Utilities Sector

• The group announced to cut its output limits of as much as 2 million barrels a day, using current targets as a starting point.
• While a significant reduction, the impact on global supply will be much smaller because several countries are already pumping below their quotas.
• Most analysts expect that the real supply cut will be around 700 to 800 bpd.

We view China Oil and Gas (COG) as “Medium Risk” on the LARA scale. This takes into account: [1] regulatory risk, with the company having experienced delays of over three years in cost pass-throughs for tariffs in Qinghai (since resolved); [2] exposure to oil price volatility in the small upstream oil and gas (O&G) segment; and [3] any aggressive debt-funded acquisitions, which we remain cautious about following the company’s acquisition of a 22% stake in Shandong Shengli in 2021. COG’s main asset is its 51% interest in downstream gas provider China City Natural Gas (CCNG), with the remaining 49% held by Kunlun Energy, a subsidiary of SOE PetroChina. Hence, cash leakage from dividends is significant. We believe the relationship with Kunlun helps secure COG’s gas supply and improves the company’s ability to obtain gas distribution concessions. In addition, PetroChina’s parent, China National Petroleum Corporation, had previously provided financing to CCNG at competitive rates.

Our Credit Bias on COG is “Stable”, given COG’s solid revenue growth from natural gas sales and distribution. Additionally, the upstream O&G business has benefited from strong oil prices. It has also expanded into production and sales of coal gasification, further diversifying the businesses. COG has a sound liquidity profile and reasonable access to funding. That said, we remain cautious about the financial performance of Shandong Shengli as COG has provided guarantees for its banking facilities, which could impact COG’s credit profile.  

Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”.

• We summarise the latest spreads and newsflow of merger arb situations covered by us across Hong Kong, Australia, New Zealand, Singapore, Indonesia, Malaysia, Thailand and Chinese ADRs.
• Highest spreads – Shandong Fengxiang (9977 HK), Alliance Aviation Services (AQZ AU), 21Vianet Group (VNET US), 111 Inc (YI US), Genex Power Ltd (GNX AU), Pendal Group (PDL AU).
• Lowest spreads  OZ Minerals Ltd (OZL AU), Tyro Payments (TYR AU), Nitro Software Ltd (NTO AU), MACA Ltd (MLD AU), Jinke Smart Services (9666 HK), True Corp Pcl (TRUE TB).

• China Power International (2380 HK) is the hardest hit in this round of market sell-off with a 28.9% plunge in share price in Sep – we think this is overdone. 
• Coal-Fired margin, which is the key drag in 1H22, will improve in 2H22. Its clean energy segment has performed well, and new capacity acquired will start to provide contribution.
• Its strategic transformation target of over 90% of capacity from new energy by 2025, up from 50.7% in 1H22, has not changed. Parent asset injection will generate massive upside potential. 

• Low valuation against peers in China albeit China Datang Corp Renewable Power (1798 HK) is one of the few pure-play wind farm operators in HK. 
• Its free cash flow reached its highest in more than 10 years. 
• The challenging equity market makes China Datang Renewable Power looks even more attractive.

• At the beginning of the week, China was redoubling its efforts to bolster food security by trying to cut the amount of soybeans that get turned into animal feed.
• China is by far the world’s biggest importer of soybeans, which account for the bulk of its consumption.
• A lower ratio would of course mean fewer soybean imports needed as demand would somehow decline a bit.

• Environmental:  KEPCO’s power transmission tower construction is destroying ecosystems and posing a climate risk in various areas, which is also why the coal mine development project in Australia was suspended. 
• Social : 58% of KEPCO’s suppliers were found to be illegal subcontractors leading to controversy over work environment issues. Also, the construction of power transmission towers sparked serious community conflicts.
• Governance : Despite KEPCO’s large deficit, the company’s moral risk and poor risk management issues, such as corruption and excessive wages of employers, continue to surface. 

• We maintain the BUY call while raising the TP by 7%to Bt62.0 on the back of SOTP adjustment to factor in acquisition of new 588MWe Jackson Generation power project (US) 
• 49% holding in the US project will add Bt4 in SOTP The company informs the SET about acquiring 49% stake in 1,200 MW (588MWe) Gas power plant “Jackson Generation”
• The company supplies electricity to the PJM (Pennsylvania, New Jersey, and Maryland) which is a regional transmission organization (RTO) that coordinates the movement of wholesale electricity in the US

• With concerns on weaker 1H22 profit and lower industry return (due to Lianjiang offshore project) now behind us, China Longyuan Power (916 HK) is well set for better 2H22.
• Utilisation hours should see improvement while new capacity growth is another major driver. The upgrades of aged and small-sized units will almost double its existing capacity. 
• Receipt of Rmb11.4bn subsidies clearly represented an acceleration in collection. This will stay as contributor to better cash flow and enhance financial position. 

• We believe KEPCO is well-positioned within the utility sector to benefit from growing support for nuclear restarts among policy makers and the general public
• Given its substantial nuclear power generating capacity, KEPCO will likely see best-in-class balance sheet and cash flow-generation over the next several years.
• This puts KEPCO well ahead of peers in terms of both environmental credentials and attractive shareholder returns.

Lucror Analytics Weekly Wraps provide an overview of all Morning Views comments and reports published by our analyst team in the past week, and also showcase a list of the most-read reports.

In this Insight:

1. ABM Investama
2. China Jinmao Holdings
3. Lifestyle International Holdings
4. Geely Auto
5. First Pacific Co

and more…