Utilities Sector

• 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.

• Clearly, the pace of decline of deemed cross-held shares held in retirement benefit trusts is slower than the pace of decline of ordinary cross-held shares held on the balance sheet.
• Companies with deemed shareholdings tend to have larger total assets than companies with general policy shareholdings (policy shareholdings account for 7.3% of total assets).
• Although they are less visible, the reduction of deemed shareholdings will come later because shares of important business partners and banks are contributed to retirement benefit trust as deemed shareholdings.

• Respect the trend – inflation continues to trend down but also continues to surprise on the upside in terms of analysts’ expectations.
• Getting inflation back into the target corridor will be a slow and painful process as inflation is broadly driven by the components of shelter, transportation services, medical services, and not only food and energy, which get the most headlines in the newspaper.
• On the other hand, we’re on the right track, as the YoY comparisons have declined since July.

• After one month from the September batch of Hong Kong Connect inclusion, we provide an analysis on the stock inclusion for 12 stocks. 
• We analysed the inclusion by performance post announcement, performance post inclusion, inflows and analyst coverage.
• We continued to observed outperformance post the HSCI announcement but not the actual inclusion despite the fact that southbound inflows has a significant impact on the trading volume. 

• 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.