TheChek News Flow

Sanderson Asset Management shows its hand a week before investors vote on Advent offer

A leading shareholder in UK aerospace group Cobham has come out against its planned £4bn takeover by a US private equity group, with just a week to go before investors vote on the deal.

Sanderson Asset Management, which ranks as the 11th-largest shareholder in the aerospace and defence company, said it was “inclined to vote against” the offer from buyout firm Advent International.

“We have privately communicated our position to the board along with our desire to see the current management team continue their good work in the event a better offer does not materialise,” the asset manager wrote in a letter addressed to Cobham’s founding family, which has urged shareholders to vote against the takeover.

Investors have been hoping a rival bidder will emerge amid concern that the 165p all-cash offer for Cobham, which is best known for its pioneering air-to-air refuelling technology, undervalues a company whose performance has been improving.

Silchester International Investors, which was Cobham’s largest shareholder when the deal was announced in July, has urged the board to find better deals but has stopped short of declaring it would vote against the deal.

Advent has so far secured the support of investors holding 5.2 per cent of the stock, including Cobham’s management as well as Artemis Investment Management. Sanderson is the first institutional investor to make clear its intentions on how it will vote since Cobham’s board agreed to the takeover.

Shareholders in the FTSE 250 group have until September 16 to decide on the bid which needs the support of 75 per cent of investors. Two influential shareholder advisory groups, ISS and Glass Lewis, last week recommended investors support the takeover.

Cobham’s share price was trading at less than 160p on Tuesday, indicating the market did not expect a rival bidder to emerge. Cobham and Advent both declined to comment on the contents of the letter. Sanderson also declined to comment to the Financial Times.

The FT disclosed last week that Nadine Cobham, whose late husband Michael Cobham ran the company and was the son of the founder Alan Cobham, had written to the top 15 investors arguing the offer significantly undervalued the company’s recovery over the past two and a half years.

In her letter Lady Cobham, whose family owns 1.5 per cent of the company, said recent interim results had “demonstrated that its turnround strategy is beginning to bear fruit”.

Cobham, she argued, was about to “enter a golden age for air-to-air refuelling, with air forces around the world looking to recapitalise or replace ageing air tanker fleets in a potential expansion of demand not seen since the 1970s and 1980s”.

In its letter, Sanderson said: “We broadly agree with your assessment of the offer.”

- press Recent comments on Italy 2020 budget deficit:

- On Aug 25th EU was said to consider softening debt reduction targets in rewriting of budget rule

- On Aug 5th reports circulated that Italy Govt was targeting 2020 budget deficit to GDP level of under 1.8%

(**Note: under the prior League/5-Star coalition).

Later Dep PM Salvini (League): Italy's 2020 Deficit to GDP would not be below 2%

Quick to develop supply will keep a lid on prices

Battery metal bulls suddenly have more to cheer about. This week saw the flashy launch of VW’s ID. 3, a mass-market hatchback that symbolises the potential market for the lithium that powers its battery. Last week, China’s Contemporary Amperex Technology (CATL) bought an 8.5 per cent stake in Australian lithium miner Pilbara Minerals.

The investment by China’s biggest battery producer — and supplier to carmakers including VW, Toyota and Volvo — was seen as a vote of confidence for the sector, which supporters say will be a big beneficiary from decarbonisation and the mass adoption of electric vehicles.

“While there has been commentary talking down the current state of lithium markets, it has belied the significant interest we have continued to see from the strategic players,” said Ken Brinsden, managing director of Pilbara. It is developing Pilgangoora, one of the world’s biggest new lithium projects, located in Western Australia’s Pilbara region.

So does CATL’s investment in Pilbara — part of a $60m wider fundraising — signal the end of what one analyst has described as the “big lithium short”?

The deal follows a brutal year for the lithium industry. Lithium carbonate for delivery into Asia has fallen from more than $18,000 a tonne in May 2018 to around $10,000 a tonne today, according to S&P Global Platts. Share prices have followed. Pilbara Minerals, for example, has dropped more than 70 per cent from last year’s high as fears of a supply glut have taken hold.

Bernstein Research estimates there are 750,000 tonnes of fresh supply that can be brought on line over the next three years. By comparison, global lithium production was less 300,000 tonnes last year.

“Of course not all of these projects will be approved,” says Paul Gait, analyst at Bernstein Research. “But is striking how quickly the supply can essentially triple.”

Viewed through that lens, CATL’s investment in Pilbara is bad news for the industry because it means another 90,000 tonnes of capacity has heavyweight financial backing.

That is one reason why Mr Gait and others do not see lithium prices rebounding. They think things will get worse before they get better. “Huge capacity in the pipeline and oversupply will keep prices punishing producer margins until sufficient cuts are made,” says Citi analyst Oliver Nugent.

While low prices have triggered some production cuts and project delays, lithium producers have not materially changed their long-term supply plans. That is perhaps unsurprising. EV-related demand is not going away given that battery-powered vehicles will have a big part to play in lowering global emissions.

But it is only when those attitudes start to shift and projects are scrapped that investors can be sure lithium prices have really bottomed. Until then, the spectre of quick to develop supply will continue to hang over the sector.

“Lithium may not be recognised as a typical commodity but it cannot be wholly expected to break away from the economics of supply and demand,” says Mr Nugent.

Le Maire calls for sustainable economic model based on social responsibility

French finance minister Bruno Le Maire has called for an “urgent transition” to a form of capitalism that is based on social responsibility in an attempt to curb the rise of populism.

Mr Le Maire, speaking at an investment conference in Paris, said that the visible effects of climate change and the surge in populist sentiment had laid bare the need for an economic model that seeks to tackle environmental and social concerns.

“We need a new capitalism for the 21st century, which would be more sustainable and which would allow us to reduce inequalities among nations and within nations,” said Mr Le Maire.

Mr Le Maire’s calls add weight to the chorus of support for reforms to the current capitalist system. Last month, the Business Roundtable, which has close to 200 corporate members, took the unprecedented step of dropping its creed of shareholder primacy, declaring that companies should consider the environment and workers’ wellbeing alongside their pursuit of profits.

The EU last year began working on sustainable finance legislation in a move to channel more money into green investment and place environmental, social and governance concerns at the heart of finance.

But Mr Le Maire, who said the EU had “a special duty to build [a] fairer capitalism, consistent with its founding values”, urged EU policymakers to “move faster”. He called for action on an EU green bond standard and said France would push for a social and environmental reporting framework for companies at European level.

“People, especially young people, will not wait for our decisions,” he said. “They are asking for a new economic model now.”

He added. “If we want to avoid the rise of populism all over Europe and the world, we need to give concrete answers and concrete responses to what young people are calling for.”

Mr Le Maire told delegates at the annual conference of the Principles for Responsible Investment, the UN-backed sustainable finance body, that France would “push for a green new deal to be implemented as soon as possible” and would seek to convince EU rulemakers to follow in the footsteps of French domestic legislation, including climate risk disclosure rules for institutional investors introduced in 2015.

This month, the SLI tumbled in the face of deteriorating trade talks between China and the US, compounded by a devaluation of the yuan and continued pro-democracy protests in Hong Kong.

LONDON, United Kingdom — Trump is building a virtual wall between the USA and China by imposing a 15 percent tariff on previously nil-duty imports from China as of 1 September. This will impact an additional $300 billion worth of annual imports to the USA. In response, China has allegedly allowed the yuan to devalue beyond RMB7/US$1 for the first time since the global financial crisis 11 years ago.

Protesters have also been on the streets in Hong Kong for the past 12 weeks demanding more autonomy from China. While the impact of tariff increases and a cheaper yuan have not yet flowed through to company results, as demonstrated by Brunello Cucinelli and Estée Lauder’s strong performance in mainland China over the last six months, the protests in Hong Kong are starting to bite.

Prada and Tiffany both pointed to a slowdown in this key market during their results announcements; July saw the biggest decline in retail sales in Hong Kong since February 2016, resulting in calls for landlords to slash rents by 50 percent for a period of up to six months. Prada’s landlord in Causeway Bay announced that the rent on the soon-to-be-vacated flagship will be cut by 44 percent in a bid to attract a new tenant.

This all paints a gloomy outlook for luxury goods sales in the region, prompting brokers to issue warnings about a turn for the worse for the sector in the second half of 2019.

News of Barneys going bust is causing ripples in the US department store sector. Only a few years ago, trend-setting Barney’s was considered by luxury brands as one of the hottest doors to be in. Some say this led to a certain level of complacency by the operator, notably a lack of willingness to change its business model to reflect market developments.

Nevertheless, a 72 percent hike in rent at its flagship Madison Avenue store, combined with an expensive venture in New York’s Chelsea, led Barneys to file for chapter 11 bankruptcy protection this month. US department stores have been struggling for a while, and the jury is out as to whether Barneys’ bankruptcy has unwittingly set off another trend.

Corporate activity has been particularly quiet this month, with only one deal of note: Tod’s founder and majority shareholder Diego Della Valle raised his voting stake in the company to 81.2 percent and is said to be considering taking the company private.

The Savigny Luxury Index (“SLI”) ended the month down more than 4 percent, driven mainly by a deteriorating outlook for mainland China and Hong Kong, not to mention the continuing Brexit mess and a potential slowdown in the US. The MSCI did not fare so well either, dropping almost 2 percent.

Pinduoduo draws shoppers outside China's big cities with low-priced goods. It trails only Alibaba in number of users, and has a larger market cap than eBay.

Li Suzhi scrolls through the front page of Chinese ecommerce app Pinduoduo, browsing T-shirts, electronics, and fruit, all priced at a fraction of the cost of similar products on other platforms. “I have to be careful not to use this app too much. It has so many deals that I want to spend all my time and money on it,” says the 46-year-old housewife and ayi (the Chinese term for nanny) from rural Inner Mongolia.

Shoppers like Li—price conscious and far from China’s big cities—have made Pinduoduo China’s hottest ecommerce player. Its 366 million monthly active users trail only Alibaba, outranking better-known rivals such as JD.com. Last month, Pinduoduo reported that second-quarter revenue had more than doubled from a year earlier. Its $40 billion market value exceeds eBay’s and places it among China’s five most valuable internet companies.

Analysts attribute the company’s success to its rock-bottom bargains, discounts based on group buys that prod users to recruit friends, and a design that relies more on browsing than search. Rebecca Fannin, author of three books on China, calls Pinduoduo “a Chinese Groupon on steroids.”

Ashley Dudarenok, coauthor of the recently published New Retail: Born in China Going Global: How Chinese Tech Giants are Changing Global Commerce, says Pinduoduo tapped an opening to “educate rural users to use online shopping.” She says rural Chinese are less brand-conscious than their urban counterparts, and so more amenable to Pinduoduo’s browsing-based system.

Still, Pinduoduo remains unprofitable, and critics accuse it of essentially buying revenue with heavy marketing spending. Sales and marketing expenses in the first half of the year nearly equalled revenue, and even the most optimistic analysts don’t expect the company to post a profit before the middle of next year.

“I doubt they will turn a profit in 2020,” says Cathy Roberson, president of Logistics TI, a research and consulting company. She says Pinduoduo will have to continue steep spending on marketing to compete with Alibaba and JD.

“Pinduoduo has been very successful with their ‘team buying’ model, and by offering products at the lowest prices, but they need to expand beyond these for long-term sustainability,” says Michael Zakkour, coauthor with Dudarenok of New Retail. He says Pinduoduo needs to “break free from the idea that they are a ‘one trick pony.’”

Victor Tseng, Pinduoduo’s VP of corporate affairs, says the company “will continue improving and iterate fast.” As a 4-year-old company, “we should be investing more aggressively,” he says, but adds the company is learning to invest more efficiently.

Not all Pinduoduo shoppers are in rural backwaters. Wang Xiu Ping, who tailors suits in a Beijing wholesale market threatened by ecommerce platforms like Pinduoduo, says she likes the app because it has “so many cheap items.” She sometimes opens the app for one product, and finds herself browsing others, such as rice bowls marked down to a third of their regular price, recommended to her based on her prior buying and viewing habits.

Unlike most ecommerce platforms, Pinduoduo’s search bar is hidden at the bottom of its front page, making it browsing-centric rather than search-centric. Recommended items are placed front and center, a list tailored to each user from an algorithm developed by 100 of the company’s 700 engineers, according to one online tutorial.

That addictive, playful element makes sense, given founder and CEO Zheng “Colin” Huang’s prior experience heading Xunmeng, a studio that made online-based role-playing games. Xunmeng’s players often teamed up to score points and reach new levels. Pinduoduo encourages a different type of teamwork—recruiting friends or joining strangers to take advantage of the app’s group-only discounts via ubiquitous Chinese social media app WeChat, part of Chinese conglomerate Tencent, an investor in Pinduoduo. Tencent is a powerful ally, as WeChat blocks links from rivals, including Alibaba. Xue Yu, an analyst at IDC, says the absence of Alibaba links on WeChat aided Pinduoduo’s rise.

Prior to Xunmeng, Huang was an engineer at Google. He left in 2007 after being summoned to the US so an executive could sign off on the font size and color of Chinese characters in Google search results, according to Bloomberg. Huang struck out on his own in China, founding an ecommerce consumer electronics site called Ouku, then sold it and started a marketing firm for foreign brands angling for a toehold on Chinese ecommerce platforms. Then came the gaming studio, and later Pinduoduo.

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Now Huang is the billionaire head of one of China’s top three ecommerce platforms. That couldn’t be further from his upbringing, which was as rural and price sensitive as the third-tier city users who powered Pinduoduo’s rise. Born to factory-worker parents in rural Zhejiang in 1980, Huang was a star student who won a Mathematics Olympiad competition medal and was then accepted into Hangzhou’s prestigious Foreign Languages School, before studying computer science at Zhejiang University and the University of Wisconsin, according to the South China Morning Post.

“If Hollywood central casting were to create the ideal Chinese entrepreneur, he would look a lot like Colin Huang,” says Andy Mok, senior research fellow at the Center for China and Globalization, a Beijing think tank. He says Pinduoduo’s social-commerce approach turns “your customers into salespeople.”

Dudarenok, the author, says “Huang’s famous idea was that the consumption upgrade in China is not to let Shanghai people live the Parisian life, but to let the countryside people have kitchen paper and good fruits to eat.”

Such enthusiasm isn’t unanimous. Critics deride the quality of goods on the site. Well-known writer Zheng Yuanjie needled Pinduoduo last year on social media because one of the platform’s stores was selling counterfeit versions of his books. Chinese market regulators are investigating the sale of contraband and pirated products on the platform.

Pinduoduo later said it had removed more than 4 million listings. Tseng says Pinduoduo’s revenue growth shows consumers’ “trust and comfort level for Pinduoduo has grown.”