Gapping down
In reaction to earnings/guidance:
- CHWY -13.9%, MVST -11.2%, AER -10.3%, FIVE -4.3%, LYEL -3.1%, RH -2.4% (also announces intent to do a 3-for-1 stock split), PVH -1.6%, SPWH -1.2%
Other news:
- GERN -18.8% (prices offering of common stock and warrants)
- NWN -7.2% (prices offering of 2.5 mln shares of common stock at $50.00 per share)
- IGMS -5.9% (prices offering of 8695653 shares of its non-voting common stock at $23.00 per share)
- VLNS -3.9% (files for $150 mln mixed securities shelf offering)
- MTDR -3.7% (to be added to S&P MidCap 400)
- HESM -2.8% (commences offering of 7.9 mln Class A shares by selling shareholders; signs accretive $400 mln sponsor unit repurchase agreement)
- ABCM -2.6% (files mixed securities shelf offering)
- UDR -2.5% (stock offering)
Analyst comments:
- BK -0.7% (downgraded to Neutral from Buy at Goldman)
Gapping up
In reaction to earnings/guidance:
- MLKN +12.2%, BNTX +8.1%, LULU +7% (also authorizes $1 bln stock repurchase program), HLTH +6.7%, MU +3.9%, CALM +2.1%, PRGS +2.1%, VRNT +1.8%, SLGC +1%
Other news:
- ADGI +68.1% (announces ADG20 (adintrevimab) is the first monoclonal antibody to meet primary endpoints with statistical significance across pre- and post-exposure prophylaxis and treatment for COVID-19 and plans to seek US emergency use authorization)
- VIR +11.6% (to be added to S&P SmallCap 600)
- SUNL +7.6% (names new CFO)
- RMO +7.1% (announces shipment of first pedigree packs to key customer)
- AMLX +5% (ahead of FDA NDA meeting for AMX0035)
- CSTL +3% (granted Advanced Diagnostic Laboratory Test status by CMS)
- QTRX +3% (partners with Alzheimer's Foundation to accelerate development of multi-analyte plasma test for early detection of Alzheimer's disease)
- DOOO +2.9% (announces terms of $250000000 substantial issuer bid)
- NSC +2.6% (authorizes new $10 bln stock repurchase program)
- CALM +2.1% (announces that its Board of Directors has approved new capital projects to further expand the Company's cage-free egg production capabilities)
- REPL +2% (provides new clinical data broad program update and future development strategy for its tumor-directed oncolytic immunotherapies)
- TWI +1.7% (divests its Australian Wheel Business)
- CVAC +1.4% (CureVac and GlaxoSmithKline (GSK) to develop second-gen COVID-19 vaccine candidate CV2CoV)
Analyst comments:
- FRPT +3.4% (upgraded to Buy from Neutral at Goldman)
Chinese Property Giant Country Garden Tries to Prove Its Doubters Wrong
Net profit last year fell 23%, but the company said it is in a strong financial position and believes it can weather the downturn
HONG KONG—In a property sector plagued by slumping apartment sales and rock-bottom bond prices, one of China’s biggest private developers is trying hard to convince home buyers and investors that it is doing just fine.
Country Garden Holdings Co. 2007 6.29% , the country’s largest developer by contracted sales, on Wednesday said its net profit for 2021 fell 23% to the equivalent of $4.2 billion, in what it described as a year of turbulence and upheaval for China’s property-development industry.
The company, which is based in China’s southern Guangdong province, said the cooling down of the property market and a tougher financing environment “has posed big challenges to all industry participants.” Country Garden added, however, that it has acted prudently and is in a strong financial position, and believes it can weather the downturn.
Mo Bin, the company president, said the past year had been volatile and it could take time for China’s property market to recover fully. But he said recent regulatory changes set the industry up for long-term healthy growth. “We are confident about the future of the market,” Mr. Mo told reporters.
Chinese real-estate developers have been hit hard by an unprecedented regulatory crackdown on their borrowing activities, which has coincided with the coronavirus pandemic and a slowing economy. More than 10 property companies have defaulted on dollar debt in the past year, and many others have endured steep declines in their stock and bond prices, as a crisis of confidence among investors has dragged on for months.
The malaise has also affected Country Garden, which has long been viewed by investors and global credit raters as one of the more financially prudent developers. The company’s bonds—some of which have investment-grade ratings, unlike most Chinese developers’ junk-rated debt—earlier this month plunged to a low of around 40 cents on the dollar before recovering recently, according to Tradeweb. Country Garden’s Hong Kong-listed shares, meanwhile, have dropped 39% over the past year.
The company’s release of audited results contrasted with delays that at least nine Chinese developers have reported in recent days. Industry heavyweights China Evergrande Group and Sunac China Holdings Ltd. were among those that said they wouldn’t be able to publish their audited annual results by a March 31 deadline. Auditors have resigned from a series of property companies, and some developers have blamed Covid-related disruptions for the delays.
Country Garden was founded by Yang Guoqiang, an entrepreneur who set out to capitalize on China’s urbanization three decades ago. His daughter, Yang Huiyan, now controls the company and is the wealthiest property tycoon in mainland China.
The company expanded rapidly for years, but did so without borrowing aggressively like Evergrande. In the first half of 2016, Country Garden boasted that it acquired 181 pieces of land—averaging about one a day—and started selling apartments less than five months after it acquired the land, according to its website. Last year, it said it bought 219 pieces of land in the first half, and shortened the average period between acquisition and home sales by more than a month.
Much of Country Garden’s business involves building affordable housing in smaller and less developed cities in China. The company said more than two-thirds of its sales revenue in 2021 was derived from so-called tier 3 and 4 cities. Many lower-tier cities have experienced bigger sales declines and price drops in the past year than more densely populated and economically advanced cities.
Country Garden said its 2021 contracted sales totaled 558 billion yuan ($87.7 billion), down about 2% from a year ago. Its average selling prices, however, decreased by 6.6% from the previous year, and were down 11% from their pre-pandemic level in 2019.
Some of the developer’s price cuts have upset buyers who previously paid more for apartments. In February, some homeowners from a Country Garden development in Shenyang in Liaoning province complained in letters to the city’s mayor that the developer had cut prices significantly, hurting the value of their properties. The local real-estate bureau said it looked into the issue and concluded that the price cut wasn’t in violation of any laws. The regulator also said it has asked developers to “control the pace and extent of price reductions, and consider the psychology and interests of owners who have purchased houses.”
Earlier this month, when Country Garden’s bonds sold off sharply, the company upped its efforts to calm investors. It said it had received regulatory approval to issue new onshore debt and obtained the equivalent of $8.6 billion in funding from two major state-owned banks for purposes including acquiring projects from other developers and providing mortgage loans to home buyers. It also said it has repurchased some dollar bonds and fully repaid all its yuan bonds due this year.
Kenny Ng, a securities strategist of Everbright Securities International, said Country Garden’s 2021 results showed a significant business slowdown.
On a positive note, he said Country Garden has reduced its leverage and taken steps to conserve cash given its uncertain operating environment. “Country Garden’s business will still face certain pressure in the short term, but as one of the leading companies in the industry, it is expected that after the downturn period, the group will still have the opportunity to resume its growth pace in the future,” Mr. Ng added.
Mark Zuckerberg Is Away From the Office
Failure for Meta’s remote-working ‘metamates’ could threaten to sink the whole ship
Meta Platforms’ reality is going virtual.
The Wall Street Journal reported last week that the company formerly called Facebook is taking remote work “to the extreme” among its senior ranks with several leaders planning moves across the globe and others, including Chief Executive Officer Mark Zuckerberg, planning to work for significant periods of time away from the company’s Silicon Valley headquarters.
The company said in June it would give most of its employees the choice to seek permission to work outside the office. Meta says its goal is to be “the most forward-leaning company for remote work” at its scale and believes it could have tens of thousands of people working remotely in the future.
Online real-estate giant Zillow Group was exceptionally early to embrace a permanent work-from-home option, announcing back in July 2020—just a few months into the pandemic—that 90% of its employees would have the option to continue to work from home at least indefinitely. Under its new “distributed workforce model,” Zillow says it now has employees spread across 49 states.
Zillow is a much smaller company than Meta, with a domestic workforce rather than a global one, but its early remote-work lessons could be helpful for Meta investors. In an interview, Chief People Officer Dan Spaulding said Zillow’s decision to move to a more flexible workforce model had to do with attracting and retaining the best talent. Even prior to the pandemic, he said, asking candidates to uproot their family and move to Seattle, where Zillow is headquartered, “was getting to be a really tough proposition,” adding he “can’t imagine” trying to persuade people to change jobs and move in today’s labor market.
Zillow says it had a greater than 58% increase in applicants in the first half of 2021 compared with the first half of 2019, with diversity among applicants increasing too. In 2021 surveys, the company says nearly half its new hires said they chose Zillow because of its “freedom and flexibility.”
Meta could use some of that boost, especially at the top. Senior executives, including the head of communications,the global advertising chief, the head of its Facebook app, the co-creator of its digital currency, the vice president of virtual reality, the vice president of augmented and virtual reality content, and its chief creative officer, among others, have all left the company over the past 15 months. Meta’s stock—a key element of executive pay—is looking a lot less attractive these days, off by nearly a third year-to-date, erasing some $300 billion in market value.
But Mr. Spaulding called the faster pace enabled by remote work both a pro and a con. He said it has enabled Zillow to move quickly through the wind-down of its iBuying business. Its rapid rollout last year led to hundreds of millions in inventory write-downs in a single quarter. Mr. Spaulding said he didn’t know, though, if iBuying’s blowup could have been avoided with a more centralized workforce.
Meta says it is still too early to share data on how many of its employees have chosen to pursue remote work as an option but did say 2022 will be “a learning year.” A company long known for its mantra, “move fast and break things,” it is now under the gun to make rapid progress as it works to expand upon its social-media roots into the so-called “metaverse,” a highly competitive space that counts Microsoft and Nvidia as competitors.
In an interview for Tim Ferriss’s podcast released last week, Mr. Zuckerberg called out “the rise of distributed work” as perhaps the most significant societal trend he is seeing now. He also discussed core values for his company over the years, such as using the very things you are building toward fast feedback. Moving fast, he said, is the key to learning; but implied in that is the tolerance of “some amount of bugs.”
Sometimes those bugs bite. To evaluate the promise of remote work, Ben Waber, president and co-founder of workplace-analytics company Humanyze, looked at pandemic performance of publicly traded video game companies globally—an industry he says he figured would be an “ideal test case” for success in a fully distributed workforce given its pandemic popularity and its production of almost exclusively digital goods, like Meta’s. In the end, he and Zanele Munyikwa, a Ph.D. student at MIT Sloan School of Management, found public video game companies that moved to remote work during the pandemic reported 4.4 times more delays than they did pre-pandemic, while those that didn’t shift to remote work reported roughly half the delays compared with before the pandemic.
“Now, no one can claim they know what they’re doing,” he said about post-pandemic workplace arrangements at this stage. “For Meta, if they’re being honest, it’s a hypothesis.”
It is a particularly high stakes hypothesis for a company that is now asking investors to invest in its construction of a virtual environment where it expects the world not only to play and communicate but also to work. In that sense, Meta’s bet on remote work is a critical proof-of-concept.
This crisis could be the making of Europe’s carbon market
Volatility triggered by war in Ukraine brings a chance to force corporate investment in decarbonisation
A disorderly crash is a strange way for a market to herald its coming of age. But it might just be the making of Europe’s carbon trading scheme.
The price of EU carbon permits tumbled following Russia’s invasion of Ukraine, falling from record highs of €98 per tonne in early February to lows of around €55, before partially recovering to about €80 a tonne.
The volatility smacked of “here we go again” for a market that has spent most of its 17-year existence in ineffectual crisis and policy flux. Its future is once again a matter of fevered debate.
The emissions trading scheme (ETS) caps greenhouse gases allowable from industry, issuing tradable permits that are bought or received by power stations and industrial plants. It has often been described as Europe’s key tool in reducing emissions.
But after its launch in 2005, the ETS floundered. Excessive allocations of free allowances and a recession that dented industrial demand left the price of emitting a tonne of carbon dioxide languishing for years in the single digits.
The founding principle of the market was that polluters pay. Well, they didn’t. Certainly not at a price that reflected the social costs of their activities, or forced substantial reductions in emissions.
After reforms in 2019, the market had been on an upwards trajectory before February’s crash. The war in Ukraine prompted a sharp reduction in liquidity, amid rumours of forced selling and a shift in the market’s fundamentals that has yet to settle. Soaring energy prices are likely to mean curtailed industrial activity, reducing demand for permits. Set against that is the need to burn more coal in the scramble to reduce reliance on Russian gas, with Germany this week taking the first step towards the rationing of gas use by industry.
There was also an existential question fuelling the turbulence: would Europe’s political commitment to putting a price on carbon survive in an environment where households and businesses were squeezed by high energy prices?
Coal-dependent nations such as Poland have long railed against the ETS, raising concerns about speculation in the market that have been dismissed by the European securities regulator.
There are now other doubters. Thierry Bros at SciencesPo Paris says temporary suspension of the ETS during the crisis would reduce power costs and allow preparations for a tougher scheme allied to a new carbon border tax.
The verdict at this month’s FT Commodities Summit was definitive: it is “inconceivable”, said one global head of carbon trading, that Europe would suspend operation of its “crown jewel”. It would set a precedent that would destroy the market, argued others.
That must be right. There is doubtless some policy pride here: the ETS, despite its flaws, is increasingly aped around the world. But considerations of national and climate security are now driving in the same direction, with the European Commission pledging to cut drastically the bloc’s dependence on Russian imports and push heavily towards renewable energy.
The role of the ETS in coalescing EU members’ disparate views around climate policy goals has been important. Its continued operation is crucial in signalling that short-term backsliding on emissions remains just that. Proposals to expand it and scrap free allowances as part of a carbon border tax underpin ambitious targets set for 2030.
This crisis has accelerated a conversation about the costs of energy transition. There will inevitably be more national support to households and industry (and member states do receive income from the permits). Elisabetta Cornago at the Centre for European Reform advocates bringing forward a centralised social aid fund proposed in a future ETS on heating and road transport.
Staying the course means Europe’s flagship climate policy could finally achieve its original goals. Until now, the price of permits has largely tracked the cost needed to induce switching from coal to gas in the power sector. At current gas prices, that relationship has totally broken down.
The real question is whether a combination of energy crisis and political will can push carbon prices up enough to force big investment in decarbonisation on to corporate board agendas. That is within touching distance, says Mark Lewis at Andurand Capital. High gas prices have closed the cost advantage of so-called grey hydrogen from gas compared with green hydrogen from renewables. On longer-term assumptions, Lewis puts the carbon price required to force structural decarbonisation of European industry at €120-150 a tonne.
Who knows? When Europe’s carbon market is lauded in the future as the cornerstone of efforts to combat climate change, it might just be true.
Early premarket gappers
- Gapping up:
- HLTH +11.8%, VIR +11.2%, MLKN +9.6%, LULU +7.2%, RMO +6.4%, MU +3.5%, CSTL +3%, QTRX +3%, SUNL +2.9%, WE +2.7%, BNTX +2.7%, NSC +2.6%, PRGS +2.1%, VRNT +1.8%, TWI +1.7%, CR +1.7%, FSR +1.1%, SLGC +1%, RCII +0.5%
- Gapping down:
- GERN -19.5%, VLNS -14.2%, CHWY -13.9%, IGMS -11.8%, MVST -10.1%, NWN -6.2%, MTDR -3.9%, LYEL -3.1%, HESM -3%, RH -1.9%, CALM -1.8%, PVH -1.6%, ARRY -1.5%, UDR -1.2%, SPWH -1.2%, KGC -0.7%
Germany takes step towards gas rationing over payment stand-off with Russia
Berlin activates emergency law as west refuses to comply with Moscow’s demand for roubles
The German government has taken the first formal step towards gas rationing as it braces itself for a potential halt in deliveries from Russia due to a dispute over payments.
Robert Habeck, economics minister, on Wednesday morning activated the “early warning phase” of an existing gas emergency law put in place to deal with acute energy shortages.
The move was triggered by German concern that Russia might cut supplies to the country and its neighbours because they are rebuffing Moscow’s efforts to force payment for gas imports in roubles.
Russian officials said on Tuesday that Moscow would not “supply gas for free” to Europe, a day after G7 countries unanimously rejected President Vladimir Putin’s directive requiring rouble payments.
During the early warning phase — the first of three stages in Germany’s emergency response — a crisis team from the economics ministry, the regulator and the private sector will monitor imports and storage.
If supplies fall short, and less draconian attempts to lower consumption do not work, the government would cut off certain parts of German industry from the grid and give preferential treatment to households.
Habeck, who is also vice-chancellor, told journalists in Berlin that the step was taken in anticipation of the Russian law, which conflicts with the denomination of long-term supply contracts in euros or dollars.
“We won’t accept a [unilateral] breach of contracts”, Habeck reiterated on Wednesday morning.
Habeck stressed that for now the gas supplies from Russia were flowing normally.
However, as Germany is trying to wean itself off Russian gas and now imports more LNG, Russia’s market share of German imports has fallen from an average of 55 per cent in recent years to 40 per cent in the past few weeks.
Last week, Germany unveiled targets to cut its dependence on Russian energy rapidly, vowing to all but wean itself off the country’s gas by mid-2024 and become “virtually independent” of its oil by the end of this year.
Europe’s wholesale gas price rose 8 per cent to €114.45 per megawatt hour in early trading on Wednesday.
Russia’s state-owned gas supplier Gazprom and the country’s central bank are due on Thursday to report to Putin on a mechanism to implement the change of payment currency for gas to roubles.
Some Russian politicians have intimated that the deadline to switch payment currency could come as early as the end of this month, although the Kremlin has not officially stated when the change will take effect.
Divisions risk undermining windfall for Europe’s defence industry
Berlin’s decision to buy US fighter jets has upset Paris amid fears it will undermine co-operation between nations
Germany’s decision to lift the cap on its military budget offered a beguiling future for Europe’s defence industry as the region’s biggest economy readied itself to write large cheques on everything from jets to tanks.
But less than a month since the invasion of Ukraine prompted Berlin’s historic move to establish a €100bn fund to modernise its armed forces, the initial euphoria risks giving way to the divisions that have long bedevilled European collaboration on defence.
The trigger for the reversal in sentiment was Germany opting earlier this month to replace its ageing Tornado fleet with a batch of F-35 fighter jets, which can carry nuclear weapons and are made by US defence group Lockheed Martin.
Handing Lockheed the order prompted dismay in France, with the industry angered that the choice of an American weapons system sent the wrong signal when the focus should be squarely on bolstering Europe’s own capabilities.
“The French will not like it at all,” one top European defence executive said of the F-35 order. The invasion of Ukraine had “reinforced the need for a strong defence industry as well as armed forces in Europe”, they added.
The sudden need to overhaul Europe’s decades-old military order has revived tensions over the Future Combat Air System, Europe’s flagship defence project launched by Berlin and Paris to great fanfare in 2017.
Best known for its ambition to build a new European fighter jet, FCAS, which Spain joined in 2019, is seen as a central building block for the region’s defence and procurement policy.
Rather than the myriad of fighter jets flown by European air forces today — spanning the Eurofighter, Germany’s Tornado, France’s Rafale and Sweden’s Gripen — FCAS envisages just one that will be the backbone for every country after 2040.
Amid the alarm in Paris over the Lockheed order, Berlin has insisted it is still committed to the programme, which relies on the continent’s biggest aerospace and defence groups: Airbus, France’s Dassault Aviation and Thales, and Spain’s Indra Sistemas.
However, even before Berlin’s move, concerns that the FCAS project might never take off were deepening because of the wrangling between Airbus, which represents Germany in the project, and rival Dassault.
Battles over technology sharing and who would lead critical parts of the programme have beset FCAS since its launch.
Eric Trappier, chief executive of Dassault, warned before the F-35 deal that such an order would add to French irritation over FCAS and that it would “cool our support”.
Earlier this month, the Dassault boss said that development work on FCAS had in effect ground to a halt, with the company taking its engineers off the programme until it was able to agree a way forward with Airbus.
“In 2022, we’ll have to make a decision. We cannot wait with our pen in our hand over a blank page,” a visibly frustrated Trappier told analysts after the group reported results.
Dassault declined to comment further, pointing to Trappier’s recent remarks. Airbus declined to comment.
One of the reasons the F-35 order risks proving problematic for FCAS is because it potentially sets Germany and France on diverging timelines, according to a former European defence industry executive.
While the German need for a new fighter has been pushed closer to 2050 with the F-35 order, the French have their Rafale only until about 2035. “The timeline and point at which France and Germany’s needs meet has been pushed back,” the executive said.
Indeed, Claudia Major of the German Institute for International and Security Affairs, insisted that if FCAS ultimately failed it would not be because of Berlin’s F-35 order, saying that the two are “totally different things”.
“Since the start [FCAS] has been the example of difficult European industrial co-operation, of mistrust and of everyone trying to defend their own industrial interest,” she said. “You launch a major project that has the ability to change industry strategy and then you don’t invest enough in the political ‘flanking’ to support it.”
It has not been devoid of progress. Last spring Germany, France and Spain agreed to develop a flying demonstration aircraft by 2027. Some industrial accords have also been struck, including on separate pillars of the programme spanning space communication and manned and unmanned aircraft.
Nonetheless, divisions remain on the next-generation fighter itself, including over the all-important flight control system, which Dassault said it needed to develop and manage itself.
Francis Tusa, editor of newsletter Defence Analysis, argued that what helped to shift the balance in the relationship between Airbus and Dassault in recent months were significant export orders for the French company’s Rafale, including from the United Arab Emirates.
“Team France no longer needs Germany in the programme. They have orders coming out of their ears,” he said, adding that he expected further orders for the fighter that could take production through to 2036.
If FCAS flounders, it will not be the first time that France, Germany and Spain have failed to turn ambitions over defence into an industrial reality.
France notably went its own way to develop the Rafale fighter, while Germany is part of the Eurofighter consortium with the UK, Italy and Spain. On battle tanks, Germany has the Leopard while France has the Leclerc.
Other programmes are under way that will test nations’ abilities to work together, including the MGCS tanks project (to replace the Leopard and the Leclerc) and Eurodrone, to develop a series of unmanned drones.
As Russian’s invasion forces European capitals to rethink their defence strategies, industry executives say that effective collaboration requires an acceptance not every country can have it all.
“Not every country can have every capability given the limits of defence budgets in Europe,” said one defence executive. “If you truly want to have a capability . . . then there needs to be some form of collaboration on EU programmes and consolidation.”
Alessandro Profumo, president of Europe’s trade body ASD and chief executive of Italy’s Leonardo, struck a hopeful note. The German move to boost its defence spending, he said, was “incredibly important for the EU” and will be a “catalyst for more European defence co-operation”.
The FCAS can still get back on track, industry experts said. One noted that while Dassault might be able to live without FCAS given its Rafale orders, the French air force would still need a more capable fighter by the 2040s.
“The problem will be, does France want to be left alone? They want to lead but will they lead alone,” said an industry executive. “I think they will compromise to keep a partner”, they added, referring to Germany.
Others highlighted that while Dassault had already flagged it was working on a “plan B” should FCAS unravel, France would lose out on shared research costs and other savings that the project brought.
“It wouldn’t be insurmountable [to lose FCAS] but it would be costly,” said Jean-Louis Thiériot, a member of parliament for France’s conservative Les Républicains party who sits on a defence commission.
Asked shortly before the invasion whether failure to reach an agreement with Dassault was an option, Airbus chief executive Guillaume Faury countered: “Well, that’s not the way we look at it. We think FCAS is front and centre to the strategy of Europe.”