Apple color on guidance cut
AAPL is indicated about 8.6% lower this morning, challenging 18-month lows as they stock extends its recent losing streak which saw shares decline more than 30% in the final three months of 2018.
- Maxim Group: "AAPL negatively pre-announced December quarter (F1Q19) results of $84B (down 5% y/y, 8% below consensus and midpoint guidance) citing "lower than anticipated iPhone revenue, primarily in Greater China, accounts for all of our revenue shortfall to our guidance." Given revenue outside of iPhone grew 19% y/y, that implies iPhone revenue was down 15% y/y. Management also noted that "most of our revenue shortfall to our guidance, and over 100% of the our y/y worldwide revenue decline, occurred in Greater China across iPhone, Mac & iPad," and as such we estimate that revenue in China declined 24%-35% y/y'; the range resulting from assuming revenue in non-Greater China regions was flat-to-up 3% y/y (consistent with original midpoint revenue growth guidance). Noting that the iPhone represents ~55% of revenue and that the bulk of the shortfall is with iPhone, we then estimate that iPhone revenue in China was down 35%-50% y/y and that units were likely down a similar amount (i.e. ASPs were flat y/y). Magnitude of China iPhone miss unlikely purely attributable to a weak China smartphone market, leading us to assume an iPhone installed base haircut is forthcoming."
- Cascend Research: "AAPL management has been disingenuous in our opinion: They tried to at least in part blame weaker Y/Y compares: this is not what is happening. This preannouncement runs counter to what AAPL's Head of Product Marketing said in late November (that the XR was the best selling iPhone since release). Are not reporting unit numbers in future quarters but said it was not because of weakness. Cut their supply chain orders severely enough for most companies to pre-announce or reduce guidance (1st week of November), but kept silent about its own issues for two months. Unprecedented discounts of iPhones worried us significantly."
- Needham stays Buy rated on AAPL but lowers their target to $180 from $200 on the name after the company effectively pre-announced its December, 2019 quarter earnings last night. What firm liked most about the December quarter results included: 1) Over $10.8B of Services revenue, hitting record highs in every geographic segment of the world; 2) wearables revenue up almost 50% y/y; 3) 100mm of new active devices in its ecosystem; 4) $130B of net cash, which AAPL has said its goal is to get to net cash neutral; and, 5) all-time record revenue hit in several first world countries.
- Monness Crespi & Hardt lowers their AAPL tgt to $200 from $300 based on nearly 19x their CY19 pro forma EPS estimate (adjusted for net interest income) that they believe is depressed, plus the company's net cash per share of $25.29.
- Oppenheimer remains on the sidelines as they feel investors still aren't pricing in long term risk.
- Read-throughs: B. Riley FBR feels AAPL's lowered guide is already reflected in supplier LITE's November guide (buyers on today's weakness). In the semi space B. Riley FBR feels implications span large- and small-cap front-end suppliers as they have repeatedly noted in the
past month, though AMAT's display segment compounds exposure and risk. - Other firms out lowering ests/targets include: DA Davidson, Morgan Stanley, Bernstein, Raymond James, Piper Jaffray, UBS, JP Morgan, and RBC Capital Mkts.
Chinese developer Evergrande tightens belt after decade of audacity
Humbled property group struggles to find new funding and growth engine
When Xia Haijun stood with a beaming Donald Trump for a photo op in 2008 after clinching a multimillion-dollar property deal, the chief executive of China Evergrande Group never imagined that 10 years later his company would appear on the now US president’s blacklist.
Evergrande, China’s third-largest property developer by sales, has been accused by the Trump administration of stealing American technology and intellectual property after it agreed to acquire a small electric vehicle start-up in 2017.
The allegation not only highlights how the relationship between the US and China has deteriorated, but also how much the residential property company has changed as a decade of heady growth comes to an end.
With one of the highest debt levels among Chinese developers, Evergrande has realised that its old formula for success — described by the company as “high debt, high leverage, high turnover and low cost” — is less effective as Beijing’s clampdown on excess corporate debt has tightened credit.
After years of rapid growth, Evergrande’s expansion plans are now increasingly challenged by rising financing costs, a slowing domestic economy and a lacklustre property market. The company is scrambling to find new sources of growth, while being forced to fund its core property business at extraordinarily high cost.
Analysts say that Evergrande’s recent multibillion-dollar bond offerings at unusually high rates of up to 13.75 per cent underscore the mounting financial pressures. The decision by the company’s billionaire chairman, Xu Jiayin, to subscribe to more than $1bn of the bonds was designed to steady investor confidence as the property market spiralled downwards in early 2018.
“Evergrande does face some refinancing risks, with the company needing to deal with almost Rmb300bn ($43.4bn) of debt next year [2019],” said Matthew Chow, an analyst at S&P Global Ratings.
That wall of debt repayment prompted the rating agency to warn in 2018 that the company had a “less than adequate” liquidity level. S&P noted that Evergrande’s liquidity profile remained weaker than its peers of similar scale or rating.
The debt was built over a decade, to fund a programme of aggressive land purchases as Chinese property prices smashed records year in, year out. Net debt to total assets rose from 23.8 per cent in 2008 to 183.7 per cent in 2017, while property prices in Beijing tripled during the period.
But as China’s property market began to cool in 2018, Evergrande realised it needed to do more to address its debt burden. In 2017 it had raised Rmb130bn from the sale of a stake in unlisted Hengda Real Estate Group to strategic investors. But from the start of this year it began slowing down land purchases and used the cash from sales to reduce debt further. Its gearing ratio, or net debt to total equity, fell from 183.7 per cent at end of 2017 to 127.3 per cent in the first six months of 2018.
Yet that figure is still well above the level of China’s two top developers, Country Garden Holdings at 59 per cent and China Vanke at 32.7 per cent. Moreover, it still has Rmb671.1bn in outstanding gross debt, of which 44.5 per cent comes due in mid-2019.
“It’s a good sign that Evergrande is making an effort to bring down its debt,” but it is not enough to convince investors that its balance sheet is healthy, said Alan Jin, head of property research for Asia, excluding Japan, at Mizuho Securities.
Even as the company’s debt rose, so too did the personal wealth of Xu Jiayin, Evergrande’s chairman and founder. The 60-year-old is mainland China’s richest real estate executive, with assets estimated at Rmb215bn, according to this year’s Hurun Report, which tracks the country’s wealthiest people.
The former boss of a state-owned steel factory in central Henan Province founded Evergrande in 1996, not long after he had relocated to Shenzhen, which borders Hong Kong and was the centre of China’s economic reforms.
Within 10 years, Mr Xu had turned the group into one of the largest property companies in southern China by aggressively acquiring land and launching new projects.
He became the country’s richest man after listing Evergrande on the Hong Kong stock exchange in 2009. That listing and the access to capital it brought, helped Evergrande to further expand its empire as household incomes rose on the wave of urbanisation that swept China in the new millennium.
Evergrande is known for its prowess in securing land for developing large residential projects. Over the years, it has accumulated the largest land bank among Chinese developers, reaching 312m sq m at the end of 2017, compared with 132m sq m for Vanke and 282m sq m for Country Garden.
Evergrande’s sales surpassed Rmb100bn for the first time in 2014, and the company rose to become China’s largest developer by sales in 2016. Competitors were catching up fast, however, benefiting from the same trends that drove Evergrande. A year later it had fallen to third place, although it still notched up Rmb500.1bn in sales.
About 98 per cent of Evergrande’s business is in residential property development, which has been one of the most lucrative businesses in China as the populations of its main cities exploded. Beijing, Shanghai and Shenzhen are among the world’s top 10 most expensive cities in terms of housing affordability, according to a survey this year by Numbeo, an online database operator that specialises in tracking consumer prices.
But the winds began to shift. China’s booming property market has begun to slow as the trade dispute with the US has hit consumer confidence. Analysts and economists expect the volume of home sales to drop by up to 10 per cent in 2019, and some developers have started slashing prices as much as 30 per cent to speed up sales and pay down their debts.
“For the first time since listing, China Evergrande’s balance sheet did not expand dramatically,” Mr Jin said, referring to the first half of 2018. Its total assets during the six-month period rose 18.5 per cent, compared with increases of 49.3 per cent in 2017 and 85.2 per cent in 2016 for the same period.
Mr Jin said the figures were more a reflection of its past strength, as it typically takes one to two years for sales revenue to be reflected on developers’ balance sheets. Its land bank, a more forward-looking indicator of a developer’s ability to sell in the future, declined 2 per cent in the first half compared with the end of 2017.
Evergrande’s sales growth has also slowed. For the first 11 months of 2018, year-on-year contract sales rose 13.8 per cent, compared with full-year growth of 34.2 per cent last year. But in November contract sales actually fell — down 29.1 per cent in the month on a year earlier. The shrinking revenue stream has weighed on Evergrande’s ability to pay down debts, Mr Jin s
As well as the unexpected bond issue, the company is looking at other ways to raise funds. It plans to list Hengda Real Estate on the Shenzhen stock exchange as part of the agreement with investors who invested Rmb130bn in 2017. Evergrande has a commitment to buy back their shares if it fails to float the business by January 2020. It is in talks with market regulators about a detailed listing plan.
The commitment to buy back the shares is seen as one of the biggest risks facing the company in the short term. There are concerns that Chinese authorities may not be keen to see a listing — and a revitalised property developer with a large war chest — as it tries to clamp down on runaway property prices.
“The government’s stance to suppress property prices is very clear,” said Wang Dan, a Beijing-based analyst with the Economist Intelligence Unit. The government will not lift restrictions, which include price caps and a ban on multiple home purchases, anytime soon despite the economic slowdown, she said.
“We see a lot of uncertainties there,” said Franco Leung, associate managing director at Moody’s Investors Service Hong Kong. “Evergrande will face extremely high financing pressure if the A-share listing plan falls through.”
Given the difficulties in property, Evergrande has been seeking alternative engines of future growth. Yet some analysts argue that the challenges are even greater to find a profitable business model beyond what Evergrande knows best.
The company has placed its bets on a range of sectors, from next-generation research to automotive technology and even cinemas. The strategy has not always paid off.
In 2017 Evergrande agreed to pay $2bn for a 45 per cent stake in California-based electric vehicle start-up Faraday Future, which is controlled by Chinese tycoon Jia Yueting.
Then, in November, as the US and China exchanged salvos in the mounting trade war, the Trump administration cited Evergrande’s investment in Faraday is an “illustrative example” of how Chinese companies were deployed by Beijing to obtain cutting-edge technology and intellectual property.
Evergrande says its investment in Faraday — which was approved by US authorities — was a “purely commercial decision.” Nevertheless, the outcry is a blow to its reputation as it seeks to diversify its revenue base.
In addition to Faraday, Evergrande spent Rmb14.5bn in September for a 41 per cent stake in BMW distributor Guanghui Group. It has also struck a deal with the China Academy of Sciences to invest Rmb100bn in technology research over the next 10 years.
Finally, Evergrande has followed fellow developer Dalian Wanda Commercial Properties into the movie business, acquiring two Beijing-based cinema operators for Rmb595m in October.
This scattershot investment strategy has puzzled many analysts and investors. “I don’t think the new businesses provide any help to Evergrande’s earnings, and the risks are very high,” said Danielle Wang, a China property analyst at DBS Vickers.
Evergrande, like many Chinese property developers that are pushing for diversified portfolios, lacks the expertise required to distinguish promising technologies from the bad ones, she said.
Mr Jin of Mizuho Securities said Evergrande’s aggressive investments in sectors other than property reflects the anxiety shared by other developers facing a souring property market.
However, many believe that Beijing would never allow the current property slowdown to become a crisis. The sector is simply “too important to the overall economy,” said Lee Wee Liat, head of property research at BNP Paribas.
“When the overall economy gets worse, property market conditions will actually get better,” he said.
Relaxing restrictions on property has been a vital tool for Beijing to pump up the economy. There is plenty of scope to do this, say analysts, given the serial crackdowns that have been imposed in the past two years. At least two cities have begun a tentative loosening by ending bans on apartment sales, according to media reports. However, this is seen more as a stabilisation measure rather than a radical lifting of constraints.
Once more significant policy incentives kick in, big developers such as Evergrande could benefit from a new wave of bank credit, backed by the huge assets it built up in the early days of growth. In short, Evergrande’s size may be its saving grace. “Being big is very important in China,” Mr Lee said.
Gapping down
In reaction to disappointing earnings/guidance:
- AAPL -8.3% (lowers Q1 revenue guidance, citing the iPhone and China)
M&A news:
- BMY -13.2% (to acquire CELG)
Select AAPL related names showing weakness:
- STM -9.3%, LITE -7.3%, QRVO -6%, SWKS -5.5%, OLED -4.4%, AVGO -4.1%, TSM -3.5%, XLK -3.2%, NVDA -3.1%, AMAT -2.9%, SMH -2.7%, AMD -2.7%, INTC -2.1%, QQQ -2%
Select FAANG stocks trading lower:
- NFLX -2%, GOOG -1.6%, AMZN -1.5%, FB -1.2%
Other news:
- SESN -20.4% (announces positive preliminary 12-month data from registration phase 3 vista trial of Vicinium for non-muscle invasive bladder cancer)
- MCRB -4.3% (enrolled the first patient in its Phase 2B trial, ECO-RESET, evaluating microbiome development candidate SER-287 in patients with active mild-to-moderate ulcerative colitis)
- TSLA -2.2% (under continued pressure)
- BA -1.5% (reports that KC-46 tank was delayed delivery due to plane issues)
- MRK -0.9% (exercises option to license NGM313, currently being evaluated for the treatment of nonalcoholic steatohepatitis and type 2 diabetes) .
Analyst comments:
- ABBV -1.5% (downgraded to Neutral from Buy at BofA/Merrill)
- DGX -0.8% (downgraded to Underperform from Neutral at BofA/Merrill)
Gapping up
In reaction to earnings/guidance:
- PCRX +8.2% (reports preliminary 2018 net Exparel sales of $331 million)
M&A news:
- CELG +33.3% (to be acquired by Bristol-Myers Squibb (BMY) for $102.43/share in cash & stock)
- ZEUS +0.5% (acquires McCullough Ind.; terms not disclosed; deal marks entry into branded metal products manufacturing)
Other news:
- DBVT +15.9% (announces changes to leadership team -- interim Chief Medical Officer named)
- PGNX +3.5% (Point72 discloses 5.7% passive stake)
- LSCC +3% (announced the appointment of Sherri Luther as Chief Financial Offer, effective immediately)
- TEVA +2.2% (resolves generic cinacalcet HCl product dispute with Amgen (AMGN))
- IRWD +0.7% (Ironwood Pharma and Allergan announce settlement with Mylan resolving LINZESS/linaclotide patent litigation)
Analyst comments:
- CSIQ +4.6% (upgraded to Buy from Neutral at Goldman)
- GILD +3.2% (upgraded to Outperform from Perform at Oppenheimer)
- FSLR +2.4% (upgraded to Buy from Neutral at Goldman)
- EMR +0.8% (upgraded to Outperform from Neutral at Credit Suisse)
Bristol-Myers Squibb to Acquire Celgene for About $74 Billion
Celgene is involved in the development and commercialization of cancer therapies
Global biopharmaceutical company Bristol-Myers Squibb Co. BMY 0.87% will acquire Celgene Corp. CELG 3.98% in a cash and stock transaction for about $74 billion.
Under the deal, Celgene shareholders will receive one Bristol-Myers Squibb share and $50 in cash for each share of Celgene, the companies announced Thursday. Celgene shareholders will also receive one tradeable Contingent Value Right for each share of Celgene. A CVR is often used when buyers and sellers can’t agree on a purchase price and usually kicks in after an acquired company meets certain sales or regulatory targets.
When the deal is completed, Bristol-Myers shareholders would own about 69% of the combined company, while Celgene shareholders would own about 31%.
Bristol-Myers develops medicines that help patients prevail over serious diseases. Summit, N.J.-based Celgene is involved in the development and commercialization of therapies for the treatment of cancer and inflammatory diseases.
German bank buyouts: kulturschock
A private equity solution is not without problems
Germany’s public banking system is having a private equity moment. For years, the Landesbanken— regional lenders co-owned by federal states and local savings banks — have been subject to the whims of local politicians and groups. That is changing.
Cerberus, Apollo and at least one other private equity group have been circling NordLB, which has €158bn in assets. A large stake in the under-capitalised lender is up for sale. Helaba, another Landesbank, has dropped out of the auction, according to local press reports this week.
A US private equity buyer would establish a trend. Before Christmas, buyout groups including Cerberus and JC Flowers closed the acquisition of HSH Nordbank, a €61bn-in-assets lender, from its previous owners, the states of Hamburg and Schleswig-Holstein.
Under private ownership, Landesbanken would cut costs to fund expansion. Free from EU-imposed restrictions, HSH will push into commercial property lending beyond Germany. Mergers are clearly an option in a fragmented sector.
Politicians and local savings bank overlords have only themselves to blame for losing control. For decades, they have resisted the consolidation that would have raised returns and bolstered financial strength. The trade-off was secure jobs for locals.
HSH and NordLB were hammered by the shipping downturn following the financial crisis. NordLB took a €2bn net loss in 2016. HSH turned to the European Commission for an asset guarantee. Now political will to support these lenders is running out.
State-backed banks are at odds with EU rules on state aid. Private capital can give banks stability. Cerberus successfully floated Austrian bank Bawag in 2017 after a decade of cost-cutting and the 2017 acquisition of Stuttgart-based Südwestbank. Hard to accuse the buyout group of short-termism.
The incursion of the buyout merchants into Germany will not be frictionless. Protectionism and nativism are on the rise in the country, as elsewhere. More prosaically, switching banks from public to private deposit insurance is a slog. But German banking badly needs shaking up. Buyout funds have the tenacity to do it.
Early premarket gappersGapping up:
- CELG +33.1%, SESN +15%, DBVT +13.2%, PGNX +3.5%, TEVA +0.8%, IRWD +0.7%, ZEUS +0.5%
Gapping down:
- STM -9.6%, AAPL -9.3%, BMY -7.8%, LITE -7.3%, SWKS -6%, QRVO -6%, OLED -4.5%, AVGO -4.1%, NVDA -3.7%, AMD -3.5%, XLK -3.3%, AMAT -3%, URI -3%, QQQ -2.7%, SMH -2.6%, TSM -2.5%, INTC -2.4%, AMZN -2.4%, NFLX -2.3%, TSLA -2.3%, BA -2.1%, MRK -2.1%, FB -1.9%