China through the US Looking Glass IV

This time last year we noticed that whilst much of our discussion showed investors were concerned about the worsening tension over US/Sino trade, the results from a significant number of first-class US and multinational consumer companies continued to shine notwithstanding. We have continued to monitor the quarterly results of these same companies. With only a few exceptions the results, and more importantly the guidance, have been bullish on each successive occasion.

The same was true in Q4 with the majority of companies reporting: the Chinese consumer was alive and kicking still.  Kimberley Clark, NIKE, Skechers, Procter Gamble, Apple, L’Oreal, Estée Lauder, Daimler, Colgate, Kering all mentioned they had a good quarter.  Some (Moncler, L’Oreal, Skechers and Kering) even talked enthusiastically about January – up until the third week that is, and the events in Wuhan.

The coronavirus is clearly causing widespread and severe disruptions. Many of these international companies are closing shops and factories and this is causing disruptions all through the value chain.  Even where outlets and facilities have remained open the same store sales are down between 40-50%. Q1 operating losses are clearly in contemplation.

Of course, we do not invest in these international companies preferring instead to concentrate on what we call the “local champions”. A number of these have had a similar experience: Alibaba’s delivery network was working at only 10-20% of capacity over the Chinese New Year, and in their results call, management anticipated a decline in Q1 revenue.  Meituan, has seen dramatic falls of circa 80% in food delivery during recent weeks, as many of its supplying restaurants closed, but as the recovery unfolds, we still expect some 7% year-on-year growth in Q1 as a whole.

However, like their international comparators, our companies remain bullish on the opportunities that lie ahead.  Of course, unlike the international set, for whom China is only a part of their whole business, the People’s Republic of China and Global Emerging Markets is the whole story for them.

Whilst by no means complacent about the current epidemic and its potential to spread, particularly in countries where healthcare provision and services are more stretched, we have seen something of its like before. After SARS in 2003 and other viral plagues, the recovery has been sharp. Pent up demand caused by lock downs and quarantines could very well be boosted by governmental stimulus.

In the light of this we remain constructive and have made few changes to our portfolio. We believe our companies are well positioned and have robust strategies, with strong local brands (Proya Cosmetics, Li Ning), education (New Oriental, East Education), innovation and ecommerce (Meituan, Alibaba Health), among others.

Year to date the portfolio is up 5%. Perversely perhaps a number of our healthcare stocks (whilst not providing any sort of miracle cure for the virus) have enjoyed a strong period boosted by general bullish sentiment towards the sector.


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