Category Archives: Japanese development

Tiffany’s dazzling 1Q11

May 27, 2011 By in China, Current Market Thoughts, earnings conference calls, economics, Hong Kong, Industry Analysis, Japanese development, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , , 1 Comment

the results

TIF reported results for its 1Q11 (TIF’s fiscal year ends on January 31st of the following calendar year) before the New York market opened on Thursday, May 26th.  The company posted earnings of $.63 per share on revenues of $761 million.  This compares with per share profits of $.50 in the year-ago quarter on sales of $633.6 million.  The Wall Street consensus was $.57.

The report represents a 26% gain in earnings on a 20% advance in sales.  TIF’s performance for the quarter was considerably better than these strong comparisons suggest, however.  TIF posted a one-time tax benefit worth $.02 a share in last year’s first quarter; this year’s income statement had in it $.04 in non-recurring costs for moving TIF’s headquarters.  Ex these items, earnings were up 39% year on year.

In its conference call, TIF raised its full year guidance by $.10 a share, to $3.45-$3.55 (excluding $.19 in non-recurring moving charges).  A few days before the report, the company upped its quarterly dividend by 16%, from $.25 a share to $.29.

The stock made an odd little rally in the closing hour of trading on Wednesday.  It gained another 8.6% on Thursday.

the details

Yes, analysts had penciled in $.57 a share in earnings, based, I think, mostly on company guidance.  But I can’t imagine anyone was super-comfortable with the number.  The two big imponderables:

1.  How would Japan perform in the aftermath of the earthquake and tsunamis that occurred on March 11th north of Tokyo?  How many stores would be damaged by the resulting power shortages, and for how long?  Would TIF’s sales be hurt by an attitude of “self-restraint” (jishuku), i.e., postponement of consumption, in sympathy with earthquake victims?  If so, would that be contained to the Tokyo area or would it spread to the rest of the country?

When TIF reported 4Q10 results on March 21st, the company said it expected Japanese sales to be down by 15% year on year in 1Q11, reducing total company eps by about $.05.  …but who knew?   …and the company had already booked half a quarter of “normal” sales–would 2Q11 be worse?

2.  Would the US business slow?  After all, the prevailing sentiment on Wall Street has been that domestic unemployment is still high, job growth is lackluster and the overall economy is being hurt, possibly more seriously than expected, by high gasoline prices.  Maybe economic doldrums would have an adverse effect on TIF customers–not only aspirational buyers but the wealthy as well.

Japanese results were unexpectedly good

Instead of down 15%, Japanese sales (which accounted for 17% of total company sales in the quarter) were up by 7%.  This was due completely to a 10% gain of the yen vs. the dollar during the quarter.  Nevertheless, same store sales were only down by 3%.  The Osaka area was relatively unaffected.  Nationwide comps were +3% in February, -16% in March (implying to me that Tokyo-area sales fell by about a third during the month), +6% in April.  Jishuku may have also had some unusual effects:  sales in Guam and Hawaii, traditional Japanese tourist destinations, were up 30% year on year for the quarter.

TIF now thinks that, while Japan won’t be a source of strength this year, it won’t be a significant drag on the rest of the company, either.  Sounds reasonable.

to me, the US was a bigger positive surprise

I know sales of luxury goods are going very well, and I expected that TIF’s sales in the Americas ( 48% of the company) would easily be up in double digits.  But the 19% gain TIF achieved was considerably higher than I expected. Comparable store sales at the flagship store in NYC were up 23%, year on year; comps in the rest of the US were up by 15%.  High-end jewelry did the best, as has been the case for some time.  However, there was even some strength in the silver jewelry that TIF’s less affluent clients favor.  US sales growth was “solid from coast to coast.”  Comps got better as the quarter progressed.

the rest of the world continues to show amazing gains

Sales were up by 37% year on year in Asia-Pacific (23% of TIF’s total) thanks mostly to Greater China.  Currency accounted for 6% of that, and new stores another 5%.  But comps were up 26%, after a 21% year on year gain in 2010.  Wow!

Sales in Europe (12%) were up 25%.  Currency gains made up 6% of the increase, and new stores 4%.  But comps were up 15%, due mostly to strength in continental Europe, after a 14% increase last year.

the stock

I haven’t changed my mind about TIF since I wrote about the stock after the 4Q11 earnings release.  I still think the company can earn $3.75 a share this year and $4.50 or so next.  Applying a 20x multiple to these figures gives us a $75 target based on 2011 eps and $90 on 2012.  Applying 25x gets correspondingly higher figures.

One thing is different, however.  TIF is no longer the sub-$60 stock it was in March.

TIF has exceptionally strong management, a wonderful brand name, and it’s also in the right place at the right time.  So I think it will continue to be an outperformer.  I’m happy to hold the stock.  I’ve trimmed my own position a bit, though, mostly because of its size.  I’d be an eager buyer on weakness.


will Hong Kong break its currency peg with the US$?–probably

May 5, 2011 By in Asian economic development, economics, emerging markets, Hong Kong, Japanese development, Strategy Tags: , , , , , , , , Leave a comment

the HK$-US$ peg

There has been increasing speculation recently that Hong Kong will abandon the policy, in place for almost thirty years, of tying the HK$ to the US$ at a fixed exchange rate.  Given the tenacity with which the former British colony defended the peg during the Asian financial crisis of the late 1990s (against speculators who seem to have had no clue about Hong Kong), this may seem strange.  But I think the peg has served its purpose and may now be more trouble than it’s worth.  My guess is the peg will go–and in the near future.  In stock market terms, this would be good for domestic firms that use US$ inputs and bad for exporters.

why the peg exists (much more detail in this post)

In the initial post-WWII period, the Hong Kong dollar was pegged for economic reasons, first to sterling and later to the US dollar. In 1974, however, the Hong Kong government decided to let the currency float.

Pegging your currency to that of your largest trade customer makes a lot of sense  for an emerging economy ( the granddaddy of post-WWII pegging successes is Japan), since it ensures that you retain the labor cost advantage that’s your greatest development asset. Doing so has a number of costs, however. One of the most significant is that you give up control of your domestic money policy. You can’t tighten when the other party is loosening, even though that might be the right move for your economy. Why not?  Your interest rates go up; the other country’s go down.  The higher interest rate differential means arbitrageurs short the other currency and use the proceeds to buy yours.  This produces immediate upward pressure on your currency and downward pressure on the other party’s.  So you’d be shooting yourself in the foot.

Therefore, you’re stuck mimicking the money policy moves of your key trading partner. Unless the developing economy is extremely vigilant and conducts a restrictive fiscal policy, the consequences can be disastrous. The most recent example of calamity can be seen in the current situation of Ireland and Spain, which imported a vastly over-stimulative monetary policy through the euro—where interest rates were set with an eye to the needs of much less dynamic members like France and Germany.  Ouch!

unpegging in 1974

In the mid-Seventies, the US was beginning a policy of too much monetary stimulus that would spawn a late-decade inflationary spiral—and the subsequent Volcker medicine (sky-high interest rates and deep recession) of the early Eighties.

Rather than be dragged along down the same path, Hong Kong unpegged.

repegging–why?

In October 1983, however, Hong Kong repegged to the dollar. This had nothing to do with the now more orthodox money path of the US. The key reason was political.  The mainland refused to renew the lease the UK held over Hong Kong, meaning that the British colony would revert to Chinese rule when the then-current lease ended, in 1997.

At first, Hong Kong citizens weren’t thrilled. They had witnessed the ill effects of the Great Leap Forward and the Cultural Revolution, and surmised that they might well be the recipients of extensive “reeducation” to purge them of their capitalist views. Given that the state and the Communist Party owned all the capital, they might forfeit all their personal wealth, as well.  And the UK wasn’t appearing overly worried about the future safety of colony residents (Parliament would eventually deny UK citizenship to the mostly ethnic Chinese Hong Kong citizens, saying they would find the climate of the British Isles inhospitable).

Given this situation, Hong Kong citizens had two priorities:

–find another country willing to make them citizens and give them passports, and

–get as much accumulated wealth as possible out of Hong Kong and out of Hong Kong dollars (which might not exist after 1997).

when to move?

When should you remove you money from Hong Kong? Assume your HK$ would have no value after the handover. Your first thought might be to take your money out of Hong Kong a few months before the fact, to avoid the terminal collapse of the currency.  But everybody is going to be thinking the same thing.  So the date when the currency begins its swoon may not be in 1997 but maybe in 1996. But everyone is probably working that out, as well. So the currency will exhibit terminal weakness even earlier.  Who knows how many iterations of this backing-off process there will be.  The only sure thing is that the penalty for waiting too long will be severe.  Maybe the safest course, then, is to start to move money out of Hong Kong immediately.

To forestall a currency crisis that was already starting to ignite, the Hong Kong government decided to repeg. It though–correctly–that if citizens were guaranteed that their currency would not lose value vs. some internatinoal standard during the runup to the handover, capital flight would be minimized.  The penalty in imported inflation might be high.  But the political necessity overrode this.

the present

The pegging policy worked.

We’re now almost thirty years later. Hong Kong has survived the continual inflationary problems that the peg to the US$ have caused. Citizens have long since realized that the luckiest day of their economic lives was the one when China decided not to renew the UK lease.

So there’s no real reason in today’s post-colonial world to keep the peg.  All it brings is inflation–especially now, when the US is maintaining super-low interest rates as it tries to recover from the near-meltdown of the financial system. And Hong Kong citizens would by and large prefer to hold currency tied to the renminbi than to the US$ anyway.

My guess is that the rumors we’re hearing are a testing of the waters as prelude to replacing the peg.

investment implications

In all likelihood, the HK$ will rise vs the US$ if the peg is removed.  If so, the implications are straightforward.  Any firm with revenues in HK$ and/or costs in US$ will benefit.  Any firm in the opposite situation will lose.

Beijing’s renminbi experiment

April 13, 2011 By in Asian economic development, China, economics, Hong Kong, Japanese development, Strategy Tags: , , , , , , , , Leave a comment

emerging market development

The standard road to economic development for emerging economies in the post-WWII era has been to emulate Japan …that is to say, to provide cheap labor and a supportive working environment to foreign firms in return for technology transfer.  To ensure the emerging country keeps its labor cost advantage, it typically pegs its currency to that of its largest target market (read: the US) or to a basket of currencies representing the bulk of potential customers.

As I’ve commented in more detail in other posts, the crucial testing point for this strategy comes when the emerging nation runs out of cheap productive resources.  Usually, the factor is labor–although it could equally be water or something else.  At this point, labor-intensive firms can no longer expand operations by turning farmhands into assembly workers.  They can only grow by poaching workers from each other, causing wages to rise and an inflationary spiral to begin.

letting the local currency rise

The orthodox solution to the problem is to dissolve the peg and allow the local currency to rise.  Doing so lessens or eliminates the labor cost advantage that has helped the emerging nation develop.  In theory, it also forces industry to evolve toward higher value-added production, and requires the labor force to learn new skills.  In practice, allowing the currency to rise is strongly opposed by industrialists who have become wealthy and politically powerful under the existing regime.

The rising currency solution has other characteristics, as well:

–overall growth slows, at least for a time,

–development reorients itself away from export-oriented manufacturing and toward the domestic economy,

–the real earning power of workers rises, but nominal wages do not necessarily change, and

–the real value of asset holdings increases for all.

This last characteristic is especially important.  In a rising currency environment, the wealthy make out like bandits.  Ordinary people get a boost to their earning power, but since they may not hold property or have a large amount of accumulated savings, they probably lose economic ground to the wealthy.

a different route

Of course, currency appreciation is not the only way to raise real wages.  Why not take the direct route and raise nominal wages?  Two considerations:  1) the mechanics of getting this done could be difficult, and 2) whoever mandates higher wages is clearly responsible for the consequences–there’s no possibility of blaming evil currency speculators for any negative effects.

Singapore

I can think of only one instance where an emerging nation tried this route.  Decades ago, when Singapore was primarily a textile manufacturer, the government there raised the cost of labor–through an increase in mandatory employer contributions to the government-run pension plan.  Singapore wanted to encourage higher value-added manufacturing.  What it got instead was textile firms fleeing and a recession–which lasted until the government rescinded the pension payment increases.

Hong Kong

Hong Kong might be seen as another case in point, although the currency peg there was instituted as a political measure–to lessen flight capital in advance of the handover of the former British colony back to Beijing–not an economic one.

The Hong Kong experience, created more by necessity than economic planning, had several important characteristics:

–economic/mobility increased significantly; power shifted quickly from the existing, mostly British, elites to new, mostly ethnic Chinese, players ,

–Hong Kong was forced to become a cauldron of entrepreneurial development, just to deal with the pressure of rising wages,

–nearby Guangdong province benefited greatly from the shift of more labor-intensive manufacturing there.

China

The large across-the-board wage increases for ordinary workers recently mandated by Beijing seem to me to be the clearest signal that China has decided to try to duplicate the beneficial effects of the Hong Kong currency peg.  The eastern seaboard will play the role of Hong Kong, western China that of Guangdong, and the “princelings,” the sons and daughters of former Communist Party leaders, that of the British.

The development of the offshore renminbi market may be a new twist in the plot, but I think that otherwise the story remains the same.  If this is correct, calls for Beijing to allow the renminbi to rise against the US dollar will continue to fall on deaf ears.  From a stock market point of view, the interesting consequence might well be surprisingly strong spending by middle- or lower-end consumers.  The big question is whether to play this through already prosperous retailers or to look for the emergence of new concepts tailored specifically to this audience.  The latter route promises much bigger payoffs; the big problem is identifying the correct stock/stocks to buy.

 

more news from Japan on post-earthquake shortages

April 11, 2011 By in Japanese development Tags: , , , , , , 1 Comment

post-earthquake recovery

Industrial life in Japan is slowly recovering from the effects of last month’s earthquake and tsunamis.  The Financial Times, for example, is reporting that the Big Three automakers of Japan, Toyota, Nissan and Honda, plan to have all their factories back in operation by a week from today.  Output will only be about half the normal rate, as the industry continues to deal with component shortages.

autos and technology

We’ll begin to learn more about the effect of the disaster on the technology industry as March quarter 2011 earnings reporting season opens up in the US this week.

Everything I’ve heard/read about the auto and IT industries, however, is generally in accord with my initial thoughts.  That is, that the auto industry would be more severely affected than IT, that initial reports would overestimate damage, that the main shortage items would likely be less well-known and lower tech parts.

Electric power is proving to be the most important shortage commodity, as well as the one least able to be alleviated by field-expedient workarounds.

new shortage areas

A number of items that I hadn’t thought about are also proving to be in shortage, namely:

–according to the Asahi Shimbun (newspaper), two of the six plants manufacturing cigarettes owned by Japan Tobacco, the dominant maker in Japan, suffered heavy damage in the earthquake.  One of the two cigarette filter plants the company runs was flooded by a tsunami.  Production at the other is being interrupted by rolling electric power blackouts.  JT is hoping to reopen its earthquake-damaged plants today at 25% of capacity.

I don’t own tobacco stocks and I don’t particularly care for the industry.  But the shortage of cigarettes is a serious issue in Japan, a country where half the adult males and 10% of the adult females smoke (maybe I should write “are addicted” instead of “smoke”).  AS suggests that smokers are significantly increasing their usage as a means of coping with post-earthquake stress.

Therefore, the earthquake is providing an unusually favorable chance for foreign manufacturers, BAT and Phillip Morris, to get distribution.  Both are airlifting large quantities of cigarettes into the country.

–the Yomuiri Shimbun reports that distribution of bottled water, in great demand because of fears of water contamination, is being slowed by earthquake damage done to key bottle caps manufacturing plants run by Japan Crown Cork and by Nihon Yamamura Glass.  Nationwide output, coming from factories in western Japan, is only at about 60% of pre-earthquake levels.

–an ink shortage is causing postponement of scheduled comic book production.  The plant responsible for 100% of Japan’s production of diisobutylene, a key ingredient in making ink has stopped production due to earthquake damage.

For investors who are willing to hold tobacco stocks, Japan is a big enough market that market share shifts there might be enough to affect the stocks of industry participants.  The main significance of the other recently reported shortage items is likely that everyday life is unlikely to return to normal in Japan for a long time to come.  The fact that these difficulties are surfacing predominantly in consumer goods suggests to me that my assumption that the Japanese government will give capital goods and export-oriented industries priority over consumer businesses in use of scarce resources.

a look at Tokyo Electric Power (TEPCO), JP: 9501

March 31, 2011 By in Asian economic development, economics, Industry Analysis, Japanese development, Utilities Tags: , , , , , , 2 Comments

“9501” says a lot

Unlike systems using letters to form ticker symbols for stocks employed in many Western markets, Japan has four-digit numbers that identify the stocks traded in that country.

The initial number indicates a company’s sector.  The 9000 companies are in the Service sector.

The second number is the firm’s subsector or industry.  The 9500 companies are Utilities.

The third and fourth numbers form a pair.  Firms are ranked in order of their importance in the industry (or at least their importance when the code numbers were initially given out), with “01” at the top.

So 9501 is the designator for the biggest and most important utility in Japan.  That’s TEPCO.

Foreign investors coming to Tokyo (other than those from Korea or Taiwan, which have similar number codes) might scratch their heads at Japanese ticker symbols.  But does a system where stocks can be designated “HOG” or “LUV” have a right to criticize?

As recently as the 1980s, the power of the “01” was immense.  Industry leading firms were magnets for the most talented university graduates.   The stock market invariably awarded the industry “01” the highest price-earnings multiple, regardless of relative growth rate or asset value, making it easier for these companies to raise equity capital if need be.

post-earthquake

I can’t imagine ever buying TEPCO again (I held tons of Japanese utility stocks in the late 1980s—that’s another story, though, having to do with a since changed electricity price setting mechanism).  So I haven’t done–and have no intention to do–the work I’d need to give an investment opinion.  What follows are observations rather than analysis:

1.  Japanese stocks are subject to maximum daily fluctuation limits, both up and down (don’t ask what the rules are).  The idea is that this gives panicky investors time to get their emotions under control so they don’t sell at crazy-low prices.  In my experience, however, wherever they’re in force the limits have the opposite effect.  There’s nothing like a day or two where your stock goes limit down with no trade–and all you can do is watch–to bring panic to never before experienced heights.  TEPCO had three such days in a row.  So the stock lost two-thirds of its value before anyone had a chance to get out.

2.  It’s not clear to me that TEPCO would be able to raise new capital from non-government sources if it operated in a market like the US.  But it doesn’t.  It’s possible that the Japanese government will pressure banks and insurance companies to provide funds.

3.  TEPCO is part of the industrial grouping (or keiretsu–another long story) led by the Mizuho Bank.  Group companies may feel a special obligation to lend support.

4.  There have been rumors that the Japanese government itself will make a large capital injection.  Since regulatory negligence seems to have been a contributing factor to the nuclear reactor disaster, this makes sense to me.  Certainly, the country has to replace the lost electric power somehow.

5.  The CEO of TEPCO has reportedly been hospitalized, suffering from a number of maladies.  It’s possible that Mr. Shimizu actually is sick.  But a company-announced hospital stay is also a ritual Japanese way for firms to sack unwanted executives.  The disappearance in January 2010 of Hirohisa Fujii as finance minister in the current administration after losing a power struggle to Ichiro Ozawa is a very recent example.

I think we’ll find that this “hospitalization” is the first step in a reorganization of TEPCO’s operations.  Interested investors should watch to see who’s appointed.