Utilities Sector

• People who can make business strategy decisions that are economic sense should be hired to serve on the board, not necessarily investors or financial experts.
• If the motivation to increase corporate value is weak, linking the compensation of directors to the expansion of corporate value or granting them the company’s stock is an alternative.
• Investors aren’t necessarily the only ones with conflicts of interest with shareholders. Founders hold significant shares, and the same problem can be assumed for directors from financial institutions with cross-shareholdings.

• Since the median P/B of companies listed on TSE is 1.0, Japanese companies will continue to attract the keen attention of activist investors around the world.
• Many Japanese managers can rest on their laurels with share prices that don’t command premium because of silent shareholders like cross-holding and BoJ that little care about share price performance.
• There are many companies that publish management strategies that only give a sense of doing, and the stock price does not fall but keeps not significantly outperforming.

• The three recent transactions of China Power International (2380 HK) provide solid evidences that it is accelerating its progress in transformation into a giant green energy play.
• Partial disposal of coal-fired assets will generate significant disposal gain and reduce exposure to loss-making business. Introduction of CCB Investment as green power shareholder will improve cash flow.  
• Acquisition of 579MW of wind power capacity will raise proportion of clean energy in its total installed capacity by 0.9pp. This also showcases strong support from its parent SPIC. 

• The SSE180, SSE380 and SZSE1000 indices rebalance at the close on Friday and that will lead to changes to the list of stocks eligible for Northbound Stock Connect.
• Deletion from the Northbound Stock Connect Buy and Sell list will result in MSCI and FTSE deleting stocks from their indices. That selling will take place at the close Friday.
• We expect 37 stocks to be deleted from the MSCI and FTSE indices at the close on 9 December – the announcements should be made later today or tomorrow.

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.

• China Water Affairs

• A “valuation system with Chinese characteristics” has the media, ostensibly, discussing whether this implies a premium for SOEs and companies aligned with national goals.
• In early 2020, SOE-backed clean energy play CGN New Energy Holdings (1811 HK) was subject to a potential privatisation from its parent; but it failed to materialise. 
• During the 14th and 15th Five-Year Plans (2021-30) period, China’s installed capacity for wind and solar power is expected double.

• Operating under the brand name J-Power, Electric Power Development C (9513 JP) is leading Japan’s efforts to make carbon dioxide-free electricity by 2050.
• The company’s investments in gasification and carbon dioxide separation technology and carbon dioxide-free hydrogen generation from coal are close to commercialisation.
• With the technology to serve other power producers to develop their own environmentally-friendly power projects, J-Power could turn into a global-leader in the power generation space in the next decade.

• While China Gas Holdings (384 HK) expects better gas dollar margin HoH, there are still high profit uncertainties and its full-year operational guidance does not look exciting.
• The expectation of flat to 10% YoY decline in new residential household connections is not encouraging. With 1H FY23 profit only amounted to 42% of consensus, we see downgrade risks.
• Despite achieving positive free cash flow, its high gearing of 69.9% (+4pp HoH) is still very stretched relative to peers. We prefer Kunlun Energy (135 HK).

• There are 15 changes for the Shanghai Shenzhen CSI 300 Index (SHSZ300 INDEX) at the upcoming rebalance that will be implemented at the close of trading on 9 December.
• While most of the deletions are in line with forecasts, there are a few differences on the inclusions as the index committee has used its discretion to overlook some names.
• The Industrials, Materials and Utilities sectors gain index spots at the expense of Health Care, Financials, Consumer Staples and Consumer Discretionary.

• It’s unclear whether the stocks that lost ％ TOPIX had been overpriced or whether selling pressure caused temporary underperformance. However, it’s clear these illiquid stocks are unsuitable for institutional investors.
• While users want TOPIX liquidity to increase, TSE insists on aligning its criteria for TOPIX stock selection with prime market listing criteria, which takes precedence over the interests of users.
• Rather than asking these companies to take on daunting task of dramatically raising both profit margins and growth, TSE should bring TOPIX criteria to threshold that institutional investors invest in.

• Manufacturing Sentiment in the US continues to decline. US manufacturing neared stagnation in October as orders contracted for the fourth time in five months, while an index of prices paid fell to a more than two-year low.
• As most commodity groups are heavily correlated with the ISM data, this will provide significant headwinds over the next six months or so, according to our leading indicators.
• By now, there is quite a divergence in industrial production in general. We expect industrial production to crash over the next few months, which will continue to be a nasty factor for commodity demand.

• Iberdrola SA has not abandoned its strategic plan in the United States, which includes the acquisition of PNM Resources through its American subsidiary Avangrid Inc.
• Iberdrola is convinced that the transaction will be unblocked in the coming weeks, either because the appeal prospers or because of changes in the regulator.
• I retain my TP of $50.3 cash takeout price (consideration offered by Avangrid/Iberdrola) vs. my $49.8/share median implied valuation. My TP represents 8.5% upside plus a 2.9% dividend yield.

• With the beginning of this week’s newsletter, I probably won’t make any new friends in my home country.
• What makes me sad is that literally nobody is speaking about the untapped natural gas reserves we have underground in Germany that are indeed accessible.
• A short calculation: In 2021 Russia delivered 55 billion cubic meters to Germany or 55% of the total German gas consumption.