Energy & Materials Sector

• On 23 September, Hanwha Solutions announced a set of restructuring measures which are probably the biggest ever moves by the company in the past 50 years.
• The spin-off of the Hanwha Galleria is a good move. Clearly, having both the renewable energy and a luxury department store business under one roof does not make much sense.
• We also like the company’s move expand its U.S. solar module production capacity. The total amount of potential benefit could be nearly US$2 billion over the next decade. 

• Growatt Technology (1833969D CH), a leading PV inverters manufacturer, will seek a listing hearing for a US$1 billion HKEx IPO in October, according to press reports.
• In Growatt Technology IPO: The Bull Case, we highlighted the key elements of the bull case. In this note, we outline the bear case. 
• The key elements of the bear case rest on rising customer concentration risk, high dependence on Brazil for growth, limited pricing power and a shift to FCF burn. 

• Inside is a recap of movements in the last week relating to the Hong Kong Stock Exchange -Shanghai and Shenzhen Northbound Connect facilities, broken down by company and industry.
• Overall, net outflow over the past week was ~US$1.4bn, split between Shanghai (-US$0.8bn) and Shenzhen (-US$0.6bn).
• The largest inflows were into Tianqi Lithium (002466 CH) and Midea Group (000333 CH). The largest outflows were in East Money Information (300059 CH) and Kweichow Moutai (600519 CH).

• There is no unlocking of treasury shares, so a flow betting on dramatic value accretion will not occur. For tendering, the proration risk appears to be relatively high.
• Passive trackers will sell at the close on February 24 and repurchase (likely only for Solutions) at the close on March 31. The flow size would be around 5.5x ADTV.
• ECO risk wouldn’t be a concern as the new rule will grant appraisal/preemptive rights to the existing shareholders. Also, Hanwha hinted at the possibility of choosing private placement over ECO.

• The seasonal strength of the water treatment business should lead to Hawkins (HWKN) offsetting the sales decline from industrial specialty chemicals declining in price in the September quarter
• There is now evidence some specialty chemical prices are beginning to decline. When there has been no LIFO charge, HWKN has reported gross margin above 20 percent.
• Summer months are seasonally the time when there is greater demand from HWKN’s water treatment customers. Over the course of the past year HWKN has grown the segment through acquisitions

• Today, Nagoya Premier-listed Chubu Steel Plate (5461 JP) announced that it had applied today to be listed in Tokyo. 
• It is one of very few Japan names not listed in Tokyo. A TSE listing examination will be conducted, and there is a possibility it moves to TSE Prime.
• There are 6 key segment transfer and listing requirements to gain a listing in TSE Prime. Chubu Steel Plate is really close.

• Six+ weeks ago, BHP Group Ltd (BHP AU) approached OZ Minerals Ltd (OZL AU) with a bid of A$25/share. Oz very quickly rejected it and said it was worth more.
• The back and forth immediately post-rejection was not conciliatory. My expectation was that if they came back quickly, they’d have to pay A$30. But coming back quickly was tough.
• There are hints now that may be the price. But it may not be. It will take time. 

• Underpinned by higher ASP and sequentially lower input costs, CPMC Holdings (906 HK) should achieve better margin in 2H22. Its 17% fall in share price YTD makes it appealing.
• Average aluminum price was down 14% so far in 2H22, vs. 1H21, good to its costs. Well-controlled selling and administrative costs will help to support profitability recovery.
• New two-piece can capacity will grow by 54% over the next three years as 5 production lines are expected to be added. Most of them already have demand lined up.

• Freeport delivered a disappointing result and failed to meet Wall Street expectations on all counts but the future outlook remains optimistic.
• The company is increasing production year over year, and controlling expenses in a difficult environment and benefits from a highly favorable macro for copper.
• With an expected rise in demand for copper with respect to energy conservation especially in EVs, the company benefits from a positive future macro.

• With an improving outlook for copper given its critical role in energy storage and transport, Southern Copper is expected to be a major beneficiary in the long run.
• Southern Copper did have an interesting set of developments despite a rather disappointing result.
• The company has signed an agreement with the Michiquillay copper project at the cost of $400 million in Cajamarca, Peru.

• Bloomberg reported that BHP Group Ltd (BHP AU) has been considering raising its bid for OZ Minerals Ltd (OZL AU). OZ is pushing BHP to increase its offer to A$30. 
• The OZ Board has a strong justification for a higher offer as BHP’s acquisition of OZ would tick the boxes of future-facing commodities and potential operational synergies.
• Rio Tinto Ltd (RIO AU) recently increased its bid to minority shareholders of Turquoise Hill Resources (TRQ CN). This increases the probability that BHP will return with a sweetened offer.

• Today before the open, China’s State Administration for Market Regulation (SAMR) finally announced the approval of the takeover of Hitachi Metals (5486 JP). This was what delayed things. 
• The approval had actually been issued on 7 September, and the collected approvals in the week to the 12th were announced today. Some media outlets had the info yesterday.
• I expect it is likely that the Bain Tender Offer to buy Hitachi Metals will be announced today after the close, or at latest, early next week.

• I’m currently working on the September issue of Watchlist Deep Dives, which features Sherwin-Williams.
• My research process is primary-sources focused and that means reading lots of 10K’s, which include a report from the company’s auditors.
• I was surprised to see that Ernst & Young had served as SHW’s auditor since 1908.

• 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.