Daily China: The Community and more

In this briefing:

1. The Community
2. U.S. Equity Strategy: Defensive Areas Weakening; Broad Market Attempting to Bottom
3. Differing Sino-US Agendas Undermine Global Growth Outlook
4. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990
5. China Housing: Are Prices Rising Faster Or Slower?

1. The Community

Luckin Coffee could be looking to IPO. lululemon raises Q4 guidance. WeWork rebrands to The We Company.

• Starbucks: Luckin Coffee could start to flash red on the radar screen for investors in Starbucks as it is apparently looking to IPO on the Hong Kong Stock Exchange.
• Apparel, Accessories & Luxury Goods: As evidence of how vertically integrated, high-margin retailers like apparel, accessories & luxury goods companies with social missions are uniquely positioned to originate value, lululemon just raised its Q4 guidance on strong holiday sales momentum.
• WeWork: Proving our controversial thesis that WeWork is more of a human capital play than a real estate play, it is re-branding to The We Company.

In yesterday’s research report, I posed the controversial question, “Could Starbucks’ Beans Start to Lose Their Magic?”, expressing my concern that Starbucks’ beanstalk could start to wilt with Schultz no longer around to cultivate his high-fidelity community-based social mission to “inspire and nurture the human spirit—one person, one cup and one neighborhood at a time”, which brings the real magic to its beans. The key emerging risk is that Starbucks faces a highly aggressive disruptive entrant, Luckin Coffee, which could start to flash red on investors’ radar screens as it is apparently looking to IPO on the Hong Kong Stock Exchange. Interestingly, in 1998, 11 years after Howard Schultz planted the magic beans for his Starbucks movement, another community-based social mission took root, with Chip Wilson starting his lululemon movement to “create components for people to live a longer, healthier, and more fun life”. Although Chip Wilson was forced out of his company in early 2015, which he recounts in his new tell-all book, “Little Black Stretchy Pants”, the cult-like following he built is bearing real fruit as lululemon is able to leverage it to build DTC distribution channels and the company just raised its Q4 guidance. And 11 years later, in 2009, Adam Neumann and Miguel McKelvey put together the pitch deck for “The we brand companies”, planting the seeds for their WeWork movement, inspired by their community-based social mission to empower people to “Make a Life. Not Just a Living.” A decade later, guided by their original vision, they have re-branded WeWork to The We Company, signaling their intent for global domination as they advance beyond office leasing.

2. U.S. Equity Strategy: Defensive Areas Weakening; Broad Market Attempting to Bottom

In this report we detail our U.S. investment thesis and provide a detailed technical appraisal of the broad market, as well as highlighting attractive investment opportunities within each of our 12 Sectors.

3. Differing Sino-US Agendas Undermine Global Growth Outlook

The fate of the global economy in 2019 will hinge on the willingness of China and the US to combat decelerating domestic growth via invoking appropriate policy support.

Given current fiscal backdrops, both China and the US have less capacity to ease policy to boost growth compared to the available monetary measures at their disposal.

Pressure is increasing on Beijing to aggressively cut taxes in March to stimulate growth, as well as structurally boosting consumption.

China’s consumers have become increasingly more discerning in their attitude towards foreign brands, partly due to the rise of credible local competitors.

The current economic and financial environment is somewhat reminiscent of 2016 when a deal between the Fed and China averted protracted economic and financial turbulence, but the current China-US nexus makes an accord in 2019 extremely unlikely.

China is unlikely to act again as buyer of last resort for the world economy courtesy of another credit binge, but policy will instead focus on stabilising growth at 6.0%-6.5%.

4. Autohome (ATHM): Commission Conflict with Dealers, as Auto Industry Suffers First Decline Since 1990

• China vehicle sales volume declined in 2018, which was the first time since 1990.
• Car dealers are negotiating commission rate with Autohome.
• We believe Autohome has more bargaining power than dealers, but will compromise to some extent.
• Our previous financial assumptions had already integrate the potential weakness in automobile industry.
• The stock price has been fully reflected the impact of the negotiation.

5. China Housing: Are Prices Rising Faster Or Slower?

Today’s data from the National Bureau of Statistics (NBS) on new home prices for 70 major cities shows on average an accelerating year-on-year price growth and a slower month-on-month increase. This contrasts with a picture of a slowing price growth based on a different index from SouFun-CREIS.