Titans of the C-suite love to sound bold in front of investors and analysts, but doing so often leads to promises blowing up in their faces months down the line.
Growth projections for China this year could be the C-suite's latest PR gaffe. Investors awoke to another Sunday surprise in the form of a China interest rate cut. China's central bank has now reduced interest rates and banks' reserve requirement ratio (RRR) four times since November to ignite the cooling economy. Yet, in spite of these ramped up monetary efforts, they have had limited positive (if any) impact, judging by a spate of recent ugly data.
China's imports fell a worse-than-expected 16.2% in April. The lackluster trade performance may cause second-quarter economic growth to fall below 7% for the first time since the Great Recession. What a turn of events. The Chinese economy expanded at an average rate of 10% a year for the three decades up to 2010. Last year, the Chinese economy rose 7.4%, something the U.S. would love. The International Monetary Fund (IMF)'s most recent forecast for China is for it to grow 6.8% this year and 6.3% in 2016. It looks as if for once, the IMF has put forward some relevant forecasts that investors need to respect.
China's official manufacturing Purchasing Managers' Index (PMI) came in at 50.1 in April, unchanged month on month. The figure appears destined to fall into contraction zone in May (below 50), which would likely spark a fresh round of concern in the market regarding exorbitant debt levels in China. Chinese companies have roughly $1 trillion in foreign debts as of the end of 2014. A private, preliminary HSBC/Market PMI survey a couple weeks ago showed factory activity in China contracted at its fastest pace in a year in April. Two manufacturing reports supporting the notion of a sharp Chinese slowdown later this year -- not great news, people.
China's stocks may finally be hinting at what could blowback on our own U.S. based multinationals (in terms of stock prices/earnings) as a result of the countries' slowdown. The stocks were hit late last week as weak economic data finally began to take hold in market sentiment.
iShares China Large-Cap (FXI)
Source: Yahoo! Finance
Unfortunately, in the face of this obvious slowdown in China, corporate America remains enamored with the company's "growth" prospects. You owe it to yourself to return to earnings call transcripts this week and do the following:
- Keyword "China."
- See what the sales growth rates have been in China.
- See what the profit growth rates have been in China.
- See what the company is projecting in terms of sales this year (and perhaps more broadly for the next three to five years) in China.
- See what investments are being hyped by execs regarding China.
The reality is that if one conducts enough of this rudimentary exercise, there is a sense major companies are ill prepared to handle the sharp slowdown in China that is unfolding. Investment levels in the region remain very high. Projections for sales and profit growth this year, and over the next five years, continue to be excessive. I believe that guidance ranges do not incorporate the necessary conservative stance on the country (and what a slowdown there means for emerging markets).
Here is an example of some typical bravado on China when I did the above exercise.
Nike (NIKE) March 19 Earnings Call
Lastly, in Greater China, we continue to see the benefits of our strategy to reset the marketplace. Q3 revenue growth was 17% and futures are up 23%. This reflects the continued strength of the NIKE Brand in the market along with our efforts to execute a more consumer-focused distribution strategy.
Our wholesale partners have continued to see strong comp store growth and expanded profitability in the doors that have been reprofiled. This success aligns with the results we've seen in our own retail doors. Additionally, inventory levels in China continue to be healthy, letting us better serve the consumer and maintain a strong pull market.
- Note: Nike's profit growth in China lagged its sales growth in the most recent quarter, a red flag that hints at a pickup in discounting ... caused by the slowdown.
Royal Caribbean (RCL) April 20 Earnings Call
And the bookings for Quantum in China are nothing less than heartwarming.
Similarly, our investment in China and the Asia-Pacific region are paying handsome dividends. In just 2 weeks Quantum of the Seas leaves for China where she will join our 3 other ships in that market. Royal Caribbean International is already seen as the preeminent brand in China. And Quantum helps secure that position further.
China now represents 6% of our capacity but at a higher percentage of our profitability. And we have recently announced that Ovation of the Seas will move to that market next year.
While trends vary by itinerary level the Asia product as a whole has been trending quite well. Quantum of the Seas will arrive in China in about 2 months and, as expected, is commanding significant premiums. Quantum's early success, with over 80% of her revenue currently booked for the inaugural China season, provided us with the necessary confidence to place her sister, Ovation of the Seas, into the China market when she debuts in 2016. We continue to expect yield increases in the low- to mid-single-digits for the Asia-Pacific product.
- Note: all cruise line companies are moving ships to China -- the slowdown could lead to margin crushing over-capacity in 2016, thanks to the economic slowdown.
