Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

The <a href="https://www.smartkarma.com/entities/shanghai-shenzhen-csi-300-index" target="_blank" data-smartkarma-citation="entities:22906:1" rel="noopener">Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX)</a> consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.There were 21 changes to the index at the June review, and we expect up to 24 changes in the December review. Estimated one-way turnover is 4.06% and there are 4 inclusions and 11 deletions that could have more than 1 day of ADV to trade.With passive tracking products holding around US$28bn of AUM, plus another US$35bn in open interest on the listed futures, there could be significant moves in the inclusion/exclusion names ahead of the rebalance announcement. There will only be 9-10 trading days between the announcement of the changes and the implementation, so having a pre-position should pay off.

The Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) consists of stocks from the Shanghai Stock Exchange and the Shenzhen Stock Exchange and is one of the most widely tracked A-share indices with passive tracking products listed in multiple markets globally. There are CFFEX listed futures that trade actively as well.There were 21 changes to the index at the June review, and we expect up to 24 changes in the December review. Estimated one-way turnover is 4.06% and there are 4 inclusions and 11 deletions that could have more than 1 day of ADV to trade.With passive tracking products holding around US$28bn of AUM, plus another US$35bn in open interest on the listed futures, there could be significant moves in the inclusion/exclusion names ahead of the rebalance announcement. There will only be 9-10 trading days between the announcement of the changes and the implementation, so having a pre-position should pay off.

CSI300 Index Rebalance Preview: 21 Changes in June, Could Be 24 in December

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

The graphite electrode market has been a market darling over the last two years as premature capacity cuts by industry majors together with environment driven production clampdowns in China drove prices up as much as 16x in spot markets. More recently supply responses from China have investors concerned about corrections from very lofty levels and this has driven industry PE multiples down into the 5-7x range. While we acknowledge the risks, we nevertheless believe that upside risks are moderately larger than downside risks.<ul>
<li>The demand outlook remains strong, driven by a shift towards EAF in China and a recovery in non-Chinese markets as a genuine clampdown on excess capacity in China has reduced exports, allowing competitors to raise utilisation rates. This should move the CAGR for global EAF capacity from about -2.5% over the last five years towards the high single digits, outstripping the historical 3.5% CAGR.</li>
<li>This is further supported by increasing steel scrap self sufficiency in China, South Korea and Taiwan which should lower prices and increase the competitiveness of EAF mills.</li>
<li>Needle Coke capacity bottlenecks should ease over time as capacity increases in China.</li>
<li>Electrode capacity should also increase in China, but a clear bifurcation exists between manufacturers capable of producing UHP electrodes and those only able to produce RP and HP electrodes. As such, we believe the UHP electrode market will continue to be undersupplied despite an impact from China at the margin. Electrode prices are also still just about 4% of steel prices and thus cost pressure from this vital component of the EAF process is likely to be less of a concern to EAF companies than securing stable supply.</li>
<li>Planned electrode capacity increases outside China are limited and with lead times of 2-4 years, we believe supply tightness should continue over the next 3-5 years, though previously implemented capacity increases should ease this situation slightly towards year end, before EAF capacity growth once again tightens the market.</li>
<li>We believe current valuations imply longer-term spreads of USD2,000-2,500 for electrode manufacturers and UHP electrode prices of about USD6,000-7,000. We believe there is some upside risk to realised prices relative to these estimates.</li>
<li>Our estimates suggest upside risk of over 100% if spreads remain at current levels and downside risk of about 50% if spreads return to historical averages.</li>
<li>Tokai Carbon is also generating almost 4% of its market cap in FCF each quarter, opening up the possibility of a significant buyback.</li>
</ul>

The graphite electrode market has been a market darling over the last two years as premature capacity cuts by industry majors together with environment driven production clampdowns in China drove prices up as much as 16x in spot markets. More recently supply responses from China have investors concerned about corrections from very lofty levels and this has driven industry PE multiples down into the 5-7x range. While we acknowledge the risks, we nevertheless believe that upside risks are moderately larger than downside risks.
The demand outlook remains strong, driven by a shift towards EAF in China and a recovery in non-Chinese markets as a genuine clampdown on excess capacity in China has reduced exports, allowing competitors to raise utilisation rates. This should move the CAGR for global EAF capacity from about -2.5% over the last five years towards the high single digits, outstripping the historical 3.5% CAGR.
This is further supported by increasing steel scrap self sufficiency in China, South Korea and Taiwan which should lower prices and increase the competitiveness of EAF mills.
Needle Coke capacity bottlenecks should ease over time as capacity increases in China.
Electrode capacity should also increase in China, but a clear bifurcation exists between manufacturers capable of producing UHP electrodes and those only able to produce RP and HP electrodes. As such, we believe the UHP electrode market will continue to be undersupplied despite an impact from China at the margin. Electrode prices are also still just about 4% of steel prices and thus cost pressure from this vital component of the EAF process is likely to be less of a concern to EAF companies than securing stable supply.
Planned electrode capacity increases outside China are limited and with lead times of 2-4 years, we believe supply tightness should continue over the next 3-5 years, though previously implemented capacity increases should ease this situation slightly towards year end, before EAF capacity growth once again tightens the market.
We believe current valuations imply longer-term spreads of USD2,000-2,500 for electrode manufacturers and UHP electrode prices of about USD6,000-7,000. We believe there is some upside risk to realised prices relative to these estimates.
Our estimates suggest upside risk of over 100% if spreads remain at current levels and downside risk of about 50% if spreads return to historical averages.
Tokai Carbon is also generating almost 4% of its market cap in FCF each quarter, opening up the possibility of a significant buyback.


Tokai Carbon: Volatility Is High but EAF Capacity Growth and UHP Tech Hurdles Suggest Upside

China

Fangda Carbon New Material Co., Ltd. manufactures and markets graphite electrodes, carbon bricks, carbon paste, and advanced carbon materials.

Fangda Carbon New Material Co, Ltd. (600516 CH)

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Fangda Carbon New Material Co, Ltd. (600516 CH)

CSI300 Index Rebalance Preview: 21 Changes in June, Could Be 24 in December

There could be 24 changes to the CSI300 index at the December review with an estimated one-way turnover of 4.06%. 4 inclusions and 11 deletions are...

Brian Freitas

Tokai Carbon: Volatility Is High but EAF Capacity Growth and UHP Tech Hurdles Suggest Upside

The graphite electrode market has been a market darling over the last two years as premature capacity cuts by industry majors together with...

Mio Kato

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)