Tag Archives: emerging markets

pricing out a low-end shirt: investment implications

May 21, 2013 By in Asian economic development, comparative advantage, Current Market Thoughts, economics, emerging markets, Industry Analysis, Retail Tags: , , , , , , Leave a comment

A while ago, I wrote about pricing out a polo shirt that retailed for $150 then ($175 now).

Today’s post goes to the other end of the fashion spectrum:  pricing out a “fast fashion” shirt that might sell at H&M or Zara for, say, $15.  The source of my information about Bangladesh is an op ed column, “The Economics of a $6.75 Shirt,” by Rubana Huq, who owns a garment business there.

Just for reference, the factory gate cost of the KP MacLane  luxury polo is:

–materials           $10.35

–manufacturing          $11.05

= $21.40.

These figures are unusually high for a shirt, mostly because of the small initial lots involved.  The unit price could easily be below $15 now, depending on how successful KP MacLane has been in its sales efforts.

in comparison, costs in Bangladesh…

…for an order of 400,000 fast fashion shirts:

materials      $5.75

–cotton cloth           $4.75

–labels, other          $1.00

manufacturing     $.875

–wages          $.38

–finishing          $.15

–utilities, factory rent          $.11

–overhead          $.11

–debt service (for manufacturing equipment)          $.125

= $6.625

The selling price at the factory door is $6.75.  Therefore, the per garment profit is $.125.  The total order earns the manufacturer, before paying himself (or, in this case, herself), $50,000.  In the example Ms. Huq gives in her op ed column, this order represents about five months business for the factory.

what I find interesting

Although the KP MacLane polo and the fast fashion t-shirt sell for wildly different prices at retail, the material costs aren’t that different.

The markup over production cost is 718% for KPM, 140% for the tee.  As I mentioned in my earlier post, a Hermès polo sells for $455, or about 2.6x the price of the KPM one.  Hermès’ production costs are probably lower than KPM’s, so the markup is likely higher than 1800%.   In both cases the buyer is clearly paying primarily for the branding, not the garment.

The operating model for classic luxury goods is far different from that of fast fashion.  The former sells far fewer items-most of which have very long shelf lives–at huge markups.  The latter sells huge numbers of items with short shelf lives at low markups.

The two styles demand different skills.  Fast fashion, in particular, has little room for error in design or sourcing/pricing from manufacturers.

the Bangladesh situation

First of all, we have to remember that the data Ms. Huq present come from a manufacturer in Bangladesh, hardly a disinterested party.  Certainly she will want to put her best foot forward.  Still, I’ve found the situation she describes to be typical of the garment industry over the decades, whether located in New York City, Japan, Thailand, China or Bangladesh.

Bangladesh employs 4 million garment workers, the vast majority of them women, who are the chief breadwinners in households totaling 20 million.  They earn US$70 – $80 a month, which is far more than an unskilled laborer could expect in any alternative employment in Bangladesh.  Although their families are barely surviving, the greatest fear of these workers is doubtless that the garment industry will shift away from Bangladesh to other low labor-cost countries, like Vietnam, leaving them unemployed.

The garment manufacturer in Bangladesh may make $100,000 a year if everything runs smoothly.  But that could be considerably less if he’s inefficient or if he encounters production delays that, say, require him to pay for shipment by air.  So one can certainly understand–not condone, just understand–the temptation an unscrupulous owner may feel to lower rent by turning a blind eye to safety violations.   It’s not clear how much leeway fast fashion has to alter its operating model by raising prices, either (look what happened to JCP).

In theory at least,  consumer pressure on international retailers for a keener eye to worker safety when sourcing garments may solve that issue–although the same problems seem to recur decade after decade and in country after country.

The more difficult issue to reconcile are the ideas that income of $70 a month is a good situation to be in, which in Bangladesh it is, and that well-intentioned efforts to improve it may make the workers’ lot considerably worse.

a strong 1Q13 from Las Vegas Sands (LVS)

May 2, 2013 By in Casinos, earnings conference calls, Entertainment, Industry Analysis, Stock ideas Tags: , , , , , , 1 Comment

the report

After yesterday’s close, LVS reported 1Q13 earnings results.  Revenues came in at a record $3.3 billion, up 19.5% year-on-year.  Earnings per share were $.71, up a penny from the 1Q12 EPS, but $.04 higher than the Wall Street analysts’ consensus.

The results are actually much stronger than the raw numbers would suggest.  As regular readers will already know, casinos count as revenue only the amount that patrons lose when they gamble, not the amount they bet.  Over long periods of time, gamblers losses adhere to highly predictable patterns.  Over short periods, however, they can fluctuate a lot from the “house advantage,” based mostly on random “luck” factors.  To get a clear picture of how a casino company is doing, we have to adjust for this.

In LVS’s case, luck made 1Q12 revenue (and operating profit) look $177 million better than it should have; luck made 1Q13 revenue look $25 million worse.  Adjusted for these differences, income for LVS was up by about 30%.

why so good?

Macau

–Chinese gamblers elected to keep low profiles during the recently completed leadership change in Beijing.  Now they’re returning to the baccarat tables in Macau.

–better transportation and streamlined border controls mean more visitors can easily reach Macau

–unlike, say, WYNN, LVS has ample spare capacity to accommodate new customers, so it’s benefiting disproportionately from the market upturn.

Singapore

–mainland Chinese gamblers, whose patronage of the Marina Bay Sands has been more highly economically sensitive than their visits to Macau, are coming back

–so too, gamblers from Indonesia

US

–Las Vegas was flattish, with strength in non-casino operations

–Bethlehem, PA continues to perk along

Asian retail mall operations

In response to an analyst question about why LVS had not yet sold any of its Macau or Singapore retail operations as previously planned, management said the businesses were still growing much more quickly than anticipated.  The company thinks the Asian malls may ultimately be worth $8 billion – $10 billion, or around 20% of the company’s market cap.

For the first time, LVS is providing segment detail about these operations.   1Q13 operating profits were $68 million, up 23.4% yoy.

a special dividend?

Management also said it’s considering borrowing in the US, à la AAPL, to fund either a special dividend or a share buyback.

my take

LVS isn’t wart-free. It’s involved in a number of lawsuits.  And its long-time auditor has just parted ways.  Still, by my calculations, the Asian operations explain more than the entire market cap of LVS.  I don’t think either Hong Kong or Wall Street has appreciated the potential of the Asian retail malls.  LVS is the only way to get exposure to Marina Bay Sands and the easiest way to participate in Sands China.  I’m not in a great rush to buy more today but I’m very happy to hold.

a falling gold price–what does it mean?

April 15, 2013 By in emerging markets, Gold, Industry Analysis, Recent Market Action Tags: , , , , , , , , 3 Comments

Back in the day, I was, among other things, a gold mining analyst.  That period left me with an enduring fascination, not about the yellow metal itself, but about gold “bugs”–the people who are obsessed with gold and who buy it as an “investment.”  I have the same complex mixture of feelings about gold bugs that I have about survivalists, Civil War reenactors, model railroad buffs and people from Brooklyn.  It’s not exactly “There but for the grace of God…”, but that’s the general direction.

I really don’t get gold as an investment.  Yes, it’s shiny and there may actually be gnomes in Zurich.  Until the mid-1970s, gold did serve as a kind of money worldwide.  But no longer.  One exception:  developing economies where either there are no banks for businesses to use, or where people don’t want/trust banks to know about their finances.

Contrary to what I think is popular belief in the US, virtually all the demand for gold comes from the developing world.  The US accounts for 5% of purchases, the EU 10%.  Japan is a non-factor.  Last year, as usual, India was the #1 buyer of gold, at 28% of the total.  Greater China took 25%.

Before the Great Recession, the large bulk, maybe 3/4th, of the world’s demand for gold was for jewelry (although much of this did double duty as chuk kam 99.9% gold trinkets). 10% was for technology or dentistry.  The rest was gold bars and coins bought as an “investment.”  The bulk of that demand was supplied by mine production, with the rest coming from recycling and steady selling by central banks in developed countries.

The GR changed that pattern, in two ways.  Demand for gold bars and coins more than tripled.  Central banks in the developed world stopped selling, while their counterparts in emerging economies began to buy gold like there was no tomorrow.  Between 2009 and 2011–which appears to have been the peak of this activity–the gold price doubled in US$.

Gold ETFs?  They peaked in 2009 at about 17% of world gold demand.  By 2011 they had shrunk to 4%.

What’s happening now?

The gold price has been slowly declining for two years, without attracting much attention, as panicky buying by gold bugs has waned.

What’s new is India.  The biggest drain on India’s growing trade imbalance is its citizens’ continuing demand for gold–both for jewelry and because the country’s banks don’t work.  New Delhi has decided to deal with the steady flow of cash out of the country by taxing gold imports.  At least to some degree, this will put the metal’s chief buyer on the sidelines.  That won’t stop mines from churning out the stuff, however, until/unless the gold price drops below their cash cost of production.  That’s a looong way down.

Elsewhere, “investment” demand appears to be waning.  Less significant in the short term, Chinese tastes seem to be slowly shifting away from chuk kam to fashion or statement jewelry with lower gold content.  And, of course, more dentists are using ceramic teeth and PC demand is slowing.

In other words, the supply/demand picture for gold is looking less favorable for prices.  The price decline has nothing to do with inflation fears in the US or EU subsiding, or renewed faith that either area is suddenly on a sounder economic footing.

Macau gambling and the Chinese economy

April 3, 2013 By in Asian economic development, Casinos, China, Current Market Thoughts, economics, Entertainment, Industry Analysis, Recent Market Action Tags: , , , , , , , , 1 Comment

March 2013 Macau gaming results

The Macau Gaming Inspection and Coordination Bureau has just released its report on the gambling take of casinos in the SAR during March 2013.  The figure is eye-popping.  Last month gamblers exited Macau;s gambling palaces with their wallets lighter by 31.3 billion patacas (US$3.9 billion).

how good is that?

–P31.3 billion is an all-time monthly record for casino win in Macau.

–It represents a 25.4% improvement over the comparable period of 2012.

–The year-on-year gain is the highest for the SAR since January 2012, after which the Chinese economy–and the Macau casinos–began to falter.

–March is also up 15%+ vs. February, which runs contrary to Macau’s (admittedly short) pattern of flattish month-on-month comparisons in the first quarter.

winners?

This is great for the Macau casino industry, and especially for the firms that have recently added capacity, mostly in Cotai, to accommodate extra gamblers.

At the same time, the Macau gambling results give us a good idea about how well-to-do Chinese citizens feel about their economy, their personal earning prospects and their degree of comfort with the newly-installed government.  It’s a solid thumbs-up on all counts.

The figures also suggest that in its newly-launched anti-corruption, anti-ostentation campaign, Beijing is aiming at much bigger fish than high-roller casino patrons.

current equity market money flows

April 2, 2013 By in Current Market Thoughts, ETFs Vs. Mutual Funds, index funds, Industry Analysis, Investment firms, securities markets, stock market Tags: , , , , , , , , 1 Comment

There’s been a lot of press recently about investors suddenly waking up after four years of strong market gains and deciding to take their money out of “safe” fixed income investments and put it into stocks.

What’s implied in many of these articles is that this flow is what’s putting the recent zip into the S&P 500.  What’s also implied, and sometimes stated, is that this is the “dumb money” whose arrival on stage is a signal that we’re entering the closing act of the current bull market.

Both implications might have some truth to them.  But neither is anything like the full story.   Most people are a lot smarter than that.  Money flows are a lot more complex.

This is what I see:

1. Any money going into stock market mutual funds or ETFs is not coming out of bonds.  Bond funds have had large inflows every month since January 2009, except for tiny outflows in December 2010 and August 2011.

Money coming into bond mutual funds accelerated in 2012, to around $25 billion a month, according to the Investment Company Institute, the mutual fund trade organization.

2.  Bond inflows have been matched by steady though smaller, outflows from stock mutual funds.  The lost stock mutual fund money may be feeding part of the bond buying binge.  But there are also two important trends within the equity world.

–There’s a big multi-year shift away from actively managed equity mutual funds toward index ETFs.  Two reasons:  better performance, and lower costs.  ETF flows are clearly much healthier than equity mutual funds’.

–Virtually all the net equity mutual fund outflows have been coming from US-only funds.  Global, international and emerging market mutual funds have been at least treading water.  Similar ETFs are seeing large inflows.  Again, this has been happening for years.

3.  So far in 2013 over $60 billion in net new money has come into equity mutual funds, breaking an almost two-year stretch of outflows.  Two-thirds of that has gone, as usual, into global etc. funds.

Much more interesting, to my mind, but almost completely unnoticed, is the HUGE outflow of over $112 billion from equity funds that occurred last year, from August through December.

Why this rush to the door?  My guess is that this is the final shoe dropping from the stock market collapse of the Great Recession. In my experience, some investors will panic and sell at the bottom.  Others will nurse their wounds and refuse to sell until they get back to breakeven.  Then nothing on heaven or earth can persuade them not to take their money and run.  I’ve turned around two woefully underperforming global funds for two different organizations.  In both cases, this sort of almost inexplicable outflow was the last step in the healing process.

If that’s what happened during the second half of 2012, it’s a significant bullish sign for stocks.

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