China Aftershocks Ripple Through Earnings From Audi To Iron Ore

by Phil Serafin at Bloomberg

China’s market slump is making itself felt in corporate earnings around the world.

French distiller Remy Cointreau SA, U.S. fast-food company Yum! Brands Inc., U.K. luxury-goods maker Burberry Group Plc and South Africa’s Kumba Iron Ore Ltd. are among the companies taking a hit from China, where a monthlong rout in stocks wiped out almost $4 trillion in market value. The International Monetary Fund sees China’s economy expanding this year at the slowest ratesince 1990, and said the country is a source of potential risk to global growth.

The effect is likely to be be highlighted over the next few weeks as the bulk of the world’s biggest companies report second-quarter earnings. China has been among the fastest-growing markets in the past decade for cars, luxury goods and raw materials, and the slowdown is particularly unwelcome now because emerging markets such as Brazil and Russia are also struggling and can’t pick up the slack.

China “is clearly a weakening environment in the near term,” John Haynes, head of research at Investec Wealth & Investment, said in an interview on Bloomberg Television. “For us that’s an opportunity, not something to worry about.”

Remy Cointreau shares dropped the most in 11 months Tuesday after the company’s quarterly sales missed estimates because Chinese wholesalers continued to hold back on cognac orders. Demand for pricey drinks, as well as expensive wallets and watches, has slumped amid a clampdown on graft and lavish spending, which has hit gift-giving.

Falling Sales

Yum, the owner of KFC, Pizza Hut and Taco Bell, last week posted revenue that missed estimates as second-quarter same-store sales in China plunged 10 percent.

Kumba Iron Ore, Africa’s largest producer of the steelmaking ingredient, eliminated its dividend on Tuesday as the Pretoria-based company announced that first-half profit sank 61 percent.

Retail and consumer-goods companies are feeling the pain after China’s individual investors suffered losses in the stock market. French supermarket operator Carrefour SA said July 16 that Chinese customers are spending less when they shop and the prices of products such as pork and cooking oil have fallen. The grocer’s comparable sales fell 12 percent in the Asian country in the second quarter, excluding fuel and calendar effects.

Financial Aid

Higher-end products also are suffering. Audi AG, China’s best-selling luxury carmaker, is providing 1.2 billion yuan ($193 million) in financial aid to dealers in the country as demand for luxury vehicles slows, people with knowledge of the matter said this week. The automaker also lowered its sales target for 2015, they said.

Some investors and companies, though, already are anticipating a rebound in business, fueled by China’s demographics and market-friendly policies. Investec’s Haynes said he would be looking to buy shares of companies such as Burberry if they slump ondisappointing news out of China.

“I’m an incurable China optimist,” he said. “These are 1.3 billion people who are becoming part of our world. They’re consuming more, they want what we want, they have a government that wants them to have what we have and they have no interest in creating disorder in the world.”

Companies, too, are betting on a rebound.

Netflix Inc. aims to introduce its Internet TV service in China next year, the company said last week. Unilever this week announced a partnership with e-commerce giant Alibaba Group Holding Ltd. to help the Anglo-Dutch consumer-goods company better reach Chinese customers. Kone Oyj, the Finnish elevator maker that gets an estimated one third of sales from the country, will highlight that business at a briefing for investors in Shanghai in September.

Falling Demand

For many companies, though, business in China will get worse before it gets better.

In Sweden, SKF AB, the world’s biggest manufacturer of bearings, last week predicted demand will drop this quarter as clients from carmakers to mining companies see weakening orders from China. Assa Abloy AB, the Stockholm-based company that makes Yale locks, is predicting a 5 percent to 10 percent drop in China sales in the second half.

“It is a clear slowdown in demand,” Chief Executive Officer Johan Molin said in an interview last week. “We see that there’s fewer and fewer construction projects ongoing, and we also see that it’s hard to get paid, so we have to be cautious.”

Source: China’s Aftershock Ripples Through Sales of Cognac to Ore - Bloomberg Business

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access