The city of Wuhan is preparing for the end of “lock-down” on April 8th, almost 11 weeks or 76 days to be precise, since it started. So, what does it look like on the other side?
There have been regular updates about the gradual return to work across China, since their rather calamitous New Year holidays, and whether it’s 70%, 80% or 90% of normal depends on your sector or province. The first 500 cinemas are re-opening and schools in seven provinces have partially re-opened. Another eight have announced dates to do so. The simple fact is the Chinese are getting there. A handful of new cases are being reported in China, but very nearly 100% of these are people arriving from abroad and being dealt with accordingly. (There are, however, plenty of asymptomatic cases being discovered, as testing continues, as we are sure we will see across the world).
More anecdotal evidence came from our Chinese property, Longfor, with their announcement of strong, but largely irrelevant, 2019 results on 24th March. More important was their guidance for 2020 of 20% earnings growth, impressively close to last year’s 21%. 96% of their sites have resumed construction and sales at a project level are back to 60-80% normal levels. 80% of their Mall space has re-opened and, despite taking a 50% cut in rent for 9 weeks, they still expect rental income to rise 30% for the full year thanks to a pipeline of new mall openings.
One of the main drivers of growth for a company like Longfor is gaining market share at the expense of their weaker brethren, and to this end, it has taken the opportunity of lower land prices to buy 24 new projects in the first few months of the year. There is a reason why we look for leaders with strong balance sheets and good cash flows, and this is all the more important at times like this. The share price of Longfor, with a cash/short term debt ratio of 4.5x, is little changed so far this year. Evergrande, with one of 0.5x, has lost a third of its value.
Nike is another company which believes China is recovering faster than anticipated. They have their own version of the four phases of Corona: containment (store closures), recovery (re-openings), normalisation and, finally, return to strong growth. They are confidently into “normalisation”. The quarter to the end of February saw China revenue fall 4%, but they anticipate a highly commendable flat revenue performance in the quarter to May, as any offline softness is offset by stronger online sales. Talking this week to Anta, one of the leading Chinese sportswear manufacturers, after their year-end results, 95% of their stores are back open. Their challenge now is to clear the excess inventory in the channel which is inevitable after such a hiatus in sales.
Of course, not every business will be so resilient, as some, like restaurants or cinemas, are just plain shut, and revenues will be zero for however long it takes. China is also a big place, so while Wuhan has been in lock down for 76 days, many other areas were closed for much shorter periods. Even back on 25th February, Bernstein estimated the coastal provinces of Zhejiang and Jiangsu, which surround Shanghai and are key manufacturing hubs, were well over 90% operational.
A final word on China is to highlight that there are also outright beneficiaries from what has happened. The online delivery of healthcare services and products was coming anyway, as was the switch from buying pharmaceuticals in hospitals to buying them from pharmacies, but this process has just been accelerated, to the benefit of portfolio holdings Alibaba Health and Yifeng Pharmacy.
India, our other major exposure, has been late to the show and the fear of what might be lurking in a place where, as we have highlighted before, there are only 12 hospital beds per 10,000 versus China’s 42, has resulted in the stock market being far from resilient. But in India’s defence, the move to full lock down has been faster than most. 66% of the population is still rural and there is some evidence the tropical climate is helpful in slowing down this virus. It is too early to tell how this will go, but we should know more as the 3 week lock down progresses.
Talking to Apollo Hospitals this week revealed that they have set aside hospitals in each of the cities where they have a presence in order to take care of COVID patients and, with many elective surgeries postponed, they have plenty of room to do this. While empty beds are not ideal for Apollo’s revenues, the better news is their pharmacy business (around 40% of revenue) is still open and doing very well. Furthermore, those postponed operations will still need to be done, so the likelihood of catch up later in the year is high. In addition, the private sector has been given the go ahead to test for COVID and they expect a surge in testing in the coming days, for better or for worse!
Once again, what is most important is that the businesses will survive, and that means having a balance sheet that can weather a period when revenues might be curtailed or indeed, for a while, disappear. We have been contacting our investments in India this week and are confident that is the case for all our companies. Around half the Indian companies in the portfolio sit in a net cash position and of the handful that have some leverage, interest coverage is well above two times.
In addition, our businesses are all leaders in their respective fields, and just like demonetisation and then GST before, they will most likely emerge stronger from the other side as weaker competitors fall by the wayside. While growth for this year may be curtailed, if not completely erased, we are confident that, for our portfolio at least, it will rebound all the stronger next year and subsequently.
We continue to be grilled about our exclusive focus on growth. “Doesn’t it mean that you will miss the boat when the inevitable reversion to mean of value occurs?” This is an understandable question and one that has been posed to us over the last 5 years. However, even in the present crisis this “inevitable reversion to mean of value” does not seem to be in evidence, as growth indices continue to outperform their value comparators. We believe that there is strong evidence that existing growth trends (online health services and online grocery sales, environmental concerns, healthier lifestyles, all being prime examples), are sustainable and will play their part in the slow but inexorable decline of so called value businesses, such as oil and commodities. We would contend this will be particularly the case in Emerging Markets.
Please click here for a pdf version
This document has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction.
This document has been prepared solely for the intended recipient for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this presentation should not be taken as a recommendation or advice.
Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated.
Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. This document does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions.