Energy & Materials Sector

• The Hang Seng Index Team announced four changes to the Hang Seng Index, bringing membership to 73 from 69, on its way to 80, but later than originally targeter mid-2022. 
• Additions are China Shenhua Energy Co H (1088 HK), Chow Tai Fook Jewellery (1929 HK), Hansoh Pharmaceutical (3692 HK), and Baidu (9888 HK). 
• Official placeholder turnover is about 3.8%. Small changes due to capping updates still to come. China Shenhua and possibly Chow Tai Fook look interesting as trades.

• Indo Tambangraya Megah (ITMG IJ) reported strong Q2 2022, with profits of 247 mn USD up 225% YoY, and coal prices averaging 202 USD/ton for the quarter (inline). 
• The only disappointment was volumes which came in at 3.9 mn tons, down 20.5% YoY. The company guided sequential improvement in coal production for Q3 2022 to 4.6 mn tons. 
• Indo Tambangraya Megah (ITMG IJ) is 2.6x PE FY22e, with 28% of its market capitalization in cash and a dividend yield of 28% based on a 70% payout ratio.

• The definitions of the terms used in this designation rule have not been clearly disclosed. Even the words used in the original Korean text make interpreting quite tricky.
• What confuses investors the most is the Short Selling Proportion, basically the ratio of a stock’s short-selling to the market.
• Amount Increase in Short Selling Transactions is also quite confusing. It is the ratio of a stock’s short selling to its 40-day average daily short selling volume.

• A busy Friday with the end of the S&P/ASX review period and announcement of changes to the Hang Seng family of indices and FTSE AW/AC at the September rebalance.
• Monday is the review cutoff for the FTSE TWSE Taiwan 50, STI, FTSE China 50 and A50 indices, among others. STAR50 Sep changes announcement expected post market close on Friday.
• There were some big inflows into Asia focused ETFs during the week, while the outflows from KraneShares CSI China Internet ETF (KWEB US) continued for yet another week.

• Thailand’s state-owned energy firm PTT (PTT TB) recently announced a ~67% and ~13% increase yoy in 1H22 revenue and net profit, buoyed by higher average selling prices and sales volume.
• Earlier this month PTT also announced the divestment of its Indonesian coal mining business as the company transitions towards clean energy.
• PTT’s goal is to make Thailand a liquified natural gas hub in Asia. The market appears to be fully pricing in this ambitious roadmap.

• We reiterate our SELL rating with a TP of Bt12.8 derived from 1.2BV’23E.Given cloudy 2H22 and 2023E earnings trend from weaker CPO and CPKO prices off seasonal effects and oversupply
• Neutral tone from the analyst meeting.We foresee a challenging tide in 2H22 growth momentum due to seasonal rout in 3Q22 amid the Thai government to keep the B5 blending ratio
• Nakhonsawan Bio-complex on plan Nakhonsawan Bio-complex phase I is expected to COD in 1Q23, so we do see potential upside in the long term. Note that the Nakonsawan Bio-complex 

• We keep our SELL rating with a new TP of Bt14.50(+4% from prior TP),as we rollover to 1.41xPBV’23E, which is -2SD of its 5-yrs trading mean.Strong QoQ growth in  2Q22
• 2Q22 core profit posted strong QoQ Excluding extra items, its core profit was at Bt622m (-14%YoY, +250%QoQ). The strong QoQ rise was far above our expectation
• Neutral tone from the analyst meeting The management reaffirmed its sales volume guidance for asphalt at 1.20m tons in 2022E (-3%YoY), while its 1H22 volume is at 0.56m tons.

We view Vedanta Resources Limited (VRL) as “High Risk” on the LARA scale, mainly due to the difficulty in upstreaming cash to service debt at the holdco level, as well as the volatility in commodity prices. The company’s fundamental credit profile is supported by: [1] a large and diversified resource asset base; [2] production efficiency, with sound earnings and cash-flow capabilities, though segmental contributions fluctuate from year to year; and [3] sound liquidity.

Conversely, VRL’s risk profile is impacted by: [1] the complex corporate structure, with related-party transactions; [2] regulatory risks (especially in the aluminium and iron ore segments); and [3] the inherent volatility of commodity prices. Holdco creditors are highly dependent on a continued stream of dividends or intercompany loans from subsidiaries.

Our Credit Bias is “Stable”, as further improvements in the financial risk profile may be inhibited by a recent correction in commodity prices and the increasing likelihood of recessions in major economies.

The ESG Impact on Credit is “Moderately Negative”, as the metal & mining industry is exposed to regulatory and geopolitical risks. For VRL, these risks are exacerbated by the fact that the company has operations in many countries, including areas with high political risks (e.g. Zambia and South Africa). Moreover, the industry faces extreme scrutiny from environmental agencies, given its negative impact on the environment. Controversies are “Immaterial”, albeit we note Governance or Environmental issues at certain subsidiaries.

• There are 4 trading days to go in the review period for the September rebalance of the S&P/ASX indices. Announcement is on 2 September with implementation on 16 September.
• There could be 6 changes to the S&P/ASX 200 (AS51 INDEX), increasing to 8 if AVZ Minerals (AVZ AU) continues to be halted and if Link Administration (LNK) is privatised.
• The potential adds have outperformed the potential deletes over the last month. Short interest has increased on a few potential deletes. There will be pre-positions built up.

• With the Reference Period for the September 2022 Rebalance nearing its end, we take a final look at the potential index changes for ASX 300, 200, 100, 50, and 20.
• AVZ Minerals (AVZ AU) and Firefinch Ltd (FFX AU) are both members of the ASX Index family and are currently suspended from trading. There could be index consequences here.
• Based on current data, I expect 7 ADDs/DELs for the ASX 200 Index and 22 ADDs and 18 DELs for the ASX 300 Index.

• There are 43 – mostly firm, mostly Asia-Pac – transactions currently being discussed and analysed on Smartkarma. Inside is a timetable of upcoming key events for each deal.
• Four new deals discussed this week: BHP (BHP AU)‘s tilt for OZ Minerals (OZL AU); Lifestyle (1212 HK)‘s privatisation; EVOC (2308 HK)‘s Merger by Absorption, and Shinoken (8909 JP)‘s MBO.
• Key updates took place for Total Access Communication (DTAC TB) / True Corp Pcl (TRUE TB).

• POSCO Holdings announced it would cancel ₩567B worth of 2.6M treasury shares last Friday. It represents 3% of the shares outstanding, reducing the treasury shares from 13% to 10%.
• With this cancellation, the float change reaches 5%p, triggering an adjustment from 68% to 73% in the upcoming cycle, just in time for the FnGuide Top 10’s December rebalancing.
• As a result, POSCO Holdings suddenly becomes a strong contender to beat KB Financial in the FnGuide Top 10 rebalancing as they will be in a very tight race.

• Deepak Nitrite (DN IN) has emerged as one of the key players in the chemical intermediate industry over the last few years.
• The company’s emergence saw a structural and more or less a positive change in the balance sheet health and overall scheme of operations.
• The green flags include strong balance sheet position and surging return ratios, while the red flags include poor cash transmission and margin losses lately.

• On 12 August, POSCO Holdings announced that it will cancel treasury shares worth 3% of outstanding shares involving 2.6 million shares worth 672 billion won.
• The cancellation of treasury shares is a shareholder friendly policy that will improve the company’s ROE and P/E ratios. The treasury shares cancellation will be completed on 22 August 2022. 
• The combination of treasury shares cancellation and high dividend yield is likely to lead to higher probability of POSCO Holdings outperforming KOSPI on a total returns basis this year.