Barrons : Samsung and Other Asian Companies Will Profit from Electric-Car Demand

Samsung and Other Asian Companies Will Profit from Electric-Car Demand. Will Investors Get on Board?

You can bet on Asia’s lead in electric-vehicle technology. Betting on the companies involved is trickier.

While dignitaries discussed climate change at the United Nations, the race to replace carbon-spewing automobiles was on half a world away. Five of the top six electric-car battery producers are South Korean or Chinese, says James Lim, who heads Korea research at Dalton Investments.

The only developed-market firm in the mix is Japan’s Panasonic (ticker: 6572.Japan). Korea’s battery big three— LG Chem (051910.Korea), Samsung SDI (006400.Korea), and SK Innovation (096770.Korea)—are leveraging existing expertise in cellphone batteries. Chinese champions Contemporary Amperex Technology , or CATL (300750.China), and BYD (1211.Hong Kong) were willed into existence by generous industry subsidies from their government.

These companies should in theory be exciting investors. With dominant auto makers from Volkswagen to General Motors betting on an electric future, demand for batteries will outstrip supply for at least three years, Lim predicts. LG Chem, viewed as the industry leader for now, has a $100 billion order backlog. Markets are cautious anyway. All of the battery makers’ stocks have declined this year except Samsung SDI, which is up 7%.

One big reason is that China slammed the brakes on state support that was propping up some 500 companies in the electric-vehicle space, says Jack Barkenbus, a visiting scholar at Vanderbilt University. Beijing shrank the subsidy pie by some 60% this year and may cut further next year. Shares in BYD, which puts most of its batteries in its own cars, have slid 22% year to date. CATL, a purer play on batteries, has gotten off with a 3.5% dip.

The longer-term problem is knowing which horse to back in an emerging industry. Global auto makers may make life tougher for battery suppliers by manufacturing their own down the road. “We’re not very keen on investment on EV,” says Michael Oh, lead manager of the Matthews Asia Innovators fund. “Even though industry growth is very strong, there’s a lot of competition coming in.” There’s also the issue that making EV batteries is a money loser at present.

The Korean players are also weighed down by their roots in the multitentacled conglomerates known as chaebol. The core business of both LG Chem and SK Innovation is oil refining and petrochemicals, Lim says. Batteries were pasted in at some point by headquarters. Little wonder that shares in Samsung SDI, a battery-focused spinoff from the electronics giant, are outperforming.

Things may get better. Electric-car battery manufacturing will turn profitable by early next year, Lim predicts. New European Union regulations should stimulate the industry there starting in 2021. Brussels will cut auto makers’ fleet-wide carbon-emissions targets by 20%. Chinese companies that survive the subsidy cutback will be firmer on their feet, with CATL probably in position to compete globally, says Simon Webber, portfolio manager for the Hartford Schroders International Stock fund. “The next 12 months is tricky,” he says. “But I’m one of the bulls on profitability from the end of 2020 onward.”

From railroads to dot-coms and solar panels, many early players in transformative industries failed, and investors took their chances. What’s new about electric-car batteries is that they’re being pioneered in emerging markets. The purportedly advanced nations are straggling behind, despite U.S.-based Tesla’s plans to supply its own vehicles. “The U.S. will never get ahead of the Asians in lithium-ion batteries,” Vanderbilt’s Barkenbus says. “Maybe we can catch them in the next generation, solid state.”

Barron's : How Cartier’s Parent Is Losing Some of Its Sparkle

How Cartier’s Parent Is Losing Some of Its Sparkle

Luxury-goods company Compagnie Financiere Richemont could be overvalued due to political uncertainty in Hong Kong and slowing momentum for its star Cartier brand.

The stock of the Swiss-listed watch and jewelry maker, which also owns high-end Van Cleef & Arpels, Dunhill, and Montblanc, has had a good run in the past three years, up 31.4%. Richemont (ticker: CFR.Switzerland), along with other big players, has shrugged off concerns of a consumer slowdown and trade tensions, with rivals LVMH Moët Hennessy Louis Vuitton (MC.France) gaining 147%, and Tiffany (TIF), 29%, over the same period.

But due to its product mix and exposure to Asia, Richemont is likely to suffer more than most from disruption in Hong Kong, depreciation of the Chinese yuan, and macro issues engulfing the region.

Analysts at UBS have warned the situation in Hong Kong will have a 2% negative impact on Richemont’s organic sales growth next year. UBS has a Sell rating and a target price of 68 Swiss francs ($68.49), 10% lower than its current CHF 75.04. Over the past three months Richemont has seen 8% wiped off its stock, compared with a 1.3% and 1.8% fall at LVMH and Tiffany, respectively.

“We believe the slowing Cartier brand performance and near-term industry headwinds, which are set to put group margins under pressure, are not priced in,” UBS analysts wrote in a Sept. 17 note.

Hong Kong is a vital market for Richemont, contributing about 11% to group sales. The crucial Chinese consumer accounts for about 40% of all sales. When asked for comment, the firm pointed to its July trading update. “Sales in Hong Kong retreated, additionally impacted by the relative strength of the Hong Kong dollar and the recent street protests,” the company said.

Richemont is the third-largest luxury-goods firm by sales, behind LVMH and Estee Lauder, according to an annual report by Deloitte. Richemont, which is based in Geneva, also owns online retailer Yoox Net-a-Porter and gun maker Purdey. It has a market value of $40 billion and employs about 30,000 people in 36 countries. The stock is priced at 21 times forward earnings, a 10% premium to its peers, and the company posted operating profit of €1.9 billion for the year ended March 31, 2019, on sales of €13.9 billion.It traces its heritage to the 1940s, when the late South Africa billionaire Anton Rupert created conglomerate Rembrandt. It had interests in tobacco, financial services, wines and spirits, and gold- and diamond-mining industries, as well as luxury goods. In 1988, Rembrandt Group spun off some of its international assets to form Richemont.

UBS has sourced data that looks at the appeal of Richemont’s largest brand, Cartier, which UBS says accounts for 80% of group earnings before interest and taxes. UBS has monitored the brand on social media and online search sites to gauge interest. Cartier has nine million followers on Instagram, but in August “likes” per post were down 7% compared with a 55% increase in July, UBS noted. Cartier also has had a 30% year-on-year decline in reads per post on the Chinese social-media platform WeChat, according to UBS.

The company has launched a new jewelry line called Clash, and Cyrille Vigneron, Cartier’s chief executive officer, said in a March statement that “Clash is super positive, the fastest launch we ever had on such a launch category.”

Cartier needs to innovate more in order to remain a star brand, otherwise Richemont will lose its sparkle.

Barrons : Don’t Blame Market Makers for Volatility, a New Study Says

Whenever markets suffer a bout of volatility, someone blames high-frequency traders. In the bumpy last months of 2018, U.S. Treasury Secretary Steven Mnuchin urged a government investigation of high-speed trading. After the recent August chop, some said the exit of traditional dealers from market-making had hurt stock-trading liquidity.

And when someone blames high-frequency traders for causing market volatility, the data nerds at Citadel Securities fire up a study. Citadel’s latest study examines whether stock-trading liquidity on exchanges has declined and aggravated the market’s mood swings. The firm concludes it has not.

The stock market’s structure has certainly changed with the rise of trading algorithms, electronic market-making and new investment products, acknowledges Gregg Berman, Citadel’s market analytics chief. “So has the amount of liquidity changed?” he wonders, rhetorically. His answer: “Liquidity has basically remained constant.”

Citadel Securities is the market-making business started by hedge-fund manager Ken Griffin. Its ears have been burning ever since Michael Lewis cast it as a villain in Flash Boys. More-careful examinations disproved Lewis’s claim that computerized market-making hurts investors, but his book’s popularity left a sting.

Using data feeds and computing power unavailable to almost anyone else, Citadel looked at the order books of the 13 U.S. exchanges for all the stocks in the S&P 500 and the Russell 2000 indexes at 10-second increments since mid-2011.

In a liquid market, a trader can buy or sell their desired amount of stock without the order moving the price much. Most liquidity studies never look beyond the top of an exchange’s order book, where it shows the number of shares available at the best bid or offer price—the quote. Citadel’s computer muscle allowed it to look deep in the order books, where additional liquidity is available at slightly wider spreads to fill bigger orders. That makes its study one of the first to look at the liquidity available to complete institutional trades worth millions of dollars.

For the stocks that comprise the two indexes, exchange liquidity has remained stable in the past eight years, says Citadel. The spreads at which traders could complete trades of $1 million and $10 million stayed constant, remaining unperturbed even in periods when the Cboe Volatility Index, or VIX, spiked. For giant orders of $100 million worth of stock, Citadel found that spreads would have varied with jumps in the VIX, but the range of liquidity was the same over the long term.

The study also looked at liquidity trends for six individual stocks, including giants like Apple (AAPL) and Microsoft (MSFT) and one of the S&P 500’s smallest stocks, News Corp (NWS), the parent of Barron’s. It confirms what has been reported here and elsewhere: Shrinking spreads in the age of computerized market-making make it cheaper to trade the small orders of retail investors and institutions.

The story is different for large orders. The spread to complete a $1 million order for the stock of Microsoft or Bank of America hasn’t fallen at the same pace as the quoted spread for a small order. This could be a reason that some buy-side traders aren’t fans of computerized market-making.

But on closer examination, the Citadel data show that the cost to execute million-dollar trades of those two stocks has declined over time—just not as much as it has for the little guy. Even for orders worth $10 million, spreads have remained about the same. “When you add it all together,” says Berman, “liquidity is equal or better than before.”

A funny thing happened to the stock of News Corp. The Citadel data show that in late 2016, News Corp spreads abruptly widened for trades of every size, raising trading costs for every investor, then narrowed again last year. What happened is that News Corp stock became part of the Tick Size Pilot Program, a misguided experiment in which Congress bullied the Securities and Exchange Commission into imposing wider spreads on the trading of 1,200 smaller stocks. Their hope was that liquidity would improve if the wide spreads attracted more dealers into market-making.

Instead, the program made liquidity worse. By the time it ended, the artificial spreads had cost traders hundreds of millions of dollars. The expensive experiment decisively found one thing that makes liquidity worse—letting politicians set the market’s rules.

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: Cover story reveals picks from Barron’s biotech roundtable; Feature says the worst may be over at AAL and shares could soon rise

* Cover story: “Recent advances in biotechnology, from data-driven diagnostics to game-changing gene therapies, suggest we’re on the cusp of a golden age in which many feared diseases will become treatable, or even cured. Yet for all the optimism in the lab, pessimism reigns on Wall Street”; The five members of Barron’s first biotech roundtable picked stocks that could pay off for investors in the future: RGNX, QURE, KRYS, MGTX, MDCO, KOD (Gbola Amusa, Chardan Capital Markets); RGNX, SRPT (Gena Wang, Barclays); VRTX, ASND, TCDA (Ziad Bakri, T.Rowe Price Health Sciences Fund); BLFS, MGTA, NVTA, MYOK (Eli Casdin, Casdin Capital); Verve Therapeutics, Beam Therapeutics, Verana Health (David Schenkein, GV).

* Tech Trader: The year has seen a host of high-profile IPOs—including UBER, LYFT, PINS, and CHWY—that didn’t meet expectations, and WeWork’s stalled effort has spooked the market, but sentiment-driven meltdowns offer buying opportunities for long-term winners; WORK, which went public through a direct listing, has “the potential to be a best-of-breed category killer with platform-like network effects.”

* Trader: Citadel’s latest study examines whether stock-trading liquidity on exchanges has declined and aggravated the market’s mood swings—and the firm concludes it has not; Optimists note that the S&P 500 is just 2.1% away from an all-time high, despite recent bad news, while pessimists note the S&P 500 created a dreaded ‘double top’ and will probably need corporate profit growth to accelerate before picking up again; Cautious on WFC: If incoming chief executive Charles Scharf is given enough time, the strength of the bank’s franchise should give him the ability to drive a laggard in the sector back toward the front of the pack.

* Profile: John Malooly, manager of the small-cap focused Wasatch Ultra Growth fund, looks for companies with business models that are disruptive, which for him means a model or technology that creates value in a way that leaves incumbents struggling to compete (top 10 holdings: KRNT, TREX, PCTY, PODD, HUBS, KNX, FRPT, ZEN, INXN, GSHD).

* Interview: CMG chief Brian Niccol talks about the food chain’s rebound—he says the turnaround has exceeded expectations—its approach to technology, food delivery, and other issues, noting that Chipotle has renewed its focus on the fundamentals of running a strong restaurant founded on simple precepts.

* Features: 1) Positive on IBB, FBIOX, FBDIX, PRHSX, VGHCX: It has been a difficult few years for funds specializing in biotech stocks, and investors are pulling money from the sector fast—for investors betting on a biotech turnaround, pure-play mutual funds and exchange-traded funds offer less risk than picking individual stocks; 2) All of a sudden, the initial public offering market is behaving rationally—after a remarkable first half that saw newly public companies raise capital at a historic rate, there are signs everywhere that a correction has set in, though it doesn’t appear to be a 2000-style bubble; 3) Positive on AAL: The carrier has faced a range of problems, including the grounding of BA’s 737 MAX jets, but some investors are betting that things can’t get worse, and that when MAX planes return to service and the company reaches a contract with the mechanics union, shares could rise again.

* European Trader: Cautious on Compagnie Financiere Richemont: Luxury-goods company, which has had a good run during the past three years, could be overvalued due to political uncertainty in Hong Kong and slowing momentum for its star Cartier brand, as well as depreciation of the Chinese yuan and macro issues in Asia.

* Emerging Markets: Cautious on Panasonic, LG Chem, Samsung SDI, SK Innovation: Asia maintains a lead in electric vehicle technology, but betting on the sector remains tricky—the long-term problem is that it’s difficult for investors to know which company to pick in an emerging industry.

* Commodities: “Metals took the spotlight in the third quarter, with silver and nickel shaking off worries over a slowdown in the global economy to score the largest percentage gains among major commodities since the end of June.”

* Streetwise: “Wall Street has come down with a case of healthy skepticism bordering on common sense,” says columnist Jack Hough. “Until it passes, stock buyers should beware of companies that don’t generate free cash, especially if estimates for their cash burn are getting worse.”

>>> Closing Stock Market Summary



Closing Stock Market Summary

U.S. stocks ended the week on a sour note following news that the White House is considering restricting U.S. investment in China. The ensuing weakness in technology stocks weighed heavily on the Nasdaq Composite (-1.1%), but stocks did close off session lows, leaving the S&P 500 (-0.5%) and Dow Jones Industrial Average (-0.3%) with modest losses. The Russell 2000 lost 0.8%.

According to Bloomberg, there have been talks to limit U.S. investors' portfolio flows to China and delist Chinese companies from U.S. stock exchanges. The news erased an early 0.3% gain in the S&P 500, which then fell as much as 1.1% amid a host of concerns, which included a re-escalation of tensions, possible Chinese retaliation, and trade talks on Oct. 10-11 not going as planned.  

Nine of the 11 S&P 500 sectors finished in the red, led lower by the trade-sensitive, and heavily-weighted, information technology sector (-1.3%). Semiconductor stocks like Micron (MU 43.21, -5.39, -11.1%) were especially weak, as well as Chinese stocks listed in the U.S. -- Alibaba (BABA 165.98, -9.02, -5.2%), JD.com (JD 27.82, -1.76, -6.0%), and Baidu (BIDU 101.21, -3.86, -3.7%). 

To be fair, Micron was already down big prior to the news, as investors reacted negatively to its soft gross margin guidance and a record inventory level. Micron suppliers Lam Research (LRCX 230.08, -12.75, -5.3%) and Applied Materials (AMAT 49.43, -2.72, -5.2%) underperformed. The Philadelphia Semiconductor Index dropped 2.4%.

The S&P 500 briefly fell below its 50-day moving average (2949), but buyers quickly stepped in to bring the benchmark index back above the key technical level. Relative strength in S&P 500 financials sector (+0.2%) supported the rebound attempt, while the energy sector (unch) returned to its unchanged mark.

Wells Fargo (WFC 50.71, +1.84, +3.8%) led the financials sector in gains after it announced Charles W. Scharf will be its next CEO, effective Oct. 21. Mr. Scharf was previously the CEO of BNY Mellon (BK 44.53, -2.10, -4.5%) and held executive positions at JPMorgan Chase, Citigroup, and Salomon Smith Barney prior to BNY Mellon.

U.S. Treasuries finished the session slightly higher, pushing yields lower. The 2-yr yield declined three basis points to 1.62%, and the 10-yr yield declined one basis point to 1.68%. The U.S. Dollar Index was unchanged at 99.10. WTI crude fell 0.9% (-$0.51) to $55.90/bbl, returning to levels before the drone attack on Saudi Arabia's oil refineries two weeks ago. 

Reviewing Friday's batch of economic data:

  • Personal income was up 0.4%, as expected, in August, while personal spending was up 0.1% (consensus +0.3%). The PCE Price Index was unchanged (consensus +0.1%), leaving it up 1.4% yr/yr for the fourth straight month, and the core PCE Price Index, which excludes food and energy, was up 0.1% (Briefing.com consensus +0.2%), leaving it up 1.8% yr/yr, versus up 1.7% in July.
    • The key takeaway from the report is that real PCE was up only 0.1% in August, which will temper growth forecasts for Q3 GDP.
  • The final September reading for the University of Michigan's Index for Consumer Sentiment printed at 93.2 (Briefing.com consensus 92.1), up from the preliminary reading of 92.0 and the final reading of 89.8 for August.
    • The key takeaway from the report is the finding that consumers are starting to express rising levels of economic uncertainty, with trade policies having the greatest negative impact on consumers.
  • Durable goods orders increased 0.2% in August (Briefing.com consensus -1.0%), which was better than expected, while durablrders excluding transportation jumped 0.5% (consensus +0.2%). 
    • The headline numbers were good, yet the key takeaway from the report is that nondefense capital goods orders excluding aircraft declined 0.2%, which is a soft sign for third quarter business spending.

Looking ahead, investors will receive the Chicago PMI for September on Monday.

  • Nasdaq Composite +19.7% YTD
  • S&P 500 +18.2% YTD
  • Dow Jones Industrial Average +15.0% YTD
  • Russell 2000 +12.8% YTD