In this briefing:
- Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
- Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
- The Art of the Deal Meets the Art of the Possible
- Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
- China’s Nominal Vs. Real GDP – Accelerated Growth
1. Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware
Fashion industry is a leading polluter of water, air and land and its rapid growth has inflicted serious environmental damage in manufacturing bases across Asia. With increased consumer awareness and public scrutiny, leading brands globally have committed to adopt sustainable practices. This can mean a rise in operating costs, margin pressures which can lead to higher prices and/or lower volumes. What does that mean for corporate earnings growth and stock valuations? Our report attempts to arrive at some ballpark estimations based on a scenario analysis. Leading branded apparel companies can suffer market value destruction ranging up to 30% if their long term margins and growth assumptions are reset at lower levels following a shake-up of their existing low cost model. And, those who refuse to adapt and adopt sustainable processes could soon be shunned by ESG-led investors and environmentally mindful consumers alike, leading to valuation discounts. Investors Beware.
Over the past decades, corporate growth and profitability agenda overshadowed environmental considerations, and apparel brands have grown in an environmentally unsustainable manner. Beneath the façade of glitzy fashion magazines lies the dirty underbelly of pesticide use, water mismanagement, irresponsible effluent discharge, chemical poisoning, greenhouse gas emissions, energy overuse, micro-plastic pollution and landfill dumping. Until recently, the notion that apparel retailers should be responsible and accountable for the environmental infringements in their highly fragmented but globalised supply chain was an unwelcome idea. Under pressure from consumers and activists, this is now changing. With ESG-led investing going mainstream, investors too may start to take notice.
The detailed report below includes:
- Summary and conclusions from the study on Fast Fashion’s environmental footprint in Asia and impact of rise in consumer awareness on global apparel companies
- Understanding Fast fashion
- Fast Fashion trends in Asia – Survey findings on consumer attitudes to shopping and environmental issues
- Environmental issues in Asia due to Fast fashion
- Sustainable clothing – an emerging trend, and what can turn it mainstream
Investing in Fast fashion: between a rock and a hard place – a Valuation vulnerability analysis
Sustainability & 13 leading fast Fashion players – how future ready are they?
This report was prepared jointly by the team at Investory – Devi Subhakesan , Rohinee Sharma and Shilpa Krishnan. Investory commissioned an exclusive survey for this report to understand young urban Asian consumers’ attitude towards fast fashion and their understanding of environmental issues.
2. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.
If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money.
3. The Art of the Deal Meets the Art of the Possible
In his 2019 State of the Union address, President Trump said he was seeking “real structural change” to China’s economy:
I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.
In the next breath, he referred to the reboot of NAFTA, which only yielded minor changes:
Another historic trade blunder was the catastrophe known as NAFTA. I have met the men and women of Michigan, Ohio, Pennsylvania, Indiana, New Hampshire, and many other states whose dreams were shattered by the signing of NAFTA. For years, politicians promised them they would renegotiate for a better deal, but no one ever tried, until now.
Our new U.S.-Mexico-Canada Agreement, the USMCA, will replace NAFTA and deliver for American workers like they haven’t had delivered to for a long time. I hope you can pass the USMCA into law so that we can bring back our manufacturing jobs in even greater numbers, expand American agriculture, protect intellectual property, and ensure that more cars are proudly stamped with our four beautiful words: “Made in the USA.
It is said that politics is the art of the possible. Here is where the Art of the Deal meets the art of the possible. Expect either the March 1 deadline to be extended or a deal to be made where both sides commit to further discussions on intellectual property protection and structural reforms.
Everybody wins. The Trump administration demonstrates a mastery of the Art of the Deal. China can temporarily take the tail-risk of additional tariffs and trade war off the table.
4. Maoyan Entertainment (猫眼娱乐) Post-IPO: The CNY Box Office Catalyst Hasn’t Materialized
We mentioned in our previous note prior to the listing of Maoyan Entertainment on Feb 4th that Chinese New Year (CNY) Box office from the two movies, namely Pegasus and The New King of Comedy that the company invested could be a catalyst post listing. However, our analysis of CNY box office data suggests although Pegasus reported box office revenues slightly north of RMB 1bn, it is far behind the number one movie, The Wandering Earth’s RMB 2bn box office. In addition to the company-specific movie investment, the overall box office for the CNY holiday has been disappointing, suggesting a challenging year for the movie industry in 2019.
Our previous coverage on Maoyan Entertainment
- Entertainment Plus (猫眼娱乐) IPO: The Engineered Movie Ticketing Leader that Runs Out of Steam (Part 1)
- Entertainment Plus (猫眼娱乐) IPO: The Coming Regulatory Bang Isn’t That Bad (Part 2)
- Maoyan Entertainment (猫眼娱乐) IPO: Turning Profitable, Thoughts on Valuation
- Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst
5. China’s Nominal Vs. Real GDP – Accelerated Growth
When China’s fourth quarter GDP numbers were released in January, predictably, Bloomberg led with “China posts weakest growth since 2009” headline. The fact that the number was still 6.4% YoY, good by almost all standards, was given little attention. Being fickle, we immediately turned to the nominal GDP series – which the media continue to ignore completely – only to find that, on a quarterly annualised basis, the fourth quarter marked an acceleration in growth, from 8.5% annualised in 3Q18 to 9.3% annualised in 4Q18 (YoY it dipped to 9.2% from 9.5% in the third quarter).
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