Chinese Frontier

 

Market Scorecard


On Friday, markets were focused solely on Sino-US trade tensions, and it was mostly negative for stocks. Friday morning, China essentially told the US to get lost. They said that they are not going to negotiate when there is a threat of tariffs hanging over their head, and that if need be the Chinese people are prepared to hunker down for a protracted trade war.

Looking on as an outsider, who would you put your money on to grit their teeth and endure a trade war, the US consumer or the Chinese? Also remember that there is a US election next year, and if this trade war is not settled by then, or escalates from here, Trump will be punished at the polls. So he will be under pressure to change course. We shall have to see how this resolves itself.

On Friday the JSE All-share closed down 0.63%, the S&P 500 closed down 0.58%, and the Nasdaq closed down 1.04%.

Company Corner


 

Michael’s Musings

On Friday morning Richemont released their full year numbers. It was a big year for the group because management moved the company into online retail in a big way. They bought the shares that they didn’t own in Yoox Net-A-Porter, and they bought Watchfinder, a leading omni-channel platform for premium pre-owned timepieces.

As a result of the two purchases, you can’t easily compare these numbers with last year’s figures. If we strip out the acquisitions, their sales were higher by 8% and their gross profit margin increased to 66.3%. When you add in their new digital division, overall gross profit margins and operating profit margins took a dive. While the digital arm built scale, it is like most new technology companies and is loss making.

I suppose the number that counts is headline earnings (HEPS). The group reported HEPS that were higher by 15% and increased the dividend by 5%. Luxury as a whole is on the up again, after recovering from an industry reset when the Chinese cracked down on gifting. The Richemont share price probably won’t shoot the lights out, but it has the potential to keep ticking higher and generating cash for shareholders. The share finished up over 4% on Friday, one of the only green stocks locally.

Our 10c Worth


 

One thing, from Paul

As Michael has already pointed out above, all of the news out of China lately has been overwhelmed by the trade war with the US and the toll that it’s taking on their economy. It’s true that disruptions of this nature are occurring, and I’m sure that certain exporters of Chinese manufactured goods are taking strain.

However, it’s important to keep the bigger picture in mind. The steady advance of the Chinese economy continues, at a rate of around 6.4%. That fell from around 6.8% in 2017, but that’s still pretty good. The population is still urbanising, and the middle classes are expanding. The political actors of the moment, Xi Jinping and Donald Trump will be gone soon, but the youth of today will keep walking.

Consider one industry report, which underscores this point: the luxury goods market. According to a recent report from McKinsey, Chinese consumers are set to contribute almost two-thirds of global growth in luxury spending in the year ahead.

In 2018, Chinese consumers at home and abroad spent 770 billion RMB ($115 billion) on luxury items. Their outlay is set to almost double to 1.2 trillion RMB by 2025, when 40 percent of the world’s spending on luxury goods will be conducted by Chinese consumers.

According to McKinsey’s analysis, that growth will be primarily driven by an explosion of upper-middle-class households, which will surge at a rate of 28 percent per annum from 2018 to 2025, taking the total number of people in China earning between $2,600 and $3,900 per month per household to 350 million. China’s affluent class (households earning above $3,900 per month) will almost triple to 65 million people during the same time period.

The majority of these people, about 70 percent in fact, will be doing their luxury spending overseas, a result of an increasing affinity for outbound travel and the price differential resulting from China’s import tax regime and brands’ own pricing policies. However, that ratio may shift in favour of domestic spending as a result of moves to cut luxury import taxes.

To invest in these trends, we own Booking.com, Richemont and some LVMH.


 

Bright’s Banter

More from China! Starbucks’ Chinese nemesis, Luckin Coffee, finally went public on Friday and the shares surged 20% on debut. Luckin listed on the Nasdaq stock exchange where its shares opened at $25, well above their IPO price of $17. The shares eventually closed just over $20. Now that’s one hell of a high!

Luckin is a unicorn coffee company with a valuation of roughly around $4 billion, like all good unicorns this company is yet to break even. According to Luckin’s IPO filing, Chinese coffee consumption is expected to balloon to 15.5 billion cups by 2023, from 8.7 billion currently.

Luckin’ has an app which customers can use to buy their coffee for delivery or to be picked up at a location closer to them, and as you can imagine the company collects crucial data on regional tastes. Starbucks’ delivery service only launched in September, and their coffee is a touch more expensive than the competition.

Remember in my previous piece I wrote the following:

The homegrown coffee giant-to-be plans to have over 4 500 stores in China by the end of 2019. Put in simple arithmetic, it means Luckin will have to build a new store every 3.5 hours in order to meet that goal and beat the Seattle coffee shop operator, Starbucks, at their own game.

Linkfest, Lap it up


Online theft is a real thing. From stealing your data to unauthorised access to your email to now stealing your bitcoin. Having a weak password makes it very easy for people to steal your information. So 1234 or your favourite sport team, is no longer good enough – Crypto thief stole $54 million by guessing weak password

Given the number of unknowns, genetic editing is a very complicated process. If you change one gene, what is the ripple effect ? (Campbell’s soup changed tomatoes’ DNA and opened up a can of mystery)

Vestact Out and About


Signing off


The JSE All-share is lower this morning, following Asian markets. Japanese GDP data out earlier this morning was much better than the market was expecting, growth of 2.1% compared to the expectation of a 0.2 contraction. It is a rather quiet day otherwise. It will be a busy week though, both on economic data and on local companies reporting.

Sent to you by Team Vestact.

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