Brief Multi-Strategy: Protein, Pork, and Prices and more

In this briefing:

  1. Protein, Pork, and Prices
  2. Biden Still the Candidate to Beat, for Both Democrats and Trump
  3. Seven & I’s Sogo Seibu Loses Kansai Branches, Converting More Stores to SCs
  4. U.S. Equity Strategy: Value Closes the Gap on Growth
  5. Shanghai Henlius Biotech IPO: Valuation Prescribed at Low-End

1. Protein, Pork, and Prices

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A hot topic on blue checkmark Twitter is food prices in China. However, a lot of what we have seen getting relayed is very anecdotal. To that end we are digging into some of the protein pricing data we can find and putting them into our standard graphs. This is food sector data we have not presented before, so let us know if you want to see more of this type of data crunching. This is will also be a two-part piece, proteins today, followed by fruit, vegetables, and grain tomorrow.

2. Biden Still the Candidate to Beat, for Both Democrats and Trump

It is way too early to be judging the state of the 2020 presidential race, with nearly 5 months still to go before the first real contest of the long marathon — the Iowa caucuses on 3rd February 2020. But the polls show it is now a 4-horse race for the Democratic nomination — Biden, Warren, Sanders, Harris — with Elizabeth Warren the leading “socialist-wing” challenger to the centrist Biden, but with Sanders nipping at her heels. Despite Biden’s feeble performance in the first debate, he leads all the polls — by a wide margin in 4, and tied with Warren in 1 — but even the Fox News poll last month (16th August) showed all four leading Democrats handily beating Trump, and this even while the economy is robust (and any recession remains unlikely before 3Q 2020). 

After her strong performance in the first debate — when she successfully ambushed Biden on the issue of race — Kamala Harris herself was ambushed by Tulsi Gabbard  in the second debate, and didn’t quite hold her own. The big winner of the second debate was Warren, while Biden was seen to have performed much better –although not “winning” his debate (which featured Booker and Harris flanking him, while Sanders and Warren debated the previous night). While the first two debates occurred over 2 nights (with 10 candidates each), the third debate (on 12th September) will feature just 10 candidates on one night: the top 4, alongside Mayor Pete Buttegieg (who is fifth in most polls), Cory Booker, Julian Castro, Amy Klobuchar, Beto O’Rourke and Andrew Yang.  

With the US economy likely to be in recession by September 2020 (see Recession Watch: Fluctuating Trade War on the Verge of Tripping up the World Economy ), Trump is vulnerable. The Democrats won the mid-term Congressional election by a record 8 percentage points — overcoming the hurdles of gerrymandering. Despite all this, a 77-year-old socialist, or a left-wing Senator (i.e., Sanders and Warren respectively) would face severe electoral challenges in the face of a general election, especially given the unpopular consequences of their “Medicare for All” proposal. Apart from Biden, the only other clear centrist (i.e., moderately liberal) candidates are Pete Buttigieg and Amy Klobuchar, with Kamala Harris relatively centrist. If any of these four is the Democratic nominee in a recession year, Trump will be toast. The debates matter, but for now will increase uncertainty and hence are likely to be a negative for the market — especially if Warren and Sanders do well in the third debate, and continue to gain in the polls. 

3. Seven & I’s Sogo Seibu Loses Kansai Branches, Converting More Stores to SCs

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Seven & I sent in a team of senior executives to sort out Sogo Seibu three years ago resulting in recommendations that included handing off the Kansai stores and converting others to shopping centres.

The resulting restructuring is in progress, with more stores closed than any other department store chain.  Next month will also see the formal renaming of Sogo Kobe and Seibu Takatsuki as Hankyu stores. The move gives H2O Retailing (8242 JP), which owns the department stores of Hankyu Hanshin Holdings (9042 JP) the opportunity to further consolidate its position as the preeminent retailer in the Kansai region.

Seven & I meanwhile will now focus on extracting more sales and profit from some of the remaining 15 stores but is likely to want to convert or close more stores in the near future. Already, it has decided to convert its large Seibu Tokorozawa store into a shopping centre later this year. The net result will be a much smaller chain of department stores that Seven & I could well be packaging up to sell to a competitor or offload through an MBO. This could lead to an improvement in OPM.

4. U.S. Equity Strategy: Value Closes the Gap on Growth

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As the major averages break topside their respective 50-day M.A.s – a positive in its own right – we are encouraged by the shift away from growth & defensives toward the down-and-out laggards in the value arena. It is too early to tell for certain if these are anything more than short-term countertrend moves, but for now the moves we are seeing give us reason for optimism — something that was running very low just one week ago. In today’s report we highlight attractive Groups and stocks within Consumer Discretionary, Manufacturing, and Transportation: Homebuilding, Small-Cap, Auto Parts, Large-Cap, Trucking, Large-Cap, and Trucking, Small-Cap.

5. Shanghai Henlius Biotech IPO: Valuation Prescribed at Low-End

Shanghai Henlius Biotech (2696 HK) is a biopharmaceutical company and a non-wholly owned subsidiary of Shanghai Fosun Pharmaceutical (Group) (2196 HK), a 61% shareholder. Henlius has launched a Hong Kong IPO to raise up to $477 million. It is the first large IPO after weeks of protests in Hong Kong.

In our initiation note, we stated that most of the core products have strong prospects. Overall, the combination of decent cornerstone support and a reasonable valuation makes Henlius tempting particularly at the low-end of the pricing range.  

For reference, our previous notes:
Initiation note: Shanghai Henlius Biotech IPO Initiation: Going Large 
Cash-breakeven study: Shanghai Henlius Biotech IPO: Cash Breakeven Analysis 

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