Coronavirus: Potential Gainers From The Tragedy

Summary

• The Coronavirus breakout in China hurts the economy but may benefit certain sectors/companies.
• Online gaming will be the #1 beneficiary of this public health emergency.
• Online education is also likely to benefit from the situation.
• The automobile industry is likely to recover fast and benefit from this in the mid-to-long term.

Source: The virus has sickened more than 28,200 people in Asia

Investment Thesis

The Coronavirus breakout in China brought challenges to the Chinese economy in the short term, but it also could benefit certain sectors/companies. We are overall confident about the Chinese government's capability in controlling the situation, and propose our positive views on certain stocks that investors can watch during this special period.

Overall Assessment of the Situation

Undoubtedly, the Coronavirus breakout is the most significant public affair in China now. Originated in Wuhan, the virus is now spread all across the nation and has caused more deaths than that from the severe acute respiratory syndrome outbreak in 2002 and 2003 in mainland China.

The breakout not only brings concerns on public health, but also has a major impact on China's economy. As required by the Chinese government, companies will have to postpone the starting date after the Spring Festival. Airline companies are facing sharply declined demand, or even forced cancellation of flights. Tourism, food chains, and many other consumer industries will take the hit, since people are recommended to quarantine at home as much as possible.

On the other hand, the Chinese government has been called out for efficiency and transparency in handling this emergency. Unlike SARS in 2003, people now have access to real-time updates on the number of infected cases, as well as confirmed death and cured ones. The government essentially "locked down" Wuhan on January 23rd, which may sound crucial but is proven to be the most effective approach in preventing a national disaster. So far, nearly 70% of the confirmed infections and 96% of the deaths are within Hubei province. The miracle of building a hospital within 10 days should also add to people's confidence in the Chinese government in fighting this emergency.

Source: China builds an entire hospital in 10 days

Timing-wise, although the infection and death numbers are still climbing, we are expecting to see the increase to flatten or even decline in the coming week or so. Wuhan was "locked down" on January 23rd, and most cities across the nation started to restrict people from traveling and gathering since January 25th. It will be 14 days by the end of this week (February 8th) after the matter has been escalated, which is the end of the incubation period for the Coronavirus. If most people have been following the guidance and quarantining at home during the period, we should see a decline in infection numbers starting from next week, as most infected people would have reported to hospitals by then.

Overall, we are confident that the Chinese government is capable of managing the situation. As for the economy, the breakout of Coronavirus will certainly have a negative impact on certain industries, but it will benefit others too. In the following sections, we try to summarize three sectors that will likely benefit from this nationwide emergency.

Online Gaming: Probably the Biggest Gainer

This should not be surprising, as most people have been "suggested" or "required" to stay at home during the holiday, where gaming is probably the only choice for them to kill time. We have noticed from multiple sources that the gaming expenditure during the Spring Festival reached a record high this year. For example, a commonly cited number is that players spent more than RMB 2 billion yuan on one of the top mobile games, Glory of the King, on January 24th alone, marking a 50% increase YoY. That mobile game has also been ranked #1 in downloads (in the Greater China region) during January 23-27:

Source: AppAnnie, collected by Sohu

For this sector, Tencent Holdings (OTCPK:TCEHY) and NetEase (NTES) are the biggest gainers, as these two dominate the online gaming (especially the mobile gaming) market in China. We expect to see killing Q1 results from these two.

Online Education: Another Short-Term Gainer

Similar to online gaming, the online education industry happens to benefit from the emergency, as all the offline courses have been banned by the Chinese government as part of the prevention actions.

GSX Techedu (GSX), as we have covered previously, is an online platform that provides K-12 private education services. The online nature of the company makes it a natural beneficiary of the current situation.

Other leading brands in the education industry, such as New Oriental Education & Technology Group (EDU) and TAL Education Group (TAL), will also benefit, as they are building up their online facilities as well.

Automakers: Potential Beneficiaries

Another industry that may potentially benefit from the emergency is the automobile sector. This is somewhat surprising because people would normally expect sales to go down, as people are reluctant to visit dealers/sales houses. Based on experiences from SARS, however, automakers actually recovered the fastest from the short-term interruption and reported record-high sales numbers after the emergency period. The logic behind this is simple - when people find commuting with public transportation is not safe enough, their demand for automobiles will be "released".

Given that the controlling actions will last for a while, a similar situation will happen again just as during SARS, where people (especially in big cities) will realize that they do need a car to keep them safe when they have to commute to work. When taking into consideration the licensing restrictions in top-tier cities (like Beijing, Shanghai), we expect EV makers to benefit more than traditional automakers. Companies to watch include Tesla (TSLA) and NIO Ltd. (NIO).

Risk Factors

All of this analysis was based on our belief that the situation will get controlled in a relatively short period. There is a potential risk that the situation continues to worsen, which will eventually lead to a more disastrous public health emergency and a substantial economic slowdown in China. In that case, all the potential benefits we mentioned above will likely be offset by the negative shocks on the overall economy.

Conclusion

Overall, we are confident that the Coronavirus situation is manageable. Despite the short-term shock to the Chinese economy, we believe some sectors/companies will actually benefit from this.

Analyst’s Disclosure: I am/we are long NIO, GSX, TCEHY, NTES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Jaschan]

Hi Aiden research can you write an article of the major API producers in the USA who the listed players could be?as 25%-28% APIs only are produced in US,rest is only dependent on china ,this trade war,corona virus thing will surely put huge pressure on US companies,its good if trump helps those companies through further cuts and benefits.

[mako69]

"Another industry that may potentially benefit from the emergency is the automobile sector."

I'm scratching my head over this. The automobile industry's supply chain is heavily based in China. Those factories for automobile parts are all shut down and will remain so. That will stop them from producing cars. Witness Hyundai just shut down all global manufacturing of their automobiles from lack of Chinese parts. I read that the major American producers have roughly two weeks of spare parts until they have to shut down production. I don't understand how not being able to produce cars to sell is going to help the automobile industry?

[mako69]

"The government essentially "locked down" Wuhan on January 23rd, which may sound crucial (sic) but is proven to be the most effective approach in preventing a national disaster."

5 million people got out of Wuhan the day before the quarantine went into effect. It also already spread to several major cities by that date. If that is your basis for the quarantine working, it is dead wrong. The quarantine has completely failed.

[User 828881]

@mako69 400 million now under quarantine - US market will crash when they start reporting deaths here.

[User 6949881]

@Aiden Research or anyone else. Please do a more detailed analysis of how long and how harsh we expect the impact of Corona Virus to be. Real data with real math. Here is my cocktail analysis based on international live data at bottom. Anyone, please shoot holes in it. Based on what I see so far, EVERYONE will be terrified of travel. I am shorting Cruise line CCL right now.

638 deaths Right now with 31,523 confirmed cases so far
That is an unscientific 2.02% death rate. Unknown if cases are much higher, which would lower the death rate, or deaths to remaining cases continue to happen which would increase death rate. Very unscientific.

Assume it spreads like flu ~10% of US population each year.
330million x 10% of population = 33million contraction
33million x 2% death rate = 660,000 deaths nationally.

gisanddata.maps.arcgis.com/...

[User 828881]

@Micro Magic Goldman thinks 2% shaved off GDP, it is already worse than they thought so good chance we get a worldwide recession or possibly depression depending on how bad this gets

[mako69]

@Micro Magic The current numbers of coronavirus infections are understated by a factor of 10 at least. Reputable estimates (Lancet) put the current infection numbers above 300,000 and will double every 6.3 days.

flu vs corona virus comparison

1) If memory serves, the flu has an RO of 1.28, the coronavirus has an RO of 2.5-3.5 (nobody is sure yet). That means the coronavirus is roughly 2 to 3 times more contagious than the flu.

2) The flu kills about 0.1% of people, the coronavirus kills 3%+, so that makes it roughly 30 times more deadly.

3) Those who need hospitalization in an ICU are about 1% for the flu and 20% for the coronavirus.

The entire Chinese economy has come to a screeching halt. It is frozen solid. 150 million under imposed quarantine and everybody else under self-imposed quarantine. This has never happened in human history, you are witnessing a Black Swan Event. The streets are deserted and very few deliveries are being made. The factories, stores (except for grocery), schools and government offices are all shut down. This will probably go on for at least two more months, best case, but probably longer. The Lancet predicts that Wuhan will peak in mid April and other Chinese cities in mid-May.

This will be catastrophic to the Chinese economy and the world supply chain.

[User 6949881]

@mako69 Thanks for input. What is the risk of it spreading to Eurozone or USA? Won't we get the same thing but a few months later? Or is it contained? Any indications either way.

[linksjoe]

Even as a bullish person about EVs in China i'm not confident with this author's logic on EV's benefiting from this virus

[wizard98]

HUYA benefits, long HUYA

[Dr. Piz]

I want to get in on a long position NIO, but not sure when? Below $4???

[Dr. Piz]

Or below $3?

[Value Yield Investing]

i see my people around me are trying to sell NIO cars at discount (or you can call "dump" or "fire sale"). That should tell you something.

[User 828881]

If a bunch of people die how does that help the auto industry?

[Agnee Tips]

I don't know what to gain from this article. Not worth reading.

[Pierre Rossouw]

You need to make the connection between production and inability to be productive and death. That simple.

[Joe Blast]

Yes, Tesla will lose less money if they go through a period without having to make cars at a loss. The labor savings alone could push shares above $1000.

[Crude Man]

I disagree on the automobile sector. The people who don't have cars either can't afford them or don't see the need for one. Those that can afford them that didn't see the need before are likely not getting work done during this time, which means their finances are taking a hit. You don't go months without working or with reduced income and then decide to go buy an overpriced niche market vehicle.

[GoldenSamurai]

I fully agree. If a Chinese worker needs to get from place A to place B, he does not need a Tesla. A small city car from a local Chinese automaker should be more than enough.

[Aiden Research]

@Crude Man
Thanks for your response!
I agree with your thoughts on people with just the commute demand for work. But people with family, especially children, will feel the pain of public transportation in such a special period. With the restrictions on gas autos, EVs will be a natural choice for them.

[User 828881]

@Aiden Research So during a pandemic people will buy overpriced EV's? LOL sure that makes sense, especially when the places to buy the cars are shut down.

[jonathanssa]

might add SCPL to that list. they have not posted Q4 earnings yet, but should soon.