Energy & Materials Sector

• Two thirds of the way through the review period, we see 15 potential index changes at the June rebalance that will be implemented at the close on 9 June.
• We estimate a one-way turnover of 2.35% at the June rebalance leading to a one-way trade of CNY 5.57bn.
• The potential adds have outperformed the potential deletes and the Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) over the last six months, though there is some near-term deterioration.

• This is our first report on International Paper Company, one of the largest producers of renewable fiber-based industrial packaging and pulp products.
• It has been a challenging and dynamic environment for International Paper and the company experienced a sharp decline in the demand for its Industrial Packaging segment and higher cost headwinds significant from higher distribution and energy costs.
• Operating margins were lower because of significant macro headwinds and International Paper saw a decline across all the end-use segments.

• International Paper Company is one of the largest manufacturers of renewable fiber-based industrial packaging and pulp products.
• The company has been facing a challenging and dynamic environment and has experienced a sharp decline in the demand for its Industrial Packaging segment and higher cost headwinds significant from higher distribution and energy costs.
• Operating margins have been lower because of significant macro headwinds and International Paper saw a decline across all the end-use segments.

• This is our first report on Sherwin-Williams, one of the largest distributors of paints and coatings in the U.S.
• The company had a stellar third quarter, with high teen sales growth leading to the first $6 billion sales quarter and significant sequential and year-over-year gross margin improvement which resulted in an all-around beat.
• In contrast to China’s and Europe’s persistent weakness, demand is still robust in the pro-architectural and North American industrial end sectors.

• What a year it was for European energy prices. Every time it gets emotional, prices behave volatile and sometimes also irrationally.
• That was the reason why we called for a peak in European energy prices already back in August of 2022.
• Back then, prices were astronomically high. Per BTU, you had to pay $93 for US crude oil, $500 for European TTF natgas, and meanwhile, “only” $54 for US Henry Hub natgas for the forward futures contract.

• Sherwin-Williams is one of the largest distributors of paints and coatings in the U.S.
• The company has had a decent financial performance off-late.
• Their management also continues to prioritize growth initiatives, product innovation, customer solutions, pricing actions, cost control, supply chain improvements, and business optimization tasks.

• The review period for the LQ45 Index ended on 30 December. The changes should be announced in the last week of January, becoming effective after the close on 31 January.
• Potential adds are Bumi Resources Minerals Tbk (BRMS IJ), Surya Esa Perkasa (ESSA IJ), Saratoga Investama Sedaya (SRTG IJ), Adaro Minerals (ADMR IJ) and Mitratel (MTEL IJ). 
• Potential deletions are PT Wijaya Karya (Persero) Tbk (WIKA IJ), Erajaya Swasembada (ERAA IJ), Media Nusantara Citra (MNCN IJ), Chandra Asri Petrochemical (TPIA IJ) and HM Sampoerna (HMSP IJ). 

• Impala Platinum and African Rainbow Minerals are overlooked mining stocks with tremendous total return prospects.
• Both companies are breadwinners. Both stocks’ total returns prospects are unparalleled, according to the analysts.
• Both stocks have strong buy ratings to both stocks, which are assigned strong buy Ratings to both.

• KRX listed ETFs tracking the KRX-CSI joint indexes: KODEX Korea China EV (450180), KODEX Korea China Semiconductor (450190), TIGER Synth Korea-China EV (449680), and TIGER Synth Korea-China Semiconductor (449690)
• From a trading perspective, whether these newly introduced ETFs will replace the existing EV ETFs would be a key thinking point.
• This means a shift in the fund size of more than 5 trillion won and will cause a significant price impact in terms of flow trading.

• BillionBricks, a Singapore-based climate-tech startup combining clean energy and large-scale affordable housing, has closed a US$2.45 million seed funding round.
• SGX-listed Thakral Corporation led the round with participation from ENGIE, a global low-carbon energy and services company.
• BillionBricks was founded in 2013 as a non-profit by architect Prasoon Kumar and venture capitalist Anurag Srivastava to address the global climate and housing crises.

• The Conference Board Leading Economic Index (LEI) for the US decreased by 1% in November 2022 to 113.5, following a decline of 0,9% in October.
• Only stock prices contributed positively to the US LEI in November.
• The labor market, manufacturing, and housing indicators all weakened—reflecting serious headwinds to economic growth.

• This is our first report on the Mosaic Company, one of the largest producers and marketers of concentrated phosphate and potash crop nutrients.
• The company delivered a disappointing set of results in the last quarter failing to meet Wall Street expectations in terms of revenues as well as earnings.
• The good news is that it did generate a sizable amount of cash flow, which enables the company to return a large amount of capital to shareholders while simultaneously continuing to invest in future growth.

• Albemarle Corporation is one of the largest producers of lithium, bromine, and other related specialty chemicals across the world.
• The strong performance for its lithium business has been driven by higher volumes and higher realized pricing.
• Albemarle is realigning its core bromine and lithium businesses to energy specialties and storage and expects it to be effective next month.

• This is our first report on Albemarle Corporation, one of the largest producers of lithium, bromine, and other related specialty chemicals across the globe.
• The strong performance for its lithium segment was driven by higher volumes and higher realized pricing.
• Albemarle is realigning its core bromine and lithium businesses to energy specialties and storage and expects it to be effective next month.

• Our base valuation of TEMC is target price of 38,363 won per share. At the mid point of the IPO price range, our target price would represent a 10% upside. 
• Typically, we require a 15-20% upside in terms of target price versus the IPO price. In this case, given the lack of upside, we have a Negative View. 
• Our target price is based on a target P/E of 8.5x in 2023 which is the average P/E of the comps.

• This morning, BHP Group Ltd (BHP AU) and OZ Minerals Ltd (OZL AU) announced they had entered into a Scheme Implementation Deed at A$28.25/share (5wks after I said 3-6 weeks).
• All terms are confirmed and there may be a fully-franked dividend up to A$1.75/share which would reduce terms to A$26.50. The OZL Directors unanimously recommend. 
• Anti-Trust approvals are needed in Brazil & Vietnam, other standard conditions, and the OZL Scheme Meeting should be late March early April. I expect this is done.

• OZ Minerals Ltd (OZL AU) has entered into a SID with BHP Group Ltd (BHP AU) at A$28.25 per share, a 49.3% premium to the undisturbed price (5 August).
• The offer price is attractive. The key conditions are shareholder and regulatory (Brazil and Vietnam) approvals. The scheme meeting is in late March/early April 2023. 
• The key risk is the rise in copper prices. At last close and for the end-April payment, the gross and annualised spread to the offer is 1.6% and 4.8%, respectively.

• After the Gina Reinhart-backed Hancock bumped its Offer for Warrego Energy (WGO AU) to A$0.28/share, in cash, Beach Energy (BPT AU) declined to match the revised Offer.  
• With Hancock seemingly in the driver’s seat, Strike Energy (STX AU), with 19.9% of shares out, proposed a one-for-one scrip Offer, with an indicative price of A$0.335/share.
• Hancock has responded that its Offer provides certainty, with cash, whereas Strike’s proposal does not. Now 15.84% of the register has come out in support of Hancock’s Offer.

We view Indika Energy as “Medium Risk” on the LARA scale, thanks to its robust balance sheet following the December 2017 acquisition of a controlling stake in PT Kideco Jaya Agung (to 91%) at a low price. We note favourably Kideco’s position as the third-largest coal producer in Indonesia, as well as the low-cost structure (first quartile; profitable even during the coal downturn in the past few years). It is one of the few HY coal credits that survived the downturn. Indika’s balance sheet appeared to be fairly levered in the past, as debt-free Kideco had not been consolidated. However, the balance sheet was transformed by the stake acquisition. The business profile also changed from that of an energy (primarily coal) services company to that of an integrated coal producer. The balance sheet is now robust, with a net cash position. In the medium term, Indika is diversifying away from coal by acquiring and investing in non-coal businesses.

Our fundamental Credit Bias on Indika is “Positive”. This is based on: [1] the strong rally in coal prices, which should further boost the company’s financial risk profile in FY 2022; and [2] Indika’s commitment to improving its business diversification and ESG standards.

Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”.

We revise our recommendation to “Hold” on the INDYIJ notes from “Buy” on the INDYIJ 8.25 25.

• LyondellBasell has become a business worth considering for anyone looking for relatively safe and high dividend yield in 2023.
• Lower margins in key segments are largely priced-in as management prepares to reduce capacity.
• Strong cash flow positioning and recent deleveraging efforts have significantly reduced risks related to future dividend payouts.