Energy & Materials Sector

• Taiwan Cement (1101 TT) is looking to raise US$437m from its GDS offering.
• The firm is offering 84m GDSs, or 420m common shares (1:5 conversion), at a 5.1-7.8% discount to its last close.
• While momentum hasn’t been the greatest, the deal is well flagged and short covering could support share price in the near term.

• On 27 September, it was announced that Lotte Chemical (011170 KS) is close to acquiring a 53.3% stake in Iljin Materials (020150 KS) for about 2.7 trillion won (US$1.9 billion).
• Iljin Materials has relatively high valuation multiples. Despite recent share price decline, its shares are trading at 32.4x P/E and 15.7x EV/EBITDA in 2022. 
• At such a high valuation premium (93% higher than current prices), there are going to be significant concerns that Lotte Chem may have overpaid for this acquisition. 

• In last week’s Macro Vision report, we noted breaks below 3900 on the SPX and $293 on the QQQ opened the door for a test of YTD lows, or worse.
• We are now getting a test of the YTD lows of 3636 on the S&P 500 and $269 on QQQ
• With so many indexes and key Sectors currently oversold and testing support, we could certainly see a bounce/pause at current levels.

• Summers Value Partners is a boutique value manager that uses a focused, long-term approach to investing in areas of the market where most managers are unwilling or unable to participate.
• The Summers Value Fund LP (“the Fund”) returned -25.9% net in the first half of 2022.
• The majority of our decline took place in the first quarter as we were too slow to react to the Fed’s decision to increase interest rates and shrink its balance sheet to cool the over-heated economy.
• The next stage of the bear market will most likely involve lower corporate earnings due to a more challenging businessclimate and reducedaccess to capital.

• We had the heads up days (or a week plus) ago, and now it is official. Bain launches its Tender Offer for Hitachi Metals (5486 JP) tomorrow at ¥2,181/share.
• The company’s trade name will be changed to PROTERIALS (i.e. losing “Hitachi”) which should be fine. It was non-core anyway. 
• This is still a large-ish deal – up to ¥434bn. MktCap is ¥930bn. But minimum is only 56.8mm shares because they get the parent vote anyway. Done deal. 

• PT Avia Avian (AVIA IJ) is known for its position as the leading and best-quality paint manufacturer in Indonesia but it now has an increasingly diverse products portfolio. 
• The company has successfully offset raw material price pressure with price rises to keep margins relatively steady and also saw a sharp pick up in sales in 2Q2022.
• Avian continues to launch new products and build out new distribution centres to support future growth, with future M&A also a potential growth driver. Valuations reflect its leading market position. 

• Occidental Energy had become a buzzing stock after Warren Buffett’s Berkshire Hathaway boosted its stake in the energy major.
• It started to repurchase shares this quarter, thus advancing its framework of shareholder return as a part of the commitment for the company to return cash to the shareholders.
• We provide the stock of Occidental with a ‘Hold’ rating and a revision in the target price.

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.

• Bharat Petroleum Corp
• China Hongqiao
• Japfa Comfeed Indonesia

• Nucor managed to deliver an all-around beat as a result of strong performance in raw material operations, tabular, buildings, deck, joist, structural, sheet, plate, and bar.
• The flexible and sustainable business model of Nucor proves its ability to grow and create values for its shareholders.
• Nucor Corporation has recently announced that it has joined an agreement to acquire Summit Utility Structures LLC and Sovereign Steel Manufacturing LLC.

• Valero Energy reported an excellent result with revenues and earnings well above Wall Street expectations as the company maximized the refining rates.
• The refinery utilization rate of the company increased in the quarter and the refining margins were reinforced by sustained energy cost advantage for the U.S. refineries, low product inventories, and strength in product demand.
• We provide the stock of Valero Energy with a ‘Hold’ rating and a revision in the target price.

• On 23 September, Hanwha Solutions announced a set of restructuring measures which are probably the biggest ever moves by the company in the past 50 years.
• The spin-off of the Hanwha Galleria is a good move. Clearly, having both the renewable energy and a luxury department store business under one roof does not make much sense.
• We also like the company’s move expand its U.S. solar module production capacity. The total amount of potential benefit could be nearly US$2 billion over the next decade. 

• Growatt Technology (1833969D CH), a leading PV inverters manufacturer, will seek a listing hearing for a US$1 billion HKEx IPO in October, according to press reports.
• In Growatt Technology IPO: The Bull Case, we highlighted the key elements of the bull case. In this note, we outline the bear case. 
• The key elements of the bear case rest on rising customer concentration risk, high dependence on Brazil for growth, limited pricing power and a shift to FCF burn. 

• 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$1.4bn, split between Shanghai (-US$0.8bn) and Shenzhen (-US$0.6bn).
• The largest inflows were into Tianqi Lithium (002466 CH) and Midea Group (000333 CH). The largest outflows were in East Money Information (300059 CH) and Kweichow Moutai (600519 CH).

• There is no unlocking of treasury shares, so a flow betting on dramatic value accretion will not occur. For tendering, the proration risk appears to be relatively high.
• Passive trackers will sell at the close on February 24 and repurchase (likely only for Solutions) at the close on March 31. The flow size would be around 5.5x ADTV.
• ECO risk wouldn’t be a concern as the new rule will grant appraisal/preemptive rights to the existing shareholders. Also, Hanwha hinted at the possibility of choosing private placement over ECO.

• The seasonal strength of the water treatment business should lead to Hawkins (HWKN) offsetting the sales decline from industrial specialty chemicals declining in price in the September quarter
• There is now evidence some specialty chemical prices are beginning to decline. When there has been no LIFO charge, HWKN has reported gross margin above 20 percent.
• Summer months are seasonally the time when there is greater demand from HWKN’s water treatment customers. Over the course of the past year HWKN has grown the segment through acquisitions

• Today, Nagoya Premier-listed Chubu Steel Plate (5461 JP) announced that it had applied today to be listed in Tokyo. 
• It is one of very few Japan names not listed in Tokyo. A TSE listing examination will be conducted, and there is a possibility it moves to TSE Prime.
• There are 6 key segment transfer and listing requirements to gain a listing in TSE Prime. Chubu Steel Plate is really close.

• Six+ weeks ago, BHP Group Ltd (BHP AU) approached OZ Minerals Ltd (OZL AU) with a bid of A$25/share. Oz very quickly rejected it and said it was worth more.
• The back and forth immediately post-rejection was not conciliatory. My expectation was that if they came back quickly, they’d have to pay A$30. But coming back quickly was tough.
• There are hints now that may be the price. But it may not be. It will take time. 

• Underpinned by higher ASP and sequentially lower input costs, CPMC Holdings (906 HK) should achieve better margin in 2H22. Its 17% fall in share price YTD makes it appealing.
• Average aluminum price was down 14% so far in 2H22, vs. 1H21, good to its costs. Well-controlled selling and administrative costs will help to support profitability recovery.
• New two-piece can capacity will grow by 54% over the next three years as 5 production lines are expected to be added. Most of them already have demand lined up.

• Freeport delivered a disappointing result and failed to meet Wall Street expectations on all counts but the future outlook remains optimistic.
• The company is increasing production year over year, and controlling expenses in a difficult environment and benefits from a highly favorable macro for copper.
• With an expected rise in demand for copper with respect to energy conservation especially in EVs, the company benefits from a positive future macro.

• With an improving outlook for copper given its critical role in energy storage and transport, Southern Copper is expected to be a major beneficiary in the long run.
• Southern Copper did have an interesting set of developments despite a rather disappointing result.
• The company has signed an agreement with the Michiquillay copper project at the cost of $400 million in Cajamarca, Peru.

• Bloomberg reported that BHP Group Ltd (BHP AU) has been considering raising its bid for OZ Minerals Ltd (OZL AU). OZ is pushing BHP to increase its offer to A$30. 
• The OZ Board has a strong justification for a higher offer as BHP’s acquisition of OZ would tick the boxes of future-facing commodities and potential operational synergies.
• Rio Tinto Ltd (RIO AU) recently increased its bid to minority shareholders of Turquoise Hill Resources (TRQ CN). This increases the probability that BHP will return with a sweetened offer.

• Today before the open, China’s State Administration for Market Regulation (SAMR) finally announced the approval of the takeover of Hitachi Metals (5486 JP). This was what delayed things. 
• The approval had actually been issued on 7 September, and the collected approvals in the week to the 12th were announced today. Some media outlets had the info yesterday.
• I expect it is likely that the Bain Tender Offer to buy Hitachi Metals will be announced today after the close, or at latest, early next week.

• I’m currently working on the September issue of Watchlist Deep Dives, which features Sherwin-Williams.
• My research process is primary-sources focused and that means reading lots of 10K’s, which include a report from the company’s auditors.
• I was surprised to see that Ernst & Young had served as SHW’s auditor since 1908.

• The main drivers for Hong Kong stock rallies are short covering, buybacks, and China government real estate support measures announcements.
• Hang Seng Index and most of its constituents continue to read like bear porn. Without a meaningful reversal/impulse rally, it is hard to call for a reversal.
• I hear and agree the case is so bad that it must be a buy signal. The sentiment is precious, BUT it needs a price action supporting the exhaustion thesis.