In this briefing:
- Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
- Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
- Futu Holdings IPO Trading Update – Might Be Trading a Little Too High
- New Century Hotel (浙江開元酒店) Trading Update – Low Free Float, Poor Liquidity
- Tesla’s Plan B 2.0; Y Not
1. Weekly Oil Views: Crude Eyes Tightening Supply but in the Shadow of Gloom
Crude has been gradually reconnecting with its supply-demand fundamentals, and the impact of highly disciplined OPEC cuts just two months into the group’s production restraint deal is becoming evident in relatively stable prices. Through much of last week, crude prices firmed and stood their ground even as global stock markets were skidding.
However, oil is not completely out of the shadows of the global economic sentiment. Crude prices were whiplashed last Friday along with the equity markets as a fresh wave of gloom and doom from the European Central Bank’s downward revision of eurozone growth projections rattled investors. Earlier in the week, China set off fresh alarm bells, by officially revising down its 2019 GDP growth target to 6-6.5%, while Premier Li Keqiang warned that the country’s economy faced a “tough struggle” ahead.
Nonetheless, benchmark Brent and WTI crude futures resisted the lows plumbed during intraday trading Friday, to close marginally higher on the week. While global oil demand growth forecasts remain tentative, supply fundamentals are clearly firming. Output from 11 of OPEC’s 14 members that agreed to collectively curb output by around 812,000 b/d starting January this year almost reached 100% of the target in February.
The race to the compliance finish line was helped by Saudi Arabia, which is slashing its output way beyond its commitment. Meanwhile, the three OPEC members exempted from the latest round of production cuts — Iran, Libya and Venezuela — are also under-delivering. That amounted to OPEC-14 production plunging by around 1.7 million b/d compared with the high of last October.
OPEC will need to be careful not to over-tighten the market, as happened through the first half of last year. We believe the group will be cautious on that front, given its experience of 2018, when it was forced to make two policy U-turns in the space of six months.
2. Short Haidilao (海底捞) Before Earning & Lock-Up Expiry
Haidilao International, the largest Chinese cuisine player by valuation, was listed on September 26th last year and lock-up expiry will be on March 26th. The stock has returned 24% since listing.
- As it heads into lock-up expiry, we will examine Haidilao’s shareholder structure and potential shares up for sale.
- Haidilao was included in the Hong Kong Connect Scheme on December 10th, 2018 and shares held by mainland investors have been consistently increasing.
- But we think Haidilao’s valuation has built in a perfect growth scenario.
- Risk of de-rating for Haidilao warrants a short position.
Our previous coverage on Meituan Dianping
- Haidilao IPO First Glance: Legendary Hot Pot Restaurant that Will Be Hot (Part 1)
- Haidilao (海底捞) IPO: Superior Metrics in a Scalable Segment (Part 2)
- Haidilao (海底捞) IPO: Near Term Rapid Growth but Deceleration Ahead (Part 3)
- Haidilao (海底捞) IPO: Appealing Valuation at the Low End for a Branded National Champion (Part 4)
- Haidilao (海底捞) Post-IPO Trading Update: Not Much Upside from High End, Lessons from Meituan
3. Futu Holdings IPO Trading Update – Might Be Trading a Little Too High
Futu Holdings Ltd (FHL US)‘s IPO was priced at the top-end at US$12/ADS raising a total of US$160m, including the US$70m raised from General Atlantic via a concurrent private placement.
In my earlier insights, I looked at the company’s background, past financial performance, scored the deal on our IPO framework and compared it to Tiger Brokers:
- Futu Holdings Pre-IPO – Great Metrics but in a Commoditised Industry,
- Futu Holdings Pre-IPO – FY18 Updates And Quick Thoughts on Valuation,
- Futu Holdings IPO – Given the Team, Execution, and Backers, Might Be Worth a Look at the Low-End, and
- Futu Holdings IPO Quick Note – Comparison with Tiger Brokers – Same Market, Different Economics
In this insight, I will re-visit some of the deal dynamics, comment on share price drivers and provide a table with implied valuations.
4. New Century Hotel (浙江開元酒店) Trading Update – Low Free Float, Poor Liquidity
Zhejiang New Century Hotel Management Group (1158 HK) (NCH) raised about US$136m at HK$16.50 per share, just slightly below the mid point of its IPO price range. We have previously covered the IPO in:
- New Century Hotel (浙江開元酒店) Pre-IPO – Improved Profitability Not Driven by Underlying Operations
- New Century Hotel (浙江開元酒店) IPO Review – Higher ADR and RevPAR than Peers but Margins Fall Short
In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.
5. Tesla’s Plan B 2.0; Y Not
Tesla Motors (TSLA US) has changed its mind, again, and now reportedly is putting on hold plans to close hundreds of its mostly newly opened stores and lay off thousands more employees–at least until the end of the month.
Employees, customers, suppliers, and investors still are reeling over Tesla’s startling decision, announced February 28th, to move immediately to online-only sales, a dramatic reversal of strategy still in place as of the 2018 10-K filing on February 19th in which the company had touted growth via recent store expansions and substantial additions planned globally going forward.
Tesla explained that even with now three substantial price cuts on all its cars and now three significant layoffs since last summer, it must slash costs even more to support the launch of its long overdue $35,000 base version of the flagship Model 3 (see my report Tesla’s New Plan: Buy Before You Try).
I warned clients that Tesla’s stunning strategy reversal seemed driven more by alarming cash consumption plus much weaker than expected sales and profit margins already apparent in what is shaping up to be a disastrous first quarter–troubling trends that may continue. However, as I noted, it also costs money to close stores, get out of leases (good luck with that), fire employees and redistribute remaining staff, and sell off fairly new equipment at steep losses.
Not to mention that shiny new Tesla stores suddenly going dark may appear ominously similar to retail stores going out of business seen increasingly all over the country–a bad look for Tesla, especially given customers already are spooked by its escalating quality, reliability, and service problems (see “Musk and Weird Q3 Developments Are Driving Investors to Telsa’s Rivals” and “Tesla – Dave’s Not Here, and Musk Won’t Leave” and “Tesla: Down to the Wire” and Tesla – Truth and Consequences).
Tesla probably hasn’t seen the light–it’s just received as of March 1st a desperately needed cash infusion by finally securing overdue funding for Tesla Shanghai Gigafactory 3 which has been under construction since January (see Tesla – Shanghai Surprise). Unfortunately, the four banks in Tesla’s new “China Loan Agreement,” which the company announced on Thursday with a rare 8-K filing, committed only to fund a one-year limited purpose loan for up to 3.5 billion yuan ($521 million). This is barely enough time or cash to get the Shanghai assembly plant up and running–much less also stave off the current cash crunch.
But Tesla must keep up appearances as well as bolster its liquidity through at least the end of the quarter as it gets ready to reveal Thursday evening the long-awaited Model Y–though I suspect this won’t result in a massive burst of cash from new reservations as Tesla hopes.
Years of robbing Peter to pay Paul hasn’t produced a sustainable growth model for Tesla, mostly because its business strategy still is better described as, “Wow, we didn’t see that coming.”
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