The WHO president was scathing in his condemnation of some countries’ responses to the outbreak in his most recent speech. “We’re concerned that some countries have either not taken this seriously enough, or have decided there’s nothing they can do...the level of political commitment... does not match the level of the threat we all face.” Elsewhere, Lufthansa has announced a massive capacity reduction of up to 50%, which surely will just result in more reductions, and the flight from risk has seen CDS spike on high-yield debt. In contrast, China is returning to work,with Starbucks now reporting that 90% of stores are open.
•High-yield debt – CDS spike to 2016 levels
•Maryland has joined Washington and California in declaring a state of emergency
•Starbucks – 90% of Chinese stores are now open
•Chinese travel company – flight bookings for June +250% vs prior week
•Jaguar Land Rover – China sales fell 85% in February
•Lufthansa – reduces capacity by 50%
•UK – first death
•Peru, Cameroon, Slovakia, Serbia & the Vatican City report first cases
The country-by-country mortality figures have some interesting points of note. While the calculation of death/cases is crude, it shows that South Korea has an extremely low death rate even with a large amount of cases. The higher ratios in Iraq and US are likely due to underreporting of cases through ineffective testing.
South Korea is particularly interesting as it has much broader testing than other countries at c140,000 people and a confirmed 43 deaths. The death rate is 0.7%, which suggests that broader testing finds many more mild cases. This level of death rate is closer to normal flu. This is in contrast to the US, where only 1,500 people have been tested, 14 deaths have been confirmed and the death rate is 6%. We expect to see the death rate in the US drop sharply as the number of tests increases.
•Costco – E -com for the four-week period (February) +20.7 ex-FX: “ Our February results benefitted by last week’s big uptick in sales, the fourth week of last month. Mostly we believe related to concerns around the coronavirus. This positively impacted the month’s total and comparable sales numbers by approximately 3pp. Our warehouses have overall remained open with only a few total days of closures at a couple of locations in Korea. As well our Shanghai location, there has been some limitations required on the number of people in the facility at a given time. Members are turning to us for a variety of items associated with preparing for and dealing with the virus, such as shelf stable dry grocery items, cleaning supplies, clorox and bleach, water, paper goods, hand sanitisers, sanitising wipes disinfectants, health and beauty aids, and even items like water filtration and food storage items. And we’re doing our best to stay in stock on these and other items. We’re getting deliveries daily, but it’s still not enough given the increased levels of demand on certain key items. It’s been a little crazy this past week in terms of outside shopping frequency and sales levels, and not only in the US. In terms of transportation issues with the Chinese New Year, and then a couple of additional closure weeks, there were not only product issues but also trucking and port issues. These are also abating, with the port capacity in China improving each day as well. And I say port capacity, it’s also the shipping lines that come to various ports. Domestically, truck capacity is plentiful.
•Cineworld: “ Thus far, we have not observed any material impact on our movie theatre admissions due to COVID-19. Following an increase in admissions in the first two months of the year against the same period in the previous year, we continue to see good levels of admissions in all our territories, despite the reported spread of COVID-19. Although the release of the new Bond movie has been postponed to November 2020, largely due to closure of cinemas in the Asian markets, the studios have advised us that in the countries in which we operate, they currently remain committed to their release schedule for the coming months and remainder of the year. There can be no certainty as to the future impact of COVID-19. We are however taking measures to ensure that we prepare our business for all possible eventualities. Should conditions relating to COVID-19 continue or worsen, we have measures at our disposal to reduce the impact on our business including, but not limited to, capex postponement and cost reduction.”
•EssilorLuxottica: “The current COVID-19 epidemic has a negative impact on the company’s business in Greater China, which represents approximately 5% of consolidated revenue. So far, the virus has also slightly impacted the company’s revenue performance in other regions. At the current level, inventory is sufficient to meet several weeks of demand. In terms of production, EssilorLuxottica plants in China are currently operating at slightly reduced capacity, which is quickly normalising, while the plants in Italy and all other locations are currently running at full capacity. Contingency plans can be activated in case of a protracted pandemic. They would aim at optimising the company’s global infrastructure. EssilorLuxottica can rely on a worldwide network of plants and laboratories, which allows flexibility and continuity. It is projecting the following: sales growth: +3.0-5.0% and adjusted operating profit growth: 0.7-1.2x sales growth.”
•Jaguar Land Rover – The coronavirus has significantly hit China sales, with February retails down around 85% vs the prior year. In the first half of the month about 20% of dealers were open, which has since improved to over 80%, although most are still operating with reduced staffing and facilities. Jaguar Land Rover expects this to improve over the course of March; however, retail sales are expected to recover more gradually. The spread of the virus to other markets such as South Korea, Japan, and Italy will also affectsales in those markets. Suppliers in China are resuming operations but remain below full capacity. Jaguar Land Rover’s supply chain is primarily based in Europe and the UK, with a relatively small percentage of direct parts from China. Over 95% of its Tier 1 and Tier 2 suppliers in China are now open but at reduced capacity, and Jaguar Land Rover is engaged with its suppliers on the status of their sub-tier suppliers in China. Jaguar Land Rover has visibility of availability of most parts out two weeks or more and has managed to avoid potential parts shortages by working closely with its suppliers and with some increased use of air freight. In the event of specific parts shortages, Jaguar Land Rover would ordinarily still be able to build cars and retrofit missing parts when available; however, we cannot rule out the risk that a shortage of critical components could affect production at some point. The spread of the virus to South Korea, Japan, and Northern Italy is creating similar issues, which we are managing in the same way.
•Lufthansa Group – Decides on extensive capacity adjustments: “ In recent days, the Lufthansa Group has been exposed to drastic declines in bookings and numerous flight cancellations due to the spread of the COVID-19 virus. All traffic areas are now affected. The Executive Board of Deutsche Lufthansa AG therefore decided today to reduce the flight capacity offered even more than previously planned. Based on further demand development, capacity will be reduced by up to 50% in the coming weeks. This measure is intended to reduce the financial consequences of the slump in demand. It complements the planned savings measures in personnel, material costs and project budgets as well as other liquidity measures.”
•Recipharm (pharmaceutical development & manufacturer) has recently noted an increase in demand for its product Klorokinfosfat. The reason for the interest in this well-known product is due to chloroquine's antiviral effects, which mean it has been mentioned as a drug that can potentially be used when treating patients with COVID-19 associated pneumonia. Furthermore, chloroquine has been included by the WHO as one drug treatment option for priority research connected to immediate goals. AlthoughKlorokinfosfat RPH Pharma is not approved as an antiviral agent or for use in relation to pneumonia, Recipharm is focusing on securing supply of its chloroquine product in case the demand suddenly increases and new recommendations are introduced. Due to the current situation with the new coronavirus we believe it is of utmost importance to take every measure to be prepared.
•Samsung– T he company has again suspended operation at its smartphone factory in Gumi, South Korea, after another worker tested positive for the disease.
•Starbucks – As previously disclosed, more than half of Starbucks stores in China were temporarily closed as of 28 January 2020. These unplanned store closures, combined with planned closures in observance of the Chinese New Year holiday, resulted in peak closures of approximately 80% of Starbucks stores in China in early February. Since that time, it has gradually reopened the vast majority of these stores in a disciplined and thoughtful manner. Currently, more than 90% of its stores in China are open but operating under elevated safety protocols. These protocols include limited lobby service, minimal café seating and use of the ‘Contactless Starbucks Experience’, leveraging Starbucks mobile ordering capabilities for contactless service through pick-up and delivery. Additionally, as a result of varying levels of travel and public health restrictions in many parts of China, as well as low foot and vehicle traffic overall, the majority of Starbucks stores in China that are currently open are operating at reduced hours. A small number of stores are offering delivery services only. Stores that remain temporarily closed are heavily concentrated in Hubei province, where the outbreak was first reported, as well as locations that are deemed as high-risk, such as hospitals, universities, cinemas and tourist attractions. At present, barring an unforeseen resurgence of the outbreak, it expects that at the end of Q2 FY20, approximately 95% of stores in China will be open, but will continue to operate with elevated safety protocols and modified schedules. Every Starbucks store entrance is set up with a ‘safety station’ to check each customer’s temperature and ensure they wear masks before entering. During February, Starbucks China’s comparable store sales were down 78% vs the prior year, primarily due to temporary store closures, reduced operating hours and severely reduced customer traffic. The sharpest decline in weekly comparable store sales occurred in the second week of February; however, it isseeing early signs of a recovery, with sequential improvements in weekly sales. In the last fiscal week of February, relative to the prior week, average dailytransactions per store improved 6% and total weekly gross sales in China grew 80%, reflecting the reopening of stores. In that last week, Starbucks China’s mobile orders accounted for approximately 80% of the sales mix, with 30% Mobile Order & Delivery and 50% Mobile Order & Pay. Prior to the COVID-19 outbreak, China comparable store sales growth was expected to be approximately 3% in Q2 FY20, in line with Q1 FY20 results. As a result of the business disruption related to COVID-19 in China, it currently estimates that comparable store sales in China for Q2 FY20 will be down approximately 50% vs the prior year. Therefore, it expected a COVID-19-related headwind of approximately US$400-430m to China’s revenue in Q2 FY20 vs prior expectations. Current estimates for China’s Q2 FY20 comparable store sales and revenue reflect current expectation that substantially all stores in the market will be open by the end of the quarter and that traffic will improve modestly for the balance of the quarter relative to February’s swift and severe slowdown. Given the planned Chinese New Year holiday and its subsequent extension, and workforce dislocation due to COVID-19, activities related to Starbucks China’s development of new stores have been temporarily paused. As a result, some store openings planned for FY20 will likely be deferred to FY21. As the COVID-19 situation continues to evolve globally, Starbucks’ business operations in Japan, South Korea and Italy have also been impacted by store closures and/or reduced customer traffic. Given the early stage of these developments, it iscurrently unable to forecast business impacts in markets outside China with reasonable accuracy. It is also currently unable to estimate business impacts beyond Q2 FY20 with reasonable accuracy. Therefore, current estimate of the impact of the COVID-19 outbreak on financial performance is limited to Q2 FY20 and does not include potential business impacts in any Starbucks markets beyond China.
•Ten Lifestyle#: “ We experienced some disruption in our APAC region in January and February and during this period we have been able to support our members in relevant ways, mitigating the financial impact on our business. Currently, service activity and member engagement levels remain as expected on a group-wide basis and we are successfully supporting our members with both ‘business as usual’ requests and other requests related to the coronavirus. Notwithstanding the above, the effects of the coronavirus outbreak may impact near-term general marketing spend and initiative.”
•Tongcheng-Elong (Chinese travel company) – Hotel bookings in week to 1March +40% from previous week. Domestic flight bookings for June +250%. Company expects hotel operating rate to reach 90% by end of March.
•Zug Estate(Swiss real estate) – The company expects sales and gross profits in its hotel and catering segments to be below prior-year levels due to the impact of the coronavirus.
•Paris marathon cancelled.
•Japan U23 football matches vs South Africa and Ivory Coast have beencancelled.
•International Indian Film Academy Awards, Bollywood’s version of the Oscars, has been called off due to the coronavirus outbreak.
•Champions League game Valencia vs Atalanta and Europa League game Inter Milan vs Getafe will be played behind closed doors next week, Uefa has confirmed.
•Twitch has cancelled its annual European convention, due to “potential health risks” around the coronavirus.
•Kazakhstan Kaztransgas has been notified of a force majeure on gas supplies by Petrochina.
•India – Airlines reported heavy cancellations on domestic flights in the past couple of days, according to Bloomberg
•South Korea – Has tested 140,000 people and confirmed 43 deaths. The death rate is 0.6%, which suggests that broader testing finds many more mild cases. This level of death rate is more akin to normal flu. This is in contrast to the US, where only 1,500 people have been tested, 14 deaths have been confirmed and the death rate is 5%. We expect to see the death rate in the US drop sharply as the number of tests increases.
•Pfizer compounds being considered could potentially be paired with Gilead’s Remdesivir.
•Twelve people on a Nile cruise boat have tested positive for the coronavirus, while not displaying symptoms, Egypt's health ministry has said. All 12 are Egyptian staff on the ship. The ship was heading to the southern city of Aswan from near Luxor.
•IATA has increased its estimate of global airline industry lost passenger revenue from COVID-19 from US$29.3bn on 20 February 2020 to between US$63-113bn yesterday. The US$63bn of lost revenue is predicated on a limited spread scenario, with an 11% decline in global passenger revenue, with passenger volumes falling by between 24% in Italy, 23% in China and 10% in both France and Germany. The extensive spread scenario assumes US$113bn of lost revenue, US$37.3bn of which would be in Europe, including the UK, based on a 24% decline in European passenger volumes. Flybe ceased trading yesterday and under either scenario we anticipate more airline failures in Europe. IAG, Ryanair and Wizz Air remain well capitalised and most likely to not only survive, but increase their market share and become stronger airlines over the medium term.
•Soaring credit risk – The pricing of risk on high yield debt has sharply increased and it is likely that today there will be no primary issuance, which will be the fourth zero day in two weeks.
•The International Energy Agency expects global oil demand to contract for the first time in a decade during Q1 2020. The coronavirus outbreak is expected to ease world oil demand by 1.1MMbpd in Q1, with China expected to ease its oil consumption growth.
•CGA’s annual Business Leaders’ Survey, conducted in partnership with hospitality technology specialist Fourth, previously showed sector optimism at a four-year high. Its latest poll shows that in just a matter of weeks it has fallen to the lowest point since immediately after the EU referendum, with just 16% of bosses now optimistic about the market over the next 12 months, down from 60%. Optimism around their own businesses’ prospects has also plummeted, with just 29% optimistic, a fall from 83% in early February.
•Royal Caribbean Group adopts ‘Cruise With Confidence’ policy, allowing cancellations up to 48 hours before sailing.
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