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Hello everyone, welcome back to NF.
As each of my video content takes a long time to create, I chose not to cover current affairs since I could not catch up with them. However, the duration of this coronavirus situation has lasted much longer than expected and we can’t ignore its seriousness. There are also many theories overseas talking about potential economic collapse of China. Thus, I decided to make this video.
Us humans believe that we have defeated other species and dominated the Earth, through mastering instruments and collaborating on a larger scale. Unfortunately, after 200,000 years we still can’t beat microorganisms and viruses around us. To our human body, virus can lead to organ mutilation and even death. To the economy, virus brings pressure to production and public fear.
I could not help much on the medical areas. But as a financial practitioner and content creator, I would like to talk about the real impacts of this 2019-nCoV on the economy.
In this video, there will not be any flag waving or cheerleading. I will not spread alarmist rumors for sure. There will not be the usual “my version shall prevail”- the video is even a bit obscure and boring.
The most comparable case of the 2019-nCoV is SARS in 2003. So, I will follow the impacts of the SARS epidemic on the economy and deduce from various perspectives.
However, before we get started I would like to point out the economic situation has changed since 2003. I will specify when comparison and inference are done under different conditions.
SARS in 2003 broke out in January and lasted till June in the same year. Overall, the economic impacts of the 2003 epidemic was rather obvious. According to statistics from NBS (National Bureau of Statistics), China’s GDP growth rate slowed down notably during SARS outbreak in 2003. The growth rate dropped by around 2%.
GDPs of Beijing and Guangdong where the virus struck the worst, fell by about 3% and 1% respectively. But they both returned to normal levels immediately after the epidemic ended.
When rounded up with the whole year’s data, SARS ’s impact on the Chinese economy was only about 0.5% in 2003.From the perspective of industrial structure, the impact of 2019-nCoV on the economy will be more profound.2003 was at the time of fast economy growth. We no longer have that kind of rapid growing economy now. Besides, the service/ tertiary sector now makes up a larger portion in China's economy, compared to in 2003. The service industry is going to be the most severely impacted. For those who are in the service industry, you should be prepared to be affected on your employment opportunities as well as income. Looking at the graph of the GDP growth rate of the three major industries, the SARS epidemic struck the service industry most seriously in 2003. Although the growth rates of the three major industries all declined, the growth rate of the secondary industry recovered just in three months, whereas the tertiary industry took 6 months to recover.
This indicated that greater the proportion of the tertiary industry in an economy, the greater impact on economy. From 2003 to 2019, the proportion of tertiary industry in China has gradually expanded, from 42% in 2003 to 54%. The larger proportion of the tertiary industry also indicates that the epidemic will hit the economy more broadly this time.
Let’s break things down now.
Let's first talk about the different industries affected by the epidemic.
Consumer goods sector suffered a lot- they are the worst. Consumptions were affected the most by SARS in 2003. The growth rate of total retail sales of consumer goods began to collapse in April 2003 and headed all the way down. And in June, when the epidemic was coming to an end, it suddenly reversed and immediately returned to normal levels. In the months after, retail sales rebounded retaliatorily to even well above normal levels.
To put it simply, the epidemic prevented people from shopping. As soon as the alarm was off, everyone started to purchase things.
Next, let’s talk about consumer confidence.
The overall inability and unwillingness of consumption would continue throughout the epidemic, similar with what happened during 2003 SARS. Both consumer confidence and expectations fell sharply during SARS. They only slowly recovered in the next 9 months, but they still did not fully return to the level before the epidemic. We can also see clues from the price index.
Now it comes to offline retail, which are the supermarkets and malls, the CPI during the SARS period in 2003, first rose and then fell. Why? When the epidemic broke out at first, nervous people all started to stockpile goods, leading to rising CPI. But then the price index suddenly went down, after people realized stockpiling doesn’t help with the panic and inventories started to expire. That was a nightmare for the markets and grocery stores. They first had to increase their supply to meet the sudden demand jump due to panic stockpiling. However, the goods that came later could not be sold and that caused large amounts of waste. The sad thing is, after 17 years, people did not learn from history so stockpiling is happening again.
In 2003, when people were trapped at home, they discovered a website called Taobao, where you can buy stuff with a simple click at home. As a result, Alibaba became a huge success. Those who benefits from 2019 virus are the online channels- takeaway platform, fresh product delivery platform, errand running platform etc.
Online business with offline supermarkets are combined through third-party e-commerce platforms. As a result, the Brick and mortar shopping malls shortened their business hours, entertainment venues closed, tourist attractions were also closed. Offline brick-and-mortar stores and restaurants were only operating in a limited time. Even there was almost no business, they still have to pay for the rent and labor costs. Those with healthy cash flow could probably carry on for a while. Others are in serious problems now. Even Xibei issued a notice declaring that their cash flow would not be able to carry on much longer, we could imagine how other chains suffer a lot more.
The government subsequently introduced relevant measures, giving merchants preferential treatments. Banks also helped with loans and by extending the deadlines. To reduce business’ operating cost, Wanda Group, Longfor Properties, China Resources, Seazen Holdings Co, Sino-Ocean Group and more than 20 property companies carried out rent reduction or exemption for their commercial tenants. The scale of relief was up 4 billion Chinese yuan.
Now let’s talk about catering, hotel, and tourism.
Looking back at the 2003 SARS period, these three sectors have been affected significantly.
According to data from the NBS, all the star hotels occupancy growth rate plunged in 2003, from positive 2% to negative 4%. But in 2004, there was a “retaliatory” rise of 5%.
The overall consumption in the catering industry was also affected in 2003.The growth rate of the catering industry fell from 27.4% in 2002 to 19.7% in 2003 but in 2004 the figure increased significantly by 54.4%. It appeared that catering industry experienced the same phenomenon as hotels.
Finally, tourism, I am using the direct data of specific attractions. According to Huangshan City Statistics Bureau, the growth rate of tourist reception changed from positive to negative in 2003.The growth rate was originally expected to be 20% increase in 2003. But reception actually dropped by 20%. Let’s look at Lijiang. The growth rate of tourist reception in Lijiang was expected to rise in 2003, but fell by 12% due to SARS. Let us look at Sanya as well. Sanya Statistics Bureau announced the passenger throughput growth at Sanya Phoenix Airport.
It usually increases every year, but the throughput decreased by 10% in 2003.All three places mentioned above shared a distinct feature. That is, after SARS, there was a “vengeful” growth.
That's why I want to talk about catering, hotels, and tourism together. They were all affected by the epidemic most evidently and obviously but also rebounded quickly afterwards.
I expect the same to happen after this virus epidemic. If some day Zhong Nanshan says that we are free to go out, imagine the scenario where all people rush to dine out, have holidays and visit tourist places. Therefore, it is reasonable for us believe that the overall trend of these three industries will be similar to that of 2003.
Now we come to the transportation industry.
During the SARS period in 2003, highway, railway, civil aviation and water transportation were all shut down. Number of passengers on roads, railways, civil aviation and water transport all fell remarkably. If we use this to estimate the impact of the new epidemic on the transportation industry, they should pretty similar to each other. As of the time when I’m writing this, based on the existing 2020 data, passenger traffic on the 20th of the Spring Festival 2020 from four dimensions: highway, railway, civil aviation and water transportation had declined notably compared to previous years. Among them, road and water passenger transportation experienced the largest decline, 13.4% and 26.4% respectively from last year.
Railway and civil aviation were not too bad. Passenger traffic decreased 3.1% and 7.7% from last year. That was the peak of the rigid transportation during the Spring Festival. If you remove those who have to go home and those who have to return to work and look at the number of people who took the initiative to travel between this year and last year, the difference would be horribly larger.
Companies in this industry also suffered heavy losses. Here we are taking China Eastern Airlines in 2003 as an example. According to the annual report published, SARS Outbreak caused China Eastern passenger volume to decline in Q2 of 2003.Operating income growth rate decreased from positive 15.1% in Q1 to negative 37.2% in Q2. The company lost 1.242 billion Chinese yuan in Q2 2003. This year's data has not yet been released yet, but the figure would not differ much. This will definitely affect those who work in the airline or want to enter the aviation industry. Opportunities will definitely decrease this year.
In order to support the aviation industry from government level, the State Council has proposed exemption from the Civil Aviation Development Fund. During SARS, the State Administration of Taxation exempted the business tax imposed on passengers of civil aviation transportation, urban maintenance and construction tax and education fee for half a year. It is reasonable to guess that the duration of this exemption would be also half of a year. In the first half of 2019 for Air China, China Southern, China Eastern Airlines
1.19 billion, 1.54 billion and 1.21 billion was paid to the fund, respectively. The amount
took up to 26.5%, 64.1% and 44.5% of their total profit. So, such exemption could really save a lot of money for airline companies and help these companies to go through the crisis.
But these are all temporary relief. The industry is no doubt being affected.
Now let’s have a look at the impact of epidemic on light industry. According to statistics from the Bureau of Statistics and industry associations, the main household appliance sales and total retail sales of consumer goods suffered during the SARS outbreak. This was also due to the traditional stores being forced to shut down. Same thing happened on furniture and electronics sales. Now someone would wonder why. E-commerce is now more mature than 2003 and phones could be bought online easily. Why would it matter if the physical stores are closed? But in fact, the sales channels of China's mainstream brand models are still in the physical market. According to data from Sinomax, online sales do not even account for 10% for some domestic brands. If we pick out a few big brands, only Xiaomi's online and offline numbers are almost equal. Physical markets still play an important role for other brands making up majority of the sales.
These are the data on the demand side, let us look at the supply side as well. The factories of these mobile phone companies are highly labor-intensive. Most of them are located in manufacturing provinces. Epidemic caused shortage of workers after the break which pushed up the cost of production. Therefore, supply decreased. In addition, the epidemic postponed the time workers return to their positions. Both frontline workers and their management will have to work extra hours to keep up with the previous orders. Such problem is not only for the electronics industry. It is a common problem that all manufacturers are facing. Toys, parts, appliances, furniture, stationery, packaging, paper making factories are all having a difficult time and most of them do not have healthy cash flow due to shrinking foreign trade and environmental policies. The pressure from insufficient domestic demand and rising costs was already there, making 2019 a tough year. And now this coronavirus…Some companies may survive the crisis with the special treatments given by government and banks but some will have to find ways to save themselves.
Textiles and clothing industry are also inevitably affected. We could easily see from the data during SARS. Clothing, footwear retail sales growth went negative even. I think the situation this year might be slightly better thanks to e-commerce. However, the physical clothing factories also face the series of problems mentioned above. The clothes, shoes, and hats mentioned here are for normal well. They exclude surgical masks, medical protective clothing, etc. Some of these companies provide raw material like non-woven fabrics and melt blown fabrics for mask protective clothing manufacturers. They would be expecting a notable rise in the demand and orders.
Now moving onto agriculture and livestock farming. We have to mention the price of pork here. According to data during 2003 SARS, pork prices did not rise much. On the one hand, personnel mobility was restricted. Cargo transportation was blocked at the time so pork from remote areas could not enter the market. That led to a decline in pork supply on the market. But on the demand side, catering companies was already dealing with their problem so they were not purchasing more pork. Therefore, demand and supply both fell, leading to stable pork prices. However, it is worth noting that immediately after SARS, the nation's long-suppressed demand erupted. Pork prices soared up in October 2003. Looking again at this year, transportation is disrupted as well. In some areas, roadblocks are installed to intercept and obstruct traffic, making it difficult to ship live pigs. The difference of pork price between the main sales area and the main production areas are widened. For example, the price difference between Guangdong and Heilongjiang, Jilin is more than 10 yuan / kg.
At the same time, large trading markets were forced to close, affecting meat sales. Besides, the catering industry also suffered similar misery this year. Both supply and demand are affected again. The pork industry has just been wounded in 2019. In the last video I mentioned that it will only resume to normal in 2021 at least. The outbreak has worsened the situation, the future is even less optimistic now.
Now let’s look at chicken. Processed chicken prices fluctuated sharply during the SARS period in 2003, first rose slightly and then free fell. Wens Foodstuff Gr, the largest broiler manufacturer in Guangdong Province had sales of broiler chickens on an average of 800,000 per day before SARS. Sales shrunk to less than 400,000 per day during SARS. The inventory rose to over 3.3 million broilers. The average price of broilers fell by 70% during the period. But after SARS ended processed chicken prices “retaliated”, just like pork price. Therefore, we conservatively predict that livestock and poultry prices will rise to varying degrees in the later period of this new epidemic.
Above are the industries that have been struck hard by the epidemic. We will also cover other industries. During the epidemic, the logistics industry held up the banner.
Looking back at data from 2003, SARS reduced the population movements
but delivery orders jumped. Domestic express delivery volume increased by 23% year-on-year in 2003. This year we have seen the same trend so far.
According to data from the State Post Office, comparing data from the Chinese New Year eve of 2019 and 2020 to the 4th day of the first month, daily average delivery volume increased significantly. A large part of this is the delivery of medical and logistical supplies.
From the news and data released by major logistics companies, such as SF Express, Cainiao, STO Express Co, YTO Express Group Co, demand logistics have exploded during the epidemic.
Now let’s talk about the medical industry.
Demand for medical supplies rose sharply during the epidemic.
Health care prices surged during the SARS period in 2003, the reason being course the rise in demand. From March to May 2003, the year-on-year growth rate increased significantly.
Similarly, this year's related medications, masks, protective clothing, oxygen generator ventilator are in extreme short supply. Even masks in Japan, the US, Canada and other countries were sold out. However, according to data from 2003, the demand and sales of medical related supplies declined “retaliatorily” not long after the epidemic ended.
Nowadays a lot of people began to analyze the trading opportunities in the medical industry.
It may seem like good opportunity to invest in pharmaceutical bio sector now. On the contrary, if you look back at the performance of this sector during SARS period in 2003, you can find it was more or less the same with the overall market performance. It did not outperform the index during SARS. Furthermore, it fell back more than overall market afterwards. There are risks to trading, investment should be done with caution.
On the other hand, the epidemic is good for online content but bad for the cinema.
Big platforms like Youku, iQiyi， Tencent Video, Bilibili, XiGua Video, DouYin, Kuaishou, Weibo, Official Accounts in WeChat, Toutiao, Zhihu they all experienced a peak.
These platforms have also made a huge contribution to the transparency of this crisis, sharing of scientific knowledge and information transmission. The movie “Lost in Russia” ‘s collaboration with Toutiao made XiGua video App’s downloads rose to the first place. The online video industry is also seeing a new round of growth.
It is worth noting that due to fact that most people have to stay at home now, they now have longer time online, compared to the fragmented time previously during commuting or short breaks before. So longer videos could also benefit.
In contrast, the Chinese New Year cinema line were forced to postpone and receive nearly no profit at all. According to Endata’s statistics, the box office in the Spring Festival period last year, and the year before was around 5 billion. So, this year's loss, depending to the length of the epidemic, will definitely exceed 5 billion. But some part of demand will rush back after the epidemic. In addition, during the SARS period in 2003, government launched targeted support for entertainment industry, such as reducing administrative fees. I expect to see similar policies this year to help the cinemas to go through the crisis.