Utilities Sector

• On 19 January, the HKEX clarified the liquidity criteria as well as treatment of Differentiated Voting Rights (DVR) stocks and the criteria for current Northbound stocks to become Sell-only.
• We currently see 975 China A-shares becoming eligible for Northbound Stock Connect when the extension is implemented.
• With the extension likely to be implemented in June, there will be additions to the MSCI China Index, FTSE All-World Index and FTSE All-Cap Index in August and September.

• On 6 July, the French Prime Minister said that France would have 100% of EDF. I recommended BUY at €8.98 in the wake of a very willing big-pocketed buyer.
• The French state now holds 92.71% of voting rights in EDF, and intends to initiate the squeeze-out within three months from closing (up to 22 March).
• Although the shares are still liquid, gross spread is 0-2 bps, and therefore there is no trade worth considering, in my view, just selling into the sustained purchase order/await squeeze-out.

• Hankyung’s report is a clear misunderstanding under the current index methodology. The possibility of Samchully and Daesung Holdings’ KOSPI 200 inclusion is NONE.
• However, the issue of deteriorating the market representation of the K200 index, which is caused by the top stocks outside the index, is gaining attention in the local financial space.
• So, we should prepare for the possibility that KRX will revise the methodology. In this case, an intense preemptive flow for the top names outside the KOSPI 200 can appear.

• China Power International (2380 HK) announced positive profit alert for FY22 at Rmb2.3-2.7bn, vs. Rmb516m losses in FY21. Such guidances are 14-34% ahead of current consensus forecasts.
• Disposal and acquisition gains of Rmb2.15bn are the main contributors. As we see further clean energy injections and coal-fired disposals going forward, there is room for more such gains. 
• Losses for core operations are Rmb300-700m in 2H22, a huge 73.5% YoY reduction. We will not read too much into HoH profitability retreat as this is due to hydropower seasonality.  

• Australian institutional investor IFM has informed the Spanish National Securities Market Commission (CNMV) that it has increased its stake in Naturgy Energy Group SA (NTGY SM) to just over 14%.
• Corporate politics: IFM is still far from the 17% threshold that would grant two sits on the Board of Naturgy (and the initial minimum acceptance condition in the partial offer).
• Speculative buy (TP €27.42, DCF-based). IFM’s intention of increasing its stake may continue to drive up the share price.

• 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).