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ab  





             

 !"



   #$    %!   &"

'()*+,&

#* %!-!*!-(!

&.&

    / 0 1% #2+344&   

*.5&$016#2+

356&01 *%6#2+3"*4"46&"

 !!!"#!$%#

71%6#2+34"46&8%!



* %!-!*!-(!()*

+" 9     $      

:;

"

$7$ !"

&'  ()

7$0

/1%#2+344&"+<2$<=

+#<=+&0:

0"

/1

0">

      /     

"?$016#2+356&;

%0   ;  0       

" 9  *       1%6 #2+

36&1%6#2+34"46&"

*!

@  $ 9A        

          2B> #2

B>&

 " <  AA #1 A&   

#CD&!"

1#EF<G/A&

$<1

#<1&"9

    AA    #&  

#'&5!"

+,

H

2

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@

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-(%*844%

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-(*5*(((

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-(%*84

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-(%*8444

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- **4%44

=      27+ + @ E  44.0*/ &+/3&4/7 48 +9:+8 8*&.7*:+*

;<=>?@;FG;C<C<GHI9?FFG;JIIKIFD=HIJ;ILM?N>;KHI@NO:P*NIA;<C<MFAIQ27+

"@

:"

"

Q-Series Redux

China's carbon trading: a fast-emerging

Rmb500bn market in the race to net zero

9"*!R 4 January 2022 ab 2

&

+R QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQS

Why revisit the theme? What has changed?. . . . . . . . . . . . . . . . . . . . . . 3

Modelling China's carbon trading—the UBS interactive model . . . . . . . 12

Potential Scenarios....................................... 13

Potential sector and stock implications. . . . . . . . . . . . . . . . . . . . . . . . . 15

1!TQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ%U

The carbon trading market formation . . . . . . . . . . . . . . . . . . . . . . . . . 19

EU ETS—a snapshot of its history. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Summary of major carbon markets globally . . . . . . . . . . . . . . . . . . . . . 23

1(VTQ Q Q Q Q Q Q Q Q Q Q W

Quantitative approach.....................................26

Qualitative approach......................................28

&!  T Q Q Q Q Q Q S

China's Rmb500bn carbon-trading market potential, and more .... . . . . 30

Implications for China's carbon trading . . . . . . . . . . . . . . . . . . . . . . . . 33

2!&VT Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q SW

Summary—expectations on China's carbon prices . . . . . . . . . . . . . . . . 38

&!&&+(!TQ Q Q Q Q Q Q Q Q Q Q Q Q SX

What is CCER?.......................................... 39

Development history of CCER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

4!RY9 (!Q Q Q Q Q Q Q Q Q Q 

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9"*!R 4 January 2022 ab 3

Q-Series Redux UBS Research

QMRRSTU

1 T1!T

)*+$

,H"

   

0"?*!-(!

"B**

* %!-!"=

 #1%6   156 &" 9     27+

1%6#2+34"46&

8%!"

?:



"

%[+ ,!! %U"%,A

V86 #2+3886&  V6 #2+36&  ("     

#&$0



"

[ & ! S)W  )  , =

+

"B

  ; WAF

 *      %!   

!B<@"

+

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"?

"

S[!(!%'=

)*+$$$"

*;;  "

><

"?

0

"

[& '<=><

          "

$  0         

"=#

&* "

?"

[+:!R'>1<2$0

*:

$"=

  * 0  0      

 " =         

           1%6

<2$V86"?

0"

1T

)*+$

:,

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abGlobalResearch4January2022NewmarketmaybeworthmorethanRmb500bn,supportingcarbonneutralityInlinewithothercountriesannouncingtheirmovesintocarbonpricinginstruments,Chinalauncheditsnationalcarbontradingmarketon16July2021,initiallyforthepowersector,whichaccountsfor40%ofitstotalemissions.In2022,webelievecarbontradingwillstarttobecomeanessentialmarkettooltocarryoutthedifficultprocessofdecarbonisingindustrialsectors(China'sareresponsiblefor50%ofitsemissions).Movingonfromour2018Q-Series,ourthreenewconclusionsarethat:1)theimpacttoearningshaswidenedacrosscompanies(-45%to+10%now,versus-12%to+8%previously),drivenbyahighercarbonprice;2)carbonmayevolveintoanalternativeinvestmentwithamarketsizeexceedingRmb500bn(US$77bn)andmoreavailablecarbon-relatedfinancialproducts;3)China'scarbonpricesmayexceedRmb200/t(US$31/t)inthenextfewyearsversusRmb40-50/t(US$6.20-7.70/t)now.Interactivemodelshowswidenedearningsimpactbetween-45%and+10%BasedonaRmb50/t(US$7.70/t)carbonpriceand95%freeallocationofcarboncredits,ourinteractivemodelshowscarbontradingcouldbringanearningsimpactofbetween-45%and+10%tocompanieswecover,comparedwith-12%to+8%inour2018Q-Series.OurfourscenarioslayoutChina'spotentialpathstodevelopingitscarbontradingmarket,basedonwhatwebelievearethetwomajorswingfactors—carbonprices,andthenumberofindustriescomplianttotheprogramme.Inourmostpositive'Booming'scenario,beneficiariesofcarbontradingcouldgainupto40%innetprofit.Carbon:alternativeinvestmenttoolwithpossiblepriceofmorethanRmb200/tBasedonourpreliminarycalculations,wethinkChina'scarbonexchangemayhaveamarketsizeofmorethanRmb500bn(US$77bn).SimilartotheEU'sEmissionsTradingScheme(ETS),weexpectthemajorityofcarbontradingvolumetobecontributedbycarbonfuturesmarket,tobeformedinthenextfewyears.Inourbullcase,weestimatethemarketsizecouldreachRmb2trn,bringingpotentialcommissionfeesofhundredsofmillionstotradingexchangesandmarketmakers.Furthermore,newcarbonfinancialproductscouldevolvewithamplemarketsizes,bringingnewbusinesstoChinesefinancialinstitutions.WeforecastChina'scarbonpricetoexceedRmb200/t(US$31/t)—5xthecurrentprice—inthenextfewyearsgivenstrongerdemandandtighteningsupply.Ourverylong-termupsidecarbonpriceestimatesarearoundRmb650/t(US$100/t),whiledownsidecarbonpricesmaybeflatatRmb50/t(US$7.70/t).SectorandstockimplicationsAtthisyear'sCOP26summit,participatingcountriesagreedtoestablisharobustframeworktotradecarboncreditswithoneanotherthroughtheUNFCCC(UnitedNationsFrameworkConventiononClimateChange),whichwethinkmightacceleratedecarbonisationglobally.EfficientthermalIPPs(CRPower)andefficientaluminiummakers(ChinaHongqiao)areourmostfavoured,withupto10%gainsinnetprofit.Renewableoperators(Longyuan,XinyiEnergy,YangtzePower)couldalsobenefitmoreifChina'sgovernmentresumesandadmitsmoreChineseCertifiedEmissionsReductions(CCER)registrationintothecarbontradingprogrammeinthefuture.OurleastfavouredstocksareinefficientthermalIPPs,inefficientaluminiummakers(Chalco)andsteel(Magang),givenpotentialearningserosionofover30%ledbyhighercarboncosts.EquitiesGlobalUtilitiesKenLiuAnalystken.liu@ubs.com+852-29717516TomLiAssociateS1460121020001tom.li@ubs.com+86-213-8668862YishuYanAnalystS1460520110001yishu.yan@ubs.com+86-21-38668782RonaldWuAnalystronald.p.wu@ubs.com+852-29715660JulieHudson,CFAAnalystjulie.hudson@ubs.com+44-20-75684632PeterGastreichAnalystpeter.gastreich@ubs.com+852-29716121JamesKanAnalystjames.kan@ubs.com+852-29716334XinChenAnalystS1460511050002xin.chen@ubs.com+86-21-38668864XinleiLiAssociateS1460120120005xinlei.li@ubs.com+86-21-38668805JarvisLamAnalystjarvis.lam@ubs.com+852-29717701SamArieAnalystsam.arie@ubs.com+44-20-75671107ThisreporthasbeenpreparedbyUBSSecuritiesAsiaLimitedANALYSTCERTIFICATIONANDREQUIREDDISCLOSURES,includinginformationontheQuantitativeResearchReviewpublishedbyUBS,beginonpage55.UBSdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.Q-SeriesReduxChina'scarbontrading:afast-emergingRmb500bnmarketintheracetonetzeroQ-SeriesRedux4January2022ab2ContentsExecutivesummary....................................3Whyrevisitthetheme?Whathaschanged?......................3ModellingChina'scarbontrading—theUBSinteractivemodel.......12PotentialScenarios.......................................13Potentialsectorandstockimplications.........................15Whatiscarbontrading?...............................18Thecarbontradingmarketformation.........................19EUETS—asnapshotofitshistory.............................22Summaryofmajorcarbonmarketsglobally.....................23Whatisthefinancialimpacttochina'seconomy?...........26Quantitativeapproach.....................................26Qualitativeapproach......................................28Couldcarbonbecomeanalternativeinvestmenttool?......30China'sRmb500bncarbon-tradingmarketpotential,andmore........30ImplicationsforChina'scarbontrading........................33HowhighcouldChina'scarbonpricego?.................36Summary—expectationsonChina'scarbonprices................38CouldCCERresumeaspartofcarbontrading?.............39WhatisCCER?..........................................39DevelopmenthistoryofCCER...............................40Appendix—Quantitativeimpactofcarbontrading..........42RequiredDisclosures..................................55GlobalDisclaimer....................................58GlobalWealthManagementDisclaimer..................60KenLiuAnalystken.liu@ubs.com+852-29717516TomLiAssociateS1460121020001tom.li@ubs.com+86-213-8668862YishuYanAnalystS1460520110001yishu.yan@ubs.com+86-21-38668782RonaldWuAnalystronald.p.wu@ubs.com+852-29715660JulieHudson,CFAAnalystjulie.hudson@ubs.com+44-20-75684632PeterGastreichAnalystpeter.gastreich@ubs.com+852-29716121JamesKanAnalystjames.kan@ubs.com+852-29716334XinChenAnalystS1460511050002xin.chen@ubs.com+86-21-38668864XinleiLiAssociateS1460120120005xinlei.li@ubs.com+86-21-38668805JarvisLamAnalystjarvis.lam@ubs.com+852-29717701SamArieAnalystsam.arie@ubs.com+44-20-75671107Q-SeriesRedux4January2022ab3Q-SeriesReduxUBSResearchExecutivesummaryWhyrevisitthetheme?Whathaschanged?IthasbeenfouryearssincewepublishedourfirstQ-SeriesonChina'scarbontradingmarket:GreeningChina,theemissiontradingscheme.Inthatreport,weappliedmetricsobservableintrialcarbontradingschemestoevaluatethepotentialearningsimpactacrosssixdifferentsectors.Weestimatedtheearningsimpactcouldbe-12%to+8%inourbasecase.Now,fromourcompany-by-companyanalysis,weforecastawiderrangefrom-45%to+10%.Thewidenedearningsimpactismainlyduetoahighercarbonprice(Rmb50/tnow,versusRmb30/tpreviously).OurresultsarebasedonUBSinteractivemodel,whichassumesasabasecaseaRmb50/t(US$7.70/t)carbonpriceand95%freeallocationofcarboncredits.Wenotefourmajormacrochangesoverthepastfewyearsthathaveledustobelievetheoverallimpactofcarbontradingatthelevelofstockshasincreased,andthatcarboncreditscouldbecomeanew,risinginvestmenttool.1)Europeancarbonpriceshavequadrupledover2018-21:Pricesarenowaround€90/t(US$99/t),versus€20/t(US$22/t)in2018.Increasedcarboncostscouldhavespillovereffectson(orleadingimplicationsfor)China'scarbonprices,totheextentthattheoverallcostsofpollutionmaybesignificantlydifferentfromwhatwethoughtfouryearsago.2)Chinaannounced2030/2060carbonpeak/carbonneutralgoals:Thisannouncement,inlateSeptember2020,significantlystrengthenedgovernmentpoliciesoncarbonemissions.Newrulesandregulationsthatdrivecorporatebehaviourmightnothavebeenfullyunderstoodbythemarket—eg,inDecember2020,PresidentXiannouncednon-fossilfuelsshouldaccountforaround25%ofprimaryenergyconsumption,whichisabovethe20%targettheNEAmentionedin2016.Inaddition,toimproveenergyusageefficiencyandreducecarbonintensity,inSeptember2021theNationalDevelopmentandReformCommission(NDRC)announcedadualcontrolplanonenergyintensityandconsumption.Webelievecorporatesarelikelytobemoreawareofproactivelyreducingtheircarbonemissionsafterthesenewregulations.3)NationalcarbontradingmarketformedinJuly2021:ThisisclosetoourpreviousQ-Series''brightsky'scenario.Currently,onlythethermalpowersectorisinvolvedintrading,whileallothercarbon-emittingsectors—andrenewables—arenotincluded.From2022Eonwards,webelieveuptoeightmoresectorscouldparticipateandmostinvestorsarenotyetawareofthepotentialearningsimpact.Webelievethemarkethaslowexpectationsoverhowmanysectorsmightbeinvolvedasinvestorsdonotyethavemuchunderstandingofcarbontrading.4)Carbonasaninvestmenttool:CarbonETFshavebeenestablishedinEuropewithassetmanagersinvolvedinprovidinganalternativeinvestmenttoolforinvestors.China'scarbonfuturesexchangeisnotyetcompletelyformedandisstillaworkinprogress.Thisyear,numerousfinancialinstitutionsinChina(suchasbanks,insurersandbrokeragecompanies)havelaunchedtrial-runproductsinvolvingcarbonallowances.Webelieveinvestorsarenotyetawareofthesedevelopments.5)EUcarbonbordertax:InourrecentFirstReadontheEU'scarbonbordertax,wenoteacceleratedlegislationonthecarbon-borderadjustmentmechanismforimportinggoodsmightfurtheracceleratetheimprovementofChina'scarbonmarket.Toavoidpayingacarbon-bordertax,Chineseexportersmustprovetheysatisfytheircarbonobligationslocally.ThelaunchofadomesticcarbonmarketcouldthereforeallowcompanieswithunavoidableemissionstopaytheChinesecarbonpriceofRmb50/tinsteadoftheEU's€90/t.WealsothinkthereisincreasedpotentialforChinesecarbonpricestoriseinthenextfewyears.Whatareournewconclusions?InthisQ-Series,werevisitourthesisonChina'scarbontradingmarketdevelopmentandhavethefollowingmajorconclusions:Q-SeriesRedux4January2022ab4Keyconclusions−Earningsimpactforcompanieshaswidenedversusour2018Q-Series—ie,beneficiariescouldbebetteroffwhileinefficientemittersarelikelytobeworseoff.Wepreviouslybelievedtheearningsimpactwouldbebetween-12%and+8%underacarbonpriceofRmb30/t(US$4.60/t).However,givencarbonpricesareincreasingtowardsRmb50/t(US$7.70/t),wenowexpecttheearningsimpacttobebetween-45%and+10%.Positivelyimpacted:renewables(solar/wind/hydro),efficientthermalIPPs,efficientaluminiummakersandpaper—upto10%earningsincreasefromthesaleofcarbonallowances.Neutral:airlines,cementandoil&refineries.Negativelyimpacted:inefficientthermalIPPs,inefficientaluminiummakersandsteel,withpotentiallymorethan30%ofearningseroded.−Freeallocationofcarboncreditscoulddeclinefasterovertimethanwepreviouslythought.Thiswouldincreasethecostofobtainingcreditsinthefirstplace,whichwehadnotconsideredin2018.TheEUhasrecordeda-7%CAGRover2005-20.Asseenfrompreviousprovincialpilots,Chinacouldallocate95%ofitscarboncreditsforfreeatthebeginningofthecarbontradinglaunch,althoughweexpectthispercentagetodeclineinthefuture,similartotheEU.−ChinesecarbonpricescouldrisebeyondRmb200/t(US$31/t)inthenextfewyears.OurEuropeanutilitiesresearchteam'sanalysisfor2021EsuggestscarbonwouldneedtobeworthUS$100-500/tinordertoincentivisefasteradoptionofcarbon-neutralindustrialtechnologiesunderthe1.5degreepathway.−WethinkcarboncouldbecomeanalternativeinvestmenttoolinChina.WeestimatethemarketsizeofChina'scarbonexchangemayreachRmb500bn(US$77bn)andaprimaryfuturesmarkettobeformedinthenextfewyears.Thiscouldprovidebrokeragesandcarbonassetmanagementfirmswithnewbusiness.−Wethinknewcarbonfinancialproductsshouldevolve.Currently,thereareproductsincludingcarbonassetpledges,carbonbonds,carbonrepurchases(repo),carboninsuranceandcarbonstructuredproducts,andwebelievethefuturemarketsizecouldbesignificant.−WethinkCCER,whichallowsrenewablestoissueandtradecarbon,couldresumeattheearliestin2022E,potentiallycreatingupto10%earningsupside(assumingamodestamountofparticipationintheearlystages).Figure1:China'scarbontradinginnumbersSource:Wind,companydata,UBSestimatesQ-SeriesRedux4January2022ab5CarbontradinginanutshellTherearetwomaintypesofcarbon-pricinginstrumentsglobally—carbontradingandcarbontax.ThisQ-Seriesfocusesoncarbontrading,whichisessentiallythetradingofcarboncredits—primarilyamongcompaniesthatemitcarbon(carbonemitters),andpartlyincludingrenewablepowergenerators.Chinaadoptsacap-and-tradecarbontradingmechanismthatresemblestheEUETS.Notethatonlycompaniesthatemitmorecarbonthantheircentral-government-allocatedcarboncreditsarenegativelyimpactedsincetheyneedtobuyextracarboncredits.Efficientemittersandrenewablepoweroperatorscanbenefitfromsellingsurpluscarboncreditsorthroughtheircarbonoffsets.Asmentionedbefore,insteadofcarbontrading,somecountries(suchasSouthAfricaandArgentina)haveadoptedacarbontaxtoincentivisedecarbonisation.Comparedwithcarbontrading,acarbontaxismuchsimplersinceitdoesnotrequiregovernmentstoputalotofeffortintobuildingandsupervisingemissiontradingsystems.However,theweaknessesofcarbontaxesareobvious—itisdifficultforregulatorstodetermineareasonablerate,andacarbontaxcannotcaptotalemissions.So,inpractice,somecountriessuchastheUKaredoingboth—theyincludemajoremittersinacarbontradingprogramme,andlevycarbontaxeswhenthecarbonpricesaretoolow.Acompany'scarboncostorgainisthevalueofitsnetemissions,whichisthegapbetweenitsactualemissionsandthefreelyallocatedcarbonquota.Currently,theChinesegovernmentallocatesaround95%ofthecarbonquotaforfreeintheformofcarboncredits.Figure2:HypotheticalcarbontradingmarketSource:UBSWideningearningsimpactamongpositively/negativelyaffectedsectorsOuranalysisshowsthecarbontradingprogramme'simpactoncompaniesislikelytobewidening—ie,efficientemittersshouldbebetteroffwhileinefficientonesarelikelytobeworseoff.Inour2018Q-Series,weestimatedtheearningsimpactunderacarbonpriceofRmb30/t(US$4.60/t)tobebetween-12%and+8%.However,givencarbonpricesarereachingRmb50/t(US$7.70/t),wenowexpecttheearningsimpacttobebetween-45%and+10%.Ourkeyassumptionsare:1)95%ofcarboncreditslikelyallocatedforfree;2)carbonpricesremainatRmb50/t(US$7.70/t);3)CCERtobe5%ofcarbonemissions;4)theQ-SeriesRedux4January2022ab6allocationofcarboncreditswithinanationalcarbontradingprogrammelikelybasedontrialrunsbyprovincialgovernments.Wehavefound:1)renewableenergyoperators,efficientthermalIPPs,efficientaluminiummakersandthepaperindustryshouldallbenefit,withnetprofitlikelytoincreaseby0-10%throughsellingsurpluscarboncreditsorCCER;2)theairline,cementandoil&refinerysectorsarelargelyneutraltocarbontradingastheyalreadycomplytocertainemissionbenchmarks,ortheymightadoptthehistoricalmethodforcarboncreditallocation,meaningtheiractualemissionswouldnotdeviatemuchfromtheirallocatedquotas;3)inefficientthermalIPPs,inefficientaluminiummakersandthesteelindustrycouldallsufferfromcarbontradingwithapotential5-45%shrinkinearningsastheyhavetobearthecosthikefrompurchasingextracarboncredits.Figure3:Earningsimpactfor2020ifcarbontradingwerelaunched,bysector-38%-32%-12%-3%-1%-1%1%1%4%4%7%10%-40%-30%-20%-10%0%10%20%InefficientaluminiummakerInefficientthermalpowerSteelAirlinesOil&RefineriesCementSolarfarmsPaperWindfarmsHydropowerEfficientthermalpowerEfficientaluminiummakerSource:DepartmentofEcologyandEnvironmentofGuangdongProvince,WorldBank,ThomsonReuters,companydata,UBSestimatesThetablebelowsummarisestheresultsofourcompany-by-companyanalysisandalsoincludesanexplanationofourmethodology.Carbonquotasandfreeallocationamountsarecalculatedbasedontherulesofatrial-runconductedinGuangdongProvince.Actualcarbonemissionsarefromcompanyfilings.Thegapbetweenfreecarboncreditsandactualemissionsaretheover/underemissions,whichmayleadtolosses/gainsthroughacarbontradingmarket.Q-SeriesRedux4January2022ab7Figure4:Ourcalculatedimpacton2020earningshadcarbontradinglaunchedthatyear,bycompanyCarbonquota(mt)Freeallocationofcarboncredits(mt)Actualcarbonemissions(mt)CCERfromrenewables(mt)Over/(under)emissions(mt)Carbon(costs)/gain(Rmbm)2020Netprofit(Rmbm)Netprofitimpact(%)NegativelyimpactedInefficientthermalpowerHuaneng(316)(300)333(2)31(1,566)8,455-19%Datang(184)(175)209(6)28(1,382)3,087-45%InefficientaluminiummakerChalco(79)(75)89-14(705)1,876-38%SteelAngang(42)(40)47-7(373)1,978-19%Magang(34)(32)39-7(350)1,983-18%Baoshan(78)(74)89-15(757)12,677-6%ChinaOriental(14)(13)15-2(82)1,586-5%NeutralAirlinesAirChina(12)(11)15-4(198)6,843-3%ChinaEasternAir(11)(10)14-4(185)(1,907)NAChinaSouthernAir(17)(17)19-3(141)(211)NACementConchCement(190)(181)174-(7)32535,1641%CNBM(266)(253)255-2(81)12,553-1%CRCement(56)(54)60-6(298)7,973-4%Oil&RefineriesPetroChina(174)(165)167-2(99)19,006-1%CNOOC(9)(9)9-0(8)24,5100%Sinopec(167)(158)171-13(635)32,211-2%PositivelyimpactedPaperLee&ManPaper(6)(6)5-(1)463,1361%NineDragonsPaper(16)(15)14-(1)654,4381%SolarfarmsXinyiSolar---(0.3)(0.3)164,0590%XinyiEnergy---(0.2)(0.2)98201%HydropowerYangtzePower---(23)(23)1,14526,2984%EfficientthermalpowerCRPower(159)(151)141(2)(12)6048,2247%WindfarmsLongyuan---(4)(4)2225,3904%EfficientaluminiummakerHongqiao(103)(97)76-(21)1,06910,49610%Source:DepartmentofEcologyandEnvironmentofGuangdongProvince,WorldBank,ThomsonReuters,companydata,UBSestimates.Note:1)meansnon-ratedcompanies.Thecalculationisbackward-lookingbasedonactualearningsandemissionsin2020;2)DatangandChalco2020Anetprofitexcl.impairmentcharges,and2021EconsensusearningsusedforAirChina'snetprofit;3)Calculationsbasedonassumptionsmentionedatthebeginningofthischapter,andthequotaallocationmethodmentionedinthepreviouschapter.Inreality,themechanismcouldbedifferentasthedetailsofnationalcarbontradingprogramhaveyettobefinalised.Inourqualitativeanalysis,wediscusshowcarbontradingcouldinfluencesectors'competitivelandscapes,profitabilityandvaluations,aswellastheirstrategicresponsestoreducetheircarbonfootprints.Wethinkrenewables,efficientthermalIPPsandefficientaluminiummakersshouldbethethreesectorsthatbenefitfromimprovingreturnsandvaluationre-ratings.OurpreferredstocksinthesesectorsareCRPower,Longyuan,YangtzePowerandChinaHongqiao.Bycontrast,inefficientthermalIPPsandaluminiummakers,andsteelmakerscouldsufferfromthelaunchofcarbontrading.Therefore,Chalco,AngangandMagangcouldbenegativelyexposedgivenpotentialearningsdeteriorationfromhighercarboncreditprocurementcosts.AnemergingalternativeinvestmenttoolAsthelargestcarbon-emittingcountry,Chinahasthepotentialtobuildthelargestcarbonmarketglobally.WeexpectcarbontobecomeanalternativeinvestmenttoolinChinawith1)roughlyRmb500bn(US$77bn)marketsizeincarbontradinginthelongterm,basedonRmb50/tcarbonprice,10bntonscarbonemissions,and1xtradingmultiplier;and2)moreinnovativecarbon-relatedfinancialproducts.In2020,carbonemissioninChinawasroughly4xofEU,whilethecarbontradingvolumewasjust0.7%ofEU.ThechartsbelowcomparesthecarboncreditstradingvolumebetweenChinaandEU.China'scurrentcarbontradingvolumeissimilartothebeginningvolumeofEUETS,andwefindsomeimplicationsfromEUETSdevelopmentonChina'scarbontrading.Q-SeriesRedux4January2022ab8Figure5:ChinesecarboncredittradingvolumeSource:Wind,UBS.Note:Dataasof16November2021.Figure6:EUAfuturestradingvolumeSource:Wind,UBS.Note:Dataasof16November2021.EUA=EUemissionallowanceItisalsoworthnotingoverallcarbonemissionsintheEUin2020totalledaround2.5bntons,whilethetradingvolumereached9bntons.Soourback-of-the-envelopecalculationofChina'scarbonmarketsize—usingitstotalemissionof10bntonsmultipliedbyacarbonpriceofRmb50/t(US$7.70/t)—mightbeanunderestimationandtherealvaluecouldbehigher.ThetablebelowshowsoursizecomparisonsbetweenChina'sandtheEU'scarbonmarkets.EUETShadamarketsizeofmorethan€600bn(US$660bn)in2020,andweexpectChinatohaveapotentialmarketsizeofRmb500bn(US$77bn),basedontheroughestimationsmentionedabove.Figure7:Carbonmarketsize—EUvsChinaEUETSChinanationalcarbonmarketActualemissionsin2020(bntons)2.510Tradingvolumein2020(bntons)8.950.06Carbonprice(localcurrency)EUR70/tonRmb50/tonMarketsize(localcurrency)EUR626bn(EU2020)Rmb500bn(UBSe)Marketsize(US$)US$689bn(EU2020)US$77bn(UBSe)Source:Wind,UBSestimates.Note:Exchangerate:US$/€=1.1andRmb/US$=6.5Inourbullcase,weassumeChina'scarbonpricemayreachRmb200/twithtotalcarbonemissionsof10bntons,whichcouldcreateamarketsizeofRmb2trn.Ifweapplyatradingmultiplierof3.6x(consistentwiththeEU),andcommissionfeerateof1bp(commissionfeeratesinChinavaryover0.1-2.0bps),thenwecanprojectnationalcarbontradingislikelytobringcommissionfeesofmorethanRmb700mtotradingexchangesandmarketmakers.China'scarbonfuturesmarketiscurrentlyunderdevelopmentFirst,bylookingatEU,wethinkmorecarbontradingproductscouldbeavailableinChina.EUETSconsistsoftheEUAandCER(certifiedemissionreduction)markets,withEUAcontributingnearlyalltradingvolume.TherearethreeprincipaltradingmarketsforEUA:1)thefuturesmarket,2)OTCderivativestrading,and3)thespotmarket,whichincludescarbonpools.Thefuturesmarketisthemostimportantforcarbontradingasitaccountsformorethan90%oftradingvolume.Q-SeriesRedux4January2022ab9Figure8:Carbontradingproducts—EUvsChinaCarbontradingproducttypeEUETSChinanationalcarbonmarketChinaregionalcarbonpilotsSpotcarboncreditYesYesYes-8provincesandcitiesDerivativesoncarboncreditYes-bothfutureandforwardcontractsNoYes-eg.Hubei,butonlyforwardcontractsSpotCERYesNoYes-9provincesandcitiesDerivativesonCERYes-bothfutureandforwardcontractsNoYes-eg.Hubei,butonlyforwardcontractsSource:EEX,ICE,ShanghaiEnvironmentandEnergyExchange,UBSFigure9:EUETSmarketsharein2020,bysegmentSource:Refinitiv,UBSestimates.Notes:1)Thechartaboveexcludestheprimaryauctionandoptionsmarkets(primaryauctionsrefertothosetakingplaceeverycoupleofweeks,wherenationalgovernmentsauctionthenewsupplyofEUA);2)EUAspotincludespre-mentionedcarbonpools.WebelievethelaunchofacarbonfuturesmarketislikelytobecrucialforChina'scarbontradingmarketasitcouldgreatlyenhancemarketliquidity.However,China'scarbontradingmarketisstillintheearlystagesofstudy,accordingtothegeneralmanagerofGuangzhouFuturesExchange(GZFX)inAugust(GZFXislikelytobecomethenationaltradingcentreforcarbonfutures).Webelievekeybottlenecksinclude:1)thespotmarket'ssizeisstilltoosmall;2)andthesettingofthecarbon-trading-market'smechanismneedsfurtherimproving.Wethinktheseissuescouldbegraduallyremovedasmoresectorsandmarketparticipants(eg,institutionalinvestors,qualifiedretailinvestors,marketmakers/liquidityproviders)getinvolvedinthecarbontradingmarket.Inaddition,GZFXhasbeenhiringmoreresearchstafftoworkoncarbon-futuresproductdesign,apositivesignalthatChinesecarbonfuturesareontheway.IntheEU,thereisafairamountofspeculationaboutthefuturedirectionofpolicy.FinancialaswellasindustrialbuyersareallowedtotradeEUAs,sopeoplecanbuythemtobetonthefuturedirectionofclimatepolicy.WethinkthatwouldbepossibleinChinaaswellinthelongerterm,whichcouldboostthetradingvolumeofChinesecarboncredits.MorecarbonfinancialproductscouldbeavailableSecond,alongwithexchange-tradedcarbonproducts,variousfinancialinstitutionscoulddevelopmoreproducts.Onapositivenote,therehavebeennumerousactivetrialssince2014bytraditionalfinancialintermediariesinChinasuchasbanks,insurancecompanies,brokersandassetmanagementcompanies.Q-SeriesRedux4January2022ab10Figure10:CarbonfinancialproductsinChinaWhocanparticipate?RelatedcarbonexchangeExample-firstcaseinChinaCarbonassetpledgeBankHubeiEmissionExchangeHubeiYihuawithSPDBankin2014-Yihuapledged2.11mcarboncreditstothebankforloanofRmb40m.Theborrowingrateisusurallylowerthanthetypicalpledgeloans(sometimes50bpslower).CarbonbondBankandbrokerShenzhenEmissionExchangeCGNNewEnergywithSPDBankin2014,withdealamountofRmb1bnandafloatingcouponratelinkedwiththeCCERincomefromtheunderlyingwindfarms.CarbonstructureddepositsBankShenzhenEmissionExchangeIndustrialBankdidthefirstcarbonstructureddepositinChinain2014-Expectedannualisedreturnof4.1%iscombinedwithafixedyieldof1.9%andafloatingreturnof2.2%,whichwaslinkedtothecarbonprice.Atthematuritydate,investorscanalsobepaidwithsomecarboncredits.CarbonrepoBrokerBeijingEmissionExchangeCITICSecuritieswithHuatongThermalin2014,withdealamountatRmb13.3m-Huatongsolditscarboncreditsfirstforbridgefinancing,andpromisedtorepurchaseitsomedaylater.CarboninsuranceInsurancecompanyHubeiEmissionExchangePingAnwithHuaxinCementin2016-HuaxinCementcanclaimindemnityfromtheinsurancecompanywhenitsactualcarbonemissionexceedsitsquota.CarbonfundFundmanagementcompanyShenzhenEmissionExchangeJiaTanKaiYuanFund(嘉碳开元)establishedin2015withinitialAUMatRmb50m-Thefundwillbeinvestedtocarboncreditmarket,andCCERprojectsforrenewableenergyandenvironmentalprotection.CarbonassetmanagementCarbonassetmanagementfirmNASomepowergeneratinggiants,suchasHuanengandHuadian,haveformedinternalcarbonassetmanagementfirmstomanageandtradethecarboncreditsandCCERoftheparentcompanies,whichisaimedatincreasingthenetvalueofcarbonassets.Source:HubeiEmissionExchange,ShenzhenEmissionExchange,BeijingEmissionExchange,UBSUndertheChinesegovernment'sstrongpushoncarbonneutrality,webelievecarboncouldbecomeanincreasinglyimportantinvestmenttool,withexpandingmarketsizeandproductrange,aswellaspotentiallygoodreturns.Thisshouldinourviewalsobringemergingopportunitiesforfinancialinstitutions.COP26'sgreenlightoncross-bordercarbontradingOneofthemostimportantoutcomesfromCOP26isthatparticipatingcountrieshaveagreedtoestablisharobustframeworkunderwhichtheycantradecarboncreditswitheachotherviaUNFCCC.Currently,mostregulatedcarbon-tradingprogrammesaredomestic,withnocross-bordertransferofcarboncredits.Inhispreviousreport,UBSAPACESGanalystRonaldWusaidcross-bordercarbontradingcouldloweroverallcostsofreducingemissionsglobally,andprovideapotentialsourceofsubsidiestosupportemission-reducingprojectsandsectors.Wethinkthepotentiallinkbetweendomesticandcross-bordercarbonmarketscouldattractmoreoverseasinvestorsinthefuture,whichshouldsupportthedemandforChinesecarboncreditsandnarrowthepricegapsbetweenChineseandEUcarboncredits.Wenoteherethatgeopoliticalissuesareamajorriskthatmightconfusethetimetableofcreatingcross-bordercarbonmarkets.Carbonpricesmayriseto5xthecurrentpriceinthenext10yearsWehavevariousapproacheswithwhichtoestimatecarbonprices,withourEuropeanteam'sanalysissuggestingapricebeyondUS$100/tatthehighendneededforfulldecarbonisation(thoughnotnecessarilyinthenearterm),andindustrysurveyssuggestaroundRmb100/t(US$15.40/t)atthelowend.Ourapproachesinclude:1)comparingthecostofcarbon-neutraltechnologyversuscurrenttechnology,andtherequiredswitchingcostincentives;2)thecostofcarbonrequiredtosupportthedevelopmentofgreenhydrogen;3)thecostsChinesegovernmentofficialsthinkarecorrect;4)andChinaCarbonForum's2020carbonpricingsurvey.Q-SeriesRedux4January2022ab11China'scarbonemissionallowancesaretradingatRmb40-50/t(US$6.20-7.70/t),morethan90%lowerthantheEUcarbonpriceofaround€90/t(US$99/t).WethinkChinesecarbonpricesarelikelytopickupasdemandincreaseswhen:1)moreindustriesbecomecompliantwithanationalcarbontradingprogramme;2)moretypesofinvestorsareinvolved;and3)morekindsofcarbonproductsareoffered,suchascarbonfutures.WeestimateChina'scarbonpriceinthenext10yearscouldexceedRmb200/t(US$31/t),whichis5xthecurrentprice.Figure11:SummaryofexpectedChinesecarbonpricesby2030ESource:MinistryofEcologyandEnvironment,ChinaCarbonForum,Wind,TheStateoftheGlobalEnergyTransition(2021),UBSestimatesFigure12:China'scarbonprices020406080100120140Jun-13Nov-13Mar-14Aug-14Dec-14May-15Oct-15Feb-16Jul-16Nov-16Apr-17Sep-17Jan-18Jun-18Oct-18Mar-19Aug-19Dec-19May-20Sep-20Feb-21Jul-21Carbonprice(weightedaverage,LHS)(Rmb/ton)Source:Wind,UBS.Note:Dataasof16November2021Figure13:EU'scarbonprices01020304050607080Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18Dec-19Dec-20(Euro/ton)Source:Wind,UBS.Note:Dataasof16November2021Q-SeriesRedux4January2022ab12ModellingChina'scarbontrading—theUBSinteractivemodelAsmentionedabove,ourquantitativeanalysisoncompanies'earningssensitivitiesisbasedonthenationalcarbontradingprogrammelaunchedin2020.OurcalculationscoverthesevensectorswiththehighestemissionsinChina.Forcalculationsofcarbonquotas,weassume1)power,steel,aluminium,paper,cementandairlinesadoptthebenchmarkmethod;while2)oil&gasrefineriesadoptthehistoricalaveragemethod.WealsoassumeCCERaccountsfor5%ofthetotalcarbonsupplyinourmodel,whichimpliesaround15%ofrenewableprojectsareentitledtoCCER.Ourtwokeyinputsofvariablesare:−Thepercentageoffreeallocationofcarboncreditsissetat95%,bydefault.China'sgovernmenthasyettopublishdetailsonhowfreecarboncreditswillbeallocatedforthenationalcarbontradingprogramme,sowehaveadoptedwhatwehaveseeninthe2020Guangdongpilot.−China'scarbonpriceissetatRmb50/t(US$7.70/t),bydefault.CarboncreditsarecurrentlytradingatRmb40-50/t.Thedefaultcaseshowstheearningsimpactbroughtbynationalcarbontradingundercurrentpricelevels.Figure14:UBSinteractivemodel—theimpactonearningsfromChinacarbontradingSource:Companydata,UBSestimatesQ-SeriesRedux4January2022ab13PotentialScenariosWebelievetherearetwopotentialfactorsaffectingthedevelopmentofChina'scarbontradingmarket:1)Chinesecarbonprices(high/low);and2)thenumberofindustriescomplyingwiththecarbontradingsystem(more/fewer).Weusetheseasthehorizontalandverticalaxestodevelopthefourpotentialscenariosinourquadrantanalysis(below).Figure15:QuadrantanalysisofdifferentpotentialscenariosforChina'scarbon-tradingdevelopmentSource:UBSestimatesWebelievethesefourpotentialscenarioscouldbeusefulproxiesfortherealworldastheyarecategorisedbytwoofthemostimportantissuesthatregulators,investorsandthemediaarepayingattentionto,whichare1)Chinesecarbonprice;2)thenumberofindustriesparticipatingthenationalcarbontradingprogramme.−Booming:OurmostoptimisticscenariowherebyChina'scarbonmarkethasalargetradingvolumeandhighprices,whichfollowstheChinesegovernment'sactivepushonexpandingthenationalcarbontradingmarkettocoverallindustries.Inaddition,underthegovernment’stightenedcontrolsonemissionsandimprovedmarketliquidity,carbonpricesarelikelytoexceedRmb200/t(US$31/t).EfficientthermalIPPsandaluminiummakersarethelargestbeneficiarieswithnetprofitgainsof29-41%.InefficientthermalIPPsandaluminiummakersarenegativelyimpactedthemost,withsomestartingtoincurnetlossesunderthehighcarboncosts.−Powerfocused:InthisscenariotheChinesecarbonmarkethasarelativelysmallertradingvolumewithhighprices.OnlypowergeneratorsareinvolvedinthenationalQ-SeriesRedux4January2022ab14tradingsystem,asperthecurrentcase.However,underthegovernment’stightenedcontrolsonemissionsinthepowersector,carbonpricesmayexceedRmb200/t(US$31/t).Nodirectimpactisfeltbyindustriesotherthanpowerastheydonotcomplywiththecarbontradingprogramme.RenewablesandefficientthermalIPPsarethelargestbeneficiarieswithnetprofitgainsofasmuchas29%.However,someinefficientthermalIPPsseenetlossesunderthehighcarboncosts.−Moderateexpansion:OurbasecasewhereChina'scarbonmarkethasalargetradingvolumebutatlowprices.ItfollowstheChinesegovernment'sactivepushtoexpanditsnationalcarbontradingmarkettocoverallindustries.However,carbonpricesstayflatatRmb50/t(US$7.70/t).EfficientthermalIPPsandaluminiummakersarethelargestbeneficiarieswithnetprofitgainsof7-10%.WebelieveinefficientthermalIPPsandaluminiummakersarenegativelyimpactedthemost,withapotentialdeclineinearningsof19-45%.−Stagnant:Inthisscenario,China'scarbonmarkethasarelativelysmalltradingvolumewithlowcarbonprices.ThisisthecurrentsituationinChina,sofromalong-termperspectiveourstagnantscenariomeansalmostnofurtherdevelopmentindomesticcarbontrading.PoweristheonlycompliantsectorandthecarbonpricestaysflatatRmb50/t(US$7.70/t).RenewablesandefficientthermalIPPsearnmildgainsinnetprofitupto7%.WebelieveiInefficientthermalIPPsseeapotentialdeclineinearningsof19-45%.Nodirectimpactisbroughttoindustriesotherthanpower.Q-SeriesRedux4January2022ab15PotentialsectorandstockimplicationsThelaunchofanationalcarbontradingmarketcouldbeanopportunityforsomesectorswhileincreasingcostsforothers.Thetablebelowlinksthepotentialopportunitiesandcostsofcarbontradingtoourassessmentoftheimpactonkeysectors,fromalong-termperspective.Wesummariseourmost-andleast-favouredcompaniesasimpactedbythistheme.AttheendofthisQ-Seriesweincludeourfullsector-by-sectoranalysisfeaturingcontributionsfromUBSanalystsfromdifferentsectors.Figure16:China'scarbontrading—potential12-monthimpactonrevenues,costs,ROICandvaluationsSectorRevenuesCostsROICValuationMostfavouredLeastfavouredRenewableandefficientthermalgeneratorsInefficientthermalgeneratorsEfficientaluminiummakersInefficientaluminiummakersPaperN/ANDPCementCNBMConch-HTaiwanCementConch-AAirlinesN/AAirChina-H/AChinaSouthernAirlines-H/AOil&RefineriesSatellitePetroChina-HSPC-APetroChina-ASteelBaosteelMagang-ACRPowerLongyuanYangtzePowerN/AChinaHongqiaoChalco-H/ASource:UBSestimates.Note:1)Directionofarrowsshowtheimpactbroughtbythelaunchofcarbontrading.Upwardsmeanthemetricrisesaftercarbontradingstarts;flatmeansnosignificantchanges;downwardmeansthemetriccoulddrop;2)Colourofarrowsindicateswhethercarbontradingisbringingpositiveeffectstoacompany.Greenmeanspositive(higherrevenue/ROIC/valuationandlowercosts);redmeansnegative(lowerrevenue/ROIC/valuationandhighercosts);yellowmeansneutral.Disclaimer:Thislistofsecuritiescontainsstocksthatmaybeimpactedbyaspecificscenario.Thescenariosdescribedhereinmayplayoutoveramulti-yearperiodwhereasthebase-caseviewofUBSequityanalystsisbasedonthenext12months.Anyreferenceto'currentrating'istotheratinggiveninthelatestpublishedUBSresearchreportrelatingtotherelevantcompany,whichareavailableonUBSNeoPotentialnegativeimpactsandrisksofcarbontradingThoughwearepositiveonthedevelopmentofChina'scarbontradingmarketandthecarbonpriceinthefuture,therecouldbesomedebatesonpotentialnegativeimpactsofcarbontrading,whichmightleadtothedownsideriskstoourviewsoncarbonmarketdevelopmentandcarbonprices.1)Coulddecarbonisationleadtopowershortagesorslowingeconomicgrowth?Unlikely,andthisisnotwhattheChinesegovernmentwouldliketosee.Wethinktheregulatorswanttoachievebothstableeconomicgrowthandcarbonneutralityatthesametime,asstatedattheCentralEconomicWorkConferenceinDecember2021.Duringtheconference,keyChinesegovernmentofficialsstated:1)Chinawouldnotrushtophaseoutallcoal-firedpower,whichcanensurepowersupplysafety;and2)Chinawouldexercisedualcontroloncarbonemissionsandcarbonintensityinthefuture,ratherthanstrictcontrolonenergyconsumptionnow.Goingforward,Chinaisfocusingitsattentiononpowersupplystability.Large-scaleforcedoutagesofindustrialsagainthisyearareunlikelytooccuragain.ThisshouldsupportthestablegrowthofChineseproductionandeconomics.Inthemeantime,anationalcarbonmarketcouldincentiviserenewablesorcleantechdeveloperstocontributemoretopowergenerationanddecarboniseChinaatthesametime.Q-SeriesRedux4January2022ab162)Coulddecarbonisationleadtohighercostsofproductionandbillsforend-users?Likely.Insomecarbon-intensiveindustries,companieslaggingbehindonimprovingtheircarbonintensitywouldsufferfromtheabove-mentionedcarbondualcontrolandtheirprofitabilitywouldbehurtfromhighercarboncosts.However,wethinkthisisalsoanopportunityforefficientcarbonemitters—theycansqueezeoutinefficientemittersgiventheircostadvantagesfromcarbontrading.Inourview,nationalcarbontradingcouldaccelerateconsolidationinmanyindustrieswhilethedirectimpactonproductpricestoend-userscouldberelativelymild(thoughadmittedlytherecouldbesomeincreaseduetotightersupply).Topreventupstreamcompaniesfrompassingthroughthehighercarboncoststotheircustomers,China'sgovernmentmightlevywindfalltaxestoprotectend-users,whichwediscussinmoredetailonPage28.Additionally,thegovernmentcouldusetransferpaymentstoeaseanypotentialincreaseofbills,meaningthemoneycollectedfromprimarycarbonauctionsorcarbontaxcouldbeusedtosubsidiseend-usersandlowertheirbills.3)Arecarboncreditsfacingregulatoryrisk?Yes,wethinkso.Futurechangestothedesignofthecarbontradingschememakeithardertopredictthevalueofcarboncredits,asimilarrisksharedbyEUETS.In2007,theendofPhase1ofEUETS,EUApricesdeclinedtozeroafterEUgovernmentsstatedabundantEUAsbefore2007wouldnotbeallowedtobecarriedforward.Havingsaidthat,wethinktheregulatoryrisksforChina'snationalcarbontradingprogrammeshouldbelessthanEUETSbecause:1)ChinacouldlearnfromtheEU'slessonswhendevelopingitsowncarbontradingframework,withlessriskofcarryingoutcriticallywrongregulations;2)Chinesegovernmentofficialsarehighlyawareofpolicyconsistency,soitshouldbelesslikelytoseesuddenmaterialchangesonregulations.Allin,wethinkthenegativeimpactanddownsiderisksofChina'scarbontradingshouldbecontrollable.WethinkChina'sgovernmentwillmakeeffortstostrikeabalancebetweendecarbonisationandgrowthtargetsinthenextfewdecades.Q-SeriesRedux4January2022ab17Q-SeriesReduxUBSResearchInordertoseewhetherourthesisisplayingout,here'swhatwe'llbetrackingoverthenextsixmonthsandbeyond:DataRelease/EventDateWhatWeExpectPenaltymechanismforcarbontradingH122Weexpectmoredetailsofpenaltiesfornon-compliancetoChinacarbontradingTheEUhada€40/t(US$44/t)penaltyfornon-compliantcompaniesinPhase1ofEUETS,andthenliftedthepenaltyto€100/t(US$110/t)inPhase2.WethinktheChinesegovernmentislikelytoputforwardarelativelylowpenaltyintheneartermandthenraiseitgraduallyinthelongerterm.NationalCCERapprovalrestart2022ChinaislikelytoresumeCCERapprovalandstartnationalCCERtradingWebelievetheevidenceisprovidedbysomeprovincespreparingnewCCERprojects,andtheestablishmentofnationalCCERregistrationandtradingsystemshasgonethroughtworoundsofpublictenders.Inclusionofmoreindustries2022/23Moreenergy-intensivesectorsarelikelytobeincludedinnationalcarbontradingBesidesthepowersector,whichisalreadyinvolved,wethinkChinesegovernmentwillgraduallyincludesteel,aluminium,cement,paper,airlines,andoil&refineriesintothenationalcarbontradingprogramme.Thisshouldenhancetheliquidityofthecarbontradingmarket,inourview,givenimproveddemand.Carbonfuturesmarketopens2023/24ChinaismakingsomeinitialpreparationsonanationalcarbonfuturesmarketGZFXislikelytobecomethenationaltradingcentreofcarbonfutures.Ithasbeenhiringmoreresearchstafftoworkoncarbon-futuresproductdesign,apositivesignChina'scarbonfuturesareontheway,inourview.Q-SeriesRedux4January2022ab18Q-SeriesReduxUBSResearchWhatiscarbontrading?TherightconceptCarbontradingisessentiallythetradingofcarboncredits,primarilyamongcompaniesthatemitcarbon(carbonemitters)butalsopartlyincludingrenewablepowergenerators.Thefigurebelowcomparesandcontraststhecorrectandincorrectconceptsoncarbontrading.Chinaplanstoadoptacap-and-tradecarbontradingmechanism,whichresemblestheEUETS.Animportantconcepttostateupfrontregardingcarbontradingisthatnotallcarbonemittersarenegativelyimpacted.Itisalsoincorrecttoassumecarbontradingissimplycarbonemittersbuyingcarboncreditswhilerenewablepowergeneratorsaresellingthem.Inactualfact,onlyfirmswhosecarbonemissionsexceedtheircreditsfromthecentralgovernmentarenegativelyimpacted.Thesecompaniesareconsideredinefficientcarbonemitters,asshownbelow.Companies,evencoal-firedpowergenerators,thatemitlesscarbonthantheirallocatedcredits,areconsideredefficientcarbonemittersandcanselltheirexcesscreditsinthemarkettogenerateprofits.Renewablepoweroperatorsarealwaysbeneficiariesandsellersofcarboncredits.Theydoreceiveanycreditsfromthegovernmentbutcanregistertheirelectricitysalesasacarbon-reductionoffsetandselltheseoffsetsascarboncredits.Wehaveamoredetailedexplanationinalatersectionofthisreport.Figure17:TheconceptofcarbontradingSource:UBSCarboncostdriversinasinglepictureHowdoweknowifcompaniesareinefficientorefficientcarbonemitters?Whataretheindividualcompanies'keycarbon-costdrivers?Thefigurebelowshowsourthree-stepapproachtoestimatingcarboncosts/gainsfordifferentcompanies.Step1—Calculatingthefreeallocationofcarboncredits.Eachfactoryorproductionlineisgivenacarbonemissionquotabythegovernment.Thegovernmentthenallocatescarboncreditsforfree,basedonalldomesticcompanies'combinedaggregate.Thegovernmentcurrentlyallocatesaround95%ofitscarbonquotaasfreecarboncredits.Thesearenegativeoffsets,essentiallytellingcompanieshowmuchcarbontheycanemitforfree(wehaveanothersectionlaterthatdetailshowthecarbonquotaisdecided).Step2—Calculatingnetcarbonemissions.Thisstepcomparecompanies'actualcarbonemissionswiththeoffsetsfromthecarboncreditsinStep1andCCERtoseewhethertheyarenetcarbonemitters(weexplaintheCCERprocessindetaillater).Fornow,thesecansimplybeconsideredcarboncreditstooffsetcompanies'Q-SeriesRedux4January2022ab19emissionsonlyiftheyhaveself-runrenewablepoweroperations.Thiscanbedisregardedifcompaniesdonotownanyrenewablepowerplants.Companieswithpositivenetcarbonemissionsareconsideredinefficientcarbonemitters,andviceversa.Step3—Calculatingcarboncosts.Asimplesteptocalculatethecarboncosts/gains,bymultiplyingnetemissionswithChina'scarbonmarketprice.Figure18:CarboncostdriversSource:UBSThecarbontradingmarketformationThefigurebelowdemonstratesahypotheticalcarbontradingmarketwithalltheabovedriversandconceptsincluded.Themarketisformedbydifferentparticipantsthatarebothinefficientandefficientcarbonemitters,andproducersofrenewableenergy.Inefficientcarbonemitterssuchas(CompanyA)buycarboncreditsandthusincurcosts;efficientcarbonemitters(CompanyC)sellcarboncreditsandthusrecordgains.RenewablecompaniescanrecordgainsbysellingcarboncreditsintheformofCCER,basedontheamountofregisteredrenewableelectricitysales.Q-SeriesRedux4January2022ab20Figure19:AhypotheticalcarbontradingmarketSource:UBSSupply/demanddriversofcarbonpricesThedemandside,whereinefficientemitterscanfindmuchofthecarboncredittheyneedtobuy,ismostlydeterminedby:1)thenumberofindustriesorcompaniesforcedtoparticipateinthecarbontradingmarket;2)thequotaallowedbythegovernment,whichitcantighten;3)thepercentageoffreecarbon-creditallocation,sothelowerthepercentagethehigherthedemandforcarboncredits.Onthesupplyside,webelievethekeydriversare:1)thepercentageoffreecarbon-creditallocation,sothelowerthepercentage,thelowertheavailablecarbon-creditsupply;2)thenumberofCCERavailableinthemarket—CCERcanonlybetradedifthegovernmentendorsesandregistersthesespecificelectricitysalesfromrenewables;thepaceofregistrationaffectstheCCERsupply.Inanutshell,themarketisrelativelywellcontrolledandpolicydriven.Supplyanddemandarehighlycorrelatedtogovernmentpoliciesoncarbon-creditallocation.Wenotethesecreditscouldbeadjustedovertime.Howarecarbonquotasandthefreeallocationofcreditsdetermined?Thefigurebelowsummarisescarbonquotaallocationmethodology.Ingeneral,boththebenchmarkandhistoricalaveragemethodsareused.Thebenchmarkmethodssuitindustrieswithgooddataonexpectedlevelsofemissionsperunitofproductproducedatdifferentefficiencylevelsfortheproductionlines/machineryused.Withouttheselevelsofdata,thehistoricalaveragemethodisused.Q-SeriesRedux4January2022ab21Figure20:TwokeywaysofallocatingcarboncreditsSource:UBS,MinistryofEnvironmentToputthingsintobetterperspective,wehavereusedthepreviousexample'sCompanyAandCompanyC,whichhaverespectivefreecarbon-creditallocationsof70tand350t,toillustratehowtheirallocationsarecalculatedunderthebenchmarkmethod(thehistoricalaveragemethodissimplertounderstandsowedonotillustratethis).Differentfactoryclassesaregivendifferentemissionbenchmarks(tonsofcarbonperunitofproductproduced).Moreefficient,newerfactoriesusuallyhavetighteremissionsbenchmarks,andviceversa—eg,CompanyAobtainsacarbonquotaof74t(tons)byaddingitsproductionfromfactoryclassesIandIIandmultiplyingby95%toarriveat70toffreecarboncredits.Thisalsoshowsthequotaandcreditcalculationsmustbedoneonaplant-by-plantandfactory-by-factorybasis.Figure21:IllustrationofcarboncreditsallocationbythebenchmarkmethodSource:UBSFreeallocationofcarboncreditscouldreduceovertimeThegeneralEUETStrendsare:1)moreindustrieshavebeengraduallyincluded;and2)thefreeallocationofcarboncreditshasbeendecreasing.Apartfromfreeallocation,themajorityofEUAisallocatedunderanauctionmethod.Freeallocationiscurrentlyaround40-50%ofcarbonallowances,asshowninthechartbelow,meaningmostindustriesandcompanieshavetobidforcarbonallowancesfromtheirgovernments.EUindividualmemberstatestakecareoftheirowncountry'sQ-SeriesRedux4January2022ab22auction,with50%offundsreceivedusedforclimate-change-relatedinvestment,accordingtotheEUagreement.WiththeexceptionofGermanyandPoland,allEUcountriesusetheEuropeanEnergyExchange(EEX)inLeipzigasthecommonauctionplatform.ICEFuturesEuropeactsattheUK’sauctionplatform.Figure22:FreelyallocatedallowancesvsverifiedemissionsSource:EuropeanCommission,UBSNotethesuddendropinfreecarbonallocationsin2013,whichwasbecauseEUregulatorsbecamemuchstricteroncarbonallowanceallocationsatthebeginningofthePhase3ETSschemetocopewiththesevereoversupplyissuesinPhases1-2.Thefreeallocationpercentagewasroughly90%inPhase2butwasreducedto0%forthepowersectorand70%forindustrialsin2013asthesearethetwoheaviestemitters.Inourview,ChinaislikelytolearnthelessonsfromtheEU'sexperience—thefreesupplyofcarboncreditsshoulddeclinetoavoidoversupply,whilethetrendshouldbesmootherthantheEU'ssharpdrop,potentiallymakingChina'scarbonmarketmorestable.EUETS—asnapshotofitshistoryThebelowfiguresummarisesthecurrentEUETSanditsdevelopmenthistory.Figure23:FourphasesoftheEUcarbontradingdevelopmentTimeSectorscoveredGHGcoveredFreeallocation%HighlightsPhase12005-07•Powergenerators•Energy-intensiveindustries•CO2Almost100%LaidthefoundationsofemissionstradingbysettingthenecessarylegalandregulatoryframeworksandestablishingapriceforgreenhousegasemissionsPhase22008-12•Powergenerators•Energy-intensiveindustries•Nitric,adipic,andglyoxylicacidsproduction•CO2•N2Ofromnitric,adipic,andglyoxylicacidsproductionDownto90%•3morecountriesjoinedthesystem(Iceland,LiechtensteinandNorway)•CapsonEUAwerereducedbyaround6.5%•Penaltiesfornon-compliancejumpedfromEUR40/tontoEUR100/ton•Internationalemissioncreditswereintroduced(CERsandERUs)Phase32013-20•Powergenerators•Energy-intensiveindustries•Nitric,adipic,andglyoxylicacidsproduction•CommercialaviationwithinEUETScountries•CO2•N2Ofromnitric,adipic,andglyoxylicacidsproduction•Perfluorocarbons(PFCs)fromaluminiumproduction•Overallaround40%•Power:0%•Industrial:<70%in2013,anddownto<30%in2020.Expect0%by2027•Nation-widecapswerereplacedwithasingleEU-wideemissionscap•Auctioninghasbecometheleadingmethodofallowanceallocation•CapsonEUAwerereducedby1.74%pa.IntroducedBack-loadingofAuctionsandMarketStabilityReservetorelievetheoversupplyissuePhase42021-30Downto0%formostsectors•AcceleratedEUAcapreductionexpectedat2.2%pa•SettingupInnovationFundandModernisationFundtosupportthegreentransformationofpowerandindustrialsectorsSource:EuropeanCommission,UBSNotes:1)Back-loadingofAuctions:In2014,EUgovernmentsannouncedthepostponementofTHEauctionfor900mEUAsin2014-16to2019-20.2)MarketStabilityReserve(MSR):In2019,the900mEUAswhoseauctionwaspostponedinPhase3weretransferredtotheMSRratherthanbeingauctionED.AnyunallocatedallowancesweretransferredtotheMSR.By15Mayeachyear,theMSRannouncesthenumberofallowancesincirculation,whichservesasanindicatorofwhetherallowanceswillbereleasedfromthereserveAccordingtotheEUETSHandbook,publishedbytheEuropeanCommissionin2015,EUAtradingismostlydonebyenergyandindustrycompanieswithobligationsundertheETS,aswellasbyfinancialintermediaries.Q-SeriesRedux4January2022ab23SummaryofmajorcarbonmarketsgloballyBesidestheEU(currentlythelargestcarbontradingmarket),numerousothercountriesareactivelydevelopingtheirowncarbonmarkets.Thechartbelowsummarisesthepioneercountriesandregionswiththeirownexchanges.Notethatsomecountriesandregions,suchasAustralia,hadcarbon-tradingpilotsinthepast,whichwerelatersuspendedandhavenotbeenincludedonthelist.Figure24:Regionsandcountrieswiththeirowncarbon-tradingexchangesParticipatingcountriesEUEUmembers+Iceland,Liechtenstein,NorwayNorthAmericaUS+Canada(insomestates)ChinaChinaSouthKoreaSouthKoreaNewZealandNewZealandUKUK(kickedoffon19May2021)SwitzerlandSwitzerland(nowlinkedwithEUsystem)KazakhstanKazakhstanSource:Refinitiv,UBSIn2020,theEUhadthelargestcarbon-tradingsystem,contributing79%ofglobalcarbontradingvolume,followedbyNorthAmericawith19%ofthetotalvalue.China,SouthKoreaandNewZealandwerestillintheearlystageswith2%ofthetotalvolumeworldwide.Notably,therewasstronggrowthincarbontradingvolumeforNorthAmerica,ChinaandNewZealand,whichdelivereda14-34%CAGRin2018-20comparedwith4%fortheEUduringthesameperiod.Figure25:Globalcarbontradingvolume(2018-20)Source:Refinitive,UBSFigure26:Globalcarbontradingvolumebreakdown(2020)Source:Refinitive,UBSOnabroaderperspective,theWorldBanksummarisesamapofcarbonincentiveprogramsgloballyin2021,whichincludesbothcarbontaxesandemission-tradingsystems.Thechartbelowshowshowmajoreconomieshavenational/regionalcarbonincentivepolicieswhileemergingeconomiesarecatchingupandconsideringestablishingcarbontaxorETSprogrammes.Q-SeriesRedux4January2022ab24Figure27:Mapofcarbontaxesandemissionstradingsystemsin2021Source:WorldBankHowdocompaniesdiscloseandverifycarbonemissions,andcompletesettlements?Afterlookingathowcompaniesgettheirfreeallocationsofcarboncredits,thelastthingwediscussinthissectionishowcompaniesdiscloseandverifytheiractualemissions,andwheretheysettletheircarbonemissionswithcreditsandCCER.Timelyemission-datadisclosure,verificationandestablishedsettlementsystemsallhelpcarbonmarketsfunctionwell.Thechartbelowsummarisesthewholeprocess.Figure28:Proceduresofcarbondisclosure,verification,andsettlementSource:MinistryofEcologyandEnvironment,UBSDisclosureofcarbonemissionsCompaniesthatparticipateinthecarbontradingmarketasbuyersorsellersarerequiredtoreporttheiractualcarbonemissionsonanannualbasis.BasedonguidancefromtheMinistryofEcologyandEnvironment,thedisclosureshouldinclude:1)acarbon-emissionmonitoringplan;2)adescriptionofmajorcarbon-emittingfacilities;3)operationaldataandemissioncoefficients;and4)thedataquality-controlmechanism.China'sgovernmenthadpublishedcarbon-disclosureguidelinesfor24industriesby2015,whichcoversallofenergy-intensivesectors.VerificationbythirdpartiesAftercompaniessubmittheiremissionreport,provincialecologyandenvironmentdepartmentsauthorisethird-partyagenciestoverifythereportintermsofaccuracy,completenessandconsistency.First,accuracymeansthatcalculationerrorsshouldbeavoidedinalltheemissiondata,particularlyimportantasChinesecompaniesareQ-SeriesRedux4January2022ab25reportingcalcalation-basedcarbonemissions,whichmeanstheymultiplytheirenergyconsumptionbyanemissioncoefficienttogettheirtotalemissions.Theverificationagenciesconductrandomsamplingwhenexaminingthefuelscompaniesuseandverifythereliabilityoftheappliedemissioncoefficients.Inaddition,thegovernmentisstudyingthefeasibilityofadoptingameasurement-basedapproachtodiscloseandverifycarbonemissions,whichhasbeenwidelyacceptedintheEUandUS—eg,coal-firedIPPsarerequiredtoinstallacontinuousemissionmonitoringsystem(CEMS)attheirpower-plantchimneys.IntheUS,74%ofthethermalplantshadinstalledCEMSby2015.IntheEU,therewere155powerplantsequippedwiththismonitoringsystemby2019.WeexpectChinatograduallyadoptCEMSwhenthedomestictechnologymatures,andthisshouldprovidemoretimelyandprecisecarbonemissiondata.Year-endsettlementHavinghadtheiractualcarbonemissionsverified,companiesarerequiredtosettletheiremissionsannually.First,theyneedtoregistertheirallocatedcarboncreditattheNationalCarbonTradingRegistrationSysteminHubei('theSystem').Then,bytheendofeachyear,companiesneedtoprovidetheSystemwiththeamountofcarboncreditsandCCERthatisnotbelowtheiractualemissions.Ifthecompanieshavecarboncreditremainingafterthesettlement,theycanselltheremainingcreditontheShanghaiEnvironmentandEnergyExchange.Ontheotherhand,companiesemittingmorecarbonthantheyhavecreditonhandmayneedtobuyadditionalcreditfromtheexchangetofulfiltheirannualcarbon-emissionsettlements.Q-SeriesRedux4January2022ab26Q-SeriesReduxUBSResearchWhatisthefinancialimpacttochina'seconomy?Wehavedonebothqualitativeandquantitativeanalysisonsevenenergy-intensivesectorsinChinatoevaluatehowcarbontradingmightimpacttheirearningsinthenearterm,aswellastheprofitabilityandcompetitivelandscapesinthelongerterm.Thesevensectorsarepower,steel,aluminium,cement,paper,airlines,andoil&refineries,whichcontributemorethan80%ofChina'stotalcarbonemissions.QuantitativeapproachInourquantitativeanalysis,wemeasurethepotentialearningsimpactin2020byassuming:1)95%ofcarboncreditsareallocatedforfree;2)carbonpricesremainatRmb50/t;3)15%ofrenewableprojectsareentitledtocarboncreditorCCER.Wefoundefficientaluminiummakersandefficientthermalpowerproducersbecomethelargestbeneficiaries(7-10%earningsgains)whileinefficientfirmsinthesetwosectorsmighthave32-38%netprofitdeclines.OurinteractivemodelalsoshowsifcarbonpricesreachRmb135/Rmb160/Rmb420perton,inefficientaluminiummakers/inefficientthermalIPPs/steelmakerswouldstarttomakenetlosseswhileefficientthermalIPPscouldenjoynetprofitincreasesofatleast20%/24%/62%.Figure29:Impacton2020earningsifcarbontradingwaslaunched,bysector-38%-32%-12%-3%-1%-1%1%1%4%4%7%10%-40%-30%-20%-10%0%10%20%InefficientaluminiummakerInefficientthermalpowerSteelAirlinesOil&RefineriesCementSolarfarmsPaperWindfarmsHydropowerEfficientthermalpowerEfficientaluminiummakerSource:DepartmentofEcologyandEnvironmentofGuangdongProvince,WorldBank,ThomsonReuters,companydata,UBSestimatesFigure30:By-sectorearningssensitivityin2020foreachRmb10/tonincreaseincarbonprices-8%-6%-2%-1%0%0%0%0%1%1%1%2%-8%-6%-4%-2%0%2%4%InefficientaluminiummakerInefficientthermalpowerSteelAirlinesOil&RefineriesCementSolarfarmsPaperWindfarmsHydropowerEfficientthermalpowerEfficientaluminiummakerSource:DepartmentofEcologyandEnvironmentofGuangdongProvince,WorldBank,ThomsonReuters,companydata,UBSestimatesOurresultshowscarbon-tradingprogrammes'impactoncompaniesiswidening—ie,efficientemitterscouldbebetteroffwhileinefficientonesarelikelytobeworseoff.WithinChina'spowersector,whichcontributesthelargestlevelsofemissions,wefindthat:1)efficientthermalpowergenerators,suchasCRPower,couldmakeaprofitfromsurpluscarboncredits,increasingits2020netprofitby7%;2)renewableoperators—suchassolar,windandhydropowergenerators—couldsellCCERtothecarbonmarkettoearnextraincome.UnderthecurrentschemeofCCERtrading,weexpectourcoveredrenewableoperatorstoincreaseearningsby1-7%ifweassumecarbontradingwaslaunchedin2020;3)inefficientthermalgeneratorsarelikelytosufferfromtighteningemissioncontrolpolicies.CompaniessuchasHuanengandDatangwouldhaveneededQ-SeriesRedux4January2022ab27topurchaseadditionalcarboncreditsfromthemarkettooffsetanyemissionsthatexceedtheirgrantedquotas.Thiswouldleadtohigheroperationalcostsandcouldlowertheir2020actualnetprofitsby19-45%,ifassumingcarbontradingwaslaunchedin2020withacarbonpriceofRmb50/t.Forthealuminiumsector,weexpectasimilarstory.ForefficientsmelterssuchasHongqiao,25%ofitselectricitysupplyisfromhydrosoitscarbonintensityislower.Asitalsohasalowerenergyintensitythanthenationalbenchmark,Hongqiaocouldgainanadditional10%netprofitbysellingitssurpluscarboncredits.ButinefficientsmelterssuchasChalcocouldhaveapotential38%dropinNPduetorisingcarbon-credit-purchasecostsandtechupgradeexpenditure.Wethinkthepapersectormightbeaslightbeneficiaryfromthenationalcarbontradingprogramme.Lee&ManPaperandNineDragonsPapershouldhavesurpluscarboncredits,basedontheircurrentemissions,becausetheyhavebothalreadyswitchedtheirproductionfromcoaltogas.TheirNPcouldriseby1%fromtheimprovedcarbonintensity.However,weremaindoubtfulonpaperproducers'profitabilityinthelongtermastheirmarginscouldbeunderpressurefromhigherenergycosts,andtheyareunlikelytopassthroughthecosthikesduetosluggishdemand.Fortheairline,cementandoil&refinerysectors,carbontradingshouldbelargelyneutralbecause:1)foroil&refinerycompanies,theChinesegovernmentislikelytoadoptahistoricalmethodwhenallocatingcarbonquotastothem,anditmeanstheiractualemissionsshouldnotdeviatemuchfromthecreditsgranted;2)cementcompanieshavebeencomplianttonationalemissionstandardssotheircarbonemissionshavebeenwellcontrolledaroundbenchmarklevels.WeexpecttheNPforcompaniesinthesethreesectorstochangewitharangefrom-4%to+1%duetothelaunchofcarbontrading.Forsteel,ourresultssuggestthewholesectorcouldbehurtbycarbontradingduetoaliftinthecostcurve.Weexpectsomesmallandinefficientsteelcapacitytobesqueezedout.Webelievelargesteelmills’volumeswouldbelessimpactedandtheindustry’srevenueconcentratedwithinmajorsteelproducerssuchasBaosteelandAngang.Wethinktherecouldbehighervariableproductioncostsduetoquotapurchasingandalsohigherfixedcostsduetocompanies’investmentincarbonreduction.Steelcompanies'NPmaydeclineby5-19%duetothelaunchofanationalcarbon-tradingprogramme.Q-SeriesRedux4January2022ab28Figure31:Ourcalculatedimpacton2020earningshadcarbontradinglaunchedthatyear,bycompanyCarbonquota(mt)Freeallocationofcarboncredits(mt)Actualcarbonemissions(mt)CCERfromrenewables(mt)Over/(under)emissions(mt)Carbon(costs)/gain(Rmbm)2020Netprofit(Rmbm)Netprofitimpact(%)NegativelyimpactedInefficientthermalpowerHuaneng(316)(300)333(2)31(1,566)8,455-19%Datang(184)(175)209(6)28(1,382)3,087-45%InefficientaluminiummakerChalco(79)(75)89-14(705)1,876-38%SteelAngang(42)(40)47-7(373)1,978-19%Magang(34)(32)39-7(350)1,983-18%Baoshan(78)(74)89-15(757)12,677-6%ChinaOriental(14)(13)15-2(82)1,586-5%NeutralAirlinesAirChina(12)(11)15-4(198)6,843-3%ChinaEasternAir(11)(10)14-4(185)(1,907)NAChinaSouthernAir(17)(17)19-3(141)(211)NACementConchCement(190)(181)174-(7)32535,1641%CNBM(266)(253)255-2(81)12,553-1%CRCement(56)(54)60-6(298)7,973-4%Oil&RefineriesPetroChina(174)(165)167-2(99)19,006-1%CNOOC(9)(9)9-0(8)24,5100%Sinopec(167)(158)171-13(635)32,211-2%PositivelyimpactedPaperLee&ManPaper(6)(6)5-(1)463,1361%NineDragonsPaper(16)(15)14-(1)654,4381%SolarfarmsXinyiSolar---(0.3)(0.3)164,0590%XinyiEnergy---(0.2)(0.2)98201%HydropowerYangtzePower---(23)(23)1,14526,2984%EfficientthermalpowerCRPower(159)(151)141(2)(12)6048,2247%WindfarmsLongyuan---(4)(4)2225,3904%EfficientaluminiummakerHongqiao(103)(97)76-(21)1,06910,49610%Source:DepartmentofEcologyandEnvironmentofGuangdongProvince,WorldBank,ThomsonReuters,companydata,UBSestimates.Note:1)meansnon-ratedcompanies.Thecalculationisbackward-lookingbasedonactualearningsandemissionsin2020;2)DatangandChalco2020NPexcl.impairmentcharges,2021EconsensusearningsusedforAirChina'snetprofit;3)Calculationsbasedonassumptionsmentionedatthebeginningofthissectionandquotaallocationmethodmentionedinprevioussection.Inreality,themechanismcouldbedifferentasdetailsofnationalcarbon-tradingprogrammehaveyettobefinalisedWindfalltaxIfacarbon-tradingprogrammemightincreasethecostsofinefficientemitters,herecomesthequestion:whatifthesecompanies(ie,inefficientpowergeneratorsandaluminiummakers,andsteelfirms)raisetheirproductpricestopassthroughtheextracostsfromcarbontradingtoendcustomers?Wethinkawindfalltaxcouldbethesolution.Windfalltaxisoftenadoptedintheoil&gas,commoditiesandutilitiessectorswiththepurposeofpreventingcompaniesfromgainingexcessivereturnsattheexpenseofsocialwelfare—twoexamplesbeing:First,theEUexperiencedapowertariffhikeinQ321.Toprotectcustomersfromrisingelectricitybills,theSpanishgovernmentimposedawindfalltaxontherenewableenergysoldbythefourlargestpowergenerators,giventheybenefitfromrisingtariffswithnoimpactfromrisinggasprices.Thetaxcollectedisthenusedtolowerelectricitybillsnationwide.Second,theIndiangovernmentconsideredlevyingawindfalltaxonoilproducersonthebackofrisingpetrolanddieselretailprices.ThemoneycollectedwasusedtomoderatedomesticfuelpricesinIndia.Therefore,takinginefficientpowergeneratorsasanexample,iftheyaregoingtopassthroughthecostsfromcarbontradingbyrisingpowertariffs,theChinesegovernmentcouldimposeasimilarwindfalltaxonthemtopenalisetheirescapefromdecarbonisation.QualitativeapproachQ-SeriesRedux4January2022ab29Inourqualitativeanalysis,wediscusshowcarbontradingcouldinfluencesectors'competitivelandscapes,profitabilityandvaluations,aswellastheirstrategicresponsestoreducecarbonfootprints.Wesummariseourconclusioninthetablebelow.Ourfullsector-by-sectoranalysis,withcontributionsfromUBSanalystsacrossthesectors,isattheendofthisreport.Figure32:Howwillnationalcarbontradingprogramimpactdifferentsectorsinthelongterm?SectorRevenuesCostsROICValuationMostfavouredLeastfavouredRenewableandefficientthermalgeneratorsInefficientthermalgeneratorsEfficientaluminiummakersInefficientaluminiummakersPaperN/ANDPCementCNBMConch-HTaiwanCementConch-AAirlinesN/AAirChina-H/AChinaSouthernAirlines-H/AOil&RefineriesSatellitePetroChina-HSPC-APetroChina-ASteelBaosteelMagang-ACRPowerLongyuanYangtzePowerN/AChinaHongqiaoChalco-H/ASource:UBSestimates.Note:1)Directionofarrowsshowtheimpactbroughtbythelaunchofcarbontrading.Upwardsmeanthemetricrisesaftercarbontradingstarts;flatmeansnosignificantchanges;downwardmeansthemetriccoulddrop;2)Colourofarrowsindicateswhethercarbontradingisbringingpositiveeffectstoacompany.Greenmeanspositive(higherrevenue/ROIC/valuationandlowercosts);redmeansnegative(lowerrevenue/ROIC/valuationandhighercosts);yellowmeansneutral.Disclaimer:Thislistofsecuritiescontainsstocksthatmaybeimpactedbyaspecificscenario.Thescenariosdescribedhereinmayplayoutoveramulti-yearperiodwhereasthebase-caseviewofUBSequityanalystsisbasedonthenext12months.Anyreferenceto'currentrating'istotheratinggiveninthelatestpublishedUBSresearchreportrelatingtotherelevantcompany,whichareavailableonUBSNeo.Q-SeriesRedux4January2022ab30Q-SeriesReduxUBSResearchCouldcarbonbecomeanalternativeinvestmenttool?Inglobalterms,Chinaisthelargestcarbon-emittingcountryandhasthepotentialtobuildthelargestcarbonmarket.HavingcomparedthedevelopmentofcarbonmarketsintheEUandChina,weexpectcarbontobecomeanimportantalternativeinvestmenttoolinChina.China'sRmb500bncarbon-tradingmarketpotential,andmore...WeestimatethattheChinesecarbonmarketcouldbeasbigasRmb500bninthelongterm,basedonasimplecalculationthatChinaemitsaround10bntonsofcarbonannuallytogetherwithaspotcarbonpriceofRmb50/t.Thiscalculationisbasedonassumptionsthatallcarbonemittersareincludedinthecarbonmarketandthereisnofreeallocationforcarbon,sothisshouldbearelativelylong-termestimate.Inaddition,thisisfarfromtheend,inourview,aswehavenotyettakenintoaccounttherelatedfinancialproductsthatChinesefinancialinstitutionsareworkingon,includingcarbonassetpledges,carboninsurance,carbonassetmanagement,etc.Currently,atthestartofthenationalcarbontradingmarket,weestimateamarketsizeofRmb200bnbecauseChinahasincludedonlythepowersector,whichemitsaround40%ofthecountry'scarbon,withaspotcarbonpriceatRmb50/t.Fromatradingvolumeperspective,Chinacurrentlyhasanaveragedailytradingvolumeof0.20mtofcarbon,perapilotprogrammethatbeganin2013.On16July2021,thelaunchdayofnationalcarbontradingprogramme,thedailytradingvolumehit4.93mtandquicklydeclinedtoanaverageof0.29mt(excludingapeakof8.63mton30September)tillnow.Ourunderstandingisthatthecarbonregistration,verificationandemissionallowance-allocationprocesshastakensometime.Webelieveoncetheupfrontpreparationworkrunsmoresmoothly,tradingvolumeshouldrampupovertime.Figure33:China'scarboncredittradingvolumeSource:Wind,UBS.Note:Dataasof16November2021.Figure34:DailycarbontradingvolumesincethenationalcarbontradingprogrammelaunchedSource:Wind,UBS.Note:Dataasof16November2021.MorecarbontradingproductscouldbeavailableinChina,bylookingatEUBylookingattheexampleoftheEUETS,webelieveChina'scarbontradingmarketcouldevolvewithanumberofpossibleinvestmenttools,suchascarbonfutures.Startingin2005,theEUhastheworld'slargestcarbontradingmarket.TheEUETSconsistsoftheEUAandCERmarkets.AlmostalltradingvolumeiscontributedbytheEUAmarket.TherearethreeprincipaltradingmarketsforEUAs:1)futures,2)OTCderivativestrading,and3)thespotmarket,whichincludescarbonpools.Therehavealsobeenanumberoftransactionsusingstructurednotes.Thefuturesmarketisthemostimportantoneforcarbontradingasitaccountsformorethan90%ofthetradingQ-SeriesRedux4January2022ab31volume(seechartbelow).Figure35:EUETSmarketsharein2020,bysegmentSource:Refinitiv,UBSestimates.Note:1)Thechartaboveexcludesprimaryauctionandoptionsmarkets(primaryauctionsrefertothosetakingplaceeverycoupleofweekswherenationalgovernmentsauctionnewsupplyofEUA);2)EUAspotincludespre-mentionedcarbonpools1)FuturesmarketBytakingEUAfuturestradedontheIntercontinentalFuturesExchange(ICEFutures)asanexample,wesummarisesomeofthemarkettradingfactsandrulesbelow.ThemaintradableEUcarbonproductistheEUAfuturescontract,whichcontributesmorethan90%oftradingvolume.During2005-20,annualtradingvolumeofEUAfuturesrosebyaround100xandcarbonpricesroseby250%(seechartsbelow).Notably,EUcarbonpriceshavemorethandoubledYTDonthebackoftheincreasedglobaldecarbonisationpush,soinvestmentreturnshavebeenquiteattractiverecently.Intermsofmarketsize,withanaveragecarbonpriceof€25/tandtradingvolumeofaround9bntons,theEUAfuturesmarketexceeded€200bnin2020.WealsoincludebelowachartdetailinghowcarbonfutureshaveworkedinEurope.Figure36:EUAfuturestradingvolumeSource:Wind,UBS.Note:Dataasof16November2021.Figure37:EUAfuturesclosingpricesSource:Wind,UBS.Note:Dataasof16November2021.Q-SeriesRedux4January2022ab32Figure38:DetailsontheEUAfuturesmarketTradingexchangeEuropeanEnergyExchange(EEX)IntercontinentalFuturesExchange(ICEFutures)NASDAQOMXCommoditiesEuropeExpirationDaily,monthly,quarterly,yearly(yearlyismosttradedasexpirationcoincideswiththeendoftheannualtradingperiod)CurrencyEuroMinimumlot1,000EUAsMinimumtickEUR0.01InitialmarginRelativelyhigh-usuallyintherangeof20%oftheprevailingpriceofthecontractTradingplatformICEFuturesElectronicPlatform(knownastheICEPlatform)Tradinghours7amto5pmLondontimeonanybusinessdayExpirationdateLastMondayofthecontractmonth.WherethelastMondayofthedeliverymonthfallsonanon-businessday,orthereisanon-businessdayinthe4daysimmediatelyfollowingthelastMonday,theexpirationdateshallbethepenultimateMondayofthedeliverymonth.Source:ICEFutures,UBS2)OTCderivativestradingAsthenameimplies,OTCderivativestradinginvolvesOTCtransactionsexecutedbilaterallybetweentwoparties.TheEUETSmarkethasachoiceofthreedocumentationplatformsforOTCtransactions,eachpreparedbyaseparatetradeorganisation:ISDA,IETAandEFET.Themostcommonlytradedtransactionsunderthedocumentationplatformsare'put'and'call'options,andforwardtransactions.TheOTCmarketcontributesaround5%ofEUETStradingvolume.3)CarbonpoolsCarbonpoolsarespottradingplatforms;theirmembersaresmallemittersthathavebeenallocatedallowancesundertheEUETS.Thepoolcollects'buy'and'sell'orderstogetherinanorderbook.Afterplacinganorder,partiestransfertheirfundsorallowancesintotheirpoolaccountsandthesearethentransferredwithinthepool.Theadvantagesofcarbonpoolsincludecounterpartyanonymity,thegroupingofsmallordersintolargerorderstogether,andincreasedliquidity.Thismechanismfitssmall-andmedium-sizeindustrialcompanies.ThespotEUAmarket(includingcarbonpools)contributesaround3%ofEUETStradingvolume.4)CERCERdiffersfromtheabovethreetypesofcarbonmarketsasitistradinginthevoluntarycarbonmarket,whilecarbonallowancesandderivativesaretradingintheregulatedcomplianceemissionmarket.Thesevoluntarycarbonoffsetsaregeneratedbyactivitiesthatremoveoravoidemissions.Inavoluntarycontext,thedemandforcarbonoffsetsisdrivenbyentitiesorindividualsthatpurchaseoffsetstomeetcarbon-neutralorotherenvironmentalaspirations,orinsomecasesbyentitiesthatpurchasepre-complianceoffsetsbeforetheyarerequiredbyregulation.UBSKnowledgeNetworkpublishedaprimeronvoluntarycarbonmarketsinNovember2021,notingthedemandforvoluntarycarbonoffsetshavebeenstrong(aCAGRofaround30%in2010-20).About70-80%ofthesecarbonoffsetswasneededbythedevelopmentofrenewableenergyprojectsandREDD+projects(reducingemissionsfromdeforestationandforestdegradation).Q-SeriesRedux4January2022ab33Figure39:Demandforvoluntarycarboncredits(mtCO2)Source:TroveIntelligence2021,UBSAmongalltypesofvoluntarycarbonoffsets,CERisoneofthemostpopular.ItisdevelopedundertheCleanDevelopmentMechanism(CDM),whichwasputforwardintheKyotoProtocol.ThisCDMisaglobalcarbonemissionreductionprocessengagingbothdevelopedanddevelopingcountries.UnderCDM,developedcountriesprovidedcapitalandtechnologiesforcarbonemissionreductionprojectsindevelopingcountries.EmissionsdesignatedasCERareissuedbyaCDMExecutiveBoardandinreturnboughtbydevelopedcountriestofulfiltheircarbonemissiontargets.EachCERunitcouldoffsetonetonofCO2equivalent.IntheEU,CERwasintroducedasacarbonoffsettoolin2008.However,duetoinadequateregulatoryframeworks,therewassignificantoversupplyofCERduring2008-12,leadingtoashockintheEUAmarketasCERtendedtobecheaperthanEUA.Sofrom2013onwards,EUgovernmentstightenedthelimitsofCERapprovalandusagetocopewiththisoversupplyissue.Asperthechartbelow,CERfutures'tradingvolumepeakedin2012anddeclinedby70%YoYin2013.ThetradingvolumeofCERfutureswasonaverage23%ofEUAfuturesduring2008-12,anddeclinedtoalmost0%in2020.Figure40:CERfuturestradingvolume26%20%20%23%24%6%3%1%0%0%0%0%0%0%5%10%15%20%25%30%0.0200.0400.0600.0800.01,000.01,200.01,400.01,600.01,800.020082009201020112012201320142015201620172018201920202021CERfutures(LHS)%comparedwithEUAfutures(RHS)(mtCO2)Source:Wind,UBSImplicationsforChina'scarbontradingWethinkthecurrentnationalcarbontradingmechanisminChinaisquitesimilartothePhase1carbontradingintheEU,especiallyintermsofmarketparticipantsandthecarboncreditallocationmethodology.Therefore,wethinktheremightbesomelessonsthatChinacanlearnfromtheEUwhendevelopingitsnationalcarbonmarket—eg,intermsofcarbon-tradingproducts,EUhasspotandderivativemarketsforbothcarboncreditsandCER,whileChinacurrentlyhasonlyanationalspotmarketforcarboncredits.Onapositivenote,theChinesegovernmentisconductingsomestudiesonreopeningtheCCERmarketandestablishinganationalcarbonderivativesmarket—someregionalpilotsarelistedbelow.1)AcarbonexchangecouldevolvewithmoreproductsQ-SeriesRedux4January2022ab34Figure41:Carbontradingproducts-EUvsChinaCarbontradingproducttypeEUETSChinanationalcarbonmarketChinaregionalcarbonpilotsSpotcarboncreditYesYesYes-8provincesandcitiesDerivativesoncarboncreditYes-bothfutureandforwardcontractsNoYes-eg.Hubei,butonlyforwardcontractsSpotCERYesNoYes-9provincesandcitiesDerivativesonCERYes-bothfutureandforwardcontractsNoYes-eg.Hubei,butonlyforwardcontractsSource:EEX,ICE,ShanghaiEnvironmentandEnergyExchange,UBSWithincarbonderivatives,thekeyiscarbonfutures—intheEU,morethan90%ofcarbontradingvolumeiscontributedbycarbonfutures.However,Chinaisstillintheearlystages.Wethinkthekeybottleneckscouldinclude:1)thesizeofthespotmarketisstilltoosmall.In2020,China'scarbonemissionswereroughly4xbiggerthantheEU's,whilecarbontradingvolumewasjust0.7%oftheEU's;2)furtherimprovementisrequiredinthesettingofacarbon-tradingmarketmechanism.Wethinkthesetwobottleneckscouldbegraduallyremovedasmoresectorsandmarketparticipants(eg,institutionalinvestors,qualifiedretailinvestors,marketmakers/liquidityproviders)becomeinvolved.Inaddition,GZFXhasbeenhiringmoreresearchstafftoworkoncarbon-futuresproductdesign,apositivesignthatChina'scarbonfuturesareontheway.Furthermore,intheEUtherehasbeenafairamountofspeculationaboutthefuturedirectionofpolicy.FinancialaswellasindustrialbuyersareallowedtotradeEUAs,sopeoplecanbuythemtobetonthefuturedirectionofclimatepolicy.WethinkthatwouldbepossibleinChinaaswellinthelongerterm,whichcouldboostthetradingvolumeofChinesecarboncredits.2)VariousfinancialinstitutionscoulddevelopmoreproductsBesidescarbontrading,variouscarbonfinancialproductshavebeendevelopedsince2014,involvingnumeroustraditionalfinancialintermediariessuchasbanks,insurancecompanies,brokers,andassetmanagementcompanies.UndertheChinesegovernment'sstrongcarbon-neutralitypush,webelievecarboncouldbecomeanincreasinglyimportantinvestmenttool,withrisingmarketsize,expandingproductrangeandpossiblygoodreturns.Wethinknewbusinessopportunitiesforthefinancialsectorcouldalsobeemerging.Q-SeriesRedux4January2022ab35Figure42:CarbonfinancialproductsinChinaWhocanparticipate?RelatedcarbonexchangeExample-firstcaseinChinaCarbonassetpledgeBankHubeiEmissionExchangeHubeiYihuawithSPDBankin2014-Yihuapledged2.11mcarboncreditstothebankforloanofRmb40m.Theborrowingrateisusurallylowerthanthetypicalpledgeloans(sometimes50bpslower).CarbonbondBankandbrokerShenzhenEmissionExchangeCGNNewEnergywithSPDBankin2014,withdealamountofRmb1bnandafloatingcouponratelinkedwiththeCCERincomefromtheunderlyingwindfarms.CarbonstructureddepositsBankShenzhenEmissionExchangeIndustrialBankdidthefirstcarbonstructureddepositinChinain2014-Expectedannualisedreturnof4.1%iscombinedwithafixedyieldof1.9%andafloatingreturnof2.2%,whichwaslinkedtothecarbonprice.Atthematuritydate,investorscanalsobepaidwithsomecarboncredits.CarbonrepoBrokerBeijingEmissionExchangeCITICSecuritieswithHuatongThermalin2014,withdealamountatRmb13.3m-Huatongsolditscarboncreditsfirstforbridgefinancing,andpromisedtorepurchaseitsomedaylater.CarboninsuranceInsurancecompanyHubeiEmissionExchangePingAnwithHuaxinCementin2016-HuaxinCementcanclaimindemnityfromtheinsurancecompanywhenitsactualcarbonemissionexceedsitsquota.CarbonfundFundmanagementcompanyShenzhenEmissionExchangeJiaTanKaiYuanFund(嘉碳开元)establishedin2015withinitialAUMatRmb50m-Thefundwillbeinvestedtocarboncreditmarket,andCCERprojectsforrenewableenergyandenvironmentalprotection.CarbonassetmanagementCarbonassetmanagementfirmNASomepowergeneratinggiants,suchasHuanengandHuadian,haveformedinternalcarbonassetmanagementfirmstomanageandtradethecarboncreditsandCCERoftheparentcompanies,whichisaimedatincreasingthenetvalueofcarbonassets.Source:HubeiEmissionExchange,ShenzhenEmissionExchange,BeijingEmissionExchange,UBS3)HongKong'scarbonmarket:HKEXanditsSTAGEplatformUBSfinancialanalystKelvinChuthinksHongKongExchanges(HKEX)isdevotedtodevelopingsustainabilityandcarbon-relatedproductsthroughitssustainableandgreenexchangeSTAGE(Sustainable&GreenExchange)informationplatform,incollaborationwithGZFXundertheGreaterBayArea(GBA)DevelopmentPlan.TheSTAGEplatformcurrentlyincludesarepositoryformorethan80HKEX-listedgreenproducts(eg,greenbonds)coveringissuersfromavarietyofsectors.TheearliestgreenbondincludedonSTAGEwasissuedin2017byMTRCorporation,withtheaimofreducingcarbonemissions.STAGEalsoprovidesanonlinerepositoryforgreenproductlistingguidance,marketeducationandknowledgesharing.Longterm,webelievemorecollaborationwithintheGBA,potentiallywidercarbon-relatedproducttypesandmoreglobalfundflowscouldhelpsupportthedevelopmentofcarbontradinginbothHongKongandtheGBA.WebelieveHKEX’s7%stakeinGZFXshouldhelpfacilitatebettercollaborationbetweenthetwoexchanges.Q-SeriesRedux4January2022ab36Q-SeriesReduxUBSResearchHowhighcouldChina'scarbonpricego?China'scarbonemissionallowancesaretradingatRmb40-50/t,morethan90%lowerthantheEUcarbonpriceofaround€90/t.WethinkChina'scarbonpriceislikelytopickupasthedemandincreaseswhen:1)moreindustriesarecomplianttothenationalcarbontradingprogramme;2)moretypesofinvestorsareinvolved;and3)morekindsofcarbonproductsareoffered,suchascarbonfutures.Basedonouranalysisfromthreedifferentapproaches,weestimatecarbonpricesinChinacouldexceedRmb200/tinthenext10years.Figure43:China'scarbonprice020406080100120140Jun-13Nov-13Mar-14Aug-14Dec-14May-15Oct-15Feb-16Jul-16Nov-16Apr-17Sep-17Jan-18Jun-18Oct-18Mar-19Aug-19Dec-19May-20Sep-20Feb-21Jul-21Carbonprice(weightedaverage,LHS)(Rmb/ton)Source:Wind,UBS.Note:Dataasof16November2021.Figure44:EU'scarbonprices01020304050607080Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18Dec-19Dec-20(Euro/ton)Source:Wind,UBS.Note:Dataasof16November2021.Approach1—UBS'sglobalnet-zeroscenarioInUBS-commissionedresearchbyAurorainSeptember,wefoundthatglobaldecarbonisationislikelytobemoreexpensivethanexpected,withrequiredcarbonpricesofatleastUS$100-500/tperCO2acrosssixofthehardestsectorstodecarbonise.Thesectorsarecement,chemicals,steel,buildings(heating),roadtransportandaviation.Theyaccountforroughlyhalfofglobalemissions.Ineachsector,thereportlookedatthetypicalcostsofaconventionalfossil-basedsolution,therangeofoptionsavailableinthesectortogetridofemissionscompletely,andthepossiblecostsofoneormoreoftheleadingcleantechnologies.Insomecasesthepotentialreplacementtechnologiesarenotavailableornotcurrentlyfullycommercialised,suchashydrogen-fuelledjetpropulsion,butweusedtheavailablesourcestoestimatethelikelycosts.Wethenconvertedthesecostestimatestocalculatethecarbonpricenecessarytogivecompaniesasimilarreturnwithcleantechnologythatwasachievedusingthefossiltechnologytobereplaced.TheresultsarebelowandsuggestfulldecarbonisationmayrequirecarbonpricesintherangeUS$100-500pertonne,higherthantheUS$50-150pertonneoftencited.ThisUS$100-500pricerangeisthecarbonpriceneededfora1.5degreepathway,whilenotnecessarilythecarbonpricewearegoingtoseeinthenearterm.Q-SeriesRedux4January2022ab37Figure45:WemayneedsignificantlyhighercarbonpricestofulfilglobaldecarbonisationSource:TheStateoftheGlobalEnergyTransition(UBS-commissionedresearchproject,2021)Inthisglobalnet-zeroscenario,ourprojectedcarbonpricesaremuchhigherthanconsensusasweexpectsomehigh-costdecarbonisationapproachestobeapplied,suchas'carboncapture'forindustrialproductionandhydrogenasjetfuel.Additionally,ourcalculationsassumeprojectCAPEXandOPEXfixedat2021levels.Therefore,whentheprojectconstructioncostsgodownduetotechnologybreakthroughs,therequiredcarbonpricesshouldalsodecreaseifwetargetunchangedprojectIRRs.Approach2—supportinggreenhydrogenapplicationsinChinaInAugust,UBSpublishedaQ-Seriesreportongreenhydrogenthatenvisagedhydrogenatthecoreofglobalnet-zerostrategies.SincethecostofgreenhydrogenisstillhighinChina,highercarbonpriceswouldworkasanincentiveforsomeenergy-intensivesectorstoswitchfromfossilfuelstogreenhydrogen,inourview.Ouroil&gasanalystPeterGastreichexpectsacarbontaxofUS$40/tin2030E(roughlyRmb250/tconsideringthelatestexchangerate)totakesomeoftheout-of-moneygreenhydrogenapplicationsintothecostcompetitivestageandfurthersupportChina'sgreentransition—eg,refining,ammonia&methanol,steelandoff-roadvehicles(seechartbelow).Q-SeriesRedux4January2022ab38Figure46:China'sgreenhydrogendeliveredcostsin2030Evsbreakeven(parity),byapplication(US$/kg)Source:UBSestimates.Note:Weassumeper-tonCCUS(carboncapture,utilisationandstorage)costsofRmb400/Rmb200/Rmb100in2020E/30E/50Eforcapturinghigh-concentrationCO2(70%);assumedcarbontaxin2030EofUS$40/t.Approach3—viewsfromindustryexpertsandgovernmentofficialsReasonablecarbonpriceshavebeenthesubjectofheateddiscussionsinChina.In2016,JiangZhaoli,DeputyDirectoroftheDepartmentofClimateChangeintheMinistryofEcologyandEnvironment,saidChinesecarbonpricesshouldarriveatRmb200-300/tafterthelaunchofnationalcarbontradingprogramme,whichwouldincentivisethosehigh-emissioncompaniestoacceleratetheirdecarbonisingviaadoptingmorecleanenergyintheirproduction.Additionally,ChinaCarbonForumpublishedasurveyoncarbonpricinginDecember2020,forecastingmeancarbonpricestorisefromRmb49/tin2020toRmb71/tin2025,anduptoRmb93/tin2030.Summary—expectationsonChina'scarbonpricesInshort,wethinkChinesecarbonpricesarelikelytorisefromRmb40-50/tcurrentlytomorethanRmb200/tby2030E,whichisthemedianlevel(asshowninthebelowchart).Risingcarbonpricesshouldincentivisethedevelopmentofcleantechnologies,andbettersupportChina'sgreentransformation,inourview.Figure47:SummaryofexpectedChinesecarbonpricesby2030ESource:MinistryofEcologyandEnvironment,ChinaCarbonForum,Wind,TheStateoftheGlobalEnergyTransition(2021),UBSestimatesQ-SeriesRedux4January2022ab39Q-SeriesReduxUBSResearchCouldCCERresumeaspartofcarbontrading?WhatisCCER?CCER(Chinesecertifiedemissionreductions)isasupplementaryapproachtocarbontradinginadditiontocarboncredits.InefficientcarbonemitterscanpurchaseCCERtooffsettheircarbondeficits.EachCCERunitcouldoffsetonetonofemittedcarbon.Typically,CCERhasalowerpricethancarboncredits.AccordingtoNDRC,thetotalpurchasedamountofCCERshouldnotbemorethan5%ofitsChina'soverallcarbonemissions.ThechartbelowillustrateshowCCERworksinthecarbontradingsystem.Figure48:HowCCERworksincarbontradingSource:UBS.Note:AssumesCCERcanoffsetasmuchas5%ofcarbonemissionsCCERregistrationwasopenin2012-17.Bysector,thereweremainlythreekindsofprojectsthatentitledtoCCER:renewableenergy,forestcarbonsinksandmethane.Ifeverythingwentsmoothly,ittypicallytookeightmonthsforthewholeapplicationprocess.Inaddition,byapprovalapproach,therewerefourtypes(asshownbelow).Figure49:FourtypesofCCER,byapprovalapproachRequirementsApprovalprocessAcceptanceascarbonoffsetinChinaTypeIProjectsdevelopedunderthemethodologiesdocumentedbyNDRCLong(8monthsorabove)AllpilotmarketsTypeIIApprovedasaCDMprojectbyNDRC,whileyettoberegisteredbytheCDMExecutiveBoardLong(8monthsorabove)SomepilotmarketsTypeIIIApprovedasaCDMprojectbyNDRC,andalreadyhasemissionreductiontrackrecordbeforeregistrationinCDMExecutiveBoardShort(below6months)SomepilotmarketsTypeIVRegisteredbyCDMExecutiveBoard,whileyettohaveentitledCERsShort(below6months)SomepilotmarketsSource:ChinaCertifiedEmissionReductionExchangeInfoPlatform,UBS.Note:CDMisaglobalcarbon-emission-reductionapprovalprocessthatChinawasengagedinpriorto2012Thereweretwopreconditionsforapplications.First,projectswererequiredtofulfilatleastoneoftheapprovalapproachesmentionedabove—eg,forTypeICCER,themostcommontype,projectsneededtofitinwithatleastonemethodologyorcategoryfromNDRC'slist(200methodologiesintotal).Second,theprojectneededtohaveadditionality—ie,theproject'sreturnshouldbebelowtheindustrybaselinewithoutCCERfundingsupport,butcouldrisetoabovethebaselinewithCCERsupport.Asshownabove,TypeICCERwasuniversallyacceptedascarbonoffsetsinChinabyallthepilotmarkets,whileTypeII/III/IVCCERcouldberejectedascarbonoffsetsinsomeprovincesbecausesomeTypeII/III/IVprojectsdidnothaveenoughadditionality.Iftheprojectscouldmeetthetwoprerequisitesabove,thenauthorisedtestingagencieswouldvalidatetheprojectapplications.Thereare12authorisedagenciesinChina,eachspecialisedinprojectvalidationinseveralsectors.ThevalidatedprojectswouldbeQ-SeriesRedux4January2022ab40registeredbythegovernmentandauthorisedagencieswouldthenspendaperiodoftimemonitoringandverifyingtheprojects'actualcarbonreductions.NDRCwouldgranttheCCERbasedontheverifiedemission-reductiondata.Figure50:No.ofCCERprojectsatdifferentstages28718612540500100015002000250030003500ValidatedRegisteredCCEREntitledSource:ChinaCertifiedEmissionReductionExchangeInfoPlatform,UBS.Note:Dataasof31March2017.Amongexistingvalidatedprojects,84%wereTypeI.ForregisteredandCCERentitledprojects,thepercentageswere68%and57%respectively.TypeIprojectswerepreviouslythemostpopularastheywererecognisedascarbonoffsetsinallpilotprovinces.Onapositivenote,someexpertsthinkTypeII/III/IVprojectscouldalsobewidelyacceptedascarbonoffsetsunderthenationalcarbontradingprogramme,whichmayincreasetheliquidityoftheCCERmarketandbenefittherenewablecompaniesthatowntheseCCERassets.Figure51:ValidatedCCERprojectsSource:ChinaCertifiedEmissionReductionExchangeInfoPlatform,UBSFigure52:RegisteredCCERprojectsSource:ChinaCertifiedEmissionReductionExchangeInfoPlatform,UBSFigure53:EntitledCCERprojectsSource:ChinaCertifiedEmissionReductionExchangeInfoPlatform,UBSDevelopmenthistoryofCCERAsmentioned,CCERregistrationstartedin2012.Beforethat,ChinahadbeenparticipatingintheglobalCERmarketundertheCDMandhadthelargestnumberofapprovedCDMprojects.However,thepriceofCERfellin2012duetooversupply.Whatwasworse,ithassincebecomemuchmoredifficulttoapplyfornewCDMprojectsinChinaastheEUannounceditwouldonlybuyCERsfromtheleast-developedcountries.Therefore,theChinesegovernmentestablishedadomesticCCERmarkettoreplacetheglobalCERmarket,anddidregionalCCERtradingpilotsinnineprovincesandcitiesinChina.In2017,NDRCstoppedapprovingnewCCERprojects,mainlyduetothelackoftradingvolumeandimperfectapprovalprocess.Inotherwords,BeijingdidnotwantCCER'spricetofallinthewayCERdidin2012duetorelativelyweakdemand.ThoughapprovalofnewCCERhasbeensuspended,thetradingofexistingendorsedCCERremainsnormal.AccordingtodatafromShanghaiEnvironmentandEnergyExchangeandBeijingEmissionTradingSystem,around42,000tonsofCCERhavebeentradedYTDatanASPofRmb35.20pertonofCO2.Comparedwithcarbon-emissionallowances,CCERhasamuchsmallertradingvolumeandslightlylowerASP;duringtheQ-SeriesRedux4January2022ab41sameperiod,58.1mtonsofcarboncreditsweretradednationwideatRmb37.00pertonofCO2onaverage.Figure54:CCERtradingvolumeandASP02,0004,0006,0008,00010,00012,0000.010.020.030.040.050.060.04/21/20215/21/20216/21/20217/21/20218/21/20219/21/2021Volume(tCO2)ASP(Rmb/tCO2)2021YTDASPforCCER:Rmb35/tCO2Source:ShanghaiEnvironmentandEnergyExchange,BeijingEmissionTradingSystem,UBS.Note:Dataasof15October2021.CouldCCERapprovalsreturn?WethinkCCERapprovalislikelytoresumeinthefutureaspartofthenationalcarbon-tradingmechanism.Therearetwopiecesofevidenceforthis:first,someprovinceshavestartedliningupnewCCERprojects—inAugust,theDepartmentofEcologyandEnvironmentalinShanxiannounceditwasreservingnewCCERprojectstopreparefortheresumptionofapprovalsatanationallevel;andsecond,BeijingEmissionsExchangeconductedtworoundsofpublictendersfornationalCCERregistrationandtradingsystemsinAugustandSeptember.SowethinktherestartofCCERapprovalisapproaching,andanationalCCERexchangewouldlikelybeinBeijing.TherehasalsobensometalkaboutanewnationalCCERpolicyinlate2021orearly2022.Wehaveconductedasensitivityanalysisonrenewableoperators'earningsbyassumingtwoscenarios:1)basescenario—15%ofrenewableprojectsareentitledtoCCER,basedontherestrictionstatingCCERcannotbemorethan5%ofthetotalcarbonsupply;and2)upsidescenario—100%ofrenewableprojectsaregrantedwithCCER.Inthisscenario,YangtzePowerandLongyuanwouldbenefitthemostfromapotentialCCERrestart,inourview,andthegainfromCCERsalesmightcontributetoasmuchas27-29%of2020netprofit.Figure55:EarningssensitivityshouldCCERrestartRenewableelectricitygeneration(bnKWh)Conversionratiotoreducedcarbonemission(tCO2/MWh)Reducedcarbonemission(mt)Assumed%entitledtoCCERCCERprice(Rmb/ton)GainfromCCERtrading(Rmbm)2020netprofit(Rmbm)2020netprofitimpact(%)-upsidecase2020netprofitimpact(%)-basecaseSolarfarmsXinyiSolar3.20.6672.1100%50105.94,0593%0%XinyiEnergy1.80.6671.2100%5060.08207%1%HydropowerYangtzePower226.80.667151.3100%507563.726,29829%4%EfficientthermalpowerCRPower21.00.66714.0100%50699.18,2249%1%WindfarmsLongyuan44.00.66729.4100%501468.45,39027%4%Source:DepartmentofEcologyandEnvironmentofGuangdongProvince,WorldBank,ThomsonReuters,companydata,UBSestimates.Q-SeriesRedux4January2022ab42Q-SeriesReduxUBSResearchAppendix—QuantitativeimpactofcarbontradingChinesepowerForrenewables,thesectorimpact…Revenues:Costs:ROIC:Valuation:Forinefficientthermal,thesectorimpact…Revenues:Costs:ROIC:Valuation:PIVOTALQUESTIONQ:Howmightthenationalcarbontradingprogrammeaffectthesector’sS/Dbalance,pricingandcompetitivelandscape?Weexpectthenationalcarbontradingprogrammetobenefitrenewableandefficientthermalpoweroperators,whilehurtinginefficientthermalgenerators.TheformercouldsellcarboncreditsorCCERtothecarbonmarket,andthecashcollectedusedformorecapacityexpansion.However,inefficientthermalgeneratorsmaysufferfromrisingcostswhentheypurchaseextracarboncredits.Longerterm,weexpectinefficient,lossmakingthermalplantstobesqueezedoutandrenewablestocontributemoreatthepowersupplyside.FINANCIALIMPACTQ:Howmightthelaunchofcarbontradingimpactsectorrevenue,margins,returnsandvaluations?CarbontradingmaybringadditionalrevenuestreamstorenewablesandefficientthermalpoweroperatorsthroughsellingextracarboncreditsorCCER—withunchangedcosts,weexpecttheirmarginsandROICtoincrease.Forinefficientthermalgenerators,carbontradingislikelytoleadtocostincreasesandevenrevenuereductioninthelongtermassomepowerplantsmayshutdown.Quantitatively,weestimatenetprofitofrenewableandefficientthermalgeneratorstoincreasebyasmuchas7%,whiledecliningbyupto45%forinefficientthermalgenerators(assumingcarbontradingwaslaunchedin2020).Lookingforward,wethinkcarbontradingshouldre-raterenewableenergyoperatorswhilede-ratinginefficientcoal-firednames.STRATEGICRESPONSEQ:Howistheindustryrespondingtoreducingitscarbonfootprint?Someexamplesofstrategiesmightinclude:1)buildingmorerenewablecapacityandshuttingdownsmall,inefficientcoal-firedunits;2)usingcleanercoalandimprovingboilercombustionefficiencyviatechnologicalupgrades;3)investingincarbon-reductionfacilities(suchasCCUS).MOSTFAVOUREDStockUBSratingCommentCRPowerBuyLargestbeneficiaryinthesectorunderthecurrentcarbontradingscheme,undemandingvaluationvsthestronggrowthinrenewables.LongyuanPowerBuyPotentiallybenefitsfromtherestartofCCER,expectacceleratedgrowthonqualityassetinjections.YangtzePowerBuyPotentiallybenefitsfromtherestartofCCER,UBSKeyCallBuywithsolidgrowthanddecentyield.LEASTFAVOUREDStockUBSratingCommentN/AN/AN/AKenLiu,AnalystYishuYan,AnalystJarvisLam,AnalystTomLi,Associateken.liu@ubs.comyishu.yan@ubs.comjarvis.lam@ubs.comtom.li@ubs.com+852-29717516+86-21-38668782+852-29717701+86-21-38668862Q-SeriesRedux4January2022ab43Howmighttheshutdownofinefficientthermalunitsimpactthesector?Asmentionedabove,someinefficientsmallcoal-firedunitsarelikelytoshutdownsincetheywouldburdenrelativelyhighercarboncosts.TodiscusshowthismightimpactChineseIPPs,weanalysedtheexistingcoal-firedprojectsinChina.Weconsiderthatsmallunitsbelow300MW,orunitsthathaveanoperationlifetimeofmorethan20years,couldbeathigherriskofshutdownthanotherunits.Basedonthesecriteria,weestimate10-12%ofcoal-firedcapacityinChinacouldbeclosed,mostlythoseheldbynon-listedentitiesandoperatedbylocalgovernments.Figure56:ServicelifetimeofChina'scoal-firedpowerplants40%47%10%2%0%0-9years10-19years20-29years30-39years40-49yearsSource:CoalSwarm,UBSFigure57:BreakdownofChina'scoal-firedpowerplants,bysize10%37%39%14%<300MW300-600MW600MW-1GW>=1GWSource:CoalSwarm,UBSFigure58:Percentageofcapacityoflistedpowercompanies'smallunits(sizebelow300MW)4%2%1%1%1%0%0%0%20%40%60%80%100%HuanengCRPDatangCPIGuodianFuxinLongyuanSource:Companydata,UBSInaddition,thesesmallandinefficientunitsarelocatedmostlyinthenorth.Accordingtoourpreviousresearchin2018,approximately76%ofChina'scoal-firedcapacityofbelow300MWwaslocatedinthethreenorthernareas(north,northeast,andnorthwest).Thiscouldturnintoadouble-edgedswordforlistedcoal-firedIPPs,especiallythosewithlargerexposurestothesenorthernareas.Ononehand,theymightpossiblyseehigherutilisationhoursastheirpeers'smallcoal-firedpowerplantsarecloseddownfirst.Ontheother,itputsmorepressureonlistedcoal-firedcompaniestodecarbonisethemselves,whichisthedilemmafacedbysomelargebutoverallinefficientcoal-firedgenerators,suchasHuaneng(NR)andDatang(NR).Theyhavelowerfreelyallocatedemissionquotasversustheiractualemissions,somorepowergenerationwouldresultinhigheradditionalcostsfromcarbontradingiftheydonotimprovetheircarbonintensities.Ourbackward-lookingcalculationsindicatethat2020actualearningsofHuanengandDatangwoulddeclineby19-45%werecarbontradinginplaceinthatyearwithacarbonpriceofRmb50/t.Q-SeriesRedux4January2022ab44Figure59:Breakdownofsmallcoal-firedunits,byregion47%16%13%10%9%5%NorthernNorthwesternNortheasternEasternSouthernCentralSource:CoalSwarm,UBSFigure60:Percentageoflistedpowercompanies'capacityinthreenorthernareas48%46%38%26%21%0%0%0%10%20%30%40%50%60%70%80%90%100%GuodianDatangHuanengCRPCPIFuxinLongyuanSource:Companydata,UBSQ-SeriesRedux4January2022ab45ChinesealuminiummakersEfficientsmelters’impactonsector…Revenues:Costs:ROIC:Valuation:Inefficientsmelters’impactonsector…Revenues:Costs:ROIC:Valuation:PIVOTALQUESTIONQ:Howmightthenationalcarbontradingprogrammeaffectthesector’spricingandcompetitivelandscape?Wethinkefficientaluminiumsmeltersshouldbenefitbysellingcarboncreditswhileinefficientaluminiumsmeltersincurlossesbybuyingthem.In2020,ChinaHongqiao’ssmeltingfacilitiesconsumed13,000kWhpertonneofaluminiumproduction,belowthebenchmarkvolumeof13,350kWh,whileChalcoconsumedmore(13,444kWh).Wethinkthecarbontradingsystemshouldforceinefficientsmelterstoadoptmoreefficientfacilitiesandupgradetechnologysotheyareunlikelytobesqueezedoutofthemarket,whichhasbeenthecaseinsomeothersectors.FINANCIALIMPACTQ:Howmightthelaunchofcarbontradingimpactsectorrevenue,margins,returnsandvaluations?WethinkHongqiaoshouldbenefitfromcarbongains,sellingitscarboncreditsandtherebystretchingnetprofitby6%(basedon2020).Chalcomayincurcarbonlossesbysqueezing23%ofitsnetprofit(basedon2020).Wethinkefficientsmeltersshouldenjoyhighervaluationsastheirprofitmarginwidens,andviceversa.STRATEGICRESPONSEQ:Howistheindustryrespondingtoreducingitscarbonfootprint?InChalco’sQ321resultsmeeting,managementmentionedthecompanyisinvestingtoreduceitsunitelectricityconsumptioninordertomeetthebenchmarklevelof13,350kWh,andwereconfidenttheywouldmeetthetargets.MOSTFAVOUREDStockUBSratingCommentChinaHongqiaoBuyEfficientsmelterswithlessunitelectricityconsumption,anundemandingvaluationat0.6x2022EP/BVwith2022EROEof14%.LEASTFAVOUREDStockUBSratingCommentChalco-H/ASellInefficientsmelterswithhigher-than-regulatedunitelectricityconsumption.JamesKan,AnalystBeiliWang,AssociateAnalystjames.kan@ubs.combeili.wang@ubs.com+852-29716334+852-29717812Q-SeriesRedux4January2022ab46ChinesepaperImpactonsector…Revenues:Costs:ROIC:Valuation:PIVOTALQUESTIONQ:Howmightthenationalcarbontradingprogrammeaffectthesector’sS/Dbalance,pricingandcompetitivelandscape?Thecarbontradingprogrammecoulddisciplineindustrysupplyandaccelerateitsconsolidation,inourview.Wethinkpapercompanieswithhigherquotasandbetterdecarbonisationtechnologyarelikelytogainmarketshare,andthinkpapercompaniesmayneedtousealternativefuelsuchasgasorhydrogentoproducepaperinthefuture.Thiswouldburdenmarginssincewedoubtpapercompanies’abilitytofullypassonhigherenergycostswithsluggishdemand.FINANCIALIMPACTQ:Howmightthelaunchofcarbontradingimpactsectorrevenue,margins,returnsandvaluations?Highercarbonpricescouldresultinhighercostsforpaperproducers,whomayalsoberequiredtousealternativefuelssuchasgastoproducepaper,whichwouldfurtherincreasecosts.Weremainconservativeonpapercompanies’abilitytofullypassonhighercostsduetoasluggishdemandoutlook,andexpectpapernamestode-rateinthefutureduetomarginpressure.STRATEGICRESPONSEQ:Howistheindustryrespondingtoreducingitscarbonfootprint?Papercompanieshavebeenactivelytryingto,orhavebeenrequiredto,lowertheircoalconsumptionintensity.Wenotesomelocalgovernmentshaveannouncedregulationswherebypapercompaniesmustlowertheircoalconsumption—eg,DongguanCitygovernmentaskedpapercompaniestoimplementcoal-to-gasconversionsforthisreason.Papercompanieshavebeencarryingoutupgradestolowercarbonemissionsandconserveenergy,eliminatingless-efficientequipmentwithhigh-energyconsumptionlevels,aswellasenhancingboththeoverallutilisationofsolidwasteandutilisationrateofsolidwastefromincineration.MOSTFAVOUREDStockUBSratingCommentN/AN/AN/ALEASTFAVOUREDStockUBSratingCommentNDPSellMarginsqueeze,mainlyduetocostshikesJamesKan,AnalystXinleiLi,AssociateJames.kan@ubs.comxinlei.li@ubs.com+852-29716334+86-21-38668805Q-SeriesRedux4January2022ab47ChinesecementImpactonsector…Revenues:Costs:ROIC:Valuation:PIVOTALQUESTIONQ:Howmightthenationalcarbontradingprogrammeaffectthesector’sS/Dbalance,pricingandcompetitivelandscape?Thoughcarbonpricesaredeterminedbysupplyanddemand(S/D)dynamics,weflagthegovernment’srolegivenitwilldeterminethesupplyofcarboncredits,whichislikelytodeclinetoachieveits2030/2060carbongoals.Weexpectcompanieswithhighercarbonquotasandbetterdecarbonisationtechnologytobenefitfromthecarbontradingprogramme,andourdiscussionswithindustryexpertssuggestlarge-scalecementnamessuchasConchandCNBMhavethepotentialtobebeneficiaries.Overtime,theprogrammecouldfavourablyaffectindustryconsolidationbyphasingoutoutdatedcapacity.Weexpectcementpricestoincreasegivendisciplinedsupplyandhigherindustryconcentration.FINANCIALIMPACTQ:Howmightthelaunchofcarbontradingimpactsectorrevenue,margins,returnsandvaluations?Underthecarbontradingprogramme,weexpectrevenuetogrowwithpotentialcementpricehikesfromdisciplinedindustrysupplyandhigherindustryconcentration.Meanwhile,marginsandreturnsmaycomeunderpressureascostsincrease,over-emittersneedtopayforcarbonpricesandcementcompaniestryalternativefuelstolowercarbonemissionsinordertoavoidpayingcarbonprices.WeexpecthawkishpropertypolicysignalstoinfluencemarketsentimentforChina’scementsector,andoverthelongtermitispossibletore-ratecementnameswithacceleratedindustryconsolidation.STRATEGICRESPONSEQ:Howistheindustryrespondingtoreducingitscarbonfootprint?AsamajoremitterofCO2,cementcompanieshavebeenactivelytryingtoreducecarbonemissionsandutilisethem.Conventionaldecarbonisationleversarelowerclinkerratiosandalternative-fuelsubstitution—eg,Conchhasbeenusingwasteheatpowergenerationandcleanenergytobuildbiomassfuelsystems,replacingclinkerwithindustrialwasteresidueandusingcementadmixture(abrasiveaid).Weexpectcarboncapture&storage(CCUS)tobeanadditionaldecarbonisationlever.MOSTFAVOUREDStockUBSratingCommentCNBMBuyEastChinacementexposure,stronggrowthprofilefromkeysubsidiaries,competitivetechnologyincarbonreductionConch-HBuyEastChinacementexposure,attractivevaluation,highutilisationrate,competitivetechnologyincarbonreductionLEASTFAVOUREDStockUBSratingCommentTaiwanCementSellSouthChinacementexposure,margincontraction,demandingvaluationConch-ASellUnattractivevaluationJamesKan,AnalystXinleiLi,AssociateJames.kan@ubs.comxinlei.li@ubs.com+852-29716334+86-21-3866-8805Q-SeriesRedux4January2022ab48ChineseairlinesImpactonsector…Revenues:Costs:ROIC:Valuation:PIVOTALQUESTIONQ:Howmightthenationalcarbontradingprogrammeaffectthesector’sS/Dbalance,pricingandcompetitivelandscape?Weexpectairlinestocontrolcapacityexpansionandreducecarbonemissions.However,webelievethismayhavelimitedimpactontheS/Dbalanceofthewholeindustry.Onthesupplyside,wethinkinthenextfewyearsthatindustrycapacitycouldsustaingrowththroughthenetadditionofaircraftandhigheraircraftutilisation.Onthedemandside,givenChina'smacroeconomicslowdownandintensifyingcompetitionfromhigh-speedrail(HSR),wethinkdomesticairtraveldemandmaybepressured,resultinginlimitedroomforairlinestoraisefares.FINANCIALIMPACTQ:Howmightthelaunchofcarbontradingimpactsectorrevenue,margins,returnsandvaluations?SincecarbontradingmaynotchangetheweakS/Dsituationandairfarescouldstillbepressured,wethinktheprogrammemayhavelimitedimpactonrevenueandmargins.However,CAPEXcouldincreasesinceairlinesmayneedtoreplaceoldaircraftwithmoreefficientandenergy-savingmodels,orupgradeenginestoreduceemissions,negativelyaffectingreturns.Overall,wethinktheprogrammemayhaveaslightlynegativeimpactonvaluations.STRATEGICRESPONSEQ:Howistheindustryrespondingtoreducingitscarbonfootprint?China’sbigthreecarriershavetakenactiontoreducecarbonemissions,accordingtotheirESGreports,including:1)introducinghigh-efficiencyenergy-savingmodels,anddisposingofoldplanes,2)optimisingairroutestoreducejetfuelconsumption,3)adoptingelectricshuttlebusesinsteadoffuelvehiclesatairports,4)usingelectroclinicgrounddevicesinsteadofauxiliarypowerunits(APUs)ataircraftlandingstages.MOSTFAVOUREDStockUBSratingCommentN/AN/AN/ALEASTFAVOUREDStockUBSratingCommentAirChina-ASellSlower-than-expectedinternationalrouterecovery,potentialstrictmobilityrestrictionsinBeijing,unattractivevaluation.AirChinaSellSlower-than-expectedinternationalrouterecovery,potentialstrictmobilityrestrictioninBeijing,unattractivevaluations.ChinaSouthernAirlines-ASellStiffercompetitionfromHSR/LCCsduetohighexposuretotouristroutes,GuangzhouBaiyunAirportfacingpotentialdiversionfromShenzhenAirport,unattractivevaluations.ChinaSouthernAirlinesSellStiffercompetitionfromHSR/LCCsduetohighexposuretotouristroutes,GuangzhouBaiyunAirportfacingpotentialdiversionfromShenzhenAirport,unattractivevaluations.XinChen,AnalystBruceMi,Associatexin.chen@ubs.combruce.mi@ubs.com+86-21-3866-8864+86-21-3866-8851Q-SeriesRedux4January2022ab49Chinaoil,gasandpetrochemicalsImpactonsector…Revenues:Costs:ROIC:Valuation:PIVOTALQUESTIONQ:Howmightthenationalcarbontradingprogrammeaffectthesector’sS/Dbalance,pricingandcompetitivelandscape?China’scarbontradingframeworkhasyettoincludetheupstreamE&P,refiningandchemicalssectors.However,giventherefiningprocesstendstobemorecarbonintensive,webelievetheimplicationsforeachcompanylargelydependonupstreamversusdownstreamexposure.Upstreamcarbonintensitymaydependtoacertaindegreeonwellproductivity,penetrationofnon-conventionalproduction,aswellasthedegreeofmethaneemissions(flaring).BasedonthehistoricalapproachofcarbonallowanceallocationintheGuangdongpilot,wethinkthenationalcarbontradingprogrammeshouldbringminimumimpacttothesectorinthenearterm.FINANCIALIMPACTQ:Howmightthelaunchofcarbontradingimpactsectorrevenue,margins,returnsandvaluations?Weestimatethatifthegovernmentadoptsahistoricapproachandallocates90-100%oftheprioryear’scarbonintensity,basedonproductionlevels,toeachcompany,thenetearningsimpacttothethreeoilmajorscouldbebetween-2.4%and+0.5%,basedonthe2019-20trendofproductionandGHGemissionchanges.GiventheoveralllowcarbonfootprintandheavyupstreamexposureofCNOOC,weexpectChina’scarbonpolicytohavelimitedimpactonthelistedcompany(CNOOC’sparentcompanyhasrefiningassets).WethinkSinopecismostlyexposedtoamoreaggressivecarbon-intensity-reductiontargetgivenitshigheremissionvolumeandlargershareofdownstreamoperations.Thatsaid,wethinkthedifferencewouldfurtherdivergeifthegovernmentweretoimplementaconsistentstandardacrossthesectoratdifferentcompaniesratherthanadoptahistoricapproachtoemissions.SinopeccouldbemostatriskgivenwethinkitsupstreambusinesshashighercarbonintensitycomparedtoPetroChinaandCNOOC.Longterm,wethinkthecarbontaxofotherindustriescouldacceleraterevenueopportunitiesforoilmajorsintermsofhydrogensalesandcarboncapture&storage.STRATEGICRESPONSEQ:Howistheindustryrespondingtoreducingitscarbonfootprint?Carbonintensityvariedgreatlyfromonecompanytothenext—eg,in2020,CNOOC’sunitGHGemissions(0.13tCO2pertonofoil&gasoutput)were64%lowerthanSinopec’supstream(0.37tCO2pertonofoil&gasoutput).SinopecandPetroChinabothplantocarbonpeakby2025andachievenetzeroemissionsby2050.Strategiesincludeconsolidatingrefiningcapacity,raisinggasoutput,reducingmethaneemissionsandinvestinginnewenergysuchashydrogen,wind,solarandgeothermal.MOSTFAVOUREDStockUBSratingCommentSatelliteBuySatellite(UBSKeyCall)fitswellintoChina’slowcarbontheme.ThecompanyhasChina’sfirstethane-basedcracker.Longterm,electrolytesolvent(EVbatterychain)andhydrogenmaysupportstronggrowth.PetroChina-HBuyWebelievePTR’slong-termpotentialinChinesenaturalgasmaybeunder-appreciated.PTRhasastrongbalancesheetandcash-flow,andplanstoallocateonethirdofCAPEXinnewenergyinvestmentsby2035.LEASTFAVOUREDStockUBSratingCommentSPC-ASellNegativelyimpactedbypetrochemicaldown-cycle2022E-23EandlargevaluationpremiumtoSPC-HPetroChina-ANeutralPTR-AvaluationlookslessattractiverelativetoPTR-H,whichisratedBuyPeterGastreich,AnalystAlexXu,AnalystAmilyGuo,Analystpeter.gastreich@ubs.comalex-a.xu@ubs.comamily.guo@ubs.com+852-29716121+852-37122521+86-10-58328845Q-SeriesRedux4January2022ab50CarbonintensityvariesamongChina'soilmajorsAccordingtosustainabilityreportsfromSinopec,PetroChinaandCNOOC,thethreeoilmajors'combinedGHGemissions(direct+indirect)reachedcloseto350mtonsofCO2equivalentin2020(around3.5%ofChina’stotal2020carbonemissions).China’scarbon-tradingframeworkhasyettoincludetheupstreamE&P,refiningandchemicalssectors.However,webelievetheimplicationsforeachcompanylargelydependonupstreamversusdownstreamexposuregiventherefiningprocesstendstobemorecarbonintensive.Upstreamcarbonintensitymaydependtoacertaindegreeonwellproductivity,inourview,penetrationofnon-conventionalproduction,aswellasthedegreeofmethaneemissions(flaring).WebaseournumbersonGHGemissions(scope1+scope2.Scope1referstodirectemissionsfromthecompanies;scope2referstoindirectemissionsfromthegenerationofpurchasedenergy)perunitofend-productoutput(generallyoil&gasproductionandrefineriesthroughoutdatafromcompanyreports).Wedonotaddadditionalvolumeforpetrochemicalsandassumeforsimplicity’ssakethatthismatchesthepetrochemicalfeedstockoutputfromrefineries(mostlynaphthaandLPG).WhileitwouldbepreferabletoisolateCO2/GHGemissionsforeachmajorbusinesssegment(E&P,refiningandchemicals),onlySinopecprovidesasegmentalbreakdown,whilePetroChinaprovidesGHGemissionspurelyonafullyintegratedbasis.ThelistedcomponentofCNOOC’sbusinessispurelyupstreamE&P,whilerefiningandchemicalassetsaresittingattheCNOOCgrouplevel.Thatsaid,forupstreamoperationsitisimportanttonotethatthecarbonfootprintonlyaccountsforemissionsduringtheextractionofcrudeoilandgas,andemissionsfromconsumptionareonlyconsideredwhenfuelisconsumedbytheendusers.Furthermore,futuremethodologymayconsidertheimpactofmethanesemissionmorestrictlythannow.Asthedownstreamprocessconsumesmoreenergythanupstream,weattempttoquantifythedifference.Ourcalculationshows40%lowerGHGintensityofupstreamproductioncomparedtodownstreamoperations,basedonSinopec’s2020disclosures.Carbonintensityvariedgreatlyfromonecompanytothenext—eg,in2020,CNOOC’sunitGHGemissions(0.13tofCO2pertonofoil&gasoutput)were64%lowerthanSinopec’supstream(0.37tofCO2pertonofoil&gasoutput).WethinkthelowcarbonintensityofCNOOC’soperationscouldbethankstoitswideuseoftheshore-connectedpowergrid,aswellashigherproductivitywellsandmorecentralisedoutput.WethinkitreasonabletoassumeasimilarcarbonintensityforPetroChina’srefiningbusinessasforSinopecgivenasimilarNelsoncomplexityindex.Usingthismethodology,ourestimatesindicatePetroChina’supstreamGHGintensitycouldbe32%lowerthanSinopec's.Wethinkthismakessensegivenunconventionalresources(eg,shalegas)accountforagreatproportionofSinopec’sproduction,requiringmoreenergy-intensiveprocesses,suchasfracking(consumessignificantlevelsofdieselfuel).Figure61:GHGintensity(tonofCO2pertonofweightedoutput)0.570.620.22-0.100.200.300.400.500.600.70PetroChinaSinopecCNOOCSource:Companydata,UBSestimatesImpacttonetprofitrangesbetween-2.4%and+0.5%Weestimatethatifthegovernmentadoptsahistoricapproachinallocating90-100%oftheprioryear’scarbonintensity,basedonproductionlevels,toeachcompany,thedirectQ-SeriesRedux4January2022ab51netearningsimpactcouldbebetween+0.5%and-2.4%tothethreeoilmajors,basedon2019-20trendsofproductionandGHGemissionchanges.GiventheoveralllowcarbonfootprintandheavyupstreamexposureofCNOOC,weexpectChina’scarbonpolicytohavelittledirectimpactonthecompany.WethinkSinopecismostexposedtoamoreaggressivecutofcarbonintensitytargetgivenitshigheremissionvolumesandlargershareofdownstreamoperations.Thatsaid,wethinkthedifferenceislikelytofurtherdivergeifthegovernmentweretoimplementaconsistentstandardatdifferentcompaniesacrossthesectorratherthanadoptingahistoricemissionapproach.SinopeccouldbemostatriskgivenitshighercarbonintensityofupstreamthaneitherPetroChinaorCNOOC.Longerterm(beyond2030E),fromanindirectperspective,carbontaxesorhighercarbonpricesappliedtootherindustriescouldbepositiveforoilmajorsgiventhesewouldleadtonewrevenueopportunitiesinbusinessessuchashydrogen(eg,demandforgreensteel)andCCUS(eg,ammoniaandmethanolindustries).Underthisverylong-termscenario,wethinkvaluationscouldre-ratewhileROICshouldremainlargelyflatgiventheseoilmajorsareSOEs(possiblythegovernmentmightcapanyextraordinaryreturns).Figure62:Estimatednetprofitchanges(%)assuming90-100%ofprioryear’scarbonintensity(2023E)0.49%-0.39%0.02%-0.78%-1.90%-0.05%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%PetroChinaSinopecCNOOC100%95%90%Source:Companydata,UBSestimates.Note:AssumingcarbonpriceofRmb65/tQ-SeriesRedux4January2022ab52ChinesesteelsectorImpactonsector…Revenues:Costs:ROIC:Valuation:PIVOTALQUESTIONQ:Howmightthenationalcarbontradingprogrammeaffectthesector’sS/Dbalance,pricingandcompetitivelandscape?Theintroductionofcarbontradingshouldliftthecostcurveofthewholesteelindustry.Toachieveits2060carbonneutralitygoal,webelievetheChinesegovernmentshouldcutemissionquotasinthelongrun.Asaresult,steelmillswouldhavetobuyquotastomeettherequirements.However,carbontradingshouldimprovethesteelindustry’ssupplyanddemand(S/D)structurewithinefficient/high-emissioncapacitybeingeliminated.Structurally,wealsobelievethecostcompetitivenessofEAF-basedsteelmillsshouldincreaseagainsttheirBOF-basedpeers,givenlowerCO2emissionsfromtheformer’sproductionprocess.Intermsofthepricing,steelASPshouldrisewiththeinflatedcosts,andsteelmillscanfocusmoreonhigh-endsteelproductstomaintainmargins.FINANCIALIMPACTQ:Howmightthelaunchofcarbontradingimpactsectorrevenue,margins,returnsandvaluations?Underthecarbontradingprogramme,weexpectsteelASPtoimprovebuttotalcrudesteeloutputtocontract.Webelievelargesteelmills’volumesmightbelessimpactedsoindustryrevenuemayconcentratewithmajorsteelfirmslikeBaosteelandAngang.Onproductioncosts,theremaybehighervariablecostsduetoquotapurchasing,andhigherfixedcostsduetocompanies’carbonreductioninvestments.However,webelievethegovernmentshouldbegenerousonemissionquotasatfirst,soindustrymarginscouldfirstexpandandthennormalise.STRATEGICRESPONSEQ:Howistheindustryrespondingtoreducingitscarbonfootprint?Asthesteelindustry’sleader,BaowuGroupannounceditwouldreachitscarbonpeakby2023,cutcarbonemissionsby30%by2035,andachievecarbonneutralityby2050.Guidedbythesetargets,Baosteelputforwardfourkeymeasures:1)investinginpower/heat-savingfacilitiesandswitchingfromcoaltocleanenergysources;2)replacingsomeblastfurnacecapacitywithEAFcapacity;3)lowcarbonmetallurgicaltechnology—eg,Baosteelisnowbuildingahydrogen-richsteelproductionlineatitsBayiSteelbase,whichmanagementestimatescouldreducecarbonemissionsby30%;4)developingothertechnologysuchascarboncaptureandstorage.However,thecompanyadmitsthereisstillalongwaytogotoachievegreenproduction:1)changingtheenergymixandimprovingenergyefficiencymayliftper-tonsteelcostsbyRmb200-300;2)lowscrapreservesandhighpowertariffsmakeEAFcapacitylesscostcompetitive;3)turningtoanewproductionprocesswouldincursignificantCAPEXonconstructionandreplacement.Asaresult,thecompanybelievessteelmillsshouldhavehigherbargainingpowerinthesupplychain,andtransfersomeofthecoststoupstream/downstreamsectors.MOSTFAVOUREDStockUBSratingCommentBaosteelBuyTopsteelfirmsinChinawithboththeabilityandwilltoachievecarbonneutrality.LEASTFAVOUREDStockUBSratingCommentMagang-ASellHasthehighestexposuretothepropertysectoramongthesteelmakerswecover.JamesKan,AnalystArthurLu,AssociateJames.kan@ubs.comArthur.lu@ubs.com+852-29716334+86-21-38668802Q-SeriesRedux4January2022ab53Q-SeriesRedux4January2022ab54ValuationMethodandRiskStatementCarbontradingwillbealong-termgamechangertoChineseeconomy,whilenear-termimpactsmightnotbethatobvious,dependingonhowstringentChinesegovernment’scontrolonemissionswouldbe.Theschemedesignwillbringsignificantimpactsoncarbonmarketdevelopmentandcarbonprices,whichcouldmakeourcalculationsvariedfromthereality.Additionally,thisresearchshouldnotbereadasacompleteordefinitiveaccountofalltherelevantissuesforfirms.Besidescarbontrading,thesectorsandcompaniesmentionedinthisreportmayalsofacemoreswingfactorssuchasmacro-economicconditions.KeydownsideriskstoChinesepower(renewables)sectorinclude:1)slower-than-expecteddomesticrenewable-energyinstalled-capacitygrowth;2)bigger-than-expectedtariffcutsonrenewableenergyprojects;3)slower-than-expecteddeclineinrenewablepowercosts;4)alackofsubsidyfundingsources;and5)competitionfromotherpowerresourcesunderfuturepowerreforms.KeyriskstoChinesealuminumsectorincludeeconomicconditionsandpoliciesthatcouldresultinaluminumpricevolatility.Supplyplaysasimportantaroleasdemand,togethershapingthesupply/demandbalanceanddeterminingaluminumprices.KeyupsideriskstoChinesepapersectorincludeslower-than-expectedcapacityadditions,andhigher-than-expectedpricehikes.Higher-than-expectedwastepaperimportquotaisanothermajorupsiderisktoourinvestmentthesis.Meanwhile,thereliefontheUS-Chinatradewarcouldalsobeanupsidecatalyst,especiallyonRmbtoUS$appreciationintheshortterm.KeyriskstoChinesecementsectorinclude:1)infrastructureandpropertyinvestment;2)capacityswaprequirements,off-peakproductionandenvironmentalregulations;3)supply/demandconditions;4)monetarypolicychanges;5)theprogressofindustryconsolidation;and6)rawmaterialcostvolatility.KeyupsideriskstoChineseairlinessectorincludeastronger-than-expectedyieldhike,whichcouldbedrivenbymorefavourablesupply-demanddynamics,andtrafficgrowthfromcapacityexpansionoverwhelmingyieldpressure.Additionally,keydownsiderisksinclude:systemicmarketrisks,risinginternationaloilprices,theeconomysufferingahardlanding,businessvolumegrowthcontinuingtoundershootourexpectations,anirrationalpricewar,thesubstitutioneffectofhigh-speedrailexceedingourexpectations,andemergenciessuchaswar,pandemicoutbreaksandterroristattacks.Keyriskstooilandgascompaniesincludevolatilityinoilandnaturalgasprices,marginsforglobalrefining,marketing,andchemicals,aswellasnormalexplorationrisksassociatedwiththeoilandgasbusiness.Forchemicalcompanies,slowornegativeeconomicgrowthcouldslowtheemergingcyclicalimprovement.Weexpecttheleadingchemicalcompaniestocontinuetogrownearthemarketgrowthrateonatrend-linebasis.However,thechemicalindustryishighlycyclicalbecauseofinventoryandrawmaterialswings.KeyriskstoChinesesteelsectorincludeeconomicconditions,feedstockpricesandpoliciesthatcouldresultinsteelpricevolatility.Supplyplaysasimportantaroleasdemand,togethershapingthesupply/demandbalanceanddeterminingsteelprices.Otherrisksinclude:1)fixedassetinvestment(FAI)growthinproperty(salesandnewstarts);2)FAIgrowthininfrastructureactivity;3)governmentenvironmentalandindustrycapacityregulation;4)potentialSOEreforms;and5)pricesofrawmaterials,includingofironoreandcokingcoal.Q-SeriesRedux4January2022ab55RequiredDisclosuresThisreporthasbeenpreparedbyUBSSecuritiesAsiaLimited,anaffiliateofUBSAG.UBSAG,itssubsidiaries,branchesandaffiliatesarereferredtohereinasUBS.ForinformationonthewaysinwhichUBSmanagesconflictsandmaintainsindependenceofitsresearchproduct;historicalperformanceinformation;certainadditionaldisclosuresconcerningUBSresearchrecommendations;andtermsandconditionsforcertainthirdpartydatausedinresearchreport,pleasevisithttps://www.ubs.com/disclosures.Thefigurescontainedinperformancechartsrefertothepast;pastperformanceisnotareliableindicatoroffutureresults.Additionalinformationwillbemadeavailableuponrequest.UBSSecuritiesCo.LimitedislicensedtoconductsecuritiesinvestmentconsultancybusinessesbytheChinaSecuritiesRegulatoryCommission.UBSactsormayactasprincipalinthedebtsecurities(orinrelatedderivatives)thatmaybethesubjectofthisreport.Thisrecommendationwasfinalizedon:31December202109:09AMGMT.UBShasdesignatedcertainResearchdepartmentmembersasDerivativesResearchAnalystswherethosedepartmentmemberspublishresearchprincipallyontheanalysisofthepriceormarketforaderivative,andprovideinformationreasonablysufficientuponwhichtobaseadecisiontoenterintoaderivativestransaction.WhereDerivativesResearchAnalystsco-authorresearchreportswithEquityResearchAnalystsorEconomists,theDerivativesResearchAnalystisresponsibleforthederivativesinvestmentviews,forecasts,and/orrecommendations.QuantitativeResearchReview:UBSpublishesaquantitativeassessmentofitsanalysts'responsestocertainquestionsaboutthelikelihoodofanoccurrenceofanumberofshorttermfactorsinaproductknownasthe'QuantitativeResearchReview'.Viewscontainedinthisassessmentonaparticularstockreflectonlytheviewsonthoseshorttermfactorswhichareadifferenttimeframetothe12-monthtimeframereflectedinanyequityratingsetoutinthisnote.Forthelatestresponses,pleaseclickhttps://neo.ubs.com/quantitative,orspeaktoyourUBSsalesrepresentativeforaccesstothereport.AnalystCertification:Eachresearchanalystprimarilyresponsibleforthecontentofthisresearchreport,inwholeorinpart,certifiesthatwithrespecttoeachsecurityorissuerthattheanalystcoveredinthisreport:(1)alloftheviewsexpressedaccuratelyreflecthisorherpersonalviewsaboutthosesecuritiesorissuersandwerepreparedinanindependentmanner,includingwithrespecttoUBS,and(2)nopartofhisorhercompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificrecommendationsorviewsexpressedbythatresearchanalystintheresearchreport.UBSInvestmentResearch:GlobalEquityRatingDefinitions12-MonthRatingDefinitionCoverage1IBServices2BuyFSRis>6%abovetheMRA.54%32%NeutralFSRisbetween-6%and6%oftheMRA.36%30%SellFSRis>6%belowtheMRA.10%23%Short-TermRatingDefinitionCoverage3IBServices4BuyStockpriceexpectedtorisewithinthreemonthsfromthetimetheratingwasassignedbecauseofaspecificcatalystorevent.<1%<1%SellStockpriceexpectedtofallwithinthreemonthsfromthetimetheratingwasassignedbecauseofaspecificcatalystorevent.<1%<1%Source:UBS.Ratingallocationsareasof30September2021.1:Percentageofcompaniesundercoveragegloballywithinthe12-monthratingcategory.2:Percentageofcompanieswithinthe12-monthratingcategoryforwhichinvestmentbanking(IB)serviceswereprovidedwithinthepast12months.3:PercentageofcompaniesundercoveragegloballywithintheShort-Termratingcategory.4:PercentageofcompanieswithintheShort-Termratingcategoryforwhichinvestmentbanking(IB)serviceswereprovidedwithinthepast12months.KEYDEFINITIONS:ForecastStockReturn(FSR)isdefinedasexpectedpercentagepriceappreciationplusgrossdividendyieldoverthenext12months.Insomecases,thisyieldmaybebasedonaccrueddividends.MarketReturnAssumption(MRA)isdefinedastheone-yearlocalmarketinterestrateplus5%(aproxyfor,andnotaforecastof,theequityriskpremium).UnderReview(UR)StocksmaybeflaggedasURbytheanalyst,indicatingthatthestock'spricetargetand/orratingaresubjecttopossiblechangeinthenearterm,usuallyinresponsetoaneventthatmayaffecttheinvestmentcaseorvaluation.Short-TermRatingsreflecttheexpectednear-term(uptothreemonths)performanceofthestockanddonotreflectanychangeinthefundamentalvieworinvestmentcase.EquityPriceTargetshaveaninvestmenthorizonof12months.EXCEPTIONSANDSPECIALCASES:UKandEuropeanInvestmentFundratingsanddefinitionsare:Buy:Positiveonfactorssuchasstructure,management,performancerecord,discount;Neutral:Neutralonfactorssuchasstructure,management,performancerecord,discount;Sell:Negativeonfactorssuchasstructure,management,performancerecord,discount.CoreBandingExceptions(CBE):Exceptionstothestandard+/-6%bandsmaybegrantedbytheInvestmentReviewCommittee(IRC).FactorsconsideredbytheIRCincludethestock'svolatilityandthecreditspreadoftherespectivecompany'sdebt.Asaresult,stocksdeemedtobeveryhighorlowriskmaybesubjecttohigherorlowerbandsastheyrelatetotherating.Whensuchexceptionsapply,theywillbeidentifiedintheCompanyDisclosurestableintherelevantresearchpiece.Q-SeriesRedux4January2022ab56Researchanalystscontributingtothisreportwhoareemployedbyanynon-USaffiliateofUBSSecuritiesLLCarenotregistered/qualifiedasresearchanalystswithFINRA.SuchanalystsmaynotbeassociatedpersonsofUBSSecuritiesLLCandthereforearenotsubjecttotheFINRArestrictionsoncommunicationswithasubjectcompany,publicappearances,andtradingsecuritiesheldbyaresearchanalystaccount.Thenameofeachaffiliateandanalystemployedbythataffiliatecontributingtothisreport,ifany,follows.UBSAGHongKongBranch:JamesKan,JarvisLam,KenLiu,PeterGastreich,RonaldWu.UBSAGLondonBranch:JulieHudson,CFA,SamArie.UBSSecuritiesCo.Limited:TomLi,XinChen,XinleiLi,YishuYan.CompanyDisclosuresCompanyNameReuters12-monthratingPricePricedateAirChina18a,16a0753.HKSellHK$5.4630Dec2021AirChina-A18a,16a601111.SSSellRmb9.1230Dec2021AluminumCorporationofChina2,13,4,18a,16a,16b2600.HKSellHK$4.2530Dec2021AluminumCorporationofChina-A2,13,4,18a,16a,16b601600.SSSellRmb6.1530Dec2021AngangSteel13,18a,16a0347.HKBuyHK$3.4930Dec2021AngangSteel-A13,18a,16a000898.SZNeutralRmb3.7230Dec2021AnhuiConchCement18a,16a0914.HKNeutralHK$39.0530Dec2021AnhuiConchCement-A18a,16a600585.SSSellRmb40.4530Dec2021BaoshanIron&Steel600019.SSBuyRmb7.1130Dec2021ChinaEasternAirlines18a,16a,16b0670.HKNeutralHK$2.9630Dec2021ChinaHongqiaoGroup2,41378.HKBuyHK$8.0530Dec2021ChinaLongyuanPower16a0916.HKBuyHK$18.0230Dec2021ChinaNationalBuildingMaterial4,16a3323.HKBuyHK$9.4030Dec2021ChinaNationalOffshoreOilCorporation18b,16a0883.HKBuyHK$8.0330Dec2021ChinaOriental0581.HKBuyHK$2.3030Dec2021ChinaResourcesCement16a1313.HKNeutralHK$5.8830Dec2021ChinaResourcesPower16a0836.HKBuyHK$26.0530Dec2021ChinaSouthernAirlines18a,16a,16b1055.HKSellHK$4.6630Dec2021ChinaSouthernAirlines-A18a,16a,16b600029.SSSellRmb6.8030Dec2021ChinaYangtzePower4600900.SSBuyRmb22.5330Dec2021Lee&ManPaperManufacturing2314.HKSellHK$5.3330Dec2021MaanshanIron&Steel18a0323.HKNeutralHK$2.8530Dec2021MaanshanIron&Steel-A18a600808.SSSellRmb3.7030Dec2021NineDragonsPaper16a2689.HKSellHK$8.1330Dec2021PetroChina4,18a,16a,16b0857.HKBuyHK$3.4730Dec2021PetroChina-A4,18a,16a,16b601857.SSNeutralRmb4.9030Dec2021Sinopec-H18a,16a,16b0386.HKBuyHK$3.6230Dec2021SinopecShanghaiPetrochemical18a,16b0338.HKBuyHK$1.7930Dec2021SinopecShanghaiPetrochemical-A18a,16b600688.SSSellRmb4.1430Dec2021TaiwanCement1101.TWSellNT$48.0030Dec2021XinyiEnergy3868.HKBuyHK$4.1830Dec2021XinyiSolar16a0968.HKBuyHK$13.0030Dec2021ZhejiangSatelliteChemical002648.SZBuyRmb41.7030Dec2021Source:UBS.Allpricesasoflocalmarketclose.Ratingsinthistablearethemostcurrentpublishedratingspriortothisreport.Theymaybemorerecentthanthestockpricingdate.2.UBSAG,itsaffiliatesorsubsidiarieshasactedasmanager/co-managerintheunderwritingorplacementofsecuritiesofthiscompany/entityoroneofitsaffiliateswithinthepast12months.4.Withinthepast12months,UBSAG,itsaffiliatesorsubsidiarieshasreceivedcompensationforinvestmentbankingservicesfromthiscompany/entityoroneofitsaffiliates.Q-SeriesRedux4January2022ab5713.UBSAG,itsaffiliatesorsubsidiariesbeneficiallyowned1%ormoreofaclassofthiscompany`scommonequitysecuritiesasoflastmonth`send(orthepriormonth`sendifthisreportisdatedlessthan10daysafterthemostrecentmonth`send).16a.UBSSecuritiesHongKongLimitedisamarketmakerintheHongKong-listedsecuritiesofthiscompany.16b.UBSSecuritiesLLCmakesamarketinthesecuritiesand/orADRsofthiscompany.18a.MarketcapitalisationiscalculatedbymultiplyingthecurrentsharepricebythesumofAandHshares.18b.USpersonsareprohibitedfrompurchasingsecuritiesofcertaincompaniesdesignatedasbeingassociatedwiththeChineseMilitaryinaccordancewiththeamendedUSPresidentialExecutiveOrder13959.Unlessotherwiseindicated,pleaserefertotheValuationandRisksectionswithinthebodyofthisreport.Foracompletesetofdisclosurestatementsassociatedwiththecompaniesdiscussedinthisreport,includinginformationonvaluationandrisk,pleasecontactUBSSecuritiesLLC,1285AvenueofAmericas,NewYork,NY10019,USA,Attention:InvestmentResearch.Q-SeriesRedux4January2022ab58TheDisclaimerrelevanttoGlobalWealthManagementclientsfollowstheGlobalDisclaimer.GlobalDisclaimerThisdocumenthasbeenpreparedbyUBSSecuritiesAsiaLimited,anaffiliateofUBSAG.UBSAG,itssubsidiaries,branchesandaffiliatesarereferredtohereinasUBS.ThisDocumentisprovidedsolelytorecipientswhoareexpresslyauthorizedbyUBStoreceiveit.Ifyouarenotsoauthorizedyo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deringoptionsshouldconsultwithhis/hertaxadvisorastohowtaxesaffecttheoutcomeofcontemplatedoptionstransactions.Mortgageandasset-backedsecuritiesmayinvolveahighdegreeofriskandmaybehighlyvolatileinresponsetofluctuationsininterestratesorothermarketconditions.Foreigncurrencyratesofexchangemayadverselyaffectthevalue,priceorincomeofanysecurityorrelatedinstrumentreferredtointhedocument.Forinvestmentadvice,tradeexecutionorotherenquiries,clientsshouldcontacttheirlocalsalesrepresentative.Thevalueofanyinvestmentorincomemaygodownaswellasup,andinvestorsmaynotgetbackthefull(orany)amountinvested.Pastperformanceisnotnecessarilyaguidetofutureperformance.NeitherUBSnoranyofitsdirectors,employeesoragentsacceptsanyliabilityforanyloss(includinginvestmentloss)ordamagearisingoutoftheuseofalloranyoftheInformation.Priortomakinganyinvestmentorfinancialdecisions,anyrecipientofthisdocumentortheinformationshouldtakestepstounderstandtheriskandreturnoftheinvestmentandseekindividualizedadvicefromhisorherpersonalfinancial,legal,taxandotherprofessionaladvisorsthattakesintoaccountalltheparticularfactsandcircumstancesofhisorherinvestmentobjectives.Anypricesstatedinthisdocumentareforinformationpurposesonlyanddonotrepresentvaluationsforindividualsecuritiesorotherfinancialinstruments.Thereisnorepresentationthatanytransactioncanorcouldhavebeeneffectedatthoseprices,andanypricesdonotnecessarilyreflectUBS'sinternalbooksandrecordsortheoreticalmodel-basedvaluationsandmaybebasedoncertainassumptions.DifferentassumptionsbyUBSoranyothersourcemayyieldsubstantiallydifferentresults.Norepresentationorwarranty,eitherexpressedorimplied,isprovidedinrelationtotheaccuracy,completenessorreliabilityoftheinformationcontainedinanymaterialstowhichthisdocumentrelates(the"Information"),exceptwithrespecttoInformationconcerningUBS.TheInformationisnotintendedtobeacompletestatementorsummaryofthesecurities,marketsordevelopmentsreferredtointhedocument.UBSdoesnotundertaketoupdateorkeepcurrenttheInformation.Anyopinionsexpressedinthisdocumentmaychangewithoutnoticeandmaydifferorbecontrarytoopinionsexpressedbyotherbusinessareasorgroups,personnelorotherrepresentativeofUBS.AnystatementscontainedinthisreportattributedtoathirdpartyrepresentUBS'sinterpretationofthedata,informationand/oropinionsprovidedbythatthirdpartyeitherpubliclyorthroughasubscriptionservice,andsuchuseandinterpretationhavenotbeenreviewedbythethirdparty.InnocircumstancesmaythisdocumentoranyoftheInformation(includinganyforecast,value,indexorothercalculatedamount("Values"))beusedforanyofthefollowingpurposes:(i)valuationoraccountingpurposes;(ii)todeterminetheamountsdueorpayable,thepriceorthevalueofanyfinancialinstrumentorfinancialcontract;or(iii)tomeasuretheperformanceofanyfinancialinstrumentincluding,withoutlimitation,forthepurposeoftrackingthereturnorperformanceofanyValueorofdefiningtheassetallocationofportfolioorofcomputingperformancefees.ByreceivingthisdocumentandtheInformationyouwillbedeemedtorepresentandwarranttoUBSthatyouwillnotusethisdocumentoranyoftheInformationforanyoftheabovepurposesorotherwiserelyuponthisdocumentoranyoftheInformation.UBShaspoliciesandprocedures,whichinclude,withoutlimitation,independencepoliciesandpermanentinformationbarriers,thatareintended,anduponwhichUBSrelies,tomanagepotentialconflictsofinterestandcontroltheflowofinformationwithindivisionsofUBSandamongitssubsidiaries,branchesandaffiliates.ForfurtherinformationonthewaysinwhichUBSmanagesconflictsandmaintainsindependenceofitsresearchproducts,historicalperformanceinformationandcertainadditionaldisclosuresconcerningUBSresearchrecommendations,pleasevisithttps://www.ubs.com/disclosures.Researchwillinitiate,updateandceasecoveragesolelyatthediscretionofUBSResearchManagement,whichwillalsohavesolediscretiononthetimingandfrequencyofanypublishedresearchproduct.Theanalysiscontainedinthisdocumentisbasedonnumerousassumptions.Allmaterialinformationinrelationtopublishedresearchreports,suchasvaluationmethodology,riskstatements,underlyingassumptions(includingsensitivityanalysisofthoseassumptions),ratingshistoryetc.asrequiredbytheMarketAbuseRegulation,canbefoundonUBSNeo.Differentassumptionscouldresultinmateriallydifferentresults.Theanalyst(s)responsibleforthepreparationofthisdocumentmayinteractwithtradingdeskpersonnel,salespersonnelandotherpartiesforthepurposeofgathering,applyingandinterpretingmarketinformation.UBSreliesoninformationbarrierstocontroltheflowofinformationcontainedinoneormoreareasQ-SeriesRedux4January2022ab59withinUBSintootherareas,units,groupsoraffiliatesofUBS.Thecompensationoftheanalystwhopreparedthisdocumentisdeterminedexclusivelybyresearchmanagementandseniormanagement(notincludinginvestmentbanking).Analystcompensationisnotbasedoninvestmentbankingrevenues;however,compensationmayrelatetotherevenuesofUBSand/oritsdivisionsasawhole,ofwhichinvestmentbanking,salesandtradingareapart,andUBS'ssubsidiaries,branchesandaffiliatesasawhole.ForfinancialinstrumentsadmittedtotradingonanEUregulatedmarket:UBSAG,itsaffiliatesorsubsidiaries(excludingUBSSecuritiesLLC)actsasamarketmakerorliquidityprovider(inaccordancewiththeinterpretationofthesetermsunderEnglishlawor,ifnotcarriedoutbyUBSintheUKthelawoftherelevantjurisdictioninwhichUBSdeterminesitcarriesouttheactivity)inthefinancialinstrumentsoftheissuersavethatwheretheactivityofliquidityprovideriscarriedoutinaccordancewiththedefinitiongiventoitbythelawsandregulationsofanyotherEUjurisdictions,suchinformationisseparatelydisclosedinthisdocument.Forfinancialinstrumentsadmittedtotradingonanon-EUregulatedmarket:UBSmayactasamarketmakersavethatwherethisactivityiscarriedoutintheUSinaccordancewiththedefinitiongiventoitbytherelevantlawsandregulations,suchactivitywillbespecificallydisclosedinthisdocument.UBSmayhaveissuedawarrantthevalueofwhichisbasedononeormoreofthefinancialinstrumentsreferredtointhedocument.UBSanditsaffiliatesandemployeesmayhavelongorshortpositions,tradeasprincipalandbuyandsellininstrumentsorderivativesidentifiedherein;suchtransactionsorpositionsmaybeinconsistentwiththeopinionsexpressedinthisdocument.Withinthepast12monthsUBSAG,itsaffiliatesorsubsidiariesmayhavereceivedorprovidedinvestmentservicesandactivitiesorancillaryservicesasperMiFIDIIwhichmayhavegivenrisetoapaymentorpromiseofapaymentinrelationtotheseservicesfromortothiscompany.WhereGlobalResearchrefersto"UBSEvidenceLabInside"orhasmadeuseofdataprovidedbyUBSEvidenceLabyouunderstandthatUBSEvidenceLabisaseparatedepartmenttoGlobalResearchandthatUBSEvidenceLabdoesnotprovideresearch,investmentrecommendationsoradvice.UBSEvidenceLabmayprovideservicestootherinternalandexternalclients.UnitedKingdom:ThismaterialisdistributedbyUBSAG,LondonBranchtopersonswhoareeligiblecounterpartiesorprofessionalclients.UBSAG,LondonBranchisauthorisedbythePrudentialRegulationAuthorityandsubjecttoregulationbytheFinancialConductAuthorityandlimitedregulationbythePrudentialRegulationAuthority.Europe:Exceptasotherwisespecifiedherein,thesematerialsaredistributedbyUBSEuropeSE,asubsidiaryofUBSAG,topersonswhoareeligiblecounterpartiesorprofessionalclients(asdetailedintheBundesanstaltfurFinanzdienstleistungsaufsicht(BaFin)RulesandaccordingtoMIFID)andareonlyavailabletosuchpersons.Theinformationdoesnotapplyto,andshouldnotberelieduponby,retailclients.UBSEuropeSEisauthorisedbytheEuropeanCentralBank(ECB)andregulatedbytheBaFinandtheECB.Germany:WhereananalystofUBSEuropeSEhascontributedtothisdocument,thedocumentisalsodeemedtohavebeenpreparedbyUBSEuropeSE.InallcasesitisdistributedbyUBSEuropeSEandUBSAG,LondonBranch.Luxembourg,theNetherlands,BelgiumandIreland:WhereananalystofUBSEuropeSEhascontributedtothisdocument,thedocumentisalsodeemedtohavebeenpreparedbyUBSEuropeSE.InallcasesitisdistributedbyUBSEuropeSEandUBSAG,LondonBranch.Turkey:DistributedbyUBSAG,LondonBranch.Noinformationinthisdocumentisprovidedforthepurposeofoffering,marketingandsalebyanymeansofanycapitalmarketinstrumentsandservicesintheRepublicofTurkey.Therefore,thisdocumentmaynotbeconsideredasanoffermadeortobemadetoresidentsoftheRepublicofTurkey.UBSAG,LondonBranchisnotlicensedbytheTurkishCapitalMarketBoardundertheprovisionsoftheCapitalMarketLaw(LawNo.6362).Accordingly,neitherthisdocumentnoranyotherofferingmaterialrelatedtotheinstruments/servicesmaybeutilizedinconnectionwithprovidinganycapitalmarketservicestopersonswithintheRepublicofTurkeywithoutthepriorapprovaloftheCapitalMarketBoard.However,accordingtoarticle15(d)(ii)oftheDecreeNo.32,thereisnorestrictiononthepurchaseorsaleofthesecuritiesabroadbyresidentsoftheRepublicofTurkey.Poland:DistributedbyUBSEuropeSE(spolkazograniczonaodpowiedzialnoscia)OddzialwPolsceregulatedbythePolishFinancialSupervisionAuthority.WhereananalystofUBSEuropeSE(spolkazograniczonaodpowiedzialnoscia)OddzialwPolscehascontributedtothisdocument,thedocumentisalsodeemedtohavebeenpreparedbyUBSEuropeSE(spolkazograniczonaodpowiedzialnoscia)OddzialwPolsce.Russia:PreparedanddistributedbyUBSBank(OOO)."ShouldnotbeconstruedasanindividualInvestmentRecommendationforthepurposeoftheRussianLaw"-FederalLaw#39-FZONTHESECURITIESMARKETArticles6.1-6.2.Switzerland:DistributedbyUBSAGtopersonswhoareinstitutionalinvestorsonly.UBSAGisregulatedbytheSwissFinancialMarketSupervisoryAuthority(FINMA).Italy:PreparedbyUBSEuropeSEanddistributedbyUBSEuropeSEandUBSEuropeSE,ItalyBranch.WhereananalystofUBSEuropeSE,ItalyBranchhascontributedtothisdocument,thedocumentisalsodeemedtohavebeenpreparedbyUBSEuropeSE,ItalyBranch.France:PreparedbyUBSEuropeSEanddistributedbyUBSEuropeSEandUBSEuropeSE,FranceBranch.WhereananalystofUBSEuropeSE,FranceBranchhascontributedtothisdocument,thedocumentisalsodeemedtohavebeenpreparedbyUBSEuropeSE,FranceBranch.Spain:PreparedbyUBSEuropeSEanddistributedbyUBSEuropeSEandUBSEuropeSE,SpainBranch.WhereananalystofUBSEuropeSE,SpainBranchhascontributedtothisdocument,thedocumentisalsodeemedtohavebeenpreparedbyUBSEuropeSE,SpainBranch.Sweden:PreparedbyUBSEuropeSEanddistributedbyUBSEuropeSEandUBSEuropeSE,SwedenBranch.WhereananalystofUBSEuropeSE,SwedenBranchhascontributedtothisdocument,thedocumentisalsodeemedtohavebeenpreparedbyUBSEuropeSE,SwedenBranch.SouthAfrica:DistributedbyUBSSouthAfrica(Pty)Limited(RegistrationNo.1995/011140/07),anauthoriseduseroftheJSEandanauthorisedFinancialServicesProvider(FSP7328).SaudiArabia:ThisdocumenthasbeenissuedbyUBSAG(and/oranyofitssubsidiaries,branchesoraffiliates),apubliccompanylimitedbyshares,incorporatedinSwitzerlandwithitsregisteredofficesatAeschenvorstadt1,CH-4051BaselandBahnhofstrasse45,CH-8001Zurich.ThispublicationhasbeenapprovedbyUBSSaudiArabia(asubsidiaryofUBSAG),aSaudiclosedjointstockcompanyincorporatedintheKingdomofSaudiArabiaundercommercialregisternumber1010257812havingitsregisteredofficeatTatweerTowers,P.O.Box75724,Riyadh11588,KingdomofSaudiArabia.UBSSaudiArabiaisauthorizedandregulatedbytheCapitalMarketAuthoritytoconductsecuritiesbusinessunderlicensenumber08113-37.UAE/Dubai:TheinformationdistributedbyUBSAGDubaiBranchisonlyintendedforProfessionalClientsand/orMarketCounterparties,asclassifiedundertheDFSArulebook.Nootherpersonshouldactuponthismaterial/communication.TheinformationisnotforfurtherdistributionwithintheUnitedArabEmirates.UBSAGDubaiBranchisregulatedbytheDFSAintheDIFC.UBSisnotlicensedtoprovidebankingservicesintheUAEbytheCentralBankoftheUAE,norisitlicensedbytheUAESecuritiesandCommoditiesAuthority.Israel:ThisMaterialisdistributedbyUBSAG,LondonBranch.UBSSecuritiesIsraelLtdisalicensedInvestmentMarketerthatissupervisedbytheIsraelSecuritiesAuthority(ISA).UBSAG,LondonBranchanditsaffiliatesincorporatedoutsideIsraelarenotlicensedundertheIsraeliAdvisoryLaw.UBSmayengageamongothersinissuanceofFinancialAssetsorindistributionofFinancialAssetsofotherissuersforfeesorotherbenefits.UBSAG,LondonBranchanditsaffiliatesmayprefervariousFinancialAssetstowhichtheyhaveormayhaveanAffiliation(assuchtermisdefinedundertheIsraeliAdvisoryLaw).NothinginthisMaterialshouldbeconsideredasinvestmentadviceundertheIsraeliAdvisoryLaw.ThisMaterialisbeingissuedonlytoand/orisdirectedonlyatpersonswhoareEligibleClientswithinthemeaningoftheIsraeliAdvisoryLaw,andthisMaterialmustnotbefurnishedto,reliedonoracteduponbyanyotherpersons.UnitedStates:DistributedtoUSpersonsbyeitherUBSSecuritiesLLCorbyUBSFinancialServicesInc.,subsidiariesofUBSAG;orbyagroup,subsidiaryoraffiliateofUBSAGthatisnotregisteredasaUSbroker-dealer(a‘non-USaffiliate’)tomajorUSinstitutionalinvestorsonly.UBSSecuritiesLLCorUBSFinancialServicesInc.acceptsresponsibilityforthecontentofareportpreparedbyanothernon-USaffiliatewhendistributedtoUSpersonsbyUBSSecuritiesLLCorUBSFinancialServicesInc.AlltransactionsbyaUSpersoninthesecuritiesmentionedinthisreportmustbeeffectedthroughUBSSecuritiesLLCorUBSFinancialServicesInc.,andnotthroughanon-USaffiliate.UBSSecuritiesLLCisnotactingasamunicipaladvisortoanymunicipalentityorobligatedpersonwithinthemeaningofSection15BoftheSecuritiesExchangeAct(the"MunicipalAdvisorRule"),andtheopinionsorviewscontainedhereinarenotintendedtobe,anddonotconstitute,advicewithinthemeaningoftheMunicipalAdvisorRule.Canada:DistributedbyUBSSecuritiesCanadaInc.,aregisteredinvestmentdealerinCanadaandaMember-CanadianInvestorProtectionFund,orbyanotheraffiliateofUBSAGthatisregisteredtoconductbusinessinCanadaorisotherwiseexemptfromregistration.Brazil:Exceptasotherwisespecifiedherein,thismaterialispreparedbyUBSBrasilCCTVMS.A.¹topersonswhoareeligibleinvestorsresidinginBrazil,whichareconsideredtobeInvestidoresProfissionais,asdesignatedbytheapplicableregulation,mainlytheCVMInstructionNo.539fromthe13thofNovember2013(determinesthedutytoverifythesuitabilityofproducts,servicesandtransactionswithregardstotheclient´sprofile).¹UBSBrasilCCTVMS.A.isasubsidiaryofUBSBBServicosdeAssessoriaFinanceiraeParticipacoesS.A.(“UBSBB”).UBSBBisanassociationbetweenUBSAGandBancodoBrasil,ofwhichUBSAGisthemajorityowner.HongKong:DistributedbyUBSSecuritiesAsiaLimited.PleasecontactlocallicensedpersonsofUBSSecuritiesAsiaLimitedinrespectofanymattersarisingfrom,orinconnectionwith,theanalysisordocumentSingapore:DistributedbyUBSSecuritiesPte.Ltd.[MCI(P)026/08/2021andCo.Reg.No.:198500648C]orUBSAG,SingaporeBranch.PleasecontactUBSSecuritiesPte.Ltd.,anexemptfinancialadviserundertheSingaporeFinancialAdvisersAct(Cap.110);orUBSAG,SingaporeBranch,anexemptfinancialadviserundertheSingaporeFinancialAdvisersAct(Cap.110)andawholesalebanklicensedundertheSingaporeBankingAct(Cap.19)regulatedbytheMonetaryAuthorityofSingapore,inrespectofanymattersarisingfrom,orinconnectionwith,theanalysisordocument.TherecipientsofthisdocumentrepresentandwarrantthattheyareaccreditedandinstitutionalinvestorsasdefinedintheSecuritiesandFuturesAct(Cap.289).Japan:DistributedbyUBSSecuritiesJapanCo.,Ltd.toprofessionalinvestors(exceptasotherwisepermitted).WherethisreporthasbeenpreparedbyUBSSecuritiesJapanCo.,Ltd.,UBSSecuritiesJapanCo.,Ltd.istheauthor,publisheranddistributorofthereport.DistributedbyUBSAG,TokyoBranchtoProfessionalInvestors(exceptasotherwisepermitted)inrelationtoforeignexchangeandotherbankingbusinesseswhenrelevant.Australia:ClientsofUBSAG:DistributedbyUBSAG(ABN47088129613andholderofAustralianFinancialServicesLicenseNo.231087).ClientsofUBSSecuritiesAustraliaLtd:DistributedbyUBSSecuritiesAustraliaLtd(ABN62008586481andholderofAustralianFinancialServicesLicenseNo.231098).ThisDocumentcontainsgeneralinformationand/orgeneraladviceonlyanddoesnotconstitutepersonalfinancialproductadvice.Assuch,theInformationinthisdocumenthasbeenpreparedwithouttakingintoaccountanyinvestor’sobjectives,financialsituationorneeds,andinvestorsshould,beforeactingontheInformation,considertheappropriatenessoftheInformation,havingregardtotheirobjectives,financialsituationandneeds.IftheInformationcontainedinthisdocumentrelatestotheacquisition,orpotentialacquisitionofaparticularfinancialproductbya‘Retail’clientasdefinedbysection761GoftheCorporationsAct2001whereaProductDisclosureStatementwouldberequired,theretailclientshouldobtainandconsidertheProductDisclosureStatementrelatingtotheproductbeforemakinganydecisionaboutwhethertoacquiretheproduct.NewZealand:DistributedbyUBSNewZealandLtd.UBSNewZealandLtdisnotaregisteredbankinNewZealand.YouarebeingprovidedwiththisUBSpublicationormaterialbecauseyouhaveindicatedtoUBSthatyouarea“wholesaleclient”withinthemeaningofsection5CoftheFinancialAdvisersAct2008ofNewZealand(PermittedClient).ThispublicationormaterialisnotintendedforclientswhoarenotPermittedClients(non-permittedClients).Ifyouareanon-permittedClientyoumustnotrelyonthispublicationormaterial.Ifdespitethiswarningyouneverthelessrelyonthispublicationormaterial,youhereby(i)acknowledgethatyoumaynotrelyonthecontentofthispublicationormaterialandthatanyrecommendationsoropinionsinsuchthispublicationormaterialarenotmadeorprovidedtoyou,and(ii)tothemaximumextentpermittedbylaw(a)indemnifyUBSanditsassociatesQ-SeriesRedux4January2022ab60orrelatedentities(andtheirrespectiveDirectors,officers,agentsandAdvisors)(eacha‘RelevantPerson’)foranyloss,damage,liabilityorclaimanyofthemmayincurorsufferasaresultof,orinconnectionwith,yourunauthorisedrelianceonthispublicationormaterialand(b)waiveanyrightsorremediesyoumayhaveagainstanyRelevantPersonfor(orinrespectof)anyloss,damage,liabilityorclaimyoumayincurorsufferasaresultof,orinconnectionwith,yourunauthorisedrelianceonthispublicationormaterial.Korea:DistributedinKoreabyUBSSecuritiesPte.Ltd.,SeoulBranch.ThisreportmayhavebeeneditedorcontributedtofromtimetotimebyaffiliatesofUBSSecuritiesPte.Ltd.,SeoulBranch.Thismaterialisintendedforprofessional/institutionalclientsonlyandnotfordistributiontoanyretailclients.Malaysia:ThismaterialisauthorizedtobedistributedinMalaysiabyUBSSecuritiesMalaysiaSdn.Bhd(CapitalMarketsServicesLicenseNo.:CMSL/A0063/2007).Thismaterialisintendedforprofessional/institutionalclientsonlyandnotfordistributiontoanyretailclients.India:DistributedbyUBSSecuritiesIndiaPrivateLtd.(CorporateIdentityNumberU67120MH1996PTC097299)2/F,2NorthAvenue,MakerMaxity,BandraKurlaComplex,Bandra(East),Mumbai(India)400051.Phone:+912261556000.ItprovidesbrokerageservicesbearingSEBIRegistrationNumber:INZ000259830;merchantbankingservicesbearingSEBIRegistrationNumber:INM000010809andResearchAnalystservicesbearingSEBIRegistrationNumber:INH000001204.UBSAG,itsaffiliatesorsubsidiariesmayhavedebtholdingsorpositionsinthesubjectIndiancompany/companies.Withinthepast12months,UBSAG,itsaffiliatesorsubsidiariesmayhavereceivedcompensationfornon-investmentbankingsecurities-relatedservicesand/ornon-securitiesservicesfromthesubjectIndiancompany/companies.Thesubjectcompany/companiesmayhavebeenaclient/clientsofUBSAG,itsaffiliatesorsubsidiariesduringthe12monthsprecedingthedateofdistributionoftheresearchreportwithrespecttoinvestmentbankingand/ornon-investmentbankingsecurities-relatedservicesand/ornon-securitiesservices.Withregardtoinformationonassociates,pleaserefertotheAnnualReportat:http://www.ubs.com/global/en/about_ubs/investor_relations/annualreporting.htmlTaiwan:Exceptasotherwisespecifiedherein,thismaterialmaynotbedistributedinTaiwan.Informationandmaterialonsecurities/instrumentsthataretradedinaTaiwanorganizedexchangeisdeemedtobeissuedanddistributedbyUBSSecuritiesPte.LTD.,TaipeiBranch,whichislicensedandregulatedbyTaiwanFinancialSupervisoryCommission.Saveforsecurities/instrumentsthataretradedinaTaiwanorganizedexchange,thismaterialshouldnotconstitute"recommendation"toclientsorrecipientsinTaiwanforthecoveredcompaniesoranycompaniesmentionedinthisdocument.NoportionofthedocumentmaybereproducedorquotedbythepressoranyotherpersonwithoutauthorisationfromUBS.Indonesia:ThisreportisbeingdistributedbyPTUBSSekuritasIndonesiaandisdeliveredbyitslicensedemployee(s),includingmarketing/salesperson,toitsclient.PTUBSSekuritasIndonesia,havingitsregisteredofficeatSequisTowerLevel22unit22-1,Jl.Jend.Sudirman,kav.71,SCBDlot11B,Jakarta12190,Indonesia,isasubsidiarycompanyofUBSAGandlicensedunderCapitalMarketLawno.8year1995,aholderofbroker-dealerandunderwriterlicensesissuedbytheCapitalMarketandFinancialInstitutionSupervisoryAgency(nowOtoritasJasaKeuangan/OJK).PTUBSSekuritasIndonesiaisalsoamemberofIndonesiaStockExchangeandsupervisedbyOtoritasJasaKeuangan(OJK).NeitherthisreportnoranycopyhereofmaybedistributedinIndonesiaortoanyIndonesiancitizensexceptincompliancewithapplicableIndonesiancapitalmarketlawsandregulations.ThisreportisnotanofferofsecuritiesinIndonesiaandmaynotbedistributedwithintheterritoryoftheRepublicofIndonesiaortoIndonesiancitizensincircumstancewhichconstitutesanofferingwithinthemeaningofIndonesiancapitalmarketlawsandregulations.ThedisclosurescontainedinresearchdocumentsproducedbyUBSAG,LondonBranchorUBSEuropeSEshallbegovernedbyandconstruedinaccordancewithEnglishlaw.UBSspecificallyprohibitstheredistributionofthisdocumentinwholeorinpartwithoutthewrittenpermissionofUBSandinanyeventUBSacceptsnoliabilitywhatsoeverforanyredistributionofthisdocumentoritscontentsortheactionsofthirdpartiesinthisrespect.Imagesmaydepictobjectsorelementsthatareprotectedbythirdpartycopyright,trademarksandotherintellectualpropertyrights.©UBS2021.ThekeysymbolandUBSareamongtheregisteredandunregisteredtrademarksofUBS.Allrightsreserved.GlobalWealthManagementDisclaimerYoureceivethisdocumentinyourcapacityasaclientofUBSGlobalWealthManagement.ThispublicationhasbeendistributedtoyoubyUBSSwitzerlandAG(regulatedbyFINMAinSwitzerland)oritsaffiliates("UBS")withwhomyouhaveabankingrelationshipwith.Thefullnameofthedistributingaffiliateanditscompetentauthoritycanbefoundinthecountry-specificdisclaimerattheendofthisdocument.Thedateandtimeofthefirstdisseminationofthispublicationisthesameasthedateandtimeofitspublication.Riskinformation:Youagreethatyoushallnotcopy,revise,amend,createaderivativework,providetoanythirdparty,orinanywaycommerciallyexploitanyUBSresearch,andthatyoushallnotextractdatafromanyresearchorestimates,withoutthepriorwrittenconsentofUBS.Thisdocumentisfordistributiononlyasmaybepermittedbylaw.Itisnotdirectedto,orintendedfordistributiontooruseby,anypersonorentitywhoisacitizenorresidentoforlocatedinanylocality,state,countryorotherjurisdictionwheresuchdistribution,publication,availabilityorusewouldbecontrarytolaworregulationorwouldsubjectUBStoanyregistrationorlicensingrequirementwithinsuchjurisdiction.Thisdocumentisforyourinformationonly;itisnotanadvertisementnorisitasolicitationoranoffertobuyorsellanyfinancialinstrumentsortoparticipateinanyparticulartradingstrategy.Nothinginthisdocumentconstitutesarepresentationthatanyinvestmentstrategyorrecommendationissuitableorappropriatetoaninvestor’sindividualcircumstancesorotherwiseconstitutesapersonalrecommendation.Byprovidingthisdocument,noneofUBSoritsrepresentativeshasanyresponsibilityorauthoritytoprovideorhaveprovidedinvestmentadviceinafiduciarycapacityorotherwise.Investmentsinvolverisks,andinvestorsshouldexerciseprudenceandtheirownjudgmentinmakingtheirinvestmentdecisions.NoneofUBSoritsrepresentativesissuggestingthattherecipientoranyotherpersontakeaspecificcourseofactionoranyactionatall.Byreceivingthisdocument,therecipientacknowledgesandagreeswiththeintendedpurposedescribedaboveandfurtherdisclaimsanyexpectationorbeliefthattheinformationconstitutesinvestmentadvicetotherecipientorotherwisepurportstomeettheinvestmentobjectivesoftherecipient.Thefinancialinstrumentsdescribedinthedocumentmaynotbeeligibleforsaleinalljurisdictionsortocertaincategoriesofinvestors.Options,derivativeproductsandfuturesarenotsuitableforallinvestors,andtradingintheseinstrumentsisconsideredrisky.Mortgageandasset-backedsecuritiesmayinvolveahighdegreeofriskandmaybehighlyvolatileinresponsetofluctuationsininterestratesorothermarketconditions.Foreigncurrencyratesofexchangemayadverselyaffectthevalue,priceorincomeofanysecurityorrelatedinstrumentreferredtointhedocument.Forinvestmentadvice,tradeexecutionorotherenquiries,clientsshouldcontacttheirlocalsalesrepresentative.Thevalueofanyinvestmentorincomemaygodownaswellasup,andinvestorsmaynotgetbackthefull(orany)amountinvested.Pastperformanceisnotnecessarilyaguidetofutureperformance.NeitherUBSnoranyofitsdirectors,employeesoragentsacceptsanyliabilityforanyloss(includinginvestmentloss)ordamagearisingoutoftheuseofalloranyoftheinformation(asdefinedbelow).Priortomakinganyinvestmentorfinancialdecisions,anyrecipientofthisdocumentortheinformationshouldtakestepstounderstandtheriskandreturnoftheinvestmentandseekindividualizedadvicefromhisorherpersonalfinancial,legal,taxandotherprofessionaladvisorsthattakesintoaccountalltheparticularfactsandcircumstancesofhisorherinvestmentobjectives.Anypricesstatedinthisdocumentareforinformationpurposesonlyanddonotrepresentvaluationsforindividualsecuritiesorotherfinancialinstruments.Thereisnorepresentationthatanytransactioncanorcouldhavebeeneffectedatthoseprices,andanypricesdonotnecessarilyreflectUBS'sinternalbooksandrecordsortheoreticalmodel-basedvaluationsandmaybebasedoncertainassumptions.DifferentassumptionsbyUBSoranyothersourcemayyieldsubstantiallydifferentresults.Norepresentationorwarranty,eitherexpressedorimplied,isprovidedinrelationtotheaccuracy,completenessorreliabilityoftheinformationcontainedinanymaterialstowhichthisdocumentrelates(the"Information"),exceptwithrespecttoInformationconcerningUBS.TheInformationisnotintendedtobeacompletestatementorsummaryofthesecurities,marketsordevelopmentsreferredtointhedocument.UBSdoesnotundertaketoupdateorkeepcurrenttheInformation.Anyopinionsexpressedinthisdocumentmaychangewithoutnoticeandmaydifferorbecontrarytoopinionsexpressedbyotherbusinessareasorgroups,personnelorotherrepresentativeofUBS.AnystatementscontainedinthisreportattributedtoathirdpartyrepresentUBS'sinterpretationofthedata,informationand/oropinionsprovidedbythatthirdpartyeitherpubliclyorthroughasubscriptionservice,andsuchuseandinterpretationhavenotbeenreviewedbythethirdparty.InnocircumstancesmaythisdocumentoranyoftheInformation(includinganyforecast,value,indexorothercalculatedamount("Values"))beusedforanyofthefollowingpurposes:(i)valuationoraccountingpurposes;(ii)todeterminetheamountsdueorpayable,thepriceorthevalueofanyfinancialinstrumentorfinancialcontract;or(iii)tomeasuretheperformanceofanyfinancialinstrumentincluding,withoutlimitation,forthepurposeoftrackingthereturnorperformanceofanyValueorofdefiningtheassetallocationofportfolioorofcomputingperformancefees.ByreceivingthisdocumentandtheInformationyouwillbedeemedtorepresentandwarranttoUBSthatyouwillnotusethisdocumentoranyoftheInformationforanyoftheabovepurposesorotherwiserelyuponthisdocumentoranyoftheInformation.UBShaspoliciesandprocedures,whichinclude,withoutlimitation,independencepoliciesandpermanentinformationbarriers,thatareintended,anduponwhichUBSrelies,tomanagepotentialconflictsofinterestandcontroltheflowofinformationwithindivisionsofUBS(includingbetweenGlobalWealthManagementandUBSGlobalResearch)andamongitssubsidiaries,branchesandaffiliates.ForfurtherinformationonthewaysinwhichUBSmanagesconflictsandmaintainsindependenceofitsresearchproducts,historicalperformanceinformationandcertainadditionaldisclosuresconcerningUBSresearchrecommendations,pleasevisithttps://www.ubs.com/disclosures.Researchwillinitiate,updateandceasecoveragesolelyatthediscretionofresearchmanagement,whichwillalsohavesolediscretiononthetimingandfrequencyofanypublishedresearchproduct.Theanalysiscontainedinthisdocumentisbasedonnumerousassumptions.Differentassumptionscouldresultinmateriallydifferentresults.Q-SeriesRedux4January2022ab61Theanalyst(s)responsibleforthepreparationofthisdocumentmayinteractwithtradingdeskpersonnel,salespersonnelandotherpartiesforthepurposeofgathering,applyingandinterpretingmarketinformation.UBSreliesoninformationbarrierstocontroltheflowofinformationcontainedinoneormoreareaswithinUBSintootherareas,units,groupsoraffiliatesofUBS.Thecompensationoftheanalystwhopreparedthisdocumentisdeterminedexclusivelybyresearchmanagementandseniormanagement(notincludinginvestmentbanking).Analystcompensationisnotbasedoninvestmentbankingrevenues;however,compensationmayrelatetotherevenuesofUBSand/oritsdivisionsasawhole,ofwhichinvestmentbanking,salesandtradingareapart,andUBS'ssubsidiaries,branchesandaffiliatesasawhole.ForfinancialinstrumentsadmittedtotradingonanEUregulatedmarket:UBSAG,itsaffiliatesorsubsidiaries(excludingUBSSecuritiesLLC)actsasamarketmakerorliquidityprovider(inaccordancewiththeinterpretationofthesetermsintheUK)inthefinancialinstrumentsoftheissuersavethatwheretheactivityofliquidityprovideriscarriedoutinaccordancewiththedefinitiongiventoitbythelawsandregulationsofanyotherEUjurisdictions,suchinformationisseparatelydisclosedinthisdocument.Forfinancialinstrumentsadmittedtotradingonanon-EUregulatedmarket:UBSmayactasamarketmakersavethatwherethisactivityiscarriedoutintheUSinaccordancewiththedefinitiongiventoitbytherelevantlawsandregulations,suchactivitywillbespecificallydisclosedinthisdocument.UBSmayhaveissuedawarrantthevalueofwhichisbasedononeormoreofthefinancialinstrumentsreferredtointhedocument.UBSanditsaffiliatesandemployeesmayhavelongorshortpositions,tradeasprincipalandbuyandsellininstrumentsorderivativesidentifiedherein;suchtransactionsorpositionsmaybeinconsistentwiththeopinionsexpressedinthisdocument.Optionsandfuturesarenotsuitableforallinvestors,andtradingintheseinstrumentsisconsideredriskyandmaybeappropriateonlyforsophisticatedinvestors.Priortobuyingorsellinganoption,andforthecompleterisksrelatingtooptions,youmustreceiveacopyof"CharacteristicsandRisksofStandardizedOptions".Youmayreadthedocumentathttps://www.theocc.com/about/publications/character-risks.jsporaskyourfinancialadvisorforacopy.Investinginstructuredinvestmentsinvolvessignificantrisks.Foradetaileddiscussionoftherisksinvolvedininvestinginanyparticularstructuredinvestment,youmustreadtherelevantofferingmaterialsforthatinvestment.Structuredinvestmentsareunsecuredobligationsofaparticularissuerwithreturnslinkedtotheperformanceofanunderlyingasset.Dependingonthetermsoftheinvestment,investorscouldloseallorasubstantialportionoftheirinvestmentbasedontheperformanceoftheunderlyingasset.Investorscouldalsolosetheirentireinvestmentiftheissuerbecomesinsolvent.UBSFinancialServicesInc.doesnotguaranteeinanywaytheobligationsorthefinancialconditionofanyissuerortheaccuracyofanyfinancialinformationprovidedbyanyissuer.Structuredinvestmentsarenottraditionalinvestmentsandinvestinginastructuredinvestmentisnotequivalenttoinvestingdirectlyintheunderlyingasset.Structuredinvestmentsmayhavelimitedornoliquidity,andinvestorsshouldbepreparedtoholdtheirinvestmenttomaturity.Thereturnofstructuredinvestmentsmaybelimitedbyamaximumgain,participationrateorotherfeature.Structuredinvestmentsmayincludecallfeaturesand,ifastructuredinvestmentiscalledearly,investorswouldnotearnanyfurtherreturnandmaynotbeabletoreinvestinsimilarinvestmentswithsimilarterms.Structuredinvestmentsincludecostsandfeeswhicharegenerallyembeddedinthepriceoftheinvestment.Thetaxtreatmentofastructuredinvestmentmaybecomplexandmaydifferfromadirectinvestmentintheunderlyingasset.UBSFinancialServicesInc.anditsemployeesdonotprovidetaxadvice.Investorsshouldconsulttheirowntaxadvisorabouttheirowntaxsituationbeforeinvestinginanysecurities.ImportantInformationAboutSustainableInvestingStrategies:Sustainableinvestingstrategiesaimtoconsiderandincorporateenvironmental,socialandgovernance(ESG)factorsintoinvestmentprocessandportfolioconstruction.StrategiesacrossgeographiesandstylesapproachESGanalysisandincorporatethefindingsinavarietyofways.IncorporatingESGfactorsorSustainableInvestingconsiderationsmayinhibittheportfoliomanager’sabilitytoparticipateincertaininvestmentopportunitiesthatotherwisewouldbeconsistentwithitsinvestmentobjectiveandotherprincipalinvestmentstrategies.ThereturnsonaportfolioconsistingprimarilyofsustainableinvestmentsmaybelowerorhigherthanportfolioswhereESGfactors,exclusions,orothersustainabilityissuesarenotconsideredbytheportfoliomanager,andtheinvestmentopportunitiesavailabletosuchportfoliosmaydiffer.CompaniesmaynotnecessarilymeethighperformancestandardsonallaspectsofESGorsustainableinvestingissues;thereisalsonoguaranteethatanycompanywillmeetexpectationsinconnectionwithcorporateresponsibility,sustainability,and/orimpactperformance.Withinthepast12monthsUBSSwitzerlandAG,itsaffiliatesorsubsidiariesmayhavereceivedorprovidedinvestmentservicesandactivitiesorancillaryservicesasperMiFIDIIwhichmayhavegivenrisetoapaymentorpromiseofapaymentinrelationtotheseservicesfromortothiscompany.IfyourequiredetailedinformationondisclosuresofinterestorconflictofinterestasrequiredbyMarketAbuseRegulationpleasecontactthemailboxMAR_disclosures_twopager@ubs.com.Pleasenotethate-mailcommunicationisunsecured.ExternalAssetManagers/ExternalFinancialConsultants:IncasethisresearchorpublicationisprovidedtoanExternalAssetManageroranExternalFinancialConsultant,UBSexpresslyprohibitsthatitisredistributedbytheExternalAssetManagerortheExternalFinancialConsultantandismadeavailabletotheirclientsand/orthirdparties.Austria:ThispublicationisnotintendedtoconstituteapublicofferunderAustrianlaw.ItisdistributedonlyforinformationpurposestoclientsofUBSEuropeSE,NiederlassungÖsterreich,withplaceofbusinessatWächtergasse1,A-1010Wien.UBSEuropeSE,NiederlassungÖsterreichissubjecttothejointsupervisionoftheEuropeanCentralBank("ECB"),theGermanCentralBank(DeutscheBundesbank),theGermanFederalFinancialServicesSupervisoryAuthority(BundesanstaltfürFinanzdienstleistungsaufsicht),aswellasoftheAustrianFinancialMarketAuthority(Finanzmarktaufsicht,FMA),towhichthispublicationhasnotbeensubmittedforapproval.UBSEuropeSEisacreditinstitutionconstitutedunderGermanlawintheformofaSocietasEuropaea,dulyauthorizedbytheECB.Bahrain:UBSisaSwissbanknotlicensed,supervisedorregulatedinBahrainbytheCentralBankofBahraintoundertakebankingorinvestmentbusinessactivitiesinBahrain.Therefore,prospects/clientsdonothaveanyprotectionunderlocalbankingandinvestmentserviceslawsandregulations.Brazil:ThisreportisonlyintendedforBrazilianresidentswhoaredirectlypurchasingorsellingsecuritiesintheBrazilcapitalmarketthroughalocalauthorizedinstitution.Canada:Theinformationcontainedhereinisnot,andundernocircumstancesistobeconstruedas,aprospectus,anadvertisement,apublicoffering,anoffertosellsecuritiesdescribedherein,solicitationofanoffertobuysecuritiesdescribedherein,inCanadaoranyprovinceorterritorythereof.AnyofferorsaleofthesecuritiesdescribedhereininCanadawillbemadeonlyunderanexemptionfromtherequirementstofileaprospectuswiththerelevantCanadiansecuritiesregulatorsandonlybyadealerproperlyregisteredunderapplicablesecuritieslawsor,alternatively,pursuanttoanexemptionfromthedealerregistrationrequirementintherelevantprovinceorterritoryofCanadainwhichsuchofferorsaleismade.UndernocircumstancesistheinformationcontainedhereintobeconstruedasinvestmentadviceinanyprovinceorterritoryofCanadaandisnottailoredtotheneedsoftherecipient.Totheextentthattheinformationcontainedhereinreferencessecuritiesofanissuerincorporated,formedorcreatedunderthelawsofCanadaoraprovinceorterritoryofCanada,anytradesinsuchsecuritiesmustbeconductedthroughadealerregisteredinCanadaor,alternatively,pursuanttoadealerregistrationexemption.NosecuritiescommissionorsimilarregulatoryauthorityinCanadahasreviewedorinanywaypasseduponthesematerials,theinformationcontainedhereinorthemeritsofthesecuritiesdescribedhereinandanyrepresentationtothecontraryisanoffence.InCanada,thispublicationisdistributedbyUBSInvestmentManagementCanadaInc.China:ThisreportispreparedbyUBSSwitzerlandAGoritsoffshoresubsidiaryoraffiliate(collectivelyas"UBSOffshore").UBSOffshoreisanentityincorporatedoutofChinaandisnotlicensed,supervisedorregulatedinChinatocarryoutbankingorsecuritiesbusiness.TherecipientshouldnotcontacttheanalystsorUBSOffshorewhichproducedthisreportforadviceastheyarenotlicensedtoprovidesecuritiesinvestmentadviceinChina.UBSInvestmentBank(includingResearch)hasitsownwhollyindependentresearchandviewswhichattimesmayvaryfromtheviewsofUBSGlobalWealthManagement.TherecipientshouldnotusethisdocumentorotherwiserelyonanyoftheinformationcontainedinthisreportinmakinginvestmentdecisionsandUBStakesnoresponsibilityinthisregard.CzechRepublic:UBSisnotalicensedbankintheCzechRepublicandthusisnotallowedtoprovideregulatedbankingorinvestmentservicesintheCzechRepublic.Thiscommunicationand/ormaterialisdistributedformarketingpurposesandconstitutesa"CommercialMessage"underthelawsofCzechRepublicinrelationtobankingand/orinvestmentservices.PleasenotifyUBSifyoudonotwishtoreceiveanyfurthercorrespondence.Denmark:ThispublicationisnotintendedtoconstituteapublicofferunderDanishlaw.ItisdistributedonlyforinformationpurposestoclientsofUBSEuropeSE,DenmarkBranch,filialafUBSEuropeSE,withplaceofbusinessatSanktAnnaePlads13,1250Copenhagen,Denmark,registeredwiththeDanishCommerceandCompaniesAgency,underNo.38172433.UBSEuropeSE,DenmarkBranch,filialafUBSEuropeSEissubjecttothejointsupervisionoftheEuropeanCentralBank("ECB"),theGermanCentralBank(DeutscheBundesbank),theGermanFederalFinancialServicesSupervisoryAuthority(BundesanstaltfürFinanzdienstleistungsaufsicht),aswellasoftheDanishFinancialSupervisoryAuthority(Finanstilsynet),towhichthispublicationhasnotbeensubmittedforapproval.UBSEuropeSEisacreditinstitutionconstitutedunderGermanlawintheformofaSocietasEuropaea,dulyauthorizedbytheECB.Egypt:SecuritiesorotherinvestmentproductsarenotbeingofferedorsoldbyUBStothepublicinEgyptandtheyhavenotbeenandwillnotberegisteredwiththeEgyptianFinancialRegulatoryAuthority(FRA).France:ThispublicationisnotintendedtoconstituteapublicofferunderFrenchlaw,itdoesnotconstituteapersonalrecommendationasitisdistributedonlyforinformationpurposestoclientsofUBS(France)S.A.,French"sociétéanonyme"withsharecapitalof€132.975.556,at69boulevardHaussmannF-75008Paris,registeredwiththe“RegistreduCommerceetdesSociétés”ofParisunderN°B421255670.UBS(France)S.A.isaproviderofinvestmentservicesdulyauthorizedaccordingtothetermsofthe"Codemonétaireetfinancier",regulatedbyFrenchbankingandfinancialauthoritiesasthe"Autoritédecontrôleprudentieletderésolution"and"Autoritédesmarchésfinanciers",towhichthispublicationhasnotbeensubmittedforapproval.Germany:ThispublicationisnotintendedtoconstituteapublicofferunderGermanlaw.ItisdistributedonlyforinformationpurposestoclientsofUBSEuropeSE,Germany,withplaceofbusinessatBockenheimerLandstrasse2-4,60306FrankfurtamMain.UBSEuropeSEisacreditinstitutionconstitutedunderGermanlawintheformofaSocietasEuropaea,dulyauthorizedbytheEuropeanCentralBank("ECB"),andsupervisedbytheECB,theGermanCentralBank(DeutscheBundesbank)andtheGermanFederalFinancialServicesSupervisoryAuthority(BundesanstaltfürFinanzdienstleistungsaufsicht),towhichthispublicationhasnotbeensubmittedforapproval.Greece:UBSAGanditssubsidiariesandaffiliates(UBS)arepremierglobalfinancialservicesfirmsofferingwealthmanagementservicestoindividual,corporateandinstitutionalinvestors.UBSAGandUBSSwitzerlandAGareestablishedinSwitzerlandandoperateunderSwisslaw.UBSoperatesinover50countriesandfromallmajorfinancialcenters.UBSisnotlicensedasabankorfinancialinstitutionunderGreeklegislationanddoesnotprovidebanking,norfinancialservicesinGreece.Consequently,UBSprovidessuchservicesfrombranchesoutsideofGreece,only.Noinformationinthisdocumentisprovidedforthepurposeofoffering,marketingandsalebyanymeansofanycapitalmarketinstrumentsandservicesinGreece.Therefore,thisdocumentmaynotbeconsideredasapublicofferingmadeortobemadetoresidentsofGreece.HongKongSAR:ThispublicationisdistributedtoclientsofUBSAGHongKongBranchbyUBSAGHongKongBranch,alicensedbankundertheHongKongBankingOrdinanceandaregisteredinstitutionundertheSecuritiesandFuturesOrdinance.UBSAGHongKongBranchisincorporatedinSwitzerlandwithlimitedliability.India:UBSSecuritiesIndiaPrivateLtd.(CorporateIdentityNumberU67120MH1996PTC097299)2/F,2NorthAvenue,MakerMaxity,Q-SeriesRedux4January2022ab62BandraKurlaComplex,Bandra(East),Mumbai(India)400051.Phone:+912261556000.ItprovidesbrokerageservicesbearingSEBIRegistrationNumberINZ000259830;merchantbankingservicesbearingSEBIRegistrationNumber:INM000010809andResearchAnalystservicesbearingSEBIRegistrationNumber:INH000001204.UBSAG,itsaffiliatesorsubsidiariesmayhavedebtholdingsorpositionsinthesubjectIndiancompany/companies.Withinthepast12months,UBSAG,itsaffiliatesorsubsidiariesmayhavereceivedcompensationfornon-investmentbankingsecurities-relatedservicesand/ornon-securitiesservicesfromthesubjectIndiancompany/companies.Thesubjectcompany/companiesmayhavebeenaclient/clientsofUBSAG,itsaffiliatesorsubsidiariesduringthe12monthsprecedingthedateofdistributionoftheresearchreportwithrespecttoinvestmentbankingand/ornon-investmentbankingsecurities-relatedservicesand/ornon-securitiesservices.Withregardtoinformationonassociates,pleaserefertotheAnnualReportat:http://www.ubs.com/global/en/about_ubs/investor_relations/annualreporting.html.Indonesia:ThismaterialwasprovidedtoyouasaresultofarequestreceivedbyUBSfromyouand/orpersonsentitledtomaketherequestonyourbehalf.Shouldyouhavereceivedthematerialerroneously,UBSasksthatyoukindlydestroy/deleteitandinformUBSimmediately.Anyandalladviceprovidedand/ortradesexecutedbyUBSpursuanttothematerialwillonlyhavebeenprovideduponyourspecificrequestorexecuteduponyourspecificinstructions,asthecasemaybe,andmaybedeemedassuchbyUBSandyou.Thematerialmaynothavebeenreviewed,approved,disapprovedorendorsedbyanyfinancialorregulatoryauthorityinyourjurisdiction.Therelevantinvestmentswillbesubjecttorestrictionsandobligationsontransferassetforthinthematerial,andbyreceivingthematerialyouundertaketocomplyfullywithsuchrestrictionsandobligations.Youshouldcarefullystudyandensurethatyouunderstandandexerciseduecareanddiscretioninconsideringyourinvestmentobjective,riskappetiteandpersonalcircumstancesagainsttheriskoftheinvestment.Youareadvisedtoseekindependentprofessionaladviceincaseofdoubt.Israel:UBSisapremierglobalfinancialfirmofferingwealthmanagement,assetmanagementandinvestmentbankingservicesfromitsheadquartersinSwitzerlandanditsoperationsinover50countriesworldwidetoindividual,corporateandinstitutionalinvestors.InIsrael,UBSSwitzerlandAGisregisteredasForeignDealerincooperationwithUBSWealthManagementIsraelLtd.,awhollyownedUBSsubsidiary.UBSWealthManagementIsraelLtd.isaPortfolioManagerlicenseewhichengagesalsoinInvestmentMarketingandisregulatedbytheIsraelSecuritiesAuthority.Thispublicationisintendedforinformationonlyandisnotintendedasanoffertobuyorsolicitationofanoffer.Furthermore,thispublicationisnotintendedasaninvestmentadviceand/orinvestmentmarketingandisnotreplacinganyinvestmentadviceand/orinvestmentmarketingprovidedbytherelevantlicenseewhichisadjustedtoeachpersonneeds.Noactionhasbeen,orwillbe,takeninIsraelthatwouldpermitanofferingoftheproduct(s)mentionedinthisdocumentoradistributionofthisdocumenttothepublicinIsrael.Inparticular,thisdocumenthasnotbeenreviewedorapprovedbytheIsraeliSecuritiesAuthority.Theproduct(s)mentionedinthisdocumentis/arebeingofferedtoalimitednumberofsophisticatedinvestorswhoqualifyasoneoftheinvestorslistedinthefirstsupplementtotheIsraeliSecuritiesLaw,5728-1968.Thisdocumentmaynotbereproducedorusedforanyotherpurpose,norbefurnishedtoanyotherpersonotherthanthosetowhomcopieshavebeensent.Anyonewhopurchasestheproduct(s)mentionedhereinshalldosoforitsownbenefitandforitsownaccountandnotwiththeaimorintentionofdistributingorofferingtheproduct(s)tootherparties.Anyonewhopurchasestheproduct(s)shalldosoinaccordancewithitsownunderstandinganddiscretionandafterithasreceivedanyrelevantfinancial,legal,business,taxorotheradviceoropinionrequiredbyitinconnectionwithsuchpurchase(s).Theword"advice"and/oranyofitsderivativesshallbereadandconstruedinconjunctionwiththedefinitionoftheterm"investmentmarketing"asdefinedundertheIsraeliRegulationofInvestmentAdvice,InvestmentMarketingandPortfolioManagementLaw,1995.TheSwisslawsandregulationsrequireanumberofmandatorydisclosurestobemadeinindependentfinancialresearchreportsorrecommendations.PursuanttotheSwissFinancialMarketInfrastructureActandtheFinancialMarketInfrastructureOrdinance-FINMA,banksmustdisclosethepercentageofvotingrightstheyholdincompaniesbeingresearched,iftheseholdingsareequaltoorexceedthestatutorythresholds.Inaddition,theDirectivesontheIndependenceofFinancialResearch,issuedbytheSwissBankersAssociation,mandateanumberofdisclosures,includingthedisclosureofpotentialconflictsofinterest,theparticipationwithinprevious12monthsinanysecuritiesissuesonbehalfofthecompanybeingresearched,aswellasthefactthatremunerationpaidtothefinancialanalystsisbasedgenerallyupontheperformanceof(i)thenewissuesdepartmentorinvestmentbanking;or(ii)securitiestradingperformance(includingproprietarytrading)orsales.Italy:ThispublicationisnotintendedtoconstituteapublicofferunderItalianlaw.ItisdistributedonlyforinformationpurposestoclientsofUBSEuropeSE,SuccursaleItalia,withplaceofbusinessatViadelVecchioPolitecnico,3-20121Milano.UBSEuropeSE,SuccursaleItaliaissubjecttothejointsupervisionoftheEuropeanCentralBank("ECB"),theGermanCentralBank(DeutscheBundesbank),theGermanFederalFinancialServicesSupervisoryAuthority(BundesanstaltfürFinanzdienstleistungsaufsicht),aswellasoftheBankofItaly(Bancad’Italia)andtheItalianFinancialMarketsSupervisoryAuthority(CONSOB-CommissioneNazionaleperleSocietàelaBorsa),towhichthispublicationhasnotbeensubmittedforapproval.UBSEuropeSEisacreditinstitutionconstitutedunderGermanlawintheformofaSocietasEuropaea,dulyauthorizedbytheECB.Jersey:UBSAG,JerseyBranch,isregulatedandauthorizedbytheJerseyFinancialServicesCommissionfortheconductofbanking,fundsandinvestmentbusiness.WhereservicesareprovidedfromoutsideJersey,theywillnotbecoveredbytheJerseyregulatoryregime.UBSAG,JerseyBranchisabranchofUBSAGapubliccompanylimitedbyshares,incorporatedinSwitzerlandwhoseregisteredofficesareatAeschenvorstadt1,CH-4051BaselandBahnhofstrasse45,CH8001Zurich.UBSAG,JerseyBranch'sprincipalplaceofbusinessis1,IFCJersey,StHelier,Jersey,JE23BX.Luxembourg:ThispublicationisnotintendedtoconstituteapublicofferunderLuxembourglaw.ItisdistributedonlyforinformationpurposestoclientsofUBSEuropeSE,LuxembourgBranch("UBSLUX"),R.C.S.Luxembourgn°B209123,withregisteredofficeat33A,AvenueJ.F.Kennedy,L-1855Luxembourg.UBSLUXisabranchofUBSEuropeSE,acreditinstitutionconstitutedunderGermanlawintheformofaSocietasEuropaea(HRBn°107046),withregisteredofficeatBockenheimerLandstrasse2-4,D-60306FrankfurtamMain,Germany,dulyauthorizedbytheGermanFederalFinancialServicesSupervisoryAuthority(BundesanstaltfürFinanzdienstleistungsaufsicht–"BaFin")andsubjecttothejointprudentialsupervisionofBaFin,thecentralbankofGermany(DeutscheBundesbank)andtheEuropeanCentralBank.UBSLUXisfurthermoresupervisedbytheLuxembourgprudentialsupervisoryauthority(CommissiondeSurveillanceduSecteurFinancier),initsroleashostmemberstateauthority.Thispublicationhasnotbeensubmittedforapprovaltoanypublicsupervisoryauthority.Malaysia:ThismaterialwasprovidedtoyouasaresultofarequestreceivedbyUBSfromyouand/orpersonsentitledtomaketherequestonyourbehalf.Shouldyouhavereceivedthematerialerroneously,UBSasksthatyoukindlydestroy/deleteitandinformUBSimmediately.Anyandalladviceprovidedand/ortradesexecutedbyUBSpursuanttothematerialwillonlyhavebeenprovideduponyourspecificrequestorexecuteduponyourspecificinstructions,asthecasemaybe,andmaybedeemedassuchbyUBSandyou.Thematerialmaynothavebeenreviewed,approved,disapprovedorendorsedbyanyfinancialorregulatoryauthorityinyourjurisdiction.Therelevantinvestmentswillbesubjecttorestrictionsandobligationsontransferassetforthinthematerial,andbyreceivingthematerialyouundertaketocomplyfullywithsuchrestrictionsandobligations.Youshouldcarefullystudyandensurethatyouunderstandandexerciseduecareanddiscretioninconsideringyourinvestmentobjective,riskappetiteandpersonalcircumstancesagainsttheriskoftheinvestment.Youareadvisedtoseekindependentprofessionaladviceincaseofdoubt.Mexico:ThisinformationisdistributedbyUBSAsesoresMéxico,S.A.deC.V.("UBSAsesores"),anaffiliateofUBSSwitzerlandAG,incorporatedasanon-independentinvestmentadvisorundertheMexicanregulationduetotherelationwithaForeignBank.UBSAsesoresisregisteredundernumber30060-001-(14115)-21/06/2016andsubjecttothesupervisionoftheMexicanBankingandSecuritiesCommission("CNBV")exclusivelyregardingtherenderingof(i)portfoliomanagementservices,(ii)securitiesinvestmentadvisoryservices,analysisandissuanceofindividualinvestmentrecommendations,and(iii)anti-moneylaunderingandterrorismfinancingmatters.ThisUBSpublicationoranymaterialrelatedtheretoisaddressedonlytoSophisticatedorInstitutionalInvestorslocatedinMexico.Researchreportsonlyreflecttheviewsoftheanalystsresponsibleforthereport.Thecompensationoftheanalyst(s)whopreparedthisreportisdeterminedexclusivelybyresearchmanagementandseniormanagementofanyentityofUBSGrouptowhichsuchanalyst(s)renderservices.Nigeria:UBSAGanditsbranchesandsubsidiaries(UBS)arenotlicensed,supervisedorregulatedinNigeriabytheCentralBankofNigeriaortheNigerianSecuritiesandExchangeCommission(SEC)anddonotundertakebankingorinvestmentbusinessactivitiesinNigeria.TheinvestmentproductsmentionedinthismaterialarenotbeingofferedorsoldbyUBStothepublicinNigeriaandtheyhavenotbeensubmittedforapprovalnorregisteredwiththeNigerianSEC.Ifyouareinterestedinproductsofthisnature,pleaseletusknowandwewilldirectyoutosomeonewhocanadviseyou.Theinvestmentproductsmentionedinthismaterialarenotbeingdirectedto,andarenotbeingmadeavailableforsubscriptionbyanypersonswithinNigeriaotherthantheselectedinvestorstowhomtheoffermaterialshavebeenaddressedasaprivatesaleordomesticconcernwithintheexemptionandmeaningofSection69(2)oftheInvestmentsandSecuritiesAct,2007(ISA).AnymaterialrelatingtoCollectiveInvestmentSchemeshasbeenprovidedtoyouatyourspecificunsolicitedrequestandforyourinformationonly.TheinvestmentproductsmentionedinsuchmaterialarenotbeingofferedormadeavailableforsalebyUBSinNigeriaandtheyhavenotbeensubmittedforapprovalnorregisteredwiththeNigerianSEC.Philippines:ThismaterialwasprovidedtoyouasaresultofarequestreceivedbyUBSfromyouand/orpersonsentitledtomaketherequestonyourbehalf.Shouldyouhavereceivedthematerialerroneously,UBSasksthatyoukindlydestroy/deleteitandinformUBSimmediately.Anyandalladviceprovidedand/ortradesexecutedbyUBSpursuanttothematerialwillonlyhavebeenprovideduponyourspecificrequestorexecuteduponyourspecificinstructions,asthecasemaybe,andmaybedeemedassuchbyUBSandyou.Thematerialmaynothavebeenreviewed,approved,disapprovedorendorsedbyanyfinancialorregulatoryauthorityinyourjurisdiction.Therelevantinvestmentswillbesubjecttorestrictionsandobligationsontransferassetforthinthematerial,andbyreceivingthematerialyouundertaketocomplyfullywithsuchrestrictionsandobligations.Youshouldcarefullystudyandensurethatyouunderstandandexerciseduecareanddiscretioninconsideringyourinvestmentobjective,riskappetiteandpersonalcircumstancesagainsttheriskoftheinvestment.Youareadvisedtoseekindependentprofessionaladviceincaseofdoubt.Poland:UBSisapremierglobalfinancialservicesfirmofferingwealthmanagementservicestoindividual,corporateandinstitutionalinvestors.UBSisestablishedinSwitzerlandandoperatesunderSwisslawandinover50countriesandfromallmajorfinancialcentres.UBSSwitzerlandAGisnotlicensedasabankorasaninvestmentfirmunderPolishlegislationandisnotpermittedtoprovidebankingandfinancialservicesinPoland.Portugal:UBSSwitzerlandAGisnotlicensedtoconductbankingandfinancialactivitiesinPortugalnorisUBSSwitzerlandAGsupervisedbytheportugueseregulators(BankofPortugal"BancodePortugal"andPortugueseSecuritiesExchangeCommission"ComissãodoMercadodeValoresMobiliários").Qatar:UBSQatarLLCisauthorizedbytheQatarFinancialCentreRegulatoryAuthority,withQFCno.01169,andhasitsregisteredofficeat14thFloor,BurjAlfardanTower,Building157,StreetNo.301,AreaNo.69,AlMajdami,Lusail,Qatar.UBSQatarLLCneitheroffersanybrokerageservicesnorexecutesanyorderwith,fororonbehalfofitsclients.Aclientorderwillhavetobeplacedwith,andexecutedby,UBSSwitzerlandAGinSwitzerlandoranaffiliateofUBSSwitzerlandAG,thatisdomiciledoutsideQatar.ItisinthesolediscretionofUBSSwitzerlandAGinSwitzerlandoritsaffiliatetoacceptorrejectanorderandUBSQatarLLCdoesnothaveauthoritytoprovideaconfirmationinthisrespect.UBSQatarLLCmayhowevercommunicatepaymentordersandinvestmentinstructionstoUBSSwitzerlandAGinSwitzerlandforreceipt,acceptanceandexecution.UBSQatarLLCisnotauthorizedtoactforandonbehalfofUBSSwitzerlandAGoranaffiliateofUBSSwitzerlandAG.Thisdocumentandanyattachmentsheretoareintendedforeligiblecounterpartiesandbusinesscustomersonly.Russia:Thisdocumentorinformationcontainedthereinisforinformationpurposesonlyandconstitutesneitherapublicnoraprivateoffering,isnotaninvitationtomakeoffers,tosell,exchangeorotherwisetransferanyfinancialinstrumentsintheRussianFederationtoorforthebenefitofanyRussianpersonorentityanddoesnotconstituteanadvertisementorofferingofsecuritiesintheRussianFederationwithinthemeaningofRussiansecuritieslaws.Theinformationcontainedhereinisnotan“individualinvestmentrecommendation”asdefinedinFederalLawof22April1996No39-FZQ-SeriesRedux4January2022ab63"OnSecuritiesMarket"(asamended)andthefinancialinstrumentsandoperationsspecifiedhereinmaynotbesuitableforyourinvestmentprofileoryourinvestmentgoalsorexpectations.Thedeterminationofwhetherornotsuchfinancialinstrumentsandoperationsareinyourinterestsoraresuitableforyourinvestmentgoals,investmenthorizonortheacceptablerisklevelisyourresponsibility.Weassumenoliabilityforanylossesconnectedwithmakinganysuchoperationsorinvestingintoanysuchfinancialinstrumentsandwedonotrecommendtousesuchinformationastheonlysourceofinformationformakinganinvestmentdecision.SaudiArabia:UBSSaudiArabiaisauthorisedandregulatedbytheCapitalMarketAuthoritytoconductsecuritiesbusinessunderlicencenumber08113-37.Singapore:ThismaterialwasprovidedtoyouasaresultofarequestreceivedbyUBSfromyouand/orpersonsentitledtomaketherequestonyourbehalf.Shouldyouhavereceivedthematerialerroneously,UBSasksthatyoukindlydestroy/deleteitandinformUBSimmediately.ClientsofUBSAGSingaporebranchareaskedtopleasecontactUBSAGSingaporebranch,anexemptfinancialadviserundertheSingaporeFinancialAdvisersAct(Cap.110)andawholesalebanklicensedundertheSingaporeBankingAct(Cap.19)regulatedbytheMonetaryAuthorityofSingapore,inrespectofanymattersarisingfrom,orinconnectionwith,theanalysisorreport.UBSAGisincorporatedinSwitzerlandwithlimitedliability.UBSAGhasabranchregisteredinSingapore(UENS98FC5560C).Spain:ThispublicationisnotintendedtoconstituteapublicofferunderSpanishlaw.ItisdistributedonlyforinformationpurposestoclientsofUBSEuropeSE,SucursalenEspaña,withplaceofbusinessatCalleMaríadeMolina4,C.P.28006,Madrid.UBSEuropeSE,SucursalenEspañaissubjecttothejointsupervisionoftheEuropeanCentralBank("ECB"),theGermanCentralbank(DeutscheBundesbank),theGermanFederalFinancialServicesSupervisoryAuthority(BundesanstaltfürFinanzdienstleistungsaufsicht),aswellasoftheSpanishsupervisoryauthority(BancodeEspaña),towhichthispublicationhasnotbeensubmittedforapproval.Additionallyitisauthorizedtoprovideinvestmentservicesonsecuritiesandfinancialinstruments,regardingwhichitissupervisedbytheComisiónNacionaldelMercadodeValoresaswell.UBSEuropeSE,SucursalenEspañaisabranchofUBSEuropeSE,acreditinstitutionconstitutedunderGermanlawintheformofaSocietasEuropaea,dulyauthorizedbytheECB.Sweden:ThispublicationisnotintendedtoconstituteapublicofferunderSwedishlaw.ItisdistributedonlyforinformationpurposestoclientsofUBSEuropeSE,SwedenBankfilial,withplaceofbusinessatRegeringsgatan38,11153Stockholm,Sweden,registeredwiththeSwedishCompaniesRegistrationOfficeunderReg.No516406-1011.UBSEuropeSE,SwedenBankfilialissubjecttothejointsupervisionoftheEuropeanCentralBank("ECB"),theGermanCentralbank(DeutscheBundesbank),theGermanFederalFinancialServicesSupervisoryAuthority(BundesanstaltfürFinanzdienstleistungsaufsicht),aswellasoftheSwedishsupervisoryauthority(Finansinspektionen),towhichthispublicationhasnotbeensubmittedforapproval.UBSEuropeSEisacreditinstitutionconstitutedunderGermanlawintheformofaSocietasEuropaea,dulyauthorizedbytheECB.Taiwan:ThismaterialisprovidedbyUBSAG,TaipeiBranchinaccordancewithlawsofTaiwan,inagreementwithorattherequestofclients/prospects.Thailand:ThismaterialwasprovidedtoyouasaresultofarequestreceivedbyUBSfromyouand/orpersonsentitledtomaketherequestonyourbehalf.Shouldyouhavereceivedthematerialerroneously,UBSasksthatyoukindlydestroy/deleteitandinformUBSimmediately.Anyandalladviceprovidedand/ortradesexecutedbyUBSpursuanttothematerialwillonlyhavebeenprovideduponyourspecificrequestorexecuteduponyourspecificinstructions,asthecasemaybe,andmaybedeemedassuchbyUBSandyou.Thematerialmaynothavebeenreviewed,approved,disapprovedorendorsedbyanyfinancialorregulatoryauthorityinyourjurisdiction.Therelevantinvestmentswillbesubjecttorestrictionsandobligationsontransferassetforthinthematerial,andbyreceivingthematerialyouundertaketocomplyfullywithsuchrestrictionsandobligations.Youshouldcarefullystudyandensurethatyouunderstandandexerciseduecareanddiscretioninconsideringyourinvestmentobjective,riskappetiteandpersonalcircumstancesagainsttheriskoftheinvestment.Youareadvisedtoseekindependentprofessionaladviceincaseofdoubt.Turkey:Theinformationinthisdocumentisnotprovidedforthepurposeofoffering,marketingorsaleofanycapitalmarketinstrumentorserviceintheRepublicofTurkey.Therefore,thisdocumentmaynotbeconsideredasanoffermade,ortobemade,toresidentsoftheRepublicofTurkeyintheRepublicofTurkey.UBSSwitzerlandAGisnotlicensedbytheTurkishCapitalMarketBoard(theCMB)undertheprovisionsoftheCapitalMarketLaw(LawNo.6362).Accordingly,neitherthisdocumentnoranyotherofferingmaterialrelatedtotheinstrument/servicemaybeutilizedinconnectionwithprovidinganycapitalmarketservicestopersonswithintheRepublicofTurkeywithoutthepriorapprovaloftheCMB.However,accordingtoarticle15(d)(ii)oftheDecreeNo.32residentsoftheRepublicofTurkeyareallowedtopurchaseorsellthefinancialinstrumentstradedinfinancialmarketsoutsideoftheRepublicofTurkey.Furthertothis,pursuanttoarticle9oftheCommuniquéonPrinciplesRegardingInvestmentServices,ActivitiesandAncillaryServicesNo.III-37.1,investmentservicesprovidedabroadtoresidentsoftheRepublicofTurkeybasedontheirowninitiativearenotrestricted.UnitedArabEmirates(UAE):UBSisnotafinancialinstitutionlicensedintheUnitedArabEmirates(UAE)bytheCentralBankoftheUAEnorbytheEmirates’SecuritiesandCommoditiesAuthorityanddoesnotundertakebankingactivitiesintheUAE.UBSAGDubaiBranchislicensedbytheDFSAintheDIFC.UnitedKingdom:ThisdocumentisissuedbyUBSWealthManagement,adivisionofUBSAGwhichisauthorisedandregulatedbytheFinancialMarketSupervisoryAuthorityinSwitzerland.IntheUnitedKingdom,UBSAGisauthorisedbythePrudentialRegulationAuthorityandissubjecttoregulationbytheFinancialConductAuthorityandlimitedregulationbythePrudentialRegulationAuthority.DetailsabouttheextentofregulationbythePrudentialRegulationAuthorityareavailablefromusonrequest.AmemberoftheLondonStockExchange.ThispublicationisdistributedtoretailclientsofUBSWealthManagement.Ukraine:UBSisnotregisteredandlicensedasabank/financialinstitutionunderUkrainianlegislationanddoesnotprovidebankingandotherfinancialservicesinUkraine.UBShasnotmadeandwillnotmakeanyofferofthementionedproductstothepublicinUkraine.NoactionhasbeentakentoauthorizeanofferofthementionedproductstothepublicinUkraineandthedistributionofthisdocumentshallnotconstitutefinancialservicesforthepurposesoftheLawofUkraine"OnFinancialServicesandStateRegulationofFinancialServicesMarkets"dated12July2001.Accordingly,nothinginthisdocumentoranyotherdocument,informationorcommunicationrelatedtothementionedproductsshallbeinterpretedascontaininganofferorinvitationtooffer,orsolicitationofsecuritiesintheterritoryofUkraine.ElectroniccommunicationmustnotbeconsideredasanoffertoenterintoanelectronicagreementorelectronicinstrumentwithinthemeaningoftheLawofUkraine"OnElectronicCommerce"dated3September2015.Thisdocumentisstrictlyforprivateusebyitsholderandmaynotbepassedontothirdpartiesorotherwisepubliclydistributed.USA:DistributedtoUSpersonsbyUBSFinancialServicesInc.orUBSSecuritiesLLC,subsidiariesofUBSAG.UBSSwitzerlandAG,UBSEuropeSE,UBSBank,S.A.,UBSBrasilAdministradoradeValoresMobiliáriosLtda.,UBSAsesoresMéxico,S.A.deC.V.,UBSSuMiTRUSTWealthManagementCo.,Ltd.,UBSWealthManagementIsraelLtd.andUBSMenkulDegerlerASareaffiliatesofUBSAG.UBSFinancialServicesIncorporatedofPuertoRicoisasubsidiaryofUBSFinancialServicesInc.UBSFinancialServicesInc.acceptsresponsibilityforthecontentofareportpreparedbyanon-USaffiliatewhenitdistributesreportstoUSpersons.AlltransactionsbyaUSpersoninthesecuritiesmentionedinthisreportshouldbeeffectedthroughaUS-registeredbrokerdealeraffiliatedwithUBS,andnotthroughanon-USaffiliate.ThecontentsofthisreporthavenotbeenandwillnotbeapprovedbyanysecuritiesorinvestmentauthorityintheUnitedStatesorelsewhere.UBSFinancialServicesInc.isnotactingasamunicipaladvisortoanymunicipalentityorobligatedpersonwithinthemeaningofSection15BoftheSecuritiesExchangeAct(the"MunicipalAdvisorRule")andtheopinionsorviewscontainedhereinarenotintendedtobe,anddonotconstitute,advicewithinthemeaningoftheMunicipalAdvisorRule.©UBS2021.ThekeysymbolandUBSareamongtheregisteredandunregisteredtrademarksofUBS.Allrightsreserved.ab

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