Monday 23/07/18

1. In CHINESE FINANCE-RELATED NEWS TODAY, China’s overseas construction spree encounters problems and Chinese peer-to-peer lenders continue to fail.

2. In AUTOMOTIVE NEWS, Fiat hastily replaces its CEO and Tesla asks for money – this time, from its suppliers.

3. In UK DISCRETIONARY SPENDING NEWS,World Cup success hits the box office, the CO2 shortage hits Britvic and Hornby changes track.

4.  In OTHER NEWS, I bring you a dog singing Britney Spears and a rude cake (depending on your viewing angle). For more details, read on…

So China’s overseas construction projects hit snags and peer-to-peer lenders fail…

China’s global spending spree runs into trouble in Pakistan (Wall Street Journal, Jeremy Page and Saeed Shah) highlights some major problems for China’s Silk Road project that includes a $62bn upgrade of Pakistan’s infrastructure. Three years into the project, Pakistan is approaching a debt crisis which has been partially caused by a big uptick in Chinese loans and imports as the upgrade has relied heavily on Chinese financing which was often contingent on using Chinese contractors. A general election is scheduled for July 25th and it looks like the opposition is keen to spill the beans on the escalating costs of the various projects as part of a new transparency towards the electorate. * SO WHAT? * What started out as a Grand Plan risks turning into a nightmare for the Chinese as Pakistan is coming close to begging the International Monetary Fund (IMF) for money, which is likely to include restrictions on spending, including a curtailment of its Belt and Road programme with China (the official name of which is the China-Pakistan Economic Corridor, or CPEC). If this were to occur, it would give the US – the IMF’s biggest contributor – a major say in China’s plans for Pakistan, which would be embarrassing for all concerned. It may well be that China just continues to throw money at these 

countries to get the job done, but there is increasing concern that China is extracting some major concessions (like the handing over of major assets, as per the case in Sri Lanka where the government had to give a Chinese state company a 99-year lease on a major port because it couldn’t repay a loan) which will come back to haunt those concerned further down the road. If this becomes a major issue, Chinese construction firms, suppliers and banks exposed to these massive projects could come under increasing pressure. This won’t happen overnight, but it is worth monitoring which companies have particularly large exposure to the CPEC.

The fallout from China’s crackdown on lending and increasing debt continues in Collapse of Chinese peer-to-peer lenders sparks investor flight (Financial Times, Gabriel Wildau and Yizhen Jia) as about 150 online lending platforms have suffered instances of investors being unable to take their money out since the beginning of June (versus 217 cases for the entirety of 2017), according to Online Lending House, which monitors the industry. As of the end of the June there were 1,836 online lending platforms doing business in China and some say that the increase in defaults is due to regulatory failures, fraud and the crackdown by the government on debt which is throttling liquidity to weaker borrowers. * SO WHAT? * This is just symptomatic of the government’s efforts to put a lid on burgeoning debt but must be very nerve-wracking for investors and customers alike. If these failures continue, however, things could snowball dramatically – and if handled incorrectly, could jeopardise the future of P2P lending as an industry in China. No doubt there will be intervention before that happens, but confidence will take some time to return if investors get badly burned.

In automotive news, Fiat gets a new CEO and Tesla asks for cash-back from its suppliers…

Sudden CEO shift jolts Fiat Chrysler (Wall Street Journal, Chester Dawson) highlights Fiat’s hasty replacement of CEO Sergio Marchionne due to ill health. He went in for surgery recently and has suffered complications which meant that the company has decided to put the former head of the Jeep and Ram truck brands, Mike Manley, into the top spot. * SO WHAT? * Manley gets the job at a tricky time as Fiat Chrysler is trying to catch-up with the competition on new technologies such as electric and self-driving vehicles and is battling to build up its reputation following a spate of safety lapses, emissions cheating and allegations of bribery. He’ll also face issues with his supply chain which will be impacted by Trump’s tariff shenanigans on aluminium and steel. Marchionne is leaving big shoes to fill as he has dragged the company through recession and generally kept up with debt reduction and profit targets to the extent that the company’s share price has almost quadrupled since 2014.

Its profit margin of 6% is also higher than Ford’s at 5.2% and is approaching GM’s at 7.2%. 

In Tesla asks suppliers for cash back to help turn a profit (Wall Street Journal, Tim Higgins) we see that Tesla has asked some suppliers to refund some of the money it has spent in the past to help it become profitable, according to a leaked memo from at least one supplier. Funnily enough, Tesla declined to comment but the leakage of such a memo does call into question Tesla’s overall cash position which has been struggling from the delays of producing the Model 3. It is relatively common for automakers to ask for price reductions for a current contract going forward, but it is very rare to ask for cash on a retroactive basis. Tesla is burning cash at a rate of $1bn a quarter and will need to pay down a $230 convertible bond this November if its shares don’t reach a conversion price of $560.64. The current share price stands at $313.58. * SO WHAT? * This sounds like madness to me, but then again you can rely on the Wall Street Journal to produce a negative piece on Tesla! Tesla would argue that when it was a younger company, its suppliers probably didn’t give it their best terms but the suppliers would argue that Tesla’s focus on its own profitability is ignoring the profitability of everyone else! Surely, Musk is going to come to market yet again and ask investors for even more money – and probably get it as well, given that production appears to be on track after numerous postponements.

In UK consumer discretionary company news, cinemas lose out on World Cup success, Britvic suffers from the CO2 shortage and Hornby changes track…

There were a few interesting stories today on companies that vie for our discretionary cash – World Cup heatwave hit UK cinema ticket sales (The Guardian, Mark Sweney) shows that UK cinemas showed box office sales down by 20% between June 1st to 12th versus the same period last

summer, blaming the unexpected England performance and heatwave for punters’ absence; CO2 shortage takes fizz out of Britvic’s sparkling performance (Daily Telegraph, Oliver Gill) contends that Britvic lost out on what would have been a fantastic heatwave-driven boost to drinks sales because of the CO2 shortage and Hornby calls in expert to fix broken model (The Times. Deirdre Hipwell) gives us the latest snapshot of what’s going on t the owner of Hornby, Scalextric and Airfix as the “new” chief exec Lyndon Davies, who started in November, is taking drastic actions to ensure survival of the much-loved toymaker. He has replaced the management team, agreed Hornby’s product line-up for 2019 with licences all arranged and schmoozed with wholesalers and suppliers. The next part of his plan in the turnaround is imminent, but he hasn’t given any details yet. Let’s hope that this traditional toymaker manages to get out of the rut and take the battle to the tablets and consoles!

…And finally, in other news…

It’s always uplifting to see talent amongst our furry friends. Just have a look at Dog singing Toxic by Britney is video you never knew you needed (Metro, Jen Mills https://tinyurl.com/yatokt5u).

AND FINALLY, it’s funny how taking a different viewpoint can change things quite dramatically (WARNING: THERE’S A SWEAR WORD INVOLVED): Mum shocked to discover rude word on her two-year-old’s birthday cake – until she realises what it is (The Mirror, Courtney Pochin https://tinyurl.com/yaskl7k9).

As always, thank you for reading Watson’s Daily!