Thursday 30/05/19

  1. In TECH NEWS, Huawei warns its ban will hit US suppliers, China increases uptake of its own chips while Nokia and Ericsson fight over replacing Huawei as suppliers
  2. In RETAIL/HIGH STREET NEWS, Abercrombie & Fitch sales disappoint, Aldi and Lidl make further market share gains and GBK’s earnings are in a pickle
  3. In TRANSPORT-RELATED NEWS, UK car production falls off a cliff and Trainline closes in on a £1bn float
  4. In OTHER NEWS, I bring you some more dad jokes. For more details, read on…



So the US-China thing has repercussions beyond Huawei but Ericsson and Nokia fight over who will gain…

Huawei warns ban set to hurt 1,200 US suppliers (Financial Times, Louise Lucas, James Kynge and Sue-Lin Wong) sounds a warning to US companies that will be hit down the supply chain as a consequence of Huawei – and 68 affiliates – being on Donnie T’s “entity list”, which basically bans US companies from selling to them. The ban is scheduled to come into force in the middle of August after Trump announced a three-month grace period following the initial announcement during which US companies were expected to re-jig their suppliers. Huawei will be immediately hit in cyber security and semiconductors – two vital areas – but its chief strategy architect, Dang Wenshuan, tried to style it out by saying “It is a huge impact but not a crisis because we have been preparing for this since a long time ago”. China pushes self-made chips in response to US threats (Financial Times, Yuan Yang, Nian Liu and Sue-Lin Wong) shows that the government is getting ready to support its domestic chipmakers as the ministry of finance announced tax breaks last week “to support the development of integrated circuit design and the software industry”. The prospect of other companies such as Hikvision, Dahua, Megvii, iFlytek and Meiya Pico getting on to Trump’s dreaded list will also be concentrating Chinese minds. Markets take fright over China’s rare metal threat (Daily Telegraph, Anna Isaac) shows investor jitters after China threatened to fight back in the trade war by restricting the export of rare earth metals (although they aren’t actually “rare” as such – they

are just tricky to extract and the extraction process is damaging to the environment). Given that value of China imports from the US are way lower than US imports from China (which is why the trade war started in the first place), this is one way for China to get leverage as rare earth metals are used in cancer treatment drugs, smartphones and renewable energy tech. Funnily enough, shares in companies that deal with rare earths shot up as markets fell – Rainbow Rare Earths spiked by almost 15% yesterday on London’s AIM and China Rare Earth Holdings shot up by 24% in Hong Kong. * SO WHAT? * Talk about the screws being tightened on US-China trade negotiations! This is tough and the pressure doesn’t look like slackening off any time soon. I do wonder, when everything has calmed down, whether this will actually turn out to be a good thing on both sides as the US will get to keep its intellectual property and China will learn to become more self-sufficient in semiconductors. It will, however, make US dealings with China much more circumspect for years to come as I reckon this has really surprised the Chinese.

On the other side of the fence, if Huawei is getting a right kicking, which suppliers are going to benefit? Well With Huawei on defensive, Ericsson and Nokia fight each other for edge (Wall Street Journal, Parmy Olson) we see that the Finns and Swedes are most likely to benefit as networks start their 5G rollout. Both companies have been winning “equipment swap” contracts where they have been brought in to replace Huawei gear and Japanese mobile carrier SoftBank Group has announced that the two long-time rivals will be primary providers for its 5G rollout. * SO WHAT? * This sort of thing is going to be painful for Huawei and gives companies like Ericsson and Nokia who have, let’s face it, been a shadow of their former selves a chance to get back in the game. The drama continues…



Abercrombie & Fitch suffers, Aldi and Lidl continue to take market share and GBK is in a pickle…

Abercrombie blames mall woes for slow sales (Wall Street Journal, Kimberly Chin and Khadeeja Safdar) highlights the shock investors got when the company announced slower sales gains and a downbeat outlook yesterday. They took flight collectively, sending the share price down by 26% on the news. The retailer blamed lower footfall at malls over the spring and said that it was going to have to do a lot of discounting going forward in order to shift unsold stock. Overseas markets were disappointing and Hollister’s usual fast growth has slowed to a crawl. It will be closing flagship stores in New York, Milan and Japan as a result, but the cost of shutting them down will hit second quarter results. * SO WHAT? * Investors had been getting excited about a turnaround in fortunes at the company, but it seemed that the excitement proved to be premature as reality hit. It’s not alone in its woes, though, as other apparel retailers such as Kohl’s, JC Penney and Nordstrom have all reported falls in comparable store sales.

Meanwhile, back in the UK, Aldi and Lidl grab record market share as sales of Big Four stall (Daily Telegraph, Michael O’Dwyer) cites the latest figures from Kantar which show that the two German discounters now have an aggregated market share of 13.8% as the Big Four – Tesco, Sainsbury’s, Asda and Morrisons – failed to grow at all, which is the first time this has happened since June 2016. Kantar’s Chris Hayward observed that “the discounters continue to attract customers with nearly 1m more households visiting Aldi compared with last year and an extra 630,000 shopping at Lidl”.

The gloom continues for casual dining restaurants in Gourmet Burger Kitchen sales dip takes bite out of earnings (Daily Telegraph, Oliver Gill) as its South African owner, Famous Brands, revealed that GBK sales were continuing to fall. You may recall that GBK entered into a CVA in December to close down underperforming sites and reduce rents – and 17 restaurants were closed with 250 job losses as a result. * SO WHAT? * Famous Brands’ chief Darren Hele believes that things are starting to turn around at GBK, but I guess trading will continue to be difficult as troubled competitors (such as Jamie’s Italian etc.) serve as a constant reminder of the issues facing the whole sector.



UK car production falls and Trainline edges closer to a flotation…

UK car production plunges amid ‘untold damage’ of Brexit chaos (The Guardian, Rob Davies) highlights the fact that UK car production almost halved in April as factories shut down to prepare for Brexit, according to the Society for Motor Manufacturers and Traders. Most of the decline was due to JLR, BMW and Peugeot bringing forward annual maintenance stoppages that usually occur in the summer. * SO WHAT? * Manufacturers that make complex products like cars need visibility more than most to be able to supply their product in the right numbers whilst maintaining the

machines and production processes to keep everything going. Prolonged Brexit uncertainty is killing them and they will no doubt continue to press the government on getting any kind of clarity either way.

In £1bn float just the ticket for Trainline (The Times, Elizabeth Burden) we see that the KKR-owned online rail and bus ticket company will float on the London Stock Exchange next month, raising £75m to fund its growth plans and pay down loans, giving the company an implied valuation of £1bn. * SO WHAT? * This is pretty impressive considering that the New York-based private equity firm bought it in 2015 for about £500m. Trainline sells tickets on behalf of 220 rail and coach companies in 45 countries. Given that only 39% of tickets were purchased online in Europe’s five largest markets last year, there is clearly more upside to be had. This will be one of the biggest IPOs in the UK so far this year.



And finally, in other news…

I just couldn’t find any unusual stories today that amused or informed, so here are some more dad jokes for you.

What’s Irish and sits in the garden? Paddy O’Furniture

How do you organise a party in space? You planet

My wife told me to stop impersonating flamingos. I had to put my foot down

Have a great day, y’all!

Some of today’s market, commodity & currency moves (as at 0835hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq *DAX *CAC-40 *Nikkei **Shanghai **
7,185 (-1.15%)25,126 (-0.87%)2, 783 (-0.69%)7,54711,838 (-1.57%)5,222 (-1.70%)20,943 (-0.29%)2,905 (-0.34%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)