Energy & Materials Sector

• On the 5 October, San Miguel (SMC PM) announced the acquisition of Eagle Cement (EAGLE PM) at P22.02/share. The deal triggered notification and clearance with the Philippine Competition Commission
• I previously concluded in San Miguel Turns Its Sights To Eagle Cement there was no issue with PCC as the transaction was effectively left pocket, right pocket for SMC/Ramon Ang.
• SMC has now announced that the Offer is not subject to approval from the PCC. No surprise there.

• Valero Energy had a mixed performance in its recent financial results for the quarter as its revenues were significantly above Wall Street expectations.
• The company has a good refining margin supported by continued energy cost advantages, low product inventories, and strong product demand for the U.S. refineries in comparison to the global competitors.
• The refining fundamentals stay strong, with global product supply staying constrained because of the high natural gas prices and capital reductions.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Vedanta Resources
• Yankuang Energy Group

• The regulator will not review San Miguel (SMC PM)’s SPA with Eagle Cement Corp (EAGLE PM)’s selling shareholders to acquire their combined 88.50% stake at PHP22.02 per share.
• We expected approval as the PCC, the regulator, previously viewed San Miguel and ECC as part of the same group. The next step is the execution of a definitive agreement.
• The approval paves the way for an MTO of the remaining 11.50% minority shares at PHP22.02, likely next month. At the last close, the spread to the offer is 6.1%.

• Lygend Resources & Technology (LR HK) is looking to raise about US$800m in its Hong Kong IPO.
• Lygend Resources & Technology (Lygend) is a nickel trading and production firm with a portfolio covering multiple areas across the nickel industry value chain.
• With the Obi Project expanding the firm’s capacity into the higher margin production segment, Lygend expects sales and profitability to pick up. 

• Inside is a recap of movements in the last week relating to the Hong Kong Stock Exchange -Shanghai and Shenzhen Northbound Connect facilities, broken down by company and industry.
• Overall, net outflow over the past week was ~US$2.7bn, split between Shanghai (-US$1.8bn) and Shenzhen (-US$0.9bn).
• The largest inflows were into Tianqi Lithium (002466 CH) and Shenzhen Mindray Bio-Medical (300760 CH). The largest outflows were in Kweichow Moutai (600519 CH) and Ping An Insurance (601318 CH).

• This is our first report on global metals and mining giant, Rio Tinto.
• The company has been witnessing a decent demand for all of its primary commodities as per recent results.
• Moreover, the Rio Tinto Safe Production System is still being effectively implemented, and there are now 15 deployments at 11 sites, up from 5 sites at the beginning of the year.

• In this insight, we take a look at the potential ADDs/DELs for the NIFTY 50, 100, and 500 Indices in the run up to the March 2023 Rebalance.
• The completion of the HDFC Limited (HDFC IN) – HDFC Bank (HDFCB IN) merger is the most significant event that can trigger intra-review changes in the next few months.
• NIFTY Indices Limited also initiated a market consultation recently on the “treatment of merger/demerger in Nifty equity indices” and the outcome could have important index consequences for such intra-review changes.

• Schlumberger delivered a solid performance in its last result surpassing Wall Street expectations on all counts as its stock price continues to zoom to new highs.
• The company maintained a high execution level, producing another quarter of double-digit sales growth.
• All regions experienced growth internationally, and the growth rate accelerated to 13% sequentially and 26% annually.

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

• Fosun International

• After a phase of some solid financial performances driven by rising aluminum prices, Alcoa delivered a disappointing result, failing to meet Wall Street expectations in terms of revenues as well as earnings.
• While the long-term fundamentals for the aluminum sector are still promising, Alcoa’s stock has been on a downward trajectory given the high volatility in the European energy markets causing losses to their two units in Europe.
• In this report, we have carried out a fundamental analysis of the historical financial statements of the company.

• Enterprise Products Partners’ results are approaching and the company had delivered an all-around beat in the last quarter.
• Its strong financial performance was primarily driven by higher margins in the octane enhancement business of the company, contributions from Midland Basin assets that it acquired recently, and higher natural gas dispensation margins.
• Enterprise Products Partners has recently announced an expansion of footprints of three organic growth projects for supporting the ongoing production development in the basin.

• Kinder Morgan delivered astonishing results.
• Due to high summer power demand, which resulted in an additional 880 million dekatherms of gas traveling to power plants per day, deliveries to power plants were strong in the quarter, increasing by roughly 11%.
• In addition, Kinder Morgan acquired North American Natural Resources and its sister companies, North American Biofuels and North American-Central, for $135 million during the quarter.

• Pioneer Natural Resources’ stock has been climbing as its results are approaching.
• Pioneer, along with ConocoPhillips and Devon, join OGMP2.0 with a commitment to increased transparency and leading Methane Performance in Emissions Reporting.
• Overall, we provide the stock of Pioneer Natural Resources with an ‘Underperform’ rating and a revision in the target price.

• Despite the WATCH list’s confusion, LG Energy Solution replaced LG Chem. In addition, Solactive excluded Iljin Materials, evidently due to its float-adjusted market cap size.
• There are some somewhat elusive additions. The most prominent example is Japan Steel Works, which replaced LG Chem in the updated WATCH list at the last minute.
• There was confusion about LG Chem’s deletion until the last minute, so, likely, the market has not sufficiently reflected this rebalancing factor in LG Energy/LG Chem’s LONG/SHORT.

• With the review period nearly complete, there could be 4 changes using a 12-month minimum listing history, and 5 changes using a 6-month minimum listing history.
• The market cap of potential adds using a 6-month minimum listing history is higher and there is a higher probability of a 6-month minimum listing history being used.
• The potential adds have outperformed the potential deletes and the index. Similar to the last few rebalances, we could see the adds outperform post the end of the review period.

• The sharp decline in the Korean stock market this year has led to more Korean companies conducting share buybacks. 
• As of 23 October, the number of companies in Korea seeking share buybacks in Korea increased by 41% YoY with 308 companies announcing share buyback programs.
• In the past month, some of the larger market cap companies including Ecopro BM and SKC that have announced share buybacks have significantly outperformed the market.

JSW’s Q2/22-23 results continued to disappoint in our view, with very weak profitability due to a plunge in steel prices. Raw material prices remain high. At this pace, Gross Debt/EBITDA may reach 5x at FYE 2022-23. Liquidity is sound, with a large cash position. We revised our FY 2022-23 margin forecast downwards to reflect the weaker than expected operating environment.

We are concerned about JSW’s large capacity expansion programme and capex plan, which may not be appropriate given the deteriorating market conditions. Peer Tata Steel appears more shielded from adverse raw material costs (thanks to its deeper vertical integration), and is also more conservative in terms of debt management (it has reduced debt by USD 1 bn p.a.) as well as capacity expansion.

We do not expect rating pressure in the near term, but remain cautious in the medium term.

• Inventories of copper in warehouses run by exchanges such as the LME do not provide a complete picture of copper stocks in the supply chain since many industrial users will hold their own reserves of the metal.
• But visible stocks can have a significant influence on sentiment in the market.
• It’s just striking how negative the financial markets are about this industry, yet the physical market is so tight.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Indonesia, Malaysia, Philippines, Thailand and Chinese ADRs.
• Highest spreads – 21Vianet Group (VNET US), Alliance Aviation Services (AQZ AU), 111 Inc (YI US), Genex Power Ltd (GNX AU), O2Micro International (OIIM US), Eagle Cement Corp (EAGLE PM).
• Lowest spreads – Tyro Payments (TYR AU),Nitro Software Ltd (NTO AU), OZ Minerals Ltd (OZL AU), Tassal (TGR AU), China Vast Industrial Urban Development (6166 HK), PTB. 

• Talk about timing… Friday before the close I wrote that I thought circumstances might merit a revised tilt at OZ Minerals Ltd (OZL AU) by BHP Group Ltd (BHP AU). 
• Earnings are Monday, copper is up in AUD terms, time is moving us forward into a supply squeeze. It all looks good to me.
• But an article this morning in the AFR says BHP CEO Mike Henry called OZ Minerals “nice to have” not a “must have” and talked “discipline.” Oops.

• With the results of Phillips 66 around the corner, the stock price has been appreciating over the past few weeks.
• Among major updates, Phillips 66 has offered to acquire the public units of DCP Midstream, the natural gas company, to boost its business of natural gas liquids.
• We provide the stock of Phillips 66 a ‘Hold’ rating and a revision in the target price.

• Copper is widely recognised to be in somewhat short supply, and EV/electrification would increase demand going forward (though slower Chinese homebuilding would soften it).
• A number of developments suggest a further squeeze in prices could be near and copper price strength along with AUD weakness makes an AUD-denominated OZL Takeover Price easier to raise.
• Short-Term positioning and longer-term supply constraints are currently battling for near-term import, but medium-term, there’s no escaping the imbalance. Looks like a buy now.

Medco Energi has launched a cash tender offer for up to USD 250 mn of three USD bonds. If the tender is successful, we expect gross debt to be reduced by USD 100 mn, the debt maturity profile to be lengthened and interest expense to decline. Tendering the bonds would make sense if noteholders require liquidity. Otherwise, they could consider holding the notes given the improving credit fundamentals.

• With Cleveland-Cliffs’ results just around the corner, it is to be seen how the management has progressed with their execution in terms of profitability and their attempts towards free cash-flow-driven reduction in debt.
• However, higher costs and inflation led to a drop in margins and it had missed out on earnings.
• The gross inventory values in terms of the working capital increased in the last quarter because of higher costs, and the overall steel inventory volumes decreased.

• There was a lot of confusion around how NSE Indices would handle the HDFC Limited (HDFC IN) / HDFC Bank (HDFCB IN) merger in its indices.
• The market consultation seeks to change the index methodology to bring it in line with other index providers. That will result in much lower turnover than the existing index methodology.
• Pidilite Industries (PIDI IN) is a high probability add to the NIFTY Index possibly in the first quarter of 2023. There will also be changes to Nifty Next 50 Index.

• Low valuations (3x Earnings, 8% cash yield) and an under supplied Oil market, nice value concoction  
• However, large part of value hinges on growth beyond FY25E, execution challenges and regulatory intervention may necessitate additional debt to fund ongoing capex
• Thus deleveraging unlikely, narrowing TV for traditional fuels – risks both earnings and valuations