Coronavirus Impact on Supply Chains

There was an interesting review by Paul Scott in his Stockopedia Small Cap Report of the impact of the Coronavirus on Chinese supply chains yesterday. As readers are probably aware, many companies have shifted the production of electrical and mechanical products to the Far East in the last 30 years. Paul covered announcements from three companies who may be affected by problems of production or transport in China – namely Up Global Sourcing Holdings (UPGS), Tandem (TND) and Volex (VLX). All three companies made announcements yesterday that gave some coverage of the issue.

Up Global, producer of branded household products. said that the majority of its manufacturing was in China. The extension of the Chinese New Year holiday is expected to cause production delays but it gave positive noises about having experience of similar disruptions in the past.

Tandem, a distributor of leisure and mobility equipment (e.g. cycles), said the virus outbreak was restricting the movement of raw materials and labour throughout China and had been delaying orders. They said they had no ability to forecast how big or how long the problem will last.

Tandem was already on a lowly valuation before this and had even been tipped by some investors as due for a re-rating, but has now slipped back to a historic p/e of about 6. Amusingly the departing Chairman who is leaving after ten years at the helm had some negative things to say about internet posters and suggested that the change in the share price during his tenure from 110p to 205p should not be disparaged. But is that good enough? It actually equates to a growth in the share price of about 5% per annum which is not what I like to see in any small cap company with growth ambitions. Sure investors have also received generous dividends but the share price went nowhere for a long time in that period.

Volex said it had four manufacturing plants in China and although they are not in Wuhan only one of the four sites has resumed operations at a reduced capacity. The Volex share price has also been on a roll of late after the company was rerated by analysts and tipped by various sources, but has now fallen back recently. As with the other companies, details provided are sparse, but that may simply be because the companies do not know the impact in detail or have any good view of the future. But Paul Scott criticised all of them for just providing “bare, disjointed facts, with zero interpretation”. It certainly makes it difficult for investors to decide whether to hold on or bale out.

It definitely appears that the vigorous steps taken by Chinese authorities to halt the spread of the disease is disrupting supply chains and my guess is that they are likely to do so for some time. Investors in companies that rely on such supply chains from China, particularly of the “just-in-time” variety need to consider what the impact might be. But it also seems likely to me that the virus will spread outside China and have some impact worldwide. But the actual impact on commercial operations might be small. The likely deaths might be tragic but it seems no worse than any other flu epidemic and we might simply learn to live with it. The best hope is probably the development of a vaccine before the disease becomes very widespread.

In the meantime, I won’t be buying shares in the aforementioned companies until the picture is clearer (and I don’t hold them already).

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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China Coronovirus Impact on Your Portfolio

With the news that the coronovirus outbreak in China is spreading and may be difficult to contain, stock markets are reacting negatively around the world. Is this the event that will halt the multi-year bull run or will it all be a flash in the pan as the Sars outbreak turned out to be? I don’t have the answer to that question so my response is to wait and see and simply follow the market. But it’s impacting some stocks more than others.

Just looking at a few I hold, and some I don’t, it seems that any stocks that have large amounts of business in China are down significantly – for example BHP and Rio Tinto are down 8% in the last few days because they ship a lot of ore to China. Even Polar Capital Technology Trust is down 4% today presumably because they have large stakes in Alibaba and Tencent, whereas most technology stocks have not yet been impacted.

If the virus does spread to the UK, then public venues might be closed so shares such as those in bowling operators (Hollywood Bowl and Ten Entertainment) have fallen and football clubs and cinema chains may be threatened. Cineworld has fallen but that’s just a continuation of a long trend at the company. Pubs, restaurants and hotel chains might also be shares to avoid if the country goes into “lock-down” as people avoid public venues. And don’t forget airlines and holiday package companies who may be impacted by travel restrictions.

Who might benefit from the virus outbreak? The two largest producers of anti-viral medicines in the world are Gilead and GlaxoSmithKline (GSK) but the share price of the latter has fallen 2% today so you can see how the panic is spreading somewhat irrationally. GSK might actually benefit from the spread of the disease.

Even given the worst scenario for the spread of the disease, it seems only those with poor immune systems or other health problems are likely to be fatally impacted unless the virus mutates which is always a possibility. The overall impact on the population may be relatively small particularly if treatments are rapidly developed.

In conclusion, I think it’s something to keep an eye on rather than dumping everything but it may be time to review those shares which may be particularly affected. With the market having had such a good upwards run in the last few weeks, perhaps top slicing a few holdings and introducing trailing stop-losses might be worth considering.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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