Coronavirus Outbreak Is Affecting Several Major Chinese Industries

The coronavirus outbreak has severely impacted industries in China, including hotels and motels, travel and leisure, airlines and transportation services.

Exhibit 1: Coronavirus Impact on Chinese Sectors

Airlines have suffered the most, declining 20.5% year-to-date, compared to a gain of 11.8% this time last year.This makes January 2020 the worst month for global and Chinese airlines since May 2019 as seen in Exhibit 2.

Air China, China’s largest airline by market capitalization, has declined 26.0% YTD, while China Eastern Airlines and China Southern Airlines declined 25.3% and 24.0% respectively.Other airlines with revenue exposure to Asia including Air France, Cathay Pacific, and Deutsche Lufthansa AG have declined 14.5%, 15.0% and 14.1% respectively.

Exhibit 2: Chinese Airlines Monthly Performance

Hotels go hand in hand with airlines, and have also been impacted, declining 15.1% year-to-date. Shangri-La Asia hotel has one of the largest exposures to China, generating 34% of their revenue in the region, according to company filings.As a result, analysts have downgraded revenue, EBITDA, and EPS forecasts for this year and next as seen in Exhibit 3.

According to the StarMine Analyst Revision Model (ARM), Shangri-La has a region percentile ranking score of 9 (out of 100), putting it in the bottom decile. StarMine ARM is an analyst revisions stock ranking model that is designed to predict future changes in analyst sentiment.

Exhibit 3: StarMine Analyst Revision Model Score for Shangri-La

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Source: Eikon by Refinitiv

While travel and tourism has been negatively impacted, other industries have benefited significantly. When looking at the top and bottom performers on the Tokyo Stock Exchange, Kawamoto Corp. stands out from the crowd. With only a market capitalization of approximately $170 million, it is the best performing stock on the exchange, up 749.0% year-to-date as seen in Exhibit 4. The reason for this is the significant demand for safety masks, which Kawamoto Corp. manufactures. Azearth is also on the top performer list, up 125.6% year-to-date. The company makes protective clothing used in hospitals.

Exhibit 4:Japanese Top/Bottom Performers

While some niche industries are benefiting, the market overall has experienced a significant increase in volatility. The VIX index has increased 44% year-to-date to an index reading of 17.9. The risk-off mood has impacted the Chinese CDS market as seen in Exhibit 5, with premiums to insure government debt spiking significantly since the outbreak.

Exhibit 5: Chinese CDS Market

Since the outbreak continues to grow, the impact on markets should be closely watched.