Cachet's Insight 04/02/2020

Updated: Feb 19, 2020

Market Outlook

With the number of cases topping 17,000, China’s government is taking extreme measures to block the spread of the disease. These measures for limiting the spread of the virus mean a heavier toll on the economy in the short term, with the impact broadening from consumption to a blow to production and supply chains.

The outbreak is occurring during the New Year holiday, which is a peak time for consumption. Spending that would have taken place during the festivities won’t be recouped afterward. The current travel restrictions are much wider than those imposed during the SARS period. There were no measures locking down cities in 2003, and no extension of a national holiday.

During the SARS episode, GDP dropped a full 2 ppts, falling from 11.1% in the first quarter of 2003 to 9.1% in the second. If the coronavirus is contained, a sharp drop in the first quarter, followed by a recovery in the second and stabilization in the latter half. For short-lived impact, the virus could take China’s first-quarter GDP growth down to 4% year on year, a drop from 6.1% in the final period of 2019 and the lowest since the quarterly data begins in 1992.

In Addition, the outbreak affects other economies through the slowdown in China’s growth, not because they suffer their own outbreaks. Assuming the outbreak is contained, most economies would see a recovery in the second quarter, followed by stabilization in the second half. Outside China and a few close neighbors, the impact would be difficult to see in the full-year growth data. Although it is hard to tell the ultimate impact of the coronavirus on China and the global economy, it is a good opportunity for long term investors to build the position when the Hang Seng index closes to 25,000 gradually.

Sentiment aside, stocks could also be dragged down by potential earnings downgrade ahead as the pandemic affect ongoing operations or delay expansion plan. Hotpot stocks are amongst the most penalized.

Haidilao International Holding Ltd (6862.HK) has lost 14% in the last five days, however consensus expectation for its earnings to grow by 34% before. Perhaps the stock could start to look attractive if share falls by another 10%.

Xiabuxiabu Catering Management China Holdings Co Ltd (0520.HK) has dropped 22.5% in the last five days, would earnings fall by 22% or more? Consensus expectation for the company is 40% earnings growth before.

Some stocks may be beneficial from the disease.

Chinese Drug makers/ Diagnostic kit

China Traditional Chinese Medicine Holdings Co Ltd (0570.HK)
Guangzhou Baiyunshan Pharmaceutical Holdings Co Ltd (0874.HK)
Da An Gene Co Ltd of Sun Yat-Sen University (002030.CH)
BGI Genomics Co Ltd (300676.CH)

Online shopping

Alibaba Group Holding Ltd (BABA.US / 9988.HK)
Sea Ltd (SE.US)

Glove

Hartalega Holdings Bhd (HART.MK)
Supermax Corp Bhd (SUCB.MK)
Kossan Rubber Industries (KRI.MK)
Top Glove Corp Bhd (TOPG.MK)

Chart of the week

An escalating corona virus outbreak in Wuhan is set to slow the number of people viewing apartments, since outsiders are banned from entering the city while residents are staying indoors. This may mean a short-term setback to Yuexiu (0123.HK)’s contracted sales, given Wuhan made up 12% of its land bank as of mid-2019. CIFI (0884.HK) could also be affected with its exposure to the city at 8%, followed by 6% for Longfor (0960.HK), Jinmao (0817.HK) and Sino-Ocean (3377.HK), and 3-4% for Sunac (1918.HK) and Shimao (0813.HK).

R&F (2777.HK), Agile (3383.HK), Evergrande (3333.HK), Seazen (1030.HK) and KWG (1813.HK) should be less exposed, since Wuhan is only 1-2% of their land banks.

Asia Bond Market

Activity ground to a halt in Asia’s primary dollar bond market on Thursday as concerns over the novel coronavirus epidemic continued to grow. No new deals have been announced this week amid uncertainties due to the virus, even as sales of Asia dollar bonds rose to $42.5b this month, a record for a January, before worries over the illness mounted. “We expect to see a reduction in new issuance, in particular Chinese corporate issuance, until markets stabilize, and the economic impacts of the virus are better understood,” said Paul Lukaszewski, head of corporate debt for Asia and Australia at Aberdeen Standard. S&P Global Ratings sees the spread of the novel coronavirus among key risks to Asia-Pacific sovereign credit, noting that a widespread infection could “materially” weaken economic growth and fiscal positions in Asian countries. Airlines face risks from coronavirus like the SARS scare in 2003, according to a note from S&P Global Ratings.

Bonds from at least 59 Chinese companies totaling $48.1 billion face repayment pressure.

Payment Calendar:

Jan. 30: GCL New Energy Holdings (0451.HK)
Feb. 1: Tianjin Real Estate Group
Feb. 1: Tianqi Lithium Corp (002466.CH)
Feb. 2: HNA Capital
Feb. 4: Car Inc (0699.HK)
Feb. 4: Jilin Forest

Hot Topic of the Bond Market

The reported surge in new coronavirus cases is shake confidence among the riskiest borrowers in Asia, Chinese real estate developers' bonds have been hit hard as potential home buyers have delayed seeking apartments. Developer relatively weak slowing down cash inflows from Chinese home sales could most damage cash coverage. Although it is difficult to tell when the virus will be infected and its ultimate impact on China and the global economy, credit analysts point out that similar health scares in the past can be effective in the long buy opportunity.

Global Indices

SSE Composite Index was closed last week.
Hang Seng Index was down 5.86% last week.
Dow Jones Industrial Average index was down 2.53% last week.
NASDAQ Composite Index was down 1.76% last week.
S&P 500 Index was down 2.12% last week.

Investment Idea

Daily Range Accruals

Asset Allocation

IPO

2263.HK Fu Shek Financial Holdings Limited (2020/1/31-2020/2/7)
6813.HK Daikiya Group Holdings Limited (2020/1/24-2020/2/4)
9929.HK SEM Holdings Limited (2020/1/31-2020/2/5)

Newly Listed

BEAM.US Beam Therapeutics Inc (2020/2/6)
CSPR.US Casper Sleep Inc (2020/2/6)
NREF.US Nexpoint Real Estate Finance Inc (2020/2/6)
PPD.US PPD Inc (2020/2/6)
SDGR.US Schrodinger Inc (2020/2/6)

Analyst Recommendation

DBS Bank gave its price target on Fortune Real Estate Investment Trust (0778.HK) to HK$10.90 a share and gave the buy rating.
China Renaissance gave its price target on Koolearn Technology Holding Ltd (1797.HK) to HK$28.00 a share and gave the buy rating.
HSBC gave its price target on Ping An Healthcare and Technology Co Ltd (1833.HK) to HK$65.50 a share and gave the buy rating.
Deutsche Bank gave its price target on NXP Semiconductors NV (NXPI.US) to US$145.00 a share and gave the buy rating.
BOCOM International Holdings gave its price target on iQIYI Inc (IQ.US) to US$26.80 a share, gave the buy rating.

Result Announcement

2020/02/03

Quarter: HIG.US Hartford Financial Services Group Inc/The
Quarter: AFG.US American Financial Group Inc/OH
Quarter: NXPI.US NXP Semiconductors NV
Quarter: SYY.US Sysco Corp
Quarter: GOOG.US Alphabet Inc

2020/02/04

Annual: 0778.HK Fortune Real Estate Investment Trust
Quarter: F.US Ford Motor Co
Quarter: DIS.US Walt Disney Co/The
Quarter: CLX.US Clorox Co/The
Quarter: EMR.US Emerson Electric Co

2020/02/05

Quarter: MET.US MetLife Inc
Quarter: CINF.US Cincinnati Financial Corp
Quarter: QCOM.US QUALCOMM Inc
Quarter: GM.US General Motors Co
Quarter: MRK.US Merck & Co Inc

2020/02/06

Quarter: BIDU.US Baidu Inc
Quarter: YUM.US Yum China Holdings Inc
Quarter: IQ.US iQIYI Inc
Quarter: TWTR.US Twitter Inc
Quarter: EL.US Estee Lauder Cos Inc/The

2020/02/07

Quarter: 8026.HK China Brilliant Global Ltd
Quarter: 8047.HK China Ocean Fishing Holdings Ltd
Quarter: 8365.HK VBG International Holdings Ltd
Quarter: 8455.HK Lai Group Holding Co Ltd
Quarter: 8456.HK Mansion International Holdings Ltd

Hot Stock

After short seller Muddy Waters disclosed his short position in a Chinese coffee chain, Luckin Coffee's stock price plummeted, saying it had received an " unallocated " report that said Luckin Chain had fabricated some financial data. The report was considered "trustworthy" by Muddy Waters, saying that after Luckin Coffee went public, "from the third quarter of 2019, it has evolved into fraud through fabrication of financial and operating figures." Luckin has not immediately commented. Muddy Waters did not immediately answer questions including where the company got the report and why the company thought the report was credible.

The report states that, among other things, the report states that "the number of products per store per day has expanded at least 69% in the third quarter of 2019 and at least 88% in the fourth quarter of 2019", the number is said it is more than 11,000 hours of store videos. The report also claimed that nearly 26,000 customer receipts showed that "Luckin exaggerated the net selling price of each product by at least RMB 1.23 or 12.3%, artificially maintaining the business model."

May initial public offering shares plummeted 26.5% on the stock market today to 26.75. In afternoon trading, Luckin Coffee's stock fell 16% to 30.62. The main reason for the decline was concerns about the spread of coronavirus in China, which has put pressure on the Chinese market.