The war drums of US-China trade battle seem to settle down as the US President Donald Trump initiated a positive move in the trade talk held at the sidelines of the G20 Osaka summit in Japan. Trump agreed to hold off on new tariffs on Chinese imports and allowed U.S. companies to continue selling to Chinese tech giant- Huawei.
US-China trade truce built hopes in the market as NASDAQ Composite Index registered an upside of 1.06% to close in green at 8091.16 points on Monday. The easing of Huawei ban was undoubtedly led by the lobbying of American chipmakers who have been quietly pressing the U.S. government to lift restrictions on Huawei exports in favour of the argument that the ban could hurt the United States’ economic security.
The benchmark technology index, NASDAQ 100 Technology Sector (NDXT), closed 2.27% higher from the previous close to settle at US$4766.310. The ceasefire in the US-China trade battle sparked a relief rally on the stock exchange with the chipmakers cheering the most. The big names in the technology world like Qualcomm, Intel and Nvidia were the few among the winning companies that have the highest revenue exposure to China.
However, the magnitude of trade war is such that it sends the shockwaves to the entire global marketplace, which draws uncertainty about the future of international players, particularly the ones having revenue exposure to China, U.S. or both. Moreover, China’s new Ecommerce Law has added to the unsure destiny of overseas companies.
Let’s see which are those ASX-listed stocks that are getting affected at this backdrop:
Fortescue Metals Group Ltd (ASX: FMG)
Iron Ore made a bull run from the optimism built through the US-China trade talks at G20 summit. China which is the largest consumer of seaborne iron ore has been closely steering the futures of global mining company. The good news of US-China trade truce has parked iron ore producers in the growth zone. Among many global steelmaking commodity producers, ASX-listed Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG) are expected to benefit from Chinese supply-side reforms.
Fortescue experienced the strong demand for its products in China; In 2018, China increased its steel production by 12% to 928mt. FMG has realised improved price and consistency in operations during the first half of Fiscal 2019 and together with the ongoing contribution of its low cost operations, the company generated strong margins and achieved a 66% increase in underlying net profit after tax compared to the half year ended 30 June 2018.
Stock Performance: FMG closed at $9.180, up 0.328%, on 2 July 2019. The year-to-date return of the stock stands at +140.37% including a positive price change of 31.95% in the past three months.
Blackmores Limited (ASX: BKL)
Natural health and beauty products company, Blackmores Limited reported lower sales to Chinese customers through Australian retailers due to the implementation of China’s new Ecommerce Law. This translates the reduction of around 6% in an overall sales to Chinese consumers during the third quarter, taking China-influenced sales through Australian retailers into account.
However, Blackmores took a move to remove the current inventory in China by bringing down the volume of China-bound stock through retail channels of Australia. This led it’s ANZ Gross Margin to improve to 2.1%.
The company stated that on the basis of the ongoing evolution in the consumption pattern of the Chinese customers in the way they access Blackmores’ products, the company has conducted a major strategic review on how to maximise its Chinese consumer facing opportunity. Its review is also stated to be in the direction of supporting daigou to engage more deeply with the Blackmores brand. Blackmores expects the outcomes of the review to be executed in fourth quarter, i.e. Q4 FY19.
Outlook: Despite the weaker third quarter, the company continues to expect a modest full-year revenue growth. However, the second half performance is projected to stay below the first half of Fiscal 2019.
The company has further ramped up its program to streamline business with the target to save ~$60 million over three years. The initiatives currently in progress are expected to help the company better understand its changing market dynamics and lead to some one-off costs in Q4 on implementation.
Blackmores recently completed its search of new Chief Executive Officer. As per the company’s announcement dated 2 July 2019, BKL appointed Mr Alastair Symington as its new managing Director and Chief Executive Officer with effect from 1 October 2019.
Stock Performance: BKL stock price edged up by 2.1% to last trade at $91.900 on 2 July 2019. The stock settled at a price to earnings multiple of 22.120x with a market capitalisation of $1.56 billion. Over the past 12 months, the stock has lost 35.31% including a decline of 3.29% recorded in the past three months.
The a2 Milk Company Limited (ASX: A2M)
A2M, the infant formula company, is one of the favourite baby milk brands of Chinese audience. The numbers could define it better! A2M China segment revenue increased by 50.1% to $171.7 million, with EBITDA up 41.6% to $68.4 million in 1HFY19 as a result of strong distribution and market share gains. Its reflects the growth of 83% in sales of A2M’s China label infant formula while its Kantar infant formula consumption value share increased to 5.7% in the 12 months ended 31 December 2018.
A2M Regional Highlight (Source: Company Presentation)
In the United States, the company exceeded 10,000 stores and added a further ~2,400 stores recently, taking the company’s distribution of the brand to approximately 12,400 stores by the end of January 2019.
The investment strategies of the company are currently driven by its plan to build strong brand equity through enhanced marketing campaigns in the US, China, and Australia, alongside the development of intellectual property.
Outlook: A2M expects its FY19 EBITDA to be ~31-31% as a percentage of sales during the year. Marketing investment in 2H19 is estimated to be approximately double the first half with further intention to continue its brand and marketing investment in FY2020.
Since the company predominantly focuses on brand awareness in China and US, any change in trade policies of these two nations could materially impact the revenue of A2M.
Stock Performance: A2M stock price last traded at $13.870, up 0.072% from the previous close on 2 July 2019. The stock has witnessed a positive price change of 33.65% over the past 12 months, that includes an upside of 1.39% over the past three months.
Treasury Wine Estates Limited (ASX: TWE)
Despite the uncertainty prevailing in the global macro-economic environment, Treasure Wine Estates confirmed the company’s position at competitive edge with its strong route-to-market that maintains growth momentum across the region, particularly in China and the US.
In China, TWE established its own warehouse in Shanghai which reduced its reliance on export channels. The company experienced the strong trading performance during the Chinese New Year festive period and further views an opportunity to continue growing its share of the imported wine market.
The French category remains one of the key focus of the company with respect to expanding its global market share as it is the largest import category that accounts for ~30-40% of the market. TWE has also built its strong and high-quality Luxury wine vintage, Vintage 2019 in Australia, which reportedly would increase the TWE Luxury intake by approximately 10% on Vintage 2018.
Outlook: TWE expects its FY2019 EBITS growth of approximately 25% which is expected to then range within 15% to 20% for FY2020.
Also, the company reiterated its plan to expand its distribution market footprints in China with the focus on leveraging its Australian and French portfolios for import category.
Stock performance: TWE closed its day trading session at $15.410, up 2.324%, on 2 July 2019. Its price to earnings multiple of 27.580x with a market capitalisation of $10.83 billion.
Needless to say, the softening of trade tensions has led the excitement and optimism across the global marketplace. But the negotiators of both the nations clarified that restarting trade talks does not indicate that the United States and China would reach a deal anytime soon, given their tough stance on negotiations. Further, the call on lifting the ban on Chinese tech companies remain pending for the final stage of talks on a bigger trade deal.
To know more about the role of trade war in the AU stock market, click here.
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