/Virus fallout rattles investors as China industry stops

Virus fallout rattles investors as China industry stops

Australia’s exports to China in 2019 were $175 billion, says UBS economist George Tharenou. Such is the coronavirus hit to Australia, he has downgraded his forecast for GDP to -0.1 per cent for the first quarter of 2020 from a previous 0.2 per cent of growth and thinks it will be the worst result for the country since the Global Financial Crisis.

McGrathNicol partner Jason Ireland said the uncertainty over how long the outbreak would constrict industrial production in China was prompting businesses in Australia to bring forward extensive contingency plans.

“The big issue is there are large numbers of people staying in their homes in China,” Mr Ireland said.

 

Moving freight inside China, and into China is difficult.

One partial saving grace is that some Australian companies have already been part of a shift out of China in the past couple of years after manufacturing costs began to rise. ASX-listed glove maker Ansell is one group on the front foot in that regard, following global bicycle maker Giant.

“China started to get too expensive relative to other countries,” Mr Ireland said.

But the sheer uncertainty now has the potential to cause a cash flow squeeze if it extends for too much longer. “It’s one of those things that is a real bump to your business model,” Mr Ireland said.

“I think banks are now looking at what they need to do and what they should be prepared for”.

Even RBA Governor Phillip Lowe is nervous. He said the coronavirus was having a rapid effect on the Australian economy.

“We’ve also had some instances in the last few weeks where Chinese companies have called force majeure and (that’s affected) exports to Australia. It’s not on a widespread scale but it is having an effect. And I expect we’ll see the impact of that when we get the GDP data for the current quarter,” he said on Thursday.

 

More than half of 100 companies surveyed by the Australian Chamber of Commerce in Shanghai expect a 20 per cent or more drop in first-quarter revenues. Another 35 per cent expect a decrease of between 10 and 15 per cent.

Tourism and Travel

Tourism is being hit hard. The elevator of the Brisbane office building housing the China Visa Application Service Centre is a bellwether.

Usually the lift is packed in the morning with people getting off at the fourth floor of the Ann St building to join a long, snaking line of people looking to get visas processed for travel into China.

But it’s been a virtual ghost town for weeks now. On Thursday morning, only one customer was buzzed through to the empty office by a security guard wearing a surgical face mask.

The travel bans are having a big impact on leisure travel. Many businesses are also stopping business trips to China, travel agency Flight Centre says.

Flight Centre shares are down nearly 12 per cent since the start of the year, Helloworld – which has large exposure to inbound Chinese travellers – has slumped 14 per cent, and Corporate Travel Management 17 per cent.

Flight Centre last week took a cautionary tone, telling investors the coronavirus’s impact could not yet be tallied but would “make it more difficult” to hit full year profit guidance of between $310 million and $350 million.

“Travellers could potentially alter travel plans in the coming months if larger-scale outbreaks were detected elsewhere in the world,” Flight Centre said.

Still, analysts at firms including UBS and Citigroup estimated the impact might be transitory, as happened in 2003 with the SARS crisis.

“The SARS experience indicates the decline in travel volumes precedes a period of ‘catch up’ where activity increases materially”, potentially late in the second half of this financial year or next year, Citigroup analyst Bryan Raymond said.

Consumer Goods

Penfolds owner Treasury Wine Estates and vitamins group Blackmores had both become ASX glamour stocks over the past few years as they tapped into the prodigious growth in demand from Chinese consumers. But they have suffered a huge fall from grace in the past three weeks. Coronavirus hasn’t been the only concern, but has injected a fresh set of worries on top of problems in other parts of their businesses as investors look ahead.

Shares in Treasury Wine Estates have fallen sharply.  FRS.

Shares in Treasury Wine have lost $4.5 billion in sharemarket value since January 28 when it warned of a surprise profit downgrade after a cheap wine glut in the United States.

But the shutdown of some liquor retailers such as 1919 in China and the difficulties of shifting freight inside the country have investors alarmed. Asia makes up 40 per cent of Treasury Wine’s profits and China is the lion’s share through the luxury brand Penfolds.

Citi analyst Craig Woolford estimates coronavirus fallout will punch a $15 million hole in the wine group’s profits this year. Macquarie warns that it will result in a a slump in sales to China of 460,000 cases of wine and is a ”material risk” now.

Blackmores shares have dropped 19 per cent since February 5. Profits were squashed in the first half by problems taking over a $43 million factory in Melbourne and in an overhaul of labelling, but the coronavirus outbreak has prompted the company to warn that it may not make any profits at all in the six months to June.

Blackmores’ new chief executive Alastair Symington has taken a conservative view and estimated it might take three months for things to return to normality, with the disruption in China likely to strip $7 million from profits. The irony is that demand in China for vitamin C has never been stronger, but landing the product in China amid shortages of medical-grade glass bottles which can only be sourced from China, is increasingly fraught.

Retail

The coronavirus has had little impact thus far on retailers despite fears factory closures and travel restrictions will disrupt supply chains, leaving retailers short of stock, and crimp sales at retailers reliant on the tourist trade.

Most retailers are keeping details of the impact on sales or supply chains close to their chest until they report December-half results, but several including Bunnings and Wesfarmers have banned travel to China.

Those that have reported – JB Hi-Fi, Nick Scali and Breville – say the virus has had little impact on sales to date, but are closely monitoring the situation.

Smaller retailer AuMake, which last year spent $14 million buying a chain of Broadway stores relying almost solely on Chinese tourists, said this week it would either close some stores temporarily or cut their trading hours.

JB Hi-Fi – whose shares have risen another 4.8 per cent this month after almost doubling over the past year – says the biggest risk is that factories in China will run short of components.

“As the biggest player in the Australian market we would like to think we can work with suppliers to ensure stock levels are maintained,” said CEO Richard Murray.

Nick Scali managing director Anthony Scali said the epidemic would delay deliveries by one or two weeks and may force the furniture retailer to shift more sourcing to Vietnam if factories in China remain closed.

Breville chief executive Jim Clayton said the appliance maker’s China sales were insignificant and the group had a buffer against supply disruptions after boosting inventory levels last year as insurance against Brexit and tariff increases in the US and to keep up with rapid expansion in Europe.
“These higher inventory holdings are in effect a buffer for any slower post Chinese New Year production ramp-up,” he told analysts and investors on February 13.

Jirsch Sutherland partner Andrew Spring says retailers likely to be most affected by supply chain issues include fast fashion chains, which have long lead times but frequent deliveries of new product, and retailers that don’t have diversified supply chains or lack the market power of larger rivals to secure supplies.

Airports and freight

Airport profits will be hard hit by the travel bans, particularly at Sydney and Melbourne airports where the numbers of people coming from China and Hong Kong outstrip every other international market. Fees charged on international passengers are much higher than those charged on domestic travellers, so airport income is badly hurt by declines in international travel. Falling passenger numbers, exacerbated by companies stopping non-essential travel to Asian countries where the virus is spreading and Australians deferring travel plans, will also hurt spending at airport shops and restaurants.

Passenger travel to and from China accounts for almost 20 per cent of all movements through Sydney Airport, up from 11 per cent in 2002, according to Macquarie, which cut its full year earnings forecast for the airport in late January before the coronavirus impacts gathered speed. Sydney Airport delivers its interim results on February 20.

Moody’s Investors Services has warned that Melbourne Airport’s A3 credit rating is most exposed among the airports it rates if travel disruptions from the virus continue, given the number of Chinese who travel through the airport as well its big investment pipeline, which includes building a third runway.

Analysts are also expecting a drop in goods shipped between countries and moved through ports due to factory closures in China. “If more companies suspend Chinese operations or withdraw from production in China, shipping volume may take longer to recover,” said analysts at Fitch Ratings.

Revenues could fall at container ports such as Patrick, which is 50 per cent owned by logistics group Qube, as well as coal export and cruise ship terminals, analysts said. Aurizon warned that delivery of 66 rail wagons from a manufacturer in Wuhan could be delayed after the manufacturer declared force majeure, and Rio Tinto warned of delays in copper deliveries from its Mongolian mine.

Rail operators and service providers such as Aurizon and Downer EDI have also warned that movement of equipment and people between Australia and China has been disrupted.

Medical Technology

Hearing implant success story Cochlear has fallen victim to the coronavirus, downgrading its full-year underlying net profit guidance by 5 per cent as hospitals across China are forced to defer surgeries to limit the spread of the deadly virus.

The coronavirus outbreak has caused Chinese hospitals to put off elective surgery, including surgery using Cochlear’s hearing implants. AP

The hearing device maker cut its net profit forecast from $290 million to $300 million to $270 million to $290 million on February 11, hitting its share price.

But biotech giant CSL has escaped unscathed thus far.

The blood products company is not expecting any effect on its move to a direct distribution model for its albumin sales in China and so far none of its employees in its Wuhan manufacturing centre has contracted the virus.

Chief executive Paul Perreault said he was also not expecting any slowdown in demand for its immunoglobulin or albumin products.

“Because these are medicines that are in need, I don’t see that really slowing down and to date we haven’t had any disruption to supply, or imports, of albumin in China or around the world. We’re in pretty good stead,” he said.

Property

Sydney’s hotels were at the frontline of feeling the impact, after already dealing with the fall-out from bushfire smoke. The deadly virus dampened demand further. Revenues fell 7 per cent for the city’s hotels in January. Meanwhile student accommodation providers, whose fortunes are closely tied to the education sector, are nervously hoping the travel ban will be lifted in time to fill rooms for the first semester.

The travel ban is having repercussions for the housing market more broadly. Agents are worried about delays in settlement on purchases by Chinese buyers delayed by the ban.

The outbreak has thrown a pall over consumer sentiment more broadly. That is expected to hit shopping centres, especially those favoured by overseas students and tourists. The major mall owners, Scentre and Vicinity, are due to report later this month. Landlords such as Mirvac and GPT, which both own shopping centres, are monitoring the flow-on impact. In the last few weeks for example, GPT noted that foot traffic had fallen by up to 5 per cent at Melbourne Central, a hub for foreign students.

Also at risk is property development. Residential and commercial projects rely on Chinese factories for a proportion of their materials. such as joinery, facade materials and structural steel. Already building contractors have warned of potential project delays.

The country’s largest property player is ASX-listed Goodman, which oversees a $50 billion portfolio of industrial and logistics assets around the world. A large part of that is housed in China. Greg Goodman is watching the situation carefully but said this week his business is yet to feel any material impact.