Coronavirus - Hercules & The Hydra

Today once again saw a significant drop in reported cases in China. This is likely due to the government’s actions to contain the outbreak. However, cases are rising outside China, most notably in South Korea, where the number has more than doubled to 104. Japan has also seen a significant increase, although many of those have come from the stricken cruise liner the ‘Diamond Princess’. The word from industry continues to be mixed, with some seeing an immediate material impact and others unaffected. The Peoples Bank of China has cut its interest rate in an effort to prop-up the economy.

Cases: 516
Deaths: 117

Cases: 75,739
Deaths: 2,128

Company news
• Accor (hotel and hospitality provider) – Accor CFO Jean-Jacques Morin said on a conference call that 200 of the company’s 370 hotels in Greater China are closed because of the coronavirus outbreak. The CFO also said Greater China, including HK and Macau, accounts for 3% of the company’s business and the company had “practically no activity”.

• Air France KLM – Has reported its FY19 results and quantifies the impact of coronavirus at €150m-€200m (12-16% of FY20E consensus EBIT) due to flight cancellations and weaker demand for Asia.

• Atlantis Japan Growth Fund – “At present, consensus estimates assume the virus will be under control by mid-2020, which would result in Japanese GDP shrinking by 0.5% in the January-March quarter. Subsequent quarters should see the release of virus-induced pent-up demand combined with the introduction of a JPY 26tn supplementary budget; these will limit the economic contraction to 0.1% in CY20. On these estimates, the Tokyo market is currently priced on 15.6x forward PE and 1.3x PBR, while yielding 2.1%. These projections will prove to be overly optimistic if it takes longer to contain the epidemic.”

• Aveva (industrial software provider) – “The ongoing disruption in China, caused by the coronavirus, due to travel restrictions and office closures, is having some impact on sales in that country. China has historically accounted for around 5% of AVEVA's overall group revenue.”

• EgyptAir – Will resume some flights to China from next week.

• General Electric – The company’s three facilities in Hubei are still shut. Other sites are open in China, but at varying levels of staffing.

• Hon Hain (Foxconn) – Will resume production cautiously. The company hopes to resume half of its production by month end (Reuters) “short-term volatility and challenges” because of disruptions at its suppliers and to the transport of parts. But it said most of its plants had re-started operations and that demand should rebound once the outbreak stabilises.

• Lenovo (electronic hardware) – Macro factors including coronavirus could bring short-term challenges and volatility, but demand in China is expected to rebound after stabilisation of the outbreak. The company expects its key Shenzhen facility to become fully operational by the end of the month. Its factories in Wuhan and Chengdu remain shut but can resume upon government approval.

• Maersk (global shipping) – “The outlook for 2020 is impacted by the current outbreak of the coronavirus (COVID-19) in China, which has significantly lowered visibility on what to expect in 2020. As factories in China are closed for longer than usual in connection with the Chinese New Year and as a result of COVID-19, we expect a weak start to the year.” In a Bloomberg interview the CEO said “It means, very well, we could be set for a peak (in the virus) within the next two weeks. If that were to be the case, then we would expect a very weak March and a rebound in April, a sharp rebound in April,”.

• Macau Property Opportunity Fund – “The outbreak has had a rapid and significant negative impact on Macau, affecting the tourism, gaming, hotel, retail and food & beverage sectors. Mainland China and Macau's governments have reacted swiftly in order to confine the virus outbreak and implemented various measures, including cancellations of package tours, suspensions of individual travel permits for mainland Chinese visiting the territory, and the temporary closure of casinos for 15 days. Casinos may reopen from 20 February 2020. Macau's government has also announced measures to mitigate the impact of the outbreak on the local economy, including a waiver of rents on government-owned properties for three months, effective from 1 February 2020, and earlier distributions of cash to individual Macau residents.”

• Norcros (bathroom product assembler) – Issued a profit warning today driven predominantly by coronavirus-driven supply chain issues. Purchases from China currently total c35% of the group’s cost of sales, with products on the water for around five weeks. While the impact of coronavirus on the Chinese supply chain has had no impact to date (as the group’s UK-based stock levels have been sufficient to satisfy customer demand), the group foresees an impact on the seasonally-important end to the financial year (March year-end). As a result, we downgraded underlying PBT by 7-8% in each of the three forecast years.

• Norwegian Cruise Lines – Norwegian said the coronavirus outbreak’s known direct impact on full-year 2020 adjusted earnings is 75 cents a share. That includes customer compensation and 40 cancelled, modified or redeployed Asia voyages. Shares are down 3.5%.

• Procter & Gamble – Has said its results for the quarter will be materially impacted on both the top and bottom line. The company has faced supply and demand challenges associated with the coronavirus outbreak. Some demand has shifted online but due to the lack of delivery operators (ie people), it has been difficult to fulfil.

• Tyson Food – Has said it is facing temporary challenges from the coronavirus. The slowdown in China since January has been caused by the inability to get product through ports in China due to them being backed up and lacking staff.

• Qantas – Reported overnight that the financial impact of coronavirus would cost it A$100m- A$150m (£51m-£76m and 7-11% of consensus FY20E EBIT) due to flight cancellations to mainland China and weaker demand for Hong Kong, Singapore and Japan, where Qantas has already reduced its capacity.

• Schneider Electric (electrical equipment retailer) – “The group is assessing the impact of the coronavirus to the business. There will be an impact in the first quarter of 2020 due to factory closures in January and February. At this point, this impact has been estimated at cEUR 300 million mainly in China and the group assumes it will be almost entirely compensated in 2020 largely in the second half of the year.”

• Smith+Nephew (medical equipment manufacturer) – “Is monitoring the COVID-19 outbreak closely, which introduces additional uncertainty. Our full-year outlook assumes that the situation normalises early in Q2. China represented 7% of group revenue in 2019.”

• Sydney Airport – Expects traffic to be significantly impacted in February as a result of falling passenger numbers. The will inevitably have an impact on revenue. Sydney Airport's international passenger numbers had dropped about 15-20 per cent this month after the federal government banned mainland Chinese from entering Australia at the start of the month.

• Whitehaven Coal (Aus coal miner) – The outbreak has caused a drop in demand for coal products, also the supply of coal in China has been reduced. Profits plunged 91% in the first-half due to soft thermal coal prices and production curbs. The shares were down 5%.

• Woolworths Holdings (the South African business with interests in Australia)– The coronavirus is significantly impacting tourism, footfall and sales in Australia. A further impact on sourcing is also expected across the group. The group is currently actively considering ways to mitigate the risks associated with the coronavirus. Sourcing from China delayed by at least a month.

• Yum brands (US fast food brands) – Expects its Q1 results to be significantly impacted by the outbreak of the coronavirus, with potentially continuing adverse effects through to the end of March.

• China’s stimulus measures continued this morning, as it took 10 basis points off the one-year Loan Prime Rate (LPR) to 3.95%, and five basis points off the five-year LPR to 4.75%.
• China’s Development Bank Shanghai branch has lent out 1.77bn yuan in cheap loans to firms for coronavirus prevention.
• South Korea – The mayor of Daegu urged its 2.5 million people not to go outside as infections of a new coronavirus grew and he pleaded for help from the central government after 35 additional cases of infection with the new coronavirus today. Kwon also asked Daegu citizens to wear masks, even indoors if possible. He expressed fears that rising infections in the region will soon overwhelm the city's health infrastructure and called for urgent help from the central government in Seoul. (HK Standard).
• The Hong Kong government will extend work-from-home arrangement for civil servants to 1 March to reduce social contacts and the risk of spread of novel coronavirus in the community, according to an official statement.
• China State Railways – 28 out of 116 railway projects planned for this year have resumed construction, with over 70,000 people on sites.
• Bank of Indonesia bought 27trn Rupiah of government bonds during capital outflows related to virus fears.
• Japan’s government has announced that two passengers from the Diamond Princess have died after being infected by the virus.

Country-by-country cases
Source: WHO
Japan* 728
Canada 8
Egypt 1
Singapore 84
India 3
Thailand 35
Italy 3
Republic of Korea 104
Philippines 3
Malaysia 22
Russia 2
Germany 16
Spain 2
Vietnam 16
Belgium 1
Australia 15
Cambodia 1
USA 15
Finland 1
France 12
Nepal 1
UK 9
Sri Lanka 1
Sweden 1
*includes international conveyance