Energy & Materials Sector

• As expected, China Shenhua Energy Co H (1088 HK) replaces Country Garden Holdings Co (2007 HK) in the Hang Seng China Enterprises Index (HSCEI INDEX) at the close 2 June.
• Using prices from the close on 12 May, estimated one-way turnover is 2.1% leading to a one-way trade of HK$1.3bn (US$170m).
• The change will lead to an increase in the fair value of the HSCEI 2023 Dividend Futures. We’d be sellers on a move higher towards 240 DIPS.

• There are 39 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Three new deals were discussed on Smartkarma this past week: the Allkem (AKE AU)/Livent (LTHM US)‘s merger; Yitai Coal (3948 HK)‘s H-share buyback;  Networks Corp (4423 JP)‘s tender offer. 
• Key updates took place forSt Barbara Ltd (SBM AU), AAG Energy Holdings (2686 HK), and Toshiba Corp (6502 JP).

• After abandoning its reverse merger, St Barbara (SBM AU) confirmed it will sell its flagship Leonora gold project to Genesis Minerals (GMD AU) for $600mn (cash and GMD scrip).
• That transaction appeared all stitched up, until Silver Lake Resources (SLR AU) gatecrashed the party with a non-binding proposal for the Leonara asset. SBM’s board rejected the competing proposal. 
• SLR has now tweaked terms to address SBM concerns. Back in SBM’s court. GMD has matching rights if SBM sides with SLR.

• We review some charts, starting with commodities that are precariously close to signalling a breakdown.
• The weakness became pronounced after China’s PPI, CPI, and the disappointing Aggregate Finance data (this needs a separate section).  
• If China’s recovery continues to be disappointing, then the deflation of exports and a long position on commodities will be a big problem for the rest of the world.

• Aussie lithium miner Allkem Ltd (AKE AU) has inked a $US10bn+ merger with Livent (LTHM US) to form the world’s fifth largest lithium producer.
• Travis Lundy tackled this “merger-of-equals” and the index implications in Allkem/Livent (AKE AU | LTHM US) Merger Of Lithium Equals Has Index Surprises. 
• The spoils of ongoing lithium demand for electric vehicle batteries will ostensibly go to the prevalent, low-cost producer. Yet Livent shareholders may question the lack of premium in the transaction. 

• Back on the 1 January, Shandong Xinjufeng Technology Packaging (301296 CH) sought to acquire Jardine Matheson Holdings (JM SP)‘s 28.22% stake in Greatview Aseptic Packaging (468 HK) at HK$2.65/share.
• It was hardly a knockout price. However, Mathson had been itching to exit. Even if it involved selling its stake to one of Greatview’s competitor. 
• Greatview’s board is unimpressed, and now reckons Matheson’s initial buy-in may be in breach of PRC anti-monopoly laws. 

• A battle is brewing between Genesis Minerals (GMD AU) and Silver Lake Resources (SLR AU) for St Barbara Ltd (SBM AU)’s Leonora assets. SLR’s revised proposal addresses some Board’s concerns.
• SLR’s revised offer which shortens the completion timeline, is fully funded and higher than GMD’s offer, pressures the Board to engage to create a bidding war. 
• Irrespective of the winning bidder, SBM is attractive, and the shares offer a free option on realising value from its remaining assets and investment portfolio.    

• The severity of yesterday’s ruling has caught the market’s attention as it may provide insight into an ongoing investigation into insider trading based on undisclosed internal information.
• This matter is not limited to the operational risk caused by the imprisonment of Lee Dong-chae. There is a possibility that it could lead to delisting, depending on the circumstances.
• The substantial legal risk that could lead to delisting will further amplify price volatility. Adopting a more segmented approach appears crucial, like specific setups in each tighter interval.

• Aekyung Chemical produces materials and additives for sodium-ion batteries. If sodium-ion batteries become more popular for EV batteries, Aekyung Chemical could benefit from this trend. 
• Aekyung Chemical is increasingly likely to be included in KOSPI 200 index in 2H 2023 or 2024.
• The Aekyung Group completed the merger of three chemical businesses (Aekyung Petrochemical, AK ChemTech, and Aekyung Chemical) into one entity (Aekyung Chemical) in 2021. 

• Today, after the close, ASX-listed Allkem Ltd (AKE AU) (formerly known as Orocobre, which merged with Galaxy Resources in 2021) announced it would merge with Livent (LTHM US). 
• At US$10bn, this “merger-of-equals” NEWCO (pro-forma US$1.9bn revenue, US$1.2bn EBITDA), with NYSE primary listing and foreign entity listing on the ASX, would be a global lithium player. Deal closing end-2023.
• The doc (243 pages) and presentation (42p) are worth reading. There are interesting index effects, and there may be “Lithium Risk” in this deal for arbs, but it looks good.

• Allkem Ltd (AKE AU) and Livent (LTHM US) are combining in an all-stock merger of equals to create a global lithium chemicals producer.
• Allkem Ltd (AKE AU) shareholders will receive 1 NewCo share for each Allkem share held while Livent (LTHM US) shareholders will receive 2.406 NewCo shares for each Livent share held.
• The merger will have implications for the stocks in the MSCI, S&P/ASX, thematic, and other global indices at the time of implementation.

• Allkem Ltd (AKE AU) and Livent (LTHM US) announced a merger of equals. AKE shareholders receive 1 NewCo share per AKE share, LTHM shareholders get 2.406 NewCo shares per LTHM share.
• The transaction is expected to close by the end of calendar year 2023 subject to shareholder (AKM and LTHM) and regulatory approvals. 
• The merger is sensible as NewCo will have scale, synergies and capital efficiency. AKE shareholders benefit from an attractive merger ratio and potential rerating from a US listing. 

• In 2QFY23, Electrovaya achieved record revenue of $10.5 million, a 144% Y/Y increase from $4.3 million in 2QFY22.
• The increase in revenue was due to increased order volume and ramp-up in production to meet the demand, despite ongoing supply chain issues and inflationary pressures.
• Revenue was predominantly from the sale of batteries for Materials Handling Electric Vehicles (MHEVs), which accounted for $10.2 million (~97%) in 2QFY23, versus $3.9 million (~90%) in 2QFY22.

• kopi-C with Pan United’s Group Head of Corporate Development: “We are decarbonising the world with concrete” Jim Teh, Group Head of Corporate Development of Pan United, believes in fighting climate change by innovating in its concrete products.
• Pan-United Corporation Ltd (Pan-United) is a listed Asia-based technology company (SGX:P52) catalysing change in the ready-mix concrete and logistics space.

• TPL reported first quarter results that included a larger than normal legal expense crippling the Company’s net income in the period
• TPL is disputing with its largest shareholder as to the voting agreement they have in place with them 
• Increase in non-oil and gas royalty revenue during a seasonally soft quarter leads us to expect outperformance over the next two quarters.

• Consolidated revenue in Q2 FY2023 increased by 28% including 20% organic revenue growth.

• Growth was driven by bouyant demand from oil & gas customers both the Processing Equipment and Service segments.

• Compressed Gas segment also performed well with 32% revenue growth during the quarter. 

• ECVT reported first quarter results depressed from the effects of a winter storm and a facility turnaround
• ECVT is maintaining the adjusted EBITDA and free cash flow guidance provided with fourth quarter 2022 results
• The biggest adjustment we are making to our earnings model is the reduction in sales due to deflation of pass-through costs

Treatt’s H123 results demonstrate that the business is back to greater stability and resilience. The growth was particularly impressive in Citrus, Coffee and China, and management is quietly confident about the rest of the year. We continue to believe that risk lies to the upside in terms of market expectations. Growth in H1 was driven by price increases, which offset inflationary pressures and supported margins. Cost control and efficiency measures are ongoing, and cash flow was strong, as highlighted in the recent trading update, with improved net debt despite the traditional build of working capital at H1.

• Back on the 29 March, Inner Mongolia Yitai Coal Company Ltd (3948 HK) announced a possible H-share buyback at HK$17/share, a 50.4% premium to the undisturbed price.
• Yitai Coal is PRC-incorporated, therefore it is not afforded compulsory acquisition rights. To buy back ALL H-shares, either a Merger by Acquisition or a Voluntary Conditional Offer is required.
• The Offer/buyback, should it proceed, is subject to various PRC regulatory approvals, including SAFE; together with approval from Yitai Coal’s A/H shareholders. To date, the SAFE Registration has been completed.

• Inner Mongolia Yitai Coal Company Ltd (3948 HK)‘s H Share buyback offer is at HK$17.50, a 54.9% premium to the undisturbed price and a 9.0% premium to the last close. 
• The key conditions are approval by at least 75% of independent H Shareholders (<10% of all independent H Shareholders rejection). There is a 90% minimum acceptance condition.  
• The three independent H shareholders holding a blocking stake will be supportive of the attractive offer (9-year H Share price high). The price is final. Timing is the key risk.

• Timing is everything. Yesterday afternoon I flagged Inner Mongolia Yitai Coal Company Ltd (3948 HK)‘s possible H-share buyback at HK$17/share.
• Roughly five hours later a firm HK$17.50/share Offer was announced. The Offer Price is final.
• Other terms and approvals were largely as expected. Payment under the Offer may occur mid-August.

• In this insight, we discuss the potential inclusions and exclusions that the locals are highlighting for the KOSPI 200 and KOSDAQ 150 rebalance in May 2023. 
• The top five best performing stocks YTD that are expected to be included in either KOSPI200 and KOSDAQ150 include Rainbow Robotics, Kumyang, Cosmo Chemical, Yunsung F&C, and Posco M Tech.
• In the coming weeks, there is a higher probability these five stocks underperform the market on average as many investors sell the news on them getting included in these indices. 

• Southern Copper Corporation had a great quarter despite several economic difficulties and managed an all-around beat.
• The company’s other open pit operations reported a decrease in annual copper production, with the exception of the Buenavista operation, where production levels were higher than those in 2021.
• We give Southern Copper Corporation a ‘Hold’ rating with a revised target price.

• Pioneer Natural Resources delivered a mixed set of results in the last quarter.
• Pioneer has formed the largest contiguous acreage position in the Midland Basin with its persistent focus on the Permian Basin.
• We give Pioneer Natural Resources Company a ‘Hold’ rating with a revised target price.

• AAG Energy Holdings (2686 HK) is one of those periodic (and rare) takeover situations that will likely be remembered for what went wrong rather than what went right.  
• A low-balled Offer (proxy advisors agree); perfunctory IFA analysis; a large, and silent, shareholder; and the postponement of the Scheme vote due to voting instructions not being “duly processed”.
• A new Court Meeting has been confirmed for the 2 June. And now we have some odd CCASS movements which raise further questions.

• The review period for the June rebalance ends on 31 May. Announcement of the changes will be made on 9 June with implementation at the close on 16 June.
• There could be 4 or 5 A-share additions due to their inclusion in Northbound Stock Connect. That in turn expands the universe and could result in up to 3 deletions.
• If all changes go through as expected, estimated one-way turnover at the rebalance will be 15.1% resulting in a one-way trade of US$99m.

• Dow had a challenging quarter given the ongoing market dynamics.
• The year’s first quarter is expected to align with the fourth-quarter performance, with discrete headwinds of $75 million.
• We give Dow Inc. a ‘Hold’ rating with a revised target price.

• Earthstone generated $272 million of adjusted EBITDA in 1Q23 on average production of 104.4 MBOE/d.
• Production was slightly below the 104.8 MBOE/d produced in 4Q22 and 194% higher than 1Q22.
• 1Q22 adjusted EBITDA was $123 million. Y/Y gains in both production and adjusted EBITDA demonstrate the impact of three major Permian Basin asset acquisitions that closed in 2022.

• The wobbly first four months of the year are over, and it has become easier to detect clear trends in the market.
• As you can see, our YTD performance has clearly picked up, and we’re confident that we’ll continue to clearly outperform the CRB Commodity Index.
• Consultancy Datagro announced on Thursday that Brazil’s center-south region is anticipated to have a sugar output of 38.3 million tonnes in the current season, which began in April.

• Kinder Morgan had a mixed quarter with below-par revenues but it managed an earnings beat.
• As compared to the first quarter of 2022, natural gas gathering volumes increased by 18%, with Haynesville volumes increasing by 42% and Eagle Ford volumes rising by 21%, respectively.
• For the quarter compared to the first quarter of 2022, volumes of refined products in Kinder Morgan’s product pipeline segment were unchanged.

• Japanese companies are buying back more stock than ever before, and recent moves by the TSE and METI are effectively pushing for more.
• The new goal is to lift PBR and ROE. The easiest way to lift ROE is reduce E. Low-PBR Cos with excess assets and cross-holdings (outbound and inbound) are targets.
• In this insight I look at several possible rankings for potential large buyback targets.

• Aag Energy Holdings (2686 HK)’s disclosed a revised timetable to vote on Xinjiang Xintai Natural Gas (603393 CH)’s HK$1.85 offer. The new scheme meeting is set for 2 June. 
• Our analysis suggests that in the best case, Xinjiang Xintai would need to further swing NO votes representing 6.52%-8.34% of outstanding shares to YES to get the scheme approved. 
• AAG’s case is unprecedented. The risk-reward remains unattractive as the upside to a scheme pass (13.5% upside) is equal to the downside to a scheme fail (average 13.5% downside).

• Kum Yang IR director Park once mentioned that the block deals to sell the 2M treasury shares would likely occur in late May or early June.
• There has been speculation in the market that the timing of the block deal may be postponed until after its inclusion in the KOSPI 200, allowing for short selling.
• Considering the immediate funding needs faced by the company, setting an aggressive approach to shorting from shortly after its inclusion in the KOSPI 200 would be reasonable regarding entry timing.

• AAG Energy (2686) exhibits a clear wedge range to trade with an intermediate positive outcome as long as lower wedge support stands up near outlined 1.50 support.
• The intermediate cycle favors a bullish outcome as long as lower pattern support holds true. Wedge still needs time to mature.
• 1.70 is the level to clear for bull traction. Risk to 1.40 region if we fail to hold lower wedge support at 1.48.

• There are 39- mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• One new deal was discussed on Smartkarma this past week: the unconditional Offer for Penguin International (PBS SP) from its Chairman and Dymon Group.
• Key updates took place for Liontown Resources (LTR AU), AAG Energy Holdings (2686 HK), Lian Beng (LBG SP), and Golden Energy & Resources (GER SP).

• It was recently reported that Choi Mun-Ho (CEO of Ecopro BM) sold 2,000 shares of Ecopro BM Co Ltd (247540 KS) at 254,000 won per share.
• It was also recently announced that Eroom T&C, the family company of Lee Dong-Chae, the chairman of Ecopro Group, also sold shares of Ecopro BM.
• Recent selling of Ecopro BM shares by CEO Choi Mun-Ho and Ecopro affiliate Eroom T&C are negative signs on the Ecopro BM. Lofty valuations are also negative on Ecopro BM. 

• It was a successful Q4 for Cleveland-Cliffs as the company managed an all-around beat with lower-than-expected losses.
• Cleveland-Cliffs supplies over 7 million tons of steel to the automotive industry, including 5 million tons of direct sales and over 2 million tons of indirect sales.
• With typical volumes of 5 million tons per year, the company expects its full-year 2023 carbon flat-rolled steel selling price to increase to $1,415 per net ton, a $115 per net ton increase year over year.

• This morning, Trigon Metals Inc. (TM:TSXV), announced additional high-grade drill results from its Kombat Mine in Namibia.
• The Company reported drill results from 12 holes totalling 996m at the Kavango West area, 150m west of the Main Kavango Pit (Figure 1).
• These results build upon the already reported high-grade copper drill results from the Main Kavango Pit and East 400 area (150m east of the Kavango Pit), highlighting the strong mineralization across the Kombat trend.

• A SELL note from a broker on Ecopro BM Co Ltd (247540 KS) was a key reason for the 7% and 8+% fall for Ecopro Co Ltd (086520 KS) .  
• Is this finally start of the end of the rally for the poster boy for Korean EV 
• When will earnings matter and what are the catalysts that could start the downfall?