Coronavirus - Walking a tightrope

The WHO’s Tedros said “we are at a decisive point” in the epidemic. Similarly, the global economy is nearing a juncture. As the fallout from the outbreak continues, businesses are beginning to see tangible effects on earnings and profits. These are largely due to governments policies, most notably restricting workers movement. As pressures in the supply chain builds, decisions will need to be made on what is the greatest risk: COVID-19 or a global shutdown. The longer these measures are in place the chances of a quick recovery diminish as supply chains fracture. For better or worse, China is already trying to restart its engines.

Cases: 1,000
Deaths: 38

Cases: 81,909
Deaths: 2,808

Company news
• Aston Martin: “COVID-19 has the potential to impact both the supply chain and customer demand in China and other markets. China was the company's fastest-growing market in 2019 and represented 9% of total wholesales. None of the company’s Tier 1 suppliers manufactures in China. The supply chain is being proactively managed in China and other markets. Despite some disruption to supply of some components from China, there has been no impact on production. Supply is secured until at least end March.”

• Anheuser Busch Inbev has estimated that in the first two months of 2020 the outbreak has resulted in lost revenue of US$285m and lost EBITDA of US$170m in China. The company stated that the impact continues to evolve.

• AirAsia has said the virus has had an adverse impact on the sales of passenger tickets and foresees major challenges in the first half of 2020.

• Bakkavor(food processor) – Eight out of the company’s nine plants in China are now operational (except for Wuhan), but orders are significantly lower given the exposure to the quick service restaurant sector (eg, Starbucks). Volumes are currently running at a c70% reduction and will take time to rebuild given the number of people in quarantine, working from home or unable to return to work. The profit impact will be significant given that a large proportion of costs will be fixed in the short term given a desire to retain the workforce to ensure production can rebuild as orders increase. The company has estimated that EBITDA for the international division will be £6-10m lower than the £6.4m reported for last year, which compares with prior expectations of delivering growth of c£4m. We are assuming that full-year sales in China are 25% lower and that it will take time to recover the lost sales as it may take time for consumers to return to prior spending patterns and QSR will slow down expansion plans.

• Crocs (apparel) says its revenue in 2020 will be reduced by US$40-$0m as a result of the outbreak’s disruption to its Asian business.

• Edreams (online travel agent) – Bookings at all destinations have fallen due to the coronavirus outbreak, especially in Asia and also now in Italy.

• Emirates Airline says passengers from a number of countries (including China, Japan, Italy, Iran, India and Pakistan) won’t be allowed to fly with it to Saudi Arabia.

• H&M (fashion retailer) has reopened more stores in China, with 383 of 518 now open. The company currently sees no large delays in its supply chain.

• Hikma Pharmaceuticals – The company confirmed it has limited direct exposure to manufacturing or supply in China and does not expect a material impact from the coronavirus on its operations; supply restrictions elsewhere could put upward pressure on US generics prices, which could lead to an upside to Hikma’s Generics revenue guidance.

• Lafarge (French industrial) – Its CEO says the company is experiencing a massive slowdown in China.

• Manila Electria (power distribution) confirmed that delays in solar projects are due to a hold up in shipments of solar panels from China.

• Microsoft is the latest major company to warn of a disruption as China grapples with the coronavirus outbreak. The tech giant said because its Chinese suppliers were shutdown, manufacturing operations have been affected.

• John Menzies(aviation services) – The outbreak and spread of COVID-19 is affecting operations (mainly in Macau and where Menzies handles Chinese carriers). The Board estimates that there is likely to be an adverse profit impact in FY20 of c£6-9m on the basis the virus subsides towards the end of Q2.

• Novavax (vaccine company) – Its shares are up 20% after potential vaccine for COVID-19 was disclosed.

• Nestle has asked all employees worldwide not to travel for business purposes until 15 March.

• Paypal – It currently estimates the negative impact from COVID-19 will reduce revenue by one percentage point on both a spot and foreign currency-neutral basis in Q1. The company now expects to report Q1 2020 revenue towards the lower end of its guidance of US$4.78-4.84bn.

• Reckitt Benckiser commented that it was seeing a spike in demand for Dettol and Lysol products, as well as increased online sales from consumers in China. However, it was also seeing some disruption in its supply chain and distribution channels connected to China.

• Rentokil only expects a small net impact from the coronavirus on business in Q1.

• Standard Chartered’s Asian HSBC has said it could face loan losses of up to US$600m if the virus outbreak continues into H2 2020: “The outbreak of the novel coronavirus comes with unpredictable human and economic consequences," said Standard Chartered’s CEO Bill Winters.

• St James’s Place (asset management) – The company said at its analyst presentation that there is a bigger impact in the Asian part of the business; the Shanghai office is closed and employees are working at home. 80% of the UK partners work out of office so there is less risk. No evidence so far that clients are visiting the offices, but it can continue to contact clients by phone or electronically so this should only have a modest impact.

• Safran (aerospace engineering) says its Chinese factories have returned to between 74% and 95% of normal staffing.

• Vesuvius (ceramics engineering) – Its steel-related businesses are running at 100% utilisation as are its customers (90% last week). Chinese steel production is remarkably strong and was up 7.2% in January. It is also having no issues in terms of raw material supply and exporting finished goods. Its foundry operations are running at 50-65%, which seems to be the ‘norm’.

• Yatra online (Indian online travel agent) – The outbreak of the coronavirus may have a material adverse effect on business and results of operations in the future. However, the impact on revenue has been minimal to date.

• Geneva has cancelled its annual watch fair that attracts the world’s leading watchmakers. It was scheduled to take place on 25-29 April.
• Nice has cancelled its carnival and fireworks because of coronavirus fears. The carnival, which began on 15 February, was due to culminate in a flower parade on Saturday. It has now been called off, as has a fireworks display that had been planned for Sunday.
• In Italy, third-tier football games have been suspended, as have the rugby, volleyball and basketball leagues.

• Goldman Sachs says US companies will generate no earnings growth in 2020 if the coronavirus becomes widespread.
• Japanese PM Shinzo Abe has called for all schools in the country to close for several weeks as authorities try to contain the coronavirus. The closures are set to take effect on Monday and will last until the end of the spring vacation – typically in early April.
• Japan Steel Federation Chairman says Chinese steel makers should adjust output to meet falling manufacturing activities as a result of the outbreak.
• Australia has extended a ban on foreign visitors from China – in place since 1 February – by another week.
• The US State Department has raised its alert level for South Korea and urged travellers to “reconsider travel”.
• The German Auto Association says it sees a decline of 7% in the Chinese auto market.
• The German Association of the Automotive Industry said the coronavirus is affecting supply chains of car manufacturers and suppliers.
• Russia suspends its train from Moscow to Nice from 4 March over coronavirus fears.
• Israel’s El Al Airlines estimates the outbreak will reduce revenue by US$50-70m for the period January-April.
• Iran has cancels a religious sermon on Friday in Tehran due to the outbreak in the country.
• Iran has banned Chinese citizens from entering the country, state media said.

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