation of the future rise of the underlying stock.Therefore, the occurrence of either of the tightening of capital expectations or the lack of momentum for the rise of the underlying stocks may bring about the valuation of the cb market.According to our statistics, there have been 5 active compression of cb valuation since 2017. The corresponding background has the following three characteristics: (1) Active compression usually occurs at the stage high of valuation;(2) The active compression of cb valuation is accompanied by the upward trend of 10-year Treasury bond interest rate;(3) Due to the higher coincidence between the composition of the cb equity and the small and mid-cap index, there were four active compression of the cb valuation accompanied by the sharp decline of the small and mid-cap index SSEC 2000.Based on the analysis of the active compression of cb valuation in history and the current market background, we believe that there are two reasons for the sharp drop and active compression of CB valuation in the past two days. First, the fundamental reason for the sharp drop is that market sentiment is easily affected by irrational high valuation caused by cb trading congestion.Since the second half of 2021, CSBS have consistently outperformed the Sse Index, leading to a continuous uptick in valuation.During the occasional callback but do not change the upward trend.Since the middle of December 2021, the equity market has continued to pull back, and the convertible bonds have fought against the decline, leading to a further rise in valuation.By January 28, 2022, the average conversion premium rate of the cb market reached 40%, approaching the 97% quantile since 2017.The high valuation has become the sword of Damocles hanging over the cb market. The market is constantly worried about the high valuation. In this case, the market sentiment is vulnerable to negative events.Secondly, the direct cause of the drop comes from the recent stock bond double kill.In the stock market, since the middle of January, the small and mid-cap index represented by the STATE Securities 2000 fell significantly, and the growth stocks represented by the GROWTH enterprise board continued to kill valuation.Equity market valuation bubble phenomenon, new energy, CRO and other high growth and high valuation track take turns to kill;On the bond market side, January social finance data exceeded expectations, the bond market wide credit expectations significantly increased.The fed’s higher inflation data and higher US bond rates, combined with higher commodity prices such as crude oil, have adversely affected the bond market sentiment, resulting in higher 10-year Treasury rates.When the stock market and bond market adjust at the same time, it is difficult for cb to stay immune.Then, will the killing valuation of cb market continue?In the medium to long term, we believe there is still room for interest rates to fall, and the bond market will remain liquid amid a glut of money and a shortage of goods.As a flexible asset that can be allocated with fixed income funds, cb still has a strong appeal, and there is limited space for cb valuation compression.In the short term, the rising capital interest rate, the equity market, especially the correction of small and mid-cap indexes, including concentrated strong redemption, will disturb investor sentiment, bring selling pressure to cb, and the valuation of CB may further compress.Although yesterday’s valuation was compressed, the 35.28% level is still high in the 87% quartile since 2017 and remains a cause for caution.In the current situation of high valuation of cb market and many short-term disturbance factors, we believe that cb bond selection can be carried out from the following three perspectives: (1) Select cb with relatively low price and valuation and strong certainty of the rise of the underlying stocks, which has both high win rate and high odds.For example, CCB and Hejian convertible bonds of the Steady growth sector and CCB and Muyuan convertible bonds and Hope convertible 2 of the breeding sector;(2) Choose low-priced products with relatively controllable credit risks and high odds, such as Zhengbang convertible bonds;(3) Although the valuation is still not low after the decline, some high-quality track leaders are more cost-effective than the previous stage. If the subsequent valuation is further compressed, we can consider the layout, such as Weir convertible bonds, Funeng convertible bonds and TRW convertible bonds.Painful as it has been, valuation compression is not a bad thing.Valuation compression is accompanied by the improvement of the performance ratio of convertible bonds. Historically, valuation compression caused by liquidity shock is often an entry opportunity.For example, in May 2020 and the end of January 2021, convertible bonds fell due to the impact of the liquidity of the bond market, which in hindsight was a better time to add positions throughout the year.If the subsequent positive shares and convertible bonds continue to kill valuation, do not prevent seize the “cheap” opportunity.(after)