In this briefing:
- Governments and Policies Adapting to Critical Known Unknown
- Costs of and Response to COVID-19
- Covid-19: RBI Has Gone All-Out-Attack
- China Auto Parts A Shares: Parts Of The Future
- Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants
We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.
That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.
The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.
This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.
In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.
The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.
For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.
As the epicentre of the coronavirus pandemic shifts from Europe to the US and the number of deaths and infection cases reach new highs, the costs of the crisis are beginning to be revealed. In Singapore economic activity contracted in 1Q20 at a faster pace than at the worst point during the GFC while Chinese industrial profits were down 38% in the first two months of the year. Despite this we are cautiously optimistic that Asian economic activity led by China will pick-up in the second half of the year. We are much more worried about advanced economies where policy mis-management threatens to tip the world economy into recession.
The RBI took a gigantic stride to combat the Covid-19 pandemic along with the government, as highlighted by the seventh bi-monthly monetary policy statement 2019-20. The MPC meet outcome had fired from all the possible cylinders, giving a much needed impetus to steady the economy.
China has been the fastest growing auto market in the world. Over the last 2-3 years China’s auto component industry is going through a tumultuous period – not only due to the volatility in demand (due to the auto downturn last year and corona-related lockdowns this year), but also due to two mega-trends that are providing risks and opportunities to the industry – NEVs and autonomous driving. In addition, there are 3 other less-discussed drivers of change in the industry (emerging localization requirements, junior JV partners becoming leaders in their own right, international expansion). We look at the key A-share (MSCI A-share) listed players in the industry through the lens of these five trends/drivers of change.
We prefer Passenger vehicle(PV) part suppliers over commercial vehicle (CV)part suppliers. Among PV parts suppliers, our top buy is Changzhou Xingyu (601799.CH), followed by Ningbo Joyson Electronic(600699.CH),Fuyao Glass (600660.CH/3606.HK) and Huayu Auto (600741.CH). Our main underweight Wanfeng Auto Wheel (002085.CH). In Commercial vehicle (CV) part segment, we prefer Wanxiang Qianchao (000559.CH) and Linglong Tyre (601966.CH). We suggest investors to avoid Weifu High-Tech (000581.CH).
The recent tumult in the auto sector creates significant opportunities and risks for the companies involved – however companies/equities that are driving these trends are largely listed in the A-share market. Lack of market communication, limited financial and operational disclosure and low breadth of analyst coverage in these markets has meant that there are quite a few underappreciated companies in these markets which have been overlooked by international investors.
While companies like Ningbo Joyson and Fuyao Glass enjoy some international investor recognition, we believe under-appreciated stocks like Wanxiang Qianchao and Linglong tyres are not well-covered by the market and this report provides a rationale for investors to look further into those names. We also highlight the risks to (relatively) popular names like Weifu Hi-tech (due to structural issues in the industry) and Wanfeng Auto wheel (due to management pursuing non-core acquisitions).
Note that in this report, we do not include the possible impact from Coronavirus on the industry and companies. This is because 1) it’s difficult to quantify the impact at current moment; 2) even if coronavirus impact might last for months, it’s still a relative short period compared to the 5-year time horizon we focus on. In addition, once coronavirus is gone, market demand on autos and auto parts would rebound quickly.
In this report, we analyze Korean Air Lines (003490 KS) with regards to the global COVID-19 outbreak which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.
South Korea’s government has already pledged loans of 300 billion won ($250 million) for the entire airlines in Korea. However, this is a TINY amount compared to the total amount needed to save this industry. This is also less than 1% of the $60 billion that the U.S. government has promised to its own air transport industry.
Going forward, a question mark about Korean Air is guessing which airliner that the Korean government will bail out since it seems clear that it will not be able to bail out all the airlines in Korea. Because of the dire situation right now, there has also been an idea of a potential merger between Korean Air Lines (003490 KS) and Asiana Airlines (020560 KS).
COVID-19 is a beast that will likely have the greatest-ever negative impact on the global airline industry in the past century. Many airlines are likely to become bankrupt in the next couple of years. There will be an intense industry consolidation. Korean Air faces an enormous challenge in the midst of this global COVID-19 pandemic, which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.