Biostime International Limited:Competition ®ulations key to expected growth;Initiate with Hold

　　Biostime (Ba2/BB; M/S) recently issued USD400 million of 5NC2 bonds at7.25% ytm. Bonds have done well (up ~4pts since issuance) as it providedyield pick up over recently issued Degree 21 as well as other BB China HYIndustrial names. We note strong technicals given current market sentiment aswell as China HY industrial supply expected to be limited. That said, we don’tsee significant upside from current levels and initiate on new 2021 with Hold.

　　Looking regionally, Biostime 21 (ask price of 104.5; ask ytm of 6%) is tradingflat to recently issued Degree 21 (ask price of 105.25; ask ytm of 5.9%). BothBiostime and Degree are similar rated (issuer level rating) and operate on anasset light model. Degree benefits from lower leverage and high cash balance.At the same time, Biostime has superior market position (#1 domestic player)and better product diversity, in our view. We also take comfort from Biostimemore disciplined working capital. Overall we prefer Biostime 21 over Degree 21(we initiated on Degree 21 with sell last month; please refer to our report formore details). Looking elsewhere, car rental companies are facing similarevolving regulatory risk. However, both car rental companies in our space arerelatively more asset heavy with better shareholder backing (Enterprise andCtrip for eHi and Legend Holdings for Car Inc), in our view. Similar rated andshorter dated eHi 18 is trading at ask ytm of 5.1% (104.75/105.25 ) while betterrated Car Inc 21 continues to trade tight at ask ytm of 4.5% (105/105.5).

　　Most international competitors, Nestle, Mead Johnson, Danone, etc., are muchlarger and IG rated and thus trades tight. Similar rated, US based dairycompany, Whitewave (Ba2/BB) has USD 2022 bonds which is currently tradingat ask ytm of 4% (ask price of 107.5). Comparatively, Biostime is bigger in sizewith higher margins and its bonds do look attractive. But one needs to accountfor US-China differential as well as recent press articles about potentialacquisition of Whitewave by a bigger player. Looking at another VHMS player,GNC which is rated BB+ by S&P, it has 2020 bond which is trading at ask ytmof 6.1% (ask price of 83.5). Relatively Biostime 2021 looks fair to us.