TheChek News Flow

FT Article : Austerity drive crimps gift-giving by China’s rich

China’s richest people have sharply cut gift-giving in the past year, as Beijing seeks to quash government officials’ lavish lifestyles underwritten by Chinese businessmen.

The Hurun Report, chronicle of all things wealthy in China, said in its 2014 Luxury Consumers Survey that 25 per cent fewer people plan to give a gift over Rmb5,000 ($826) at Chinese New Year – in two weeks’ time – than last year. Overall, their average luxury spending fell by 15 per cent, from Rmb1.77m last year to Rmb1.5m this year, “possibly due to the impact of anti-corruption initiatives and a slowdown in the economy”, Hurun said.

The Hurun Report surveyed 393 mainland Chinese with personal wealth of Rmb10m or more.

President Xi Jinping has made it a top priority to crack down on government ostentation and corruption, and that has created an atmosphere where many businesspeople do not dare give flashy gifts to curry favour with government officials – and the officials do not dare accept them.

“Chinese officials are looking for more discreet gifts, something that can be consumed in the home, like medicine or a massage chair,” says Shaun Rein, of China Market Research in Shanghai. “People are telling us, they used to give an expensive gift because they expected something in return, but now the officials are in lockdown so they give something less valuable just to maintain the relationship.”

In the first 11 months of last year, for example, Chinese imports of Swiss watches fell 15 per cent year on year, largely because of the crackdown on gifting.

Hurun found that the rich are also not such fans of collecting watches for their own use any more either: this has been overtaken, for the first time in five years, by collecting traditional Chinese ink paintings.

The report said Chinese millionaires’ confidence in the local economy has risen for the first time in five years, with 3 out of 10 now feeling “extremely confident” in its prospects – but that apparently is not stopping them from wanting to leave China altogether.

“The number of wealthy individuals who have emigrated, or are planning to do so, rose from 60 to 64 per cent”, but only 15 per cent want to give up Chinese nationality to move. Most seem to want to have it both ways, by acquiring permanent residency overseas – the US is the most popular destination – while maintaining ties to China, Hurun says.

Those who want to send their children overseas for pre-university education prefer the UK, Hurun notes, while the US is still preferred for undergraduate study.

And China’s rich are healthier now, too – or at least they say they are: 61 per cent say they do not smoke and 40 per cent say they are teetotal (up 12 percentage points from last year).

{http://www.hurun.net/usen/NewsShow.aspx?nid=408}

This morning, CEC Entertainment Inc. (NYSE-CEC) announced a definitive agreement to be acquired by an affiliate of Apollo Global Management, LLC (NYSE-APO) for $54.00/share cash; CEC may solicit superior proposals until 1/29/14. The offer is conditioned on a minimum of more than 50% S/O tendered, HSR clearance and other customary closing conditions. On 1/7/14, it was reported that CEC was exploring a sale; the share price rose 14% that day at closed at $49.58. The company announced disappointing 3Q13 earnings, primarily due to weak comparable store sales; the CEC CEO/President noted sales had turned positive for the first four weeks of 4Q14. The share price declined only 2% to $45.53 following the earnings announcement, supported in part by a concurrent 13% increase in the quarterly dividend to $0.27. The company reiterated its commitment to its capital expenditure plan of opening 12-15 new company-owned stores in 2014 and expanding both “domestically and internally”.

The CEC deal price is inline with our mid-$50s expectations from a private equity buyer with minimal to no strategic synergies. The valuation multiples ($1.3B EV) using consensus 2014E are 1.5x EV/Revs ($857M, up 3.7% YoY), 7.3x EV/EBITDA ($178M, up 3.1% YoY, 20.7% margin) and 16.9x P/E ($3.19 EPS, up 8.1% YoY). We sense the company was well-shopped given the short two week “go shop” period; the press release noted that the deal concludes an “extensive review of strategic alternatives. Nonetheless, we expect CEC to trade at a small premium to the deal price given the company’s ability to solicit superior proposals, which suggests there were other interested parties and APO may have been the first to be in a position to sign a definitive agreement. A buyer that has some meaningful synergies could pay in the high $50s, which equates to unadjusted multiples of 8x EV/EBITDA and 18x EPS.

CEC has a unique “entertainment” restaurant concept that would not seem to mesh well with corporations that operate a diversified brand of restaurant concepts. The brand is more akin to a juvenile version of Dave and Buster’s Inc. (“DAB”), another Dallas, TX-based company that operates dining and entertainment venues (with a much larger footprint compared to a CEC restaurant) taken private in 2006. DAB was reported in December 2013 to be considering a sale or IPO which would value it at more than $1B; it was sold to Oak Hill Capital in 2010 for $570M. While there could be some interesting synergies between the two brands, the current owner appears to be focused on monetizing its investment rather than expanding its exposure to the restaurant entertainment business.

There have been numerous criticisms of CEC, primarily that the Chuck E. Cheese concept has gotten stale over the years and that the company is overly reliant on children’s birthday parties (~15% of total revenues). However, recognizable brands are hard to create from scratch and there are international franchising opportunities that can possibly reinvigorate growth. The company has tweaked its food costs and game token policy, but making fundamental changes (and taking the associated risks) is probably best done as a private company.

HSBC faces £70bn capital hole, warn Hong Kong analysts {http://bit.ly/19wI3ks}

Research firm Forensic Asia calculates that HSBC has overstated the value of the assets on its balance sheet by more than £50bn

Hewlett-Packard Co Preparing its return to the smartphone market with the launch of two large format devices, initially available in India this February - financial press (update)

**NOTE: 07/01/13: HPQ said to be planning to re-enter the smartphone market, currently developing a new device - tech blogs
- HP Senior Director of Consumer PCs and Tablets for Asia-Pacific, Yam Su Yin answered a question about the chances of a future HP smartphone, saying "The answer is yes but I cannot give a timetable. It would be silly if we say no. HP has to be in the game."

Facebook Article highlights the "tracking pixel," released by Facebook last June, code that allows advertisers to track customers who come to their websites from Facebook ads which has been a boon for the many small businesses that market on the site - NYT (update)

- The product has likely attracted more small business advertiser to Facebook, creating more competition for Google's AdWords.
- Analyst notes that the Facebook ads are more targeted to the users existing interests that have been inputted on their profile over years versus Google's ads which respond to searches the user is currently inputting.

BlackRock, CEO: Generating outsized returns will be more difficult moving forward, positive about equities in 2014 - conf call

- US political conditions are improving
- Europe is slowly improving
- Hope Japan continues to execute well on reform plans

Formula One chief executive Bernie Ecclestone will stand trial in Germany on charges of bribery and of aiding and abetting breach of trust, a court in Munich has said.

A statement released by the court on Thursday said the trial was likely to begin at the end of April.

F1 board chairman Peter Brabeck convened a hastily arranged meeting to discuss the implications of the court decision.

It is likely that Mr Ecclestone, 83, will stand down as a board director voluntarily but continue in his role as chief executive.

Mr Ecclestone was served with an indictment by Munich prosecutors last summer following the conviction on corruption charges of Gerhard Gribkowsky, a German banker, for accepting payments totalling $45m from Mr Ecclestone and Bambino, an Ecclestone family trust.

Mr Gribkowsky was BayernLB’s chief risk officer when the bank was a shareholder in F1. He facilitated the sale of the bank’s stake to CVC as part of the private equity group’s takeover of F1 in 2005-06.

Mr Gribkowsky was convicted on corruption charges relating to the $45m payments in 2012 and jailed for eight-and-a-half years.

The Munich court said the $45m payments, made between July 2006 and December 2007, were dressed in the form of consultancy contracts and that corporate structures were put in place to obscure the origin of the payments and their recipient.

In a statement, Mr Ecclestone’s lawyers said the decision to go to trial did not constitute a finding in the case itself.

“The accusations, which are based on statements by Mr Gribkowsky, are false and in view of the established facts don’t present a convincing picture,” the statement said.

They added that further witnesses had to be heard and new evidence assessed, some of which emerged in the seven-week civil case brought by German media group Constantin Medien against Mr Ecclestone in London at the end of last year.

Constantin alleges that Mr Ecclestone and Mr Gribkowsky conspired to undervalue F1 at the time of the 2005-06 sale. The judge in the case will give his ruling in due course.

Mr Ecclestone has already given evidence at the trial of Mr Gribkowsky and during the Constantin civil case. He has maintained that the payments were made to Mr Gribkowsky because the former banker was threatening to expose details about his tax arrangements.