Recommendation

Aluminum Corporation of China Ltd (Chalco) has proposed the issuance of a 3-year USD bond at initial price guidance of T3+275bp, or 5.5% yield. The company intends to use the proceeds for the early redemption of the $350m 6.625% Perp callable in Oct 2018 and other general corporate purposes. 

Similar to the existing CHALUM 4.25% Perp NC 2021, the credit strength of the bond is expected to be derived from the Keepwell & Equity Purchase Interest Undertaking Provider, Chalco. We take comfort from the central SOE status of Chalco and the group’s stabilizing credit fundamentals. In addition, Chalco’s bondholders should benefit from cross-default clauses in Chinalco’s bonds due Aug 2021 and Apr 2022 (defined as a failure of payment of any indebtedness of Chinalco or its subsidiaries at or above $100m).

The group has been granted $1b NDRC quota which expires end 2018. However, given cheaper onshore financing cost (issued 3-year RMB bond at 3.95% – 4.8% and 5-year RMB bond at 5.09% over last two months), management indicated that it is unlikely to use up all the quota. 

We see Chinalco 4% Aug 2021 (Chalco’s parent; z+241bp / YTM 5.3%) as the closest comp for the proposed 3-year bond from Chalco. Fundamentally, we see little difference between Chinalco and Chalco, given that Chalco is a significant contributor to Chinalco’s consolidated assets and revenues. However, given that Chalco’s 3Y bond will be rated BBB+ by Fitch while Chinalco’s existing 3Y bond is unrated, the rating could provide some market technical support. We estimate the technical support to be around 30bps, extrapolating the spread differential between the bonds issued by the unrated PCCW holdco and the Baa2 rated PCCW opco. 

As such, we see the fair value of the proposed 3-year bond rated BBB+ at z+210bp / T3+225bp /~5% yield. At this level, it also looks fair compared to CHALUM 4.25% Perp NC 2021 at 5.5% YTC / z+318bp (1.5x perp/senior multiple similar to its SOE peers such as MINMET).