So, Who Is Going To Win The Chinese Lockdown Story? We've Both UK And US Evidence To Look At

Coronavirus has affected different countries at different times, different variants flowing through populations and so on. Different government have taken different approaches as well. We though are interested in the Jerry Maguire point: "Show me the money". So comparing approaches isn't the point here, what we want to know is who is likely to win in terms of stocks and share prices. 

We largely know who has won in the US and UK economies and markets. Given the later influence of lockdowns upon China perhaps we can use that knowledge to try and see what might win there? Although we do need to be aware of the underlying differences across the economies.

In the UK the big losers have actually been the commercial property landlords. Intu (that's Intu Properties, nothing to do with the software company) went bust back as this was all beginning and not really because of the 'rona at all. Hammerson and Land Securities have suffered dreadfully though. The underlying here was that British retail space was gradually being eaten by online and internet shopping. Before this all started perhaps 10 to 11% of retail sales were online, 10 to 11% of retail space was empty. This is the sort of change that killed Intu. 

As a result of lockdown that share of retail spending went up to around 28%. Which would have spelled doom entire for the other retail commercial landlords. As it turned out the online share dropped back considerably. It runs around 16 to 18% now. Lockdowns accelerated the ongoing change by a few years but didn't lead to an entire step change.

However, office space, that's different and that's the other leg of the commercial property business (traditionally in the UK "industrial" property is a different sector). Because suddenly everyone realised that working from home does in fact work. Commuting ticket sales are down by 25% for example. And no one really does think that this is going to recede back to "normal". Lockdowns have provided a shock to the system. Those landlords are suffering badly and it's not obvious they're going to come back. It's the office side which is letting them down, not retail.

Over in the US the outturn has been a little different. Amazon's business boomed just as it did in the UK. But instead of retreating back to just that perhaps couple of year acceleration of trends the company spent the time investing very heavily in expanding its local delivery networks. The last couple of miles, working from small distribution hubs, to provide speedy delivery. This is working too - it's enabling the change from delivery in a couple of days to delivery in a couple of hours. This is continuing to change shopping habits. 

Looking at China with this information we might want to just not think about the property market. That has its own and rather different problems given the decades long boom in it, the vast portion of GDP that goes into building new construction (I've seen numbers like 24% of GDP which is an amazing number). However, we might then think of being a little more specific.

MissFresh (NASDAQ: MF) for example, is expanding into that very local and very speedy delivery niche. This eats capital and even more so because the company aims to own its network rather than rent or share it. They're also introducing own brand products - as with Amazon, an excellent way to build margins - and having some success in doing so.

Recent results show revenues up 300% on those own label products from Q1 to Q4. YonY revenues for the last mile delivery business are up 40% and change. That is, we're not seeing that British experience of online sales falling back as lockdowns end.

MissFresh isn't the only company in this field of course, it's being used as an example. It's also true that perhaps China is a "better" market for delivery shopping. The astonishing growth of the economy in the last 20 years has meant that there's now that huge retail market, as in the UK or US, but without the associated habits of physical retail shopping that need to be changed. It's as if China is growing into a delivery retail nation without going through that stage of bricks and mortar retail.

It's also possible to think of companies that have simply been affected by lockdown, without lockdowns producing any underlying and long term change in the market or opportunity. Businesses that have, perhaps, been interrupted without a change in long term opportunities in the sector. For example, recycling is something that's going to grow massively in China just as it is elsewhere. But China also doesn't have the extant infrastructure to recycle in quite the same way that countries which have been rich for a century do.

So there's a market in creating that infrastructure. And it's important to understand how the recycling market works too. Knowing how to - just as an example - smelt copper scrap is useful. But the thing that makes a copper recycling business work is having the network which will produce a stream of copper scrap to be recycled. The business is not, in fact, the smelter, it's the network which feeds the smelter. It's those networks, those markets, that really need to be created.

So, we might look favourably on ATRenew which is creating just those marketplaces for used consumer electronics. It went public in summer 2021, is therefore capital rich at present and able to build out the business. The point here is that by being online it's possible to try to hit two markets at once - the reuse and the recycle ones. As to being capital rich their latest results had cash (and near cash, short term investments etc) at $382.7 million, which at their current burn rate keeps them going for several years ($25.5 million net loss a quarter).

As someone who has run a second hand business the point here is that there are network effects. Buyers come because this is where things are placed for sale. Things are placed for sale because the buyers are there. There's something of a landrace in such businesses, be the first to conquer the territory that is. Being in both markets at once increases the possibility of winning that race - volumes are higher, network effects are more likely to be positive.

The recycle market is when a PS3 (or whatever) needs renovation. The recycling market is when it's broken, or too old, or just not good enough any more. Specialists will bid on such a machine, or a crate of them, a truckload, and then sort them. Working components might be kept for repair, completely dead things sent off for metals extraction. Online marketplaces like those of ATRenew provide a one stop shop for both sellers and buyers - those network effects. Further, while the recycling work utilises physical locations the majority of the businesses are online and thus escape those lockdown effects.

There's also an intriguing possibility given the slowdown. Akin to the “lippy effect” where less good economic times actually increase the purchase of smaller items and luxuries. This could well apply to second hand and used items as they replace brand new in the consumption basket.

Again, this is not to concentrate on a specific company, it's just an example. Of something that had a hard time rolling out the new idea because of lockdowns, but 'rona and the crises doesn't change the basic viability of the business idea over time. It's had an interruption, not a change in basic viability.

It's even possible to take a very grand view of this. Ever since Blueprint for Survival was published half a century ago insisting that we must build a more circular (although they actually used the word “stock” economy, it means the same thing) and less “flow” or consumption of new resources economy this is, in fact, what the metals industries have been doing. Larger percentages of metals and other resource consumption have been coming from the recycling of the previous generation of equipment over the years. Betting against that trend would be a strange thing to do. This before we get to the political and social encouragement for such currently green activities.   

Given the 30,000 foot level of this analysis the point here is not to say that these, or any other, China based companies are going to succeed particularly. They both seem to be doing well and so on but that's not my point. Rather, given the way lockdowns have been staggered around the world we have the opportunity to apply lessons learned in one market to another. So, survey the companies that have done well - given that we're English speakers here, that'll be in the UK and US most likely - and see if such success might fit the specifics of the Chinese economy. 

Yes, sadly, we're in that world where we've got to do some work and research.