Energy & Materials Sector

• There were a bunch of rebalance announcements last week from FTSE and Nifty, and implementation of changes to the MSCI, JPXNK400 and Hang Seng indexes.
• The changes to the Nikkei 225 (NKY INDEX) should be announced early in the coming week and the changes to the SSE STAR50 (STAR50 INDEX) will be implemented on Friday.
• There were large inflows to China and Hong Kong focused ETFs during the week.

• Gold short met 1,730 PT to close and now kissing key support at 1,700 as the long pivot level. WTI’s nasty give back needs basing at the key 85/86 support.
• Gold 1,700 and WTI 85 are make or break bull/bear lines. Gold RSI bull divergence stands out as the driver amid risk aversion and a safe have bid in bonds.
• WTI RSI uber bull divergence shows good energy to retake 93 but is it enough to offset demand destruction/Sept risk. Reserve levels are low and support the bull case.

The Asia Monthly focuses on providing updates on recent events, information on new issues and spread movements, as well as summarising our top picks. The Asia Monthly is intended to broaden investors’ understanding of the Asian USD high-yield market.

• Inside is a recap of movements in the last week relating to the Shanghai and Shenzhen-Hong Kong Stock Connect facilities, broken down by company and industry.
• Overall, the net outflow over the past week was ~US$0.1bn, split (-US$0.4bn) for Shanghai and (+US$0.3bn) for Shenzhen.
• The largest inflows were into CNOOC Ltd (883 HK) and Yankuang Energy Group (1171 HK). The largest outflows were in Meituan (3690 HK) and Kuaishou Technology (1024 HK).

• Cases of illegal transactions by the president of a company from the founding family should be handled in terms of legal violations before corporate governance.
• If we focus on the issue of corporate governance, the problem is that the board of directors and statutory auditors have failed to fulfill their duties and cross-shareholdings were involved.
• If corporate governance is not effective in practice, we should at least expect to see improvements in corporate governance practices in organizational forms that are more legally binding.

Fosun International’s H1/22 results appear to be reasonable, with higher revenue but lower earnings. The reported credit metrics are not very representative of the credit profile in our view, given the company’s investment holding nature. Thus, it is difficult to assess Fosun’s credit health. However, we take some comfort from the rate of divestments, which is outpacing the rate of investments. Reported liquidity on a consolidated basis seems adequate. That said, we have no visibility on liquidity at the holdco.

Still, we highlight that Fosun has major assets to be sold, especially those without ample synergies. The company has accelerated its asset sale process since 2021. However, it cannot name the assets currently, as details of the transactions are still confidential. Moreover, Fosun does not wish to affect the morale of employees at these assets. The asset disposals are focused on non-core assets, which are typically not listed.

• Maintain HOLD recommendation for PRM but raised target price to Bt6.60 (Previous TP: Bt6.30) after revised earnings up by 16-25% in 2022-23E. We are positive toward 2H22 fleet expansion plan
• 2Q22 core profit dropped QoQ and YoY Report 2Q22 net profit at Bt199m. Excluding FX item,core earnings would be at Bt262m (-38%YoY -2%QoQ) YoY drop was due to high base 
• Core revenue hit all-time high at Bt1.7bn along with fleet expansion(59 vessels as of 2Q22)and an increase in transportation volume for domestic trading business (45% of total revenue in 2Q22)

• Lately I have seen a lot of doomporn on Twitter about Europe. A lot of people seem to almost be excited about the energy predicament Europe is in.
• So I thought I would write some anti-doom porn. And in doing so I actually became a bit more pessimistic LOL. At least for the next year or two.
• Since there is no denying that the EU is in a bad spot as it imported 150 billion m3 of gas from Russia.

• The history of Young Poong Group goes back nearly 73 years ago in 1949 when two young men Ki-ho Choi and Byeong-hee Jang founded Young Poong.
• Young Poong Group and Korea Zinc could be separated from each other with the Choi family controlling Korea Zinc and Jang family controlling Young Poong and related affiliates.
• The bullish case for Young Poong and Korea Zinc would be that once they are separated, there could be greater management transparency and ownership structure which could boost overall efficiency. 

West China Cement’s H1/22 results were in line with expectations. The company reported broad sales volume declines across all regions in China, owing to pandemic-related disruptions. Still, its revenue and gross margin were largely stable, as the better-than-expected ASP growth was able to offset increases in coal and electricity costs. Moreover, the FCF deficit was smaller than anticipated, as capex fell y-o-y. Net Debt/EBITDA weakened slightly, but remained strong at 1.8x (FYE 2021: 1.6x). Management anticipates more meaningful earnings growth and margin expansion in FY 2023, supported by the contribution from its new plant in Congo (expected to commence at end-2022).

• GCEH has experienced another set of delays with the construction of their Bakersfield, California refinery. The Company has been pushing out the timing of when the refinery would come online
• We believe the setbacks are temporary and could stem from GCEH changing engineering firms midway through the project
• We have updated our earnings model and removed the refinery from generating any revenue until 2023

• I recommend focusing on the ceiling regression play. In this regard, SK Innovation has the most notable regression spread, and we should use Samsung SDI as a hedge against it.
• As for constituent change, SungEel HiTech is firmly positioned with a market cap of ₩1.34T and a float rate of 50%. And it belongs to the Waste batteries keyword.
• But, it is unclear whether SungEel will be in the top 25 in scoring. We should patiently wait until confirmation as it’s still a worthy candidate requiring our attention.

• Q1FY23 earnings came in strong for RPPL led by robust demand and margin expansion. Volumes grew by 23.6% YoY and 24.5% QoQ.
• Operational EBITDA per kg grew by 25%+ YoY and 36%+ QoQ to INR 37.5+ per kg as the price rise in raw materials was passed on.
• RPPL has guided for a strong FY23. It can clock a volume of 10500+ MT and EBITDA of INR 35+ per kg, barring any adverse volatility in raw material prices.

• The index committee has continued to use a 6 month minimum listing history leading to five changes to the SSE STAR50 (STAR50 INDEX) in September.
• One-Way turnover is estimated at 4.07% and will result in a one-way trade of CNY 2,265m. Passive trackers will need to trade between 1-5 days ADV on the adds/deletes.
• The adds have outperformed the deletes and the CSI500 Index since the end of the review period. We’d look to buy the adds and hedge with CSI500 Index futures.

• In last week’s Int’l Compass (Aug. 18) we discussed that global equities are going through a bottoming process, but that the real test will come during the eventual pullback.
• We are getting the pullback now, but so far, there has yet to be any failed breakouts among the indexes discussed over the past month — a positive sign.
• Worth noting- further breakout attempts have failed on some of the leading market indexes, notably the Nasdaq 100 and India’s SENSEX, but they remain well-above their breakout levels from July.

• Chevron continued its restructuring efforts which included $200 million in asset sale gains and a $600 million charge to cancel an extended LNG regas contract at Sabine Pass.
• Chevron’s results were encouraging as it managed to deliver an all-around beat with superior yields and reduced carbon in the Permian.
• With the remaining project operations mostly concentrated on systems completion, commissioning, and start-up, Chevron anticipates finishing construction by year’s end.

• Rex reported a disappointing set of results mainly due to continued struggles in Oman. While Oman production was well over 10K bpd in 1H21 it deteriorated every month in 1H22.
• Revenue was 99.45M USD (+31%) but we estimate it would have been closer to 149M USD if the Yumna field wouldn’t have stopped producing for almost 70 days in 1H22.
• YTD stock is -23% and can only reverse if management proves Oman is ready to rebound. Dividend payments will start on a quarterly basis as of October 2022.

Medco Energi’s H1/22 results were strong as expected. This was supported by increased production following the ConocoPhillips Indonesia (CIHL) acquisition in March, as well as the high oil-price environment. We expect the company to deleverage further going forward, supported by earnings growth, strong OCF generation and debt repayments. The full-year FCF deficit should also narrow to a mildly negative level. We note positively management’s intentions to reduce debt, including to fully repay the USD 850 mn in debt taken on for the CIHL acquisition by 2024. Cash/ST Debt was inadequate, but we do not foresee any near-term refinancing risks.

• This model seeks companies that are potentially “overearning”, defined as companies with unusually high margins relative to their own history or relative to the industry. 
• The reasons for the margin increases are sometimes unsustainable or fraudulent. The  critical judgement involves to what extent unsustainable margins are embedded in a company’s forecasts and/or the stock’s valuation. 
• These shorts tend to have moderate to higher betas, higher valuations due to recent strong results and good short responses to subsequently disappointing earnings. 

• With an 18.6% growth in 1H22 profit from continuing operations, Kunlun Energy (135 HK) has not disappointed us. Natural gas sales segment is a bright spot with solid growth.
• Net cash swelled to Rmb10.2bn at end-Jun, about 2x more than the level at end-FY21. We estimate this roughly equals to 19% of the current share price. 
• New project momentum looks healthy and the market seems to have underestimated FY22 earnings. Its 8x and 7.5x PERs for FY22 and FY23 are clearly attractive. 

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.

• ENN Natural Gas
• Fosun International
• Geely Auto

• PetroChina (601857 CH) and EVE Energy (300014 CH) could replace China Pacific Insurance (Group) (601601 CH) and Zhangzhou Pientzehuang Pharmaceutical Co. (600436 CH) in the index at the September rebalance.
• Assuming both changes are implemented, estimated one-way turnover is 2.24% and will result in a one-way trade of CNY 1,180m.
• There has been no announcement from FTSE yet on the potential increase in the number of index constituents from 50 to 100.

• Yankuang Energy Group (1171 HK) is the highest ranked eligible non-constituent and could replace Shenzhou Intl Group Holdings (2313 HK) in the index at the September rebalance.
• Passive trackers will need to buy over 1 day of ADV on Yankuang Energy Group (1171 HK) while selling over 1 days ADV on Shenzhou Intl Group Holdings (2313 HK). 
• Short interest is over 10% of float on Yankuang Energy Group (1171 HK) and there could be short covering as the stock breaks out.