Tuesday 24/07/18

  1. In TECH NEWS TODAY, Facebook leases more office space in London, Alphabet shares rise despite the EU’s fine, Tesla’s shares falter as it asks for money and China Tower eyes a lucrative flotation in Hong Kong

  2. In CONSUMER/RETAIL-RELATED NEWS, there’s a mixed picture of the UK consumer emerging and Tesco announces a new discount format.

  3. In OTHER NEWS, I bring you the lowdown on workers’ rights in a heatwave. For more details, read on…



So Facebook believes in London, Alphabet shrugs off the fine, Tesla gets a dose of scepticism and China Tower could be the next biggie to float…

In Facebook announces King’s Cross arrival (The Times, James Dean) we see that the tech company is going to boost its London presence significantly as it becomes the latest US tech giant to invest here despite Brexit. The company announced yesterday that it had acquired enough space to house 6,000 employees – way more than the 2,300 it is projected to have by the end of this year. London is now Facebook’s biggest software engineering centre outside the US. * SO WHAT? * Although the company didn’t say how many people it’d employ or when, this is a significant move by the social networking giant as you don’t snap up this amount of space unless you’ve got something interesting planned.

Alphabet shares leap despite EU’s €4.3bn fine (The Times, James Dean) shows that a big fine can’t keep a tech giant down as the owner of Google announced stellar results last night for its second quarter which came in above market expectations. Despite taking into account a €5.1 bn charge to cover the cost of the European Commission’s record fine, underlying profits were almost 22% better than analysts were hoping, mainly on the back of particularly strong ad sales. One area to monitor for the future is Google Cloud, which is growing at a rapid pace. Its revenues aren’t reported separately at the moment – they are mixed in with the “other revenues” category, but they are rising fast. * SO WHAT? * For all the bleating, the EC’s record fine is just a tiny pimple on the backside of Alphabet’s massive @rse. Ad revenues continue to increase – and I don’t see what can slow them down at the moment. I think that with digital advertising, you win when economic confidence is low because companies are more likely to reduce ad spend via traditional means such as TV and newspapers etc. and at least maintain, if not increase their digital spend. I say that because I would argue that it is more targetable towards your perceived demographic and you therefore get more bang for your buck. You also benefit when economies are chugging along nicely because ad spend increases across the board and companies start to look at broader campaigns.

Facebook and Google really do have the digital ad market sewn up between them and even the biggest “analogue” advertisers will have difficulty in breaking this duopoly IMHO.

Following on from what I said in the WIFI yesterday, Tesla shares tumble on report it sought supplier refunds (Financial Times, Peter Campbell and Mamta Badkar) shows what investors thought about the allegation that Tesla was approaching suppliers and asking them for cash to help it remain profitable – the shares fell by 6.6% initially on the news to then recover to being 3.7% down by lunchtime. * SO WHAT? * The company made no comment on the story from the Wall Street Journal, but Elon Musk did – and he neither confirmed nor denied its veracity. If true, this move certainly smacks of desperation, but then it also seems to be a needlessly weird thing to do as the company could no doubt raise money via all sorts of other means in a far more subtle manner.

Chinese telecom giant could dial up the biggest IPO since Alibaba (Wall Street Journal, Joanne Chiu) highlights the intentions of China’s biggest cellphone tower company, China Tower Corp, as it looks to raise up to $8.7bn by selling 25% of its shares on the Hong Kong stock exchange in what could be the world’s biggest Initial Public Offering (IPO) in four years. If you then include the option to sell 15% more stock if demand is strong, the IPO could raise $10bn – which would make it the biggest IPO since Alibaba listed for $25bn in New York back in September 2014. China Tower Corp is the world’s largest telecoms tower provider and has a national market share of 97% (!) by sales. It is looking to raise money to fund a network expansion and to repay debt. The listing is slated for August 8th but comes along just as investors have turned more cautious given all the China-US Trump shenanigans. * SO WHAT? * Some could see this as a great way to get a piece of the action in China’s rapidly growing mobile market but Chinese IPOs: China Tower struggle (Financial Times, Lex) points out that the company is controlled by its clients – the three state-owned telecom providers: China Mobile, China Unicom and China Telecom – and the government, which controls all four groups, wants to keep consumer prices attractive, thus keeping a lid on potential profit. The other issue is that there is some doubt as to how well the company will do from the rollout of 5G as there may be more competition from smaller operators. Although the current valuation looks reasonable versus its global peers such as India’s Bharti Infratel and America’s Crown Castle, growth constraints will probably limit upside in the long run.



In consumer/retail related news, there’s a mixed bag re consumers and Tesco goes discount…

On the one hand, Booming labour market is just the job to boost consumers (The Times, Tom Knowles) cites findings from a survey conducted by IHSMarkit, which shows that consumers’ optimism about their finance prospects has risen for the first time since March 2016 because of Britain’s tight labour market and increased perception of job security – but then on the other hand you have Poor getting poorer as cuts to benefits bite and prices rise faster than pay (The Guardian, Phillip Inman) which cites the latest report from independent thinktank The Resolution Foundation. Its research has found that 30% of households saw their income reduced, widening the gap between middle and higher earners. * SO WHAT? * Given that the latter report comes from The Resolution Foundation, they are hardly going to publish a report that says “don’t worry everybody – everything’s going fine” – it would be like Turkeys voting for Christmas! However, I also think that a survey of people’s perceptions of how they are feeling about their finances going forward is also inherently a bit dodgy as well (as in I think it’s more of a rough guide than an absolute). What people say and what they do can be very different, so I would say that the real situation lies somewhere between the findings of the two


entities – cautious optimism with middle earners not feeling particularly rich at the moment. They will probably feel much more pessimistic if they work in retail, however, given the number of companies that are going down the toilet at the moment.

Tesco to launch new chain of discount stores (Financial Times, Murad Ahmed and Scheherazade Daneshkhu) heralds a new direction from the UK’s biggest retailer as it announced that it will be launching a NEW chain of discount stores as soon as this September to take on the likes of Aldi and Lidl, which have been eating everybody’s lunch for the last few years. It is planning on rolling out 30 such stores in the Autumn via refitting some existing stores and reopening mothballed alternative Tesco sites, and will probably call the chain “Jack’s”, which is a nod to Tesco’s founder Jack Cohen (although the name hasn’t been 100% finalised yet). Interestingly, Bernstein analyst Bruno Monteyne believes that this move “won’t be a copy of hard discounters. It will target the same price points and quality but will bring unique ranges and services”. * SO WHAT? * Yes, it’s good that Tesco is trying to take on Aldi and Lidl at their own game, but I am extremely sceptical about this as it smacks of smoke and mirrors to me. A rebrand costs more money and carries inherent risk of falling down. I would have thought they could better spend the money by putting more effort into rejigging their existing brand and putting the “discount” products next to their existing ones. I’d like to be wrong on this – because I’m all for consumer choice – but providing a properly differentiated offering will suck out a great deal of time, money and creative resource from the Tesco mother ship. It will also have twitchy shareholders to answer to – which is never great for a nascent business. If they don’t see proper returns sharpish, the chain will die before it can walk.



…And finally, in other news…

It’s a bit toasty at the moment, isn’t it! If you wanted to know what your employee rights are during this heatwave, have a look at How hot does it have to be to not work? Workers’ rights during the heatwave” (Metro, Tanveer Mann https://tinyurl.com/ydgnjcma). I would cross-check via other sources if I were you before you stride out of work, though!

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