- 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.
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.
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).
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.
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.
This article was written by
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.
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