Energy & Materials Sector

• 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.

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.

• AAC Technologies Holdings
• Vedanta Resources

• On 9 September, Capricorn’s closing share price was at a c. 29% premium vs. merger terms (186.46p); scheme approval seems tricky. Capricorn has signaled it is open to explore other transactions.
• To rebalance the exchange equation, Tullow should offer at least 4.904043 TLW LN x 1 CNE LN, which would change the balance of power (Capricorn 51.8%, Tullow 48.2%).
• Cash makes up to 72% of Capricorn’s shares, whose latest price movements could either anticipate some statement from Tullow or other “potential outcomes”. I’d be long Capricorn, rather than the spread.

• The $19bn EV operation (vs. Repsol’s market cap of €19bn) allows Repsol to maintain the majority in a strategic area, crystallizes value (market assigns a higher valuation to the E&P division separately).
• The implied valuation by the market is on average $3 billion lower. As usual with a minority stake sale, the market rarely values it at 100%. 
• I estimate a moderate positive impact (the deal is similar to what was announced in July), value unlocking could theoretically reach €2.5-€3 per share, but I’d take a neutral stance.

• Great Panther (GPL US) is a deletion from the VanEck Vectors Junior Gold Miners ETF (GDXJ US). There are a lot of float changes that will result in passive flows.
• One way turnover is estimated at 3.4% and will result in a one-way trade of US$106m at the September rebalance.
• Most index constituents have traded poorly over the last few months and the stocks with passive inflows could outperform their peers in the short-term.

• Sayona Mining (SYA AU), Sigma Lithium (SGML US) and Tianqi Lithium (9696 HK) will replace Australian Strategic Materials (ASM AU) and Sierra Rutile Holdings (SRX AU) in the index.
• Sayona Mining (SYA AU) is also an inclusion to the FTSE All-Cap and S&P/ASX 200 on the same day as the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX US) addition.
• We had Sayona Mining (SYA AU) and Tianqi Lithium (9696 HK) as potential adds while Australian Strategic Materials (ASM AU) and Sierra Rutile Holdings (SRX AU) were high probability deletes.

• This insight highlights the global backlash against ESG. This is a collaborative project between Douglas Kim and Kyle Rudden. 
• In particular, my insight will focus on three recent places of major backlash against ESG including United Kingdom, Texas, and Florida.
• Despite efforts by ESG investors to increase renewables, a return to more BALANCED energy supplies is more likely, expanding the use of nuclear power and domestic oil & gas sources. 

• The last week had the announcement of the Nikkei 225 (NKY INDEX) September changes and the implementation of the SSE STAR50 (STAR50 INDEX) rebalance.
• The coming week will have the implementation of the FTSE AW/AC, FTSE China 50/A50, Taiwan 50/Div+, STI, EPRA Nareit, S&P/ASX, REMX and GDXJ rebalances.
• There were large outflows from iShares MSCI ACWI ETF (ACWI US) and iShares MSCI Emerging Markets (EEM US) during the week.

• Shougang Fushan Resources (639 HK) is back to interesting levels after a correction in HK/China and now trades at 4.5x PE/1.3x EV-EBITDA FY22e and a dividend yield of 17%. 
• With >50% of the market capitalization in cash (accounting for the dividend liability), there is an excellent margin of safety in the name.
• A further correction of coking coal prices by 20% from these levels to 1700-1800 RMB/ton would still have the stock trading at a >10% dividend yield. 

• On 7 September, Poongsan Corp announced a physical division spin-off of its defense business unit. This is likely to have a negative impact on the existing shareholders of Poongsan Corp.
• Its proposal to spin off the defense business comes at a bad time when investors are very cautious about companies trying to spin off valuable businesses into a separate entity.
• Poongsan’s spin-off is excluded from the need to include stock purchase rights.

• Marathon’s previous quarter was one of its best financial performances since transitioning to an independent E&P company.
• Despite these factors, the company delivered an all-around beat and continues to reward its shareholders with capital returns.
• In this report, we have carried out a fundamental analysis of the historical financial statements of the company.

• There could be up to 6 changes to the Hang Seng China Enterprises Index (HSCEI INDEX) at the December rebalance, mainly driven by the deletions.
• If there are six changes to the index, estimated one-way turnover is 6.47% and will result in a one-way trade of HK$4,124m.
• There is large short interest on quite a lot of stocks and will play an important role in the rebalance.

• Sierra Rutile Holdings (SRX AU) is a high probability delete from the index, while Australian Strategic Materials (ASM AU) is close to the deletion threshold.
• Sayona Mining (SYA AU) is the highest ranked non-constituent while Tianqi Lithium (9696 HK) only makes inclusion at the entire IPO raise.
• Deletion from the index will require passive trackers to sell over 5 days of ADV on Australian Strategic Materials (ASM AU). 

• Key supports are currently being tested at 3900-3910 on the S&P 500, $293 on the Nasdaq 100 (QQQ), and $177-178 on the Russell 2000 (IWM).
• We see a bounce as possible at these levels, but breaks below these levels would virtually guarantee a test of the YTD lows — or worse.
• WTI crude oil is breaking below the critical $85 support level, confirming a major top in place. The Bloomberg commodity index needs to break $32.50 to confirm a major top.

• Over the last two months, the two largest commodity behemoths have been trying to acquire copper deposits on the cheap. Both have been rebuffed.
• Rio Tinto Ltd (RIO AU)  has raised its original 34 CAD bid for Turquoise Hill Resources (TRQ CN) twice, but large minority shareholders have voiced opposition.
• BHP Group Ltd (BHP AU) has offered to buy OZ Minerals Ltd (OZL AU) but has equally been rebuffed by management. Let the copper M&A Wave begin!

• Like most other retailers, Walmart faced the impact of food inflation which continued to increase in the quarter.
• Delivery and pickup in the quarter are quite strong, and growth has been improving on the website Walmart.com with the inclusion of the marketplace.
• We provide the stock of Walmart with a ‘Hold’ rating with a revision in the target price.

• On Friday morning, Sk Discovery (006120 KS), current owner/controller of 36.56% of Sk Chemicals Co Ltd/New (285130 KS) announced an opportunistic Partial Offer to buy 5.22% more at KRW 108,800/share.
• The stated purpose in the Tender Offer Announcement is “Stability of Management Rights.” This will get SK Discovery to 41.77%, permitting consolidation of SK Chemicals.
• The real reason?SK Chemicals shares are trading at less than one-third the value of the SK Bioscience (302440 KS) shares they hold (with net cash and others free).

• This is a cash offer. So, there is no stock swap arbitrage here. To participate in this tender, we must buy SK Chemicals shares by the 19th.
• We have proration risk. Discovery will buy on a pro-rata basis if exceeding the target volume. So, we could be at a loss.
• This is an over-the-counter transaction. So both STT and CGT apply. The STT rate is 0.43% of the tendered amount and we have a 22% CGT rate for the profit.

• The Korea FSC finalized the additional investor protection measures: 1. stricter disclosure rules, 2. tighter listing requirements, and 3. mandatory appraisal rights.
• The retroactive application period is five years. Companies that have been split off five years ago from the effective date are also subject to these new rules.
• We can play LONG/SHORT aimed at staggered spreads, considering that the pricing period is 2M VWAP and that a downward price revision intensifies towards the announcement with mandatory appraisal rights.

• OP margins for listed companies haven’t increased notably, with maximum of 5% since FY 2008. Meanwhile, real income has continued declining, and there has been trend to reduce labor costs.
• The negative aspect is illustrated by the low level of employee engagement in a company that has managed to maintain operating margin at current level by keeping labor costs low.
• Inadequate investment by both companies and employees has hindered the expansion of value-added. For expanding added value, shift to investment in human resources is needed along with wage increases.