On The Severity Of The Coronavirus And Its Impact On Chinese Economy

Feb. 14, 2020 9:46 AM ETSBUX, YUMC, TCOM, LK, YINN, TDF, HTHT, YANG, GXC, FXP, PGJ, TOUR, ZNH, CN, CHN, CXSE, CEA, XPP, GHG, YXI, FCA, WCHN, FLCH, KGRN, CHKIF, CHEAF21 Comments
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Aiden Research
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Summary

  • Our assessment shows that the coronavirus is more analogous to a more contagious and stronger flu than it is to other deadlier viruses.
  • We are optimistic about the government's capability to control the virus, but the outbreak will certainly hit Chinese economy in short term (first quarter of 2020).
  • Certain sectors and companies will suffer more acutely from the outbreak, but we would be cautious about shorting them.

Source: Xinhua

Investment Thesis

Based on our assessment, the coronavirus is closer to a more contagious and stronger flu as compared with other deadlier viruses. We are confident that the Chinese government will be able to successfully manage the situation. With that said, we believe there will be a negative impact on Chinese economy, especially for Q1 2020. We have listed a couple of sectors/companies that may suffer the most from this outbreak, but we suggest that investors exercise caution in shorting these targets.

How Serious Is the Coronavirus, Really?

As we have received a lot of questions on and challenges to our previous article on the coronavirus – and since many of these relate to evidence supporting our optimism regarding the situation – we decided to write another piece on this topic with more numerical analysis to show how our conclusions have been drawn. To reinforce the credibility of the analysis, note that all the cited numbers related to the coronavirus situation are from U.S. resources, such as Johns Hopkins CSSE or the U.S. Center of Diseases Control (CDC).

The first or the most fundamental question people are asking regards the actual severity of the virus. Our conclusion, based on our own assessment of the situation, is that the coronavirus is a highly contagious but relatively low-mortality-rate virus.

  • First of all, to reiterate, it's definitely highly contagious. According to various sources on this, the transmissibility of the coronavirus (indicated by R0) is around 4. As a comparison, the R0 for the common flu is 1.3 and for SARS it was 2. We think this is well acknowledged by governments around the globe, given how quickly and seriously they have been taking preventive actions.
  • But it's not that deadly, at least for now. It's been about two months since the first reported case of the coronavirus infection on Dec. 8 in Wuhan, China. The most recent number (as of Feb. 13) of total confirmed cases is 60,364, of which 59,826 have been in mainland China and 548 have been outside of China. The total confirmed death toll so far is 1,370, with only three deaths recorded outside of mainland China.

Source: Johns Hopkins CSSE

People might draw the conclusion that the virus’ mortality rate is about 2% based on the numbers so far, which we think is misleading and not informative at all:

  • First of all, the majority of infections (48,206 out of the 59,830, or 80%) and deaths (1,310 out of 1,367, or 96%) in China have occurred within Hubei Province, where the virus was first detected. If we separate these cases from those outside that region, we calculate mortality rates of 2.7% for Hubei Province and 0.4% for other parts of China. There is a very legitimate – and at the same time tragic – reason behind the abnormally high mortality rate for Hubei Province: the mandatory quarantine of the region imposed by the Chinese central government. The number of patients exploded in a short period and medical supplies were insufficient to address the situation, so the higher-than-average mortality rate is unsurprising.
  • Many of the deaths reported have been people with other health issues, such as lung problems or heart disease. For people who are young and healthy, the mortality rate is much lower. This also explains why we are seeing a rapid rise in the number of recovered patients.
  • For regions outside China, we don't think the number of cases is high enough to reach a meaningful conclusion on the true mortality rate. But with three coronavirus deaths outside mainland China, we tend to think the ex-China situation is not concerning to any extent.

As a comparison, the most recent flu season in the U.S. has caused around 30 million infections, with a mortality rate of about 0.1%-0.2%:

Source: CDC Website

In light of this, we think the coronavirus is more analogous to a more contagious and stronger flu than it is to other deadlier viruses such as SARS and MERS, whose reported mortality rates are 10% and 34% respectively.

What About the Impact on the Chinese Economy?

In our previous article, we tried to identify certain "gainers" from this tragedy. But we are not trying to hide the fact that this outbreak will have a negative impact on the Chinese economy overall. In this section, we will try to summarize the sectors and companies that suffer the most from the situation.

First of all, China will be hit by suspended or slowed economic activity. The virus broke out right in the middle of the Chinese Lunar New Year holiday, which pressured the government to extend the holiday's end date from Jan. 31 to Feb. 3 in order to help slow down the rapidly spreading outbreak. In some big cities, like Beijing, the holiday was extended even later — to Feb. 10. For certain companies, the holiday was extended even further, to Feb. 17, or even through the end of the month. The extended holiday, plus the mandatory or volunteered self-quarantine, will lead to slowed economic growth for Q1 2020 (primarily in February). It's hard to predict the extent of the impact, but Oxford Economics has forecast first-quarter growth of less than 4%, whereas the pre-virus forecast was 6%.

Travel-related sectors will take a loss. It's obvious that people will have to travel less, especially when it comes to leisure travel. Business travel is likely to pick up once people return to work, but other forms of travel will certainly take the hit. Airline companies such as China Southern Airlines (NYSE: ZNH) and China Eastern Airlines (NYSE: CEA) will report lower-than-expected volumes for Q1. On the other hand, crude oil has dropped by about 15% in the past two weeks, which will help lower costs and offset losses for airline companies.

ChartData by YCharts

Tourism sectors will also suffer. The Spring Festival is normally a period when many people travel to celebrate the New Year. The coronavirus outbreak will certainly hurt the demand for tourism and hospitality. Names like Trip.com Group (NASDAQ: TCOM) and Tuniu Corporation (NASDAQ: TOUR) are sure to see poor Q1 numbers. Hotel chains like Huazhu Group (NASDAQ: HTHT) and GreenTree Hospitality Group (NYSE: GHG) will suffer from reduced demand as well.

ChartData by YCharts

Food chains are among the biggest losers as well. People are certain to eat out less during this period, which is bad news for food chains such as Yum China Holdings (NYSE: YUMC) and Luckin Coffee (NASDAQ: LK). Starbucks (NASDAQ: SBUX) closed half of its China locations due to the outbreak.

ChartData by YCharts

These are the major losers from the virus outbreak, in our opinion. As you can see from the price charts, the market has already reacted to some extent (on average stock prices have dropped 10%-15%). There might be some short opportunities in these companies, especially when poor financial results come out along the way. However, given where we stand on the overall situation of the virus, we would be cautious about actually going short here.

Conclusion

In this article, we have analyzed the severity of the coronavirus based on numerical analysis and have concluded that the virus is more analogous to a highly contagious and stronger flu than it is to other deadlier viruses. This leads us to our overall optimistic view of the situation. However, the short-term impact on the Chinese economy is inevitable. We have listed a couple of companies that will suffer the most from the outbreak, although we would be cautious about shorting at this time.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

This article was written by

Aiden Research profile picture
2.58K Followers
As an independent research firm, we focus on China Opportunities, from either US-listed Chinese Companies, or US companies' operation in China. Our mission is to help bridge the huge information gap between China and global investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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