Unfortunately, it increasingly appears as if the Australian financial media have been too complacent about the potential impact of the Covid-19/coronavirus situation.
A couple of weeks back, finance news sites were full of commentary from various pundits downplaying the issue, prematurely declaring that the virus would have a limited economic impact and making comparisons to the SARS outbreak back in 2002-2003.
Yet today, the death toll from the new coronavirus stands at more than double that of the SARS epidemic: the most recent updates suggests the latest outbreak has now claimed 1,875 lives, compared to just over 770 for SARS. The number of listed Australian companies announcing that they expect to be adversely impacted by the virus also seems to grow by the day.
I managed to get hold of a Beijing-based journalist I know earlier this week, and he gave me his take on the situation in China:
...I've been in self quarantine for 4 weeks and many people are doing the same. I am sure it is have a huge impact in the small business all over the country. Some people are more scared than others but in general many foreigners have left China due the epidemic situation and I think they are not coming back since China is becoming more restrictive and not foreign friendly despite the unreliable propaganda of Beijing...
After reading that last comment, I can't but wonder if the coronavirus situation might mean that Chinese manufacturing has seen its heyday. International companies may now be more inclined to look elsewhere when looking for a destination to setup their manufacturing operations.
Turning to Gale Pacific, one positive for this company is that the spread of the virus seems to have slowed dramatically in Zhejiang province, which is home to the manufacturing centre of Ningbo City, wherein the Gale Pacific factory is located. A couple of weeks back, Zhejiang had the second highest number of confirmed coronavirus cases after Hubei, but in recent days today the province has fallen back to fourth place.
Some less encouraging news about Ningbo City was in a report I noticed last week in the South China Morning Post.
As the report noted, last Monday work resumed in China's factories and offices, after the authorities extended the holiday period by several days in many regions in an attempt to contain the outbreak.
Even so, it hasn't been smooth sailing, and the coronavirus situation has been a major impediment to many businesses, as the report goes on to highlight:
,...One common requirement for factories is that the employer must provide masks to its employees, typically two per employee for 10 days.
This has proved difficult, however, as China is experiencing a severe mask shortage.
“As far as we know, even for those enterprises with annual sales of more than 20 million yuan (US$2.8 million) in Ningbo city, about 50, or 5 per cent of them, have been allowed to restart work so far,” said Linda Chen, who works at a company producing supporting frameworks for tablets in Zhejiang province, where Ningbo is located.
“Although we have been allowed to restart production, only 20 per cent of our workers are able to return to work, mainly local Ningbo residents.”
Lisa Li, an executive at a major down jacket producer, said her business could not find enough masks.
“We can only arrange 200 employees to work on the production line of our plant in Guangdong, because the local government requires every enterprise to have at least two masks per day, and 10 days of reserve for each employee,” she said.
“That means we must have 4,000 masks in stock every day, and it means that we must stock up more masks if we want more workers to restart work.”
According to the above extract, only 5% of enterprises in Ningbo City were allowed to resume work last week, and even those lucky few were faced with a severe shortage of workers, presumably due to travel restrictions caused by the coronavirus situation. And on top of that, companies need to source and supply masks to their workers before they can recommence operations.
It is difficult to judge whether Gale Pacific will be impacted by this situation: Breville seems to have dodged a bullet, for example, as they had stockpiled inventory at the end of last year.
But at the very least, you would assume that the indirect impact of the coronavirus outbreak, namely, the reverberations from China's economic slowdown, is likely to impact this stock.
Presumably, more will be revealed in the update on the 24th.
GAP Price at posting:
17.5¢ Sentiment: None Disclosure: Held
(20min delay)