An early hibernation



We remain cautious on many other sectors though and this includes the retail and discretionary spending space. It was interesting to see that Woolworths was one of the top risers yesterday with a 2.3% gain. The company saw food sales rise 4.7% in the first quarter to $9.6 billion, while same store supermarket sales rose 4.9%, in line with expectations. I visited Costco in Sydney and Adelaide in recent weeks for the first time, and could not believe the competitive price disparities or the “hoards’ of shoppers”. Costco presently has only one outlet in Sydney but more are on the way.

While the market is anticipating a return to profit growth for Woolies later this year, we can’t get excited and the intensifying competition is just a matter of when not if. The gains appear to have been taken from Coles, and this is likely to engender a response, and this will only further exacerbate competition and margin pressures. And this is before the retail space has to face further competition from the impending arrival of Amazon, Kaufman and Lidl. Myer has already been decimated from the likes of Uniglo, Zara, and H&M and I have no doubt that a similar fate awaits Woolies and Coles.

The other issue for consumer facing stocks is the level of household debt, a situation that will be exacerbated as lending rates edge higher. Confidence is also likely to take a knock as the housing market loses steam. And there are already some signs here, with new home sales falling a further 6.1% in September month on month according to the Housing Industry Association.  New unit sales fell off at a more dramatic rate, and were down 16.7%.

Some of this of course has to do with supply, with less construction (we believe the peak has passed). Demand for housing of course is still there, and it will be down to existing home sales to plug the gap as vendors recalibrate their price expectations in a plateauing market. This will be good for listings, and will benefit the likes of Domain and Fairfax – which rallied to $1.10 yesterday.

I don’t think the market appreciates the inherent value in Domain, and yesterday REA – the dominant player – was close to making new record highs with a market valuation of close to $10 billion. The private players were sniffing around Fairfax for good reason earlier this year, and would have paid $1.30+ if shareholders were receptive.

The fact that the larger shareholders wanted “fair value” probably was the reason why the PE players walked away – and this certainly galvanised our view that Fairfax is worth north of a $1.40 at a minimum post demerger. Fairfax continues to be a top 5 holding in the Fat Prophets Global Contrarian Fund (we added more below $1 after private equity walked away) and the Australian Managed Account portfolios.

International companies in the news

China’s dominant online search giant Baidu was up 3.2% after signing a strategic framework agreement with BAIC Motor for cooperation in automatic driving, cloud services and cloud-based auto information and safety. I think AI and driverless cars are going to be a huge business in China within a decade and Baidu is set to dominate both. Baidu is our largest position in the Fat Prophets Global Contrarian Fund. Baidu underperformed last Friday after reporting earnings that were in-line with Wall Street estimates, I saw the reaction as being just a healthy correction after the stock rallied by 50% since July.

Baidu and BAIC will jointly develop connected car products, build a big data platform and explore new ways of shared mobility. I have been writing for some time about the immense potential for Baidu in the AI space and this agreement will help to cement Baidu’s presence in this rapidly developing area of technology.

Baidu was sold down by 8% last week after reporting third quarter numbers, and forecasting that revenue growth will be softer in the fourth quarter due to self-imposed content restrictions at its movie and television streaming unit iQiyi in the run-up to the Communist Party congress.

This will all wash though and the market is already quickly recalibrating earnings and revenue growth for the first quarter of next year. Baidu is also the largest holding in our Global Opportunities, North American and Asian Managed Account portfolios. US Broker Oppenheimer recently raised its price target to $295 from $250.

The Macau casino sector had a good day with Wynn Macau and MGM China up 3.31% and 3.41% respectively. Goldman Sachs raised its price target on Wynn Macau to HK$22.50 while Deutsche Bank released a report confirming that VIP volumes have picked up strongly following the ending of Party congress.

After a disappointing so called “Golden Week” of Oct 1 – 8 where Gross Gaming Revenues (GGR) were up only 9% year-on-year, there was surge in VIP activity after Golden Week with October GGR now expected to be above Bloomberg consensus estimates. Wynn Macau and MGM China are both “Top 10 holdings” in the Fat Prophets Global Contrarian Fund, and also in our Global Opportunities and Asian Managed Account portfolios.

Sony profits Soar

Japan-listed shares of electronics and entertainment conglomerate Sony rose 2.4% in trading yesterday as the company lifted its full year operating profit guidance to ¥630 billion (US$5.6 billion) for the fiscal year ending March 2018.

It was a big boost, as only a few months ago that Sony had forecast profits of ¥500 billion for the year. If Sony hits its new target, it would see the company surpass its record ¥526 billion profit set way back in the year ended March 1998. At that time, the company was riding a wave of success from the release of the first PlayStation console and its “Men in Black” movie was going gangbusters at the box office.

Sony’s semiconductor division, which houses its leading sensors business is now forecast to print an annual profit of ¥150 billion, up from ¥130 billion at the time of the August guidance and marks a huge turnaround from the year before when the business suffered from earthquake damage.

Sony also lifted its forecast for the Music segment and Home Entertainment segment by ¥19 billion and ¥18 billion respectively. The other substantial change was in a smaller operating loss expected from its administrative unit. These will compliment an already strong performance expected from the PlayStation business.

Yesterday, Sony reported that its fiscal second quarter operating income jumped to ¥204.2 billion from ¥45.7 billion a year earlier. That smoked the ¥140.5 billion average analyst estimate.


Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in Fairfax, Sony, Wynn Macau, MGM China and Baidu.

Carpe Diem!

CEO | Fat Prophets
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