TheChek News Flow

* China is the most advanced digital market in the world

Digital payment penetration in China is 50 times higher than in the USA, largely still relying on plastic. FMCG online penetration has reached the mid-teens. Big-box retailing in China makes shopping malls and department stores in the USA look like the garden of Eden.

* Western luxury brands in China are still lagging behind

Only 21 of the 34 brands we have analysed operate an e-commerce mono-brand website in China. Even more remarkable is that the largest brands, such as LV, Hermès, Gucci, Prada, Ralph Lauren and Swatch, do not have an ecommerce mono-brand site. For comparison, 31 out of 32 brands surveyed operate an e-commerce mono-brand website in the USA, and 30 out of 32 in the UK. Digital proficiency in China is 46% – against 55% in our latest digital competitive map (DCM).

* Burberry, Michael Kors and Cartier are the only exceptions

Burberry stands out in China as strong leader on the Strategic Reach axis for exploiting all possible ecommerce channels as well as on the Digital Customer Experience Axis, excelling in customer service and style advisory. Michael Kors and Cartier are close behind Burberry on the Digital Customer Experience axis thanks to personal services and customer service.

European asset managers have had bond inflows double that of equities so far in 2017. Bonds have now retraced most of their outflows since the US elections in early-Nov, according to EPFR. This is despite expectations for rising yields and positive equity markets. We think this reflects both client risk aversion from uncertain macro (Brexit, Europe elections, Trump) and structural trends. Higher bond yields are attractive for institutions seeking income and liability matching, while regulation is also supportive (Solvency II). Within bonds, high yield, investment grade and EM debt are preferred to

government and other low-risk bonds. Unless interest rates rise sharply in Europe and/or the macro outlook becomes clearer for equities, we think demand for fixed income will remain resilient. This reinforces our preference for Continental EU asset managers given their relative fixed income exposure and the mix pressure on UK managers’ fee margins.

What is the upside? The bear case is compelling: challenges in “old” Danone (execution issues in Dairy, regulation in China Baby, destocking in China Water plus input cost pressure) added to challenges in “new Danone” (deteriorating topline, organisational disruption and execution issues). 

New Levers …the bear case is easy to make with challenges in “old” Danone and challenges in “new”,and feedback from investors remains consistently negative. However, we point to 3new levers: S&S, Protein,and WWAVE and ask what is the upside? Our bull case points to the most significant potential upside in our Staples universe +70% and +31% on our base case (just -15% on our bear case). 

Structural+ Strategic …The Baby (ELN) and Waters sectors remain structurally attractive in our view. Add the Protein plan to the mix, the pressure to execute, plus WWAVE, plus strategic optionality,and we see a compelling case. The stock is very close to the classic combination of trough LFL, trough EBIT, trough margins and trough multiple … 16.5x ‘18e “old”, ~14x “new” combined. 

Protein … We expect Danone to deliver peer leading LFL, margin and earnings growth FY18-20e. We estimate 3-5% LFLgrowth, with ~450bps of margin flexibility through 2017-20e for “old” Danone and even assuming low restructuring costs and modest re-investments, we expect Danone to deliver ~100bps margin improvement 2018-20e and ~40bps margin improvement in 2017e despite the input costheadwinds. …and WWAVE increasingthegrowth profile of thegroup. We believe as a standalone business, WWAVE can sustain a ~7% organic sales CAGR during 2016- 20e, with MSD-HSD growth continuing through 2020 – driven by increased penetration in core categories and accelerated growth in adjacencies (e.g. protein powder,yogurts,growing 13-14%). Although the company has generally lagged its categories in recent months, we believe these issues are largely related to correctable execution issues and/or organizational disruption associated with the announcement of the pending Danone acquisition.

TOTAL (onto CL), RD Shell (off CL) and ENI are our Buys 

- TOTAL (added to the CL) offers strong CF generation (6%-8% 2017-19E FCF yield), high growth from 2017-18 start-ups (4% production CAGR to 2020E) and an attractive portfolio of new investment opportunities. 

- ENI (Buy) is in the middle of a transformation into a higher-return business, driven by exploration success, disposals and a strong project pipeline. Management continuity will be key, in our view, to deliver this. 

- RD Shell (off CL, remains Buy) continues to focus on capital efficiency after the BG integration, with a FCF turnaround to support a 7% dividend yield. 

- Repsol (Neutral) comes off the Buy List on strong share price performance. 

- Statoil (Sell): Our 2017/18 EPS estimates are 37%/54% below Bloomberg consensus on lower oil and gas price assumptions, despite Statoil’s significant cost reduction efforts.

Switzerland’s trade surplus hit its highest ever level last month, with falls in vehicle imports and continuing stress in watch exports offset by a gain in pharmaceutical exports.

The country saw its trade surplus balloon to SFr4.73bn compared to SFr2.69bn the previous month, which the Federal Customs Office said was a new monthly peak.

Exports and imports both declined on a seasonally adjusted basis by 4 per cent and 5.3 per cent respectively compared to the previous month.

But exports rose 2.3 per cent in real terms from the same time last year, driven by a new monthly record for exports of chemical and pharmaceutical products, while imports fell 6.8 per cent on the same measure, continuing the negative trend for Swiss imports since the summer of 2016.

Watch exports were down 12.7 per cent compared to January 2016 in real terms, adjusted for working days, while chemical and pharmaceutical exports rose 7.2 per cent on the same measure and 17 per cent in nominal terms.

Vehicle imports led the overall fall in imported goods, declining 27.7 per cent in January from the same time last year.

Switzerland has struggled to climb out of deflation as the strong franc has driven down the cost of imports. But the country saw its first year on year increase in consumer prices in two years in January, figures earlier this month showed.

Last year was the worst for Swiss watch exports since 2011, according to the Federation of the Swiss Watch Industry, amid falling sales in Hong Kong.

InterContinental Hotels, which opened 40,000 new rooms last year, is bullish on prospects for the travel industry after serving up an extra payout for investors in its annual results.

The tourism industry has had a difficult year with a spate of attacks slowing business in France, Turkey and resorts in north Africa.

Overall revenue at IHG fell 4.9 per cent year-on-year to $1.72bn, just short of analysts’ expectations of $1.74bn. Excluding the effects of disposals in Hong Kong and Paris, revenues were up 4.6 per cent to $1.58bn.

However revpar, or revenue available per room, the main metric used by the industry, rose 1.8 per cent while occupancy reached record levels, IHG said, without specifying further.

Adjusted operating profit rose 9.5 per cent to $702m. On a reported basis it rose 4 per cent to $707m. The group said it would increase its annual dividend by 11 per cent to $0.94, and would also return $400m to shareholders by the end of June this year in the form of a special dividend.

Chief executive Richard Solomons said:

The fundamentals for the hospitality industry remain compelling. Despite the uncertain environment in some markets, we remain confident in the outlook for the year ahead, as well as our ability to deliver sustainable growth into the future.

Nevertheless, the Americas region was the only one to report sales growth, which rose 4 per cent. One area of notable decline was Hong Kong and Macau, where declines offset growth in mainland China.