OPTIMAS GLOAL ALPHA FUND - Optimas Capital Limited · The key question from investors is whether...

1

OPTIMAS GLOBAL ALPHA FUND

Newsletter, October 2018

Luxury – No More Crazy Rich Asian?

Before recent correction, luxury sector was the top performer in the European market in past two years, its

premium vs. MSCI Europe is near all-time highs. Such strong performance is supported by an average of over

20% higher earnings growth than MSCI Europe. But…

Since 3Q2018, European luxury sector is facing pressure due to a combination of macro and stock specific

factors. Fears of a rapid China demand slowdown in 2H18/2019 are emerging, which is related to macro un-

certainty, FX volatility, trade wars, curbing of “Daigou”, tougher comps and more importantly the continuity

of Chinese consumer contribution on global consumption upgrade (weaker retail sales, stock market pres-

sures and RMB weakness). The key question from investors is whether global demand drivers are still in

place to support a healthy level of sales and earnings growth over the next 12 months. Given the rising risk,

the sector has witnessed a round of de-rating recently.

Luxury Goods has been the best performing sectors in Europe over the last 2 years

EU luxury relative to MSCI Europe EU luxury vs. MSCI Europe 12m fwd EPS growth

Source: MSCI

Weakening global demand trend & Chinese consumer confidence

In the past few years, the superior sector sales growth was driven by Chinese consumers. It is estimated that

the Chinese contributed to over 32% of total luxury sales and over 70% of the growth. From past months,

however, we see stronger headwinds to luxury growth, on top of which is fears on China consumption slow-

down.

Fund AUM

$350 million

Portfolio Manager

Thomas Wong

Strategy

Pan Asia Equity Long

Short

Inception

August 2016

Liquidity

Quarterly

30 days notice

Minimum

$1 million

Management Fee

2%

Incentive Fee

20%

Administrator

Northern Trust

Auditor

Ernst & Young

Legal Counsel

Deacons (Hong Kong)

Campbells (Cayman)

Prime Brokers

Credit Suisse

Morgan Stanley

Goldman Sachs

JP Morgan

2



Chinese nationals are the largest spenders on luxury goods Exposure to Chinese consumer cluster varies across brands

Source: Bain, company estimation

For example, Chinese consumer confidence, a good leading indicator for the European luxury goods performance trends in the last few

years, appears to have rolled over amid China/US trade tension and consequentially RMB depreciation. In addition, China consumption

currently faces numerous near-term headwinds within border, including tighter consumer credit and lower housing subsidies, weak A-

share market, which could continue to affect demand in 2H18 and likely 2019.

Source: MSCI, China National Bureau of Statistics, Hong Kong Census and Statistics Department

RMB deflation to trigger lower oversea spending?

Weaker RMB would have significant impact on overseas spending. It is estimated that 2/3 of Chinese luxury spending take place over-

seas, given the large price gap between domestic and overseas. Historically, we see a high correlation between currency movement and

luxury spending.

For example, weaker RMB would hurt sales of watches & jewelry in Hong Kong. Our recently channel check with industry expert sug-

gested that luxury watch spending has sharply decelerated from over 20% growth in 1H to flat or even slight decline in 3Q post RMB

depreciation since June. Meanwhile, Gem set sales also posted a sharp deceleration in 3Q from local retailers Chow Tai Fook and Luk

Fook.

Chinese consumer confidence has traditionally been a

good leading indicator for EU luxury goods sector

Hong Kong watches & jewelry sales has strong correlation

with HKD/RMB

3



Wealth effect – will people still buy luxury when they lose money on property and stock market?

Shanghai stock composite index have corrected by -23% year to date and China property also showed weakness. While wealth effect

may have less impact on general consumption, we believe that high end consumption would have been impacted, as witnessed by the

weak consumption on auto and imported cars. High net worth individuals tend to have a large asset portfolio in stock/property market,

incremental wealth decline could drag down or temporary delay their spending.

Our concern was confirmed by correlated regression result between China A-share stock market and hard luxuries stock performance,

especially Swiss watch makers Richemont and Swatch. We see A-share index as a leading indicator for swiss watch maker’s perfor-

mance, therefore, further unsatisfying performance on A-H share could have downsize impact on luxuries as well.

Hard luxury stock performance shows high correlation with China A-share stock performance, with 6 weeks lag

Source: Company data

In our August Monthly newsletter “Candle in the wind: Hong Kong Property market”, we discussed about a potential significant correc-

tion in property prices lead by higher interest rates, liquidity dried up from China, and implementation of vacancy tax. While future of

property market is uncertain at the stage, we were also cautious on the near-term performance in stock market.

Reading from recent macro data and management’s comment – a mixed bag

China & Hong Kong retail (-)

Recent publication of macro data and management’s commentary on China consumption was more a mixed bag. China Retail Sales

came in +9.2% YoY in Sep, slightly better than the +9.0% YoY growth in August, of which gold & Jewelries sales were +11.6% YoY but flat

MoM. HK jewelry sales were +11.6% on easier comp base, but showed a slight decline MoM. It is also worth noting that, as was dis-

closed and comment by local retailers, jeweler sales were mainly driven by gold (as a defensive investment amidst the weak stock mar-

ket), while non-gold jewelry has witnessed a sharp deceleration.

HK Watch & Jewelry sales growth China Retail sales growth

Source: National Bureau of Statistics, Census and Statistics Department

4



Macau gaming (-)

Macau’s gross gaming revenue (GGR) decelerated sharply in Sep (+3% YoY) partly due to Typhoon disruption, from the fast growth pace

of +17% in August and +10% in July. The growth acceleration in Jul-Aug18 was arguably mainly driven by an easier comp base, given

typhoon posted a negative impact in Aug 2017.

Swiss watch exports (-)

September Swiss watch exports came in weak - 6.9% YoY, the weakest read since 2016. This is a significant deterioration from the Au-

gust trend of +5.5% and takes the Q3 to +1.6%, versus Q2 at +10.7% and H1 at +10.5%. Adjusting for unexpected drag down from Singa-

pore and one less trading day, export would have been up around 3% YoY, which is still no growth as evidenced by relative weakness of

most markets. We expect the upcoming October export data unsatisfactory on weak consumption trend and higher base.

Macau gaming revenue growth Switzerland Watches & Clocks exports growth

Source: Gaming Inspection and Coordination Bureau of Macau, KOF - Swiss Economic Institute

Outbound tourism and tourism spending (-)

Likely due to RMB depreciation as well as weaker economy, China outbound tourism has shown an apparent slowdown in the recent

months. Traditional luxury consumption destinations, such as Japan, South Korea, Hong Kong, Macau, and Western developed coun-

tries (USA, France and Germany) have seen Chinese inbound tourists year-on-year growth drop to lower than YTD average level, or

even turn into negative. We also see Chinese outbound tourist destinations shift from higher average spending per person countries to

lower average spending countries.

Chinese outbound tourists growth, by destination

5



Cautiousness on spending is not a privilege for Chinese. The latest tourist spending data also confirms our concerns on global-wide luxu-

ry demand slowdown. Tourism spend is an important component of luxury revenue making up about 50% of sales in Europe and 35%

globally. According to Planet VAT refund data, spending in September declined -0.5% y/y in Europe, with luxury down to 1% vs -2% av-

erage in 1H18. Despite a slight rebound of Chinese consumer in September, we saw other nationalities being more cautious about their

spending, led by tourists from Russia and Middle East.

Tourist spending in Europe growth, by source market

Source: Planet Europe

Crackdown on Daigou (-)

Chinese social media reported that Shanghai Pudong Airport is stepping up spot checks on Chinese travelers who bring in goods from

overseas, to crack down resellers, or "Daigou". Asiana Airlines (Korea’s 2nd biggest carrier) has announced that they will no longer carry

luggage for ‘commercial’ use to mainland China and HK. Reportedly, they were carrying up to 50-60 extra suitcases per flight before. In

addition, considering the new e-commerce regulations in China taking effect from Jan 2019, bearers are worried about the risk of re-

seller activity grinding to a halt, as most daigous are not registered and paying their income tax properly.

We see a more regulated market inevitable in the future, but we argue that real impact of cracking down daigou on luxury sales could

take longer than what market fears. News report on cracking down daigou is nothing new and we expect only short-term fears in the

market. The price gap between mainland China and the rest of the world has never been as narrow (index 130 today vs. 200 ten years

ago) because of RMB depreciation, import duties being lowered in July (about -4% cut) and luxury goods companies pro-actively nar-

rowing the price gap over the year. We saw both authorities and companies are actively managing consumption destinations and ex-

pect more consumption of luxuries within border. Yet, we suspect the argument that crackdown on daigou will have immediate impact

on the earnings of luxury companies, and argue that it takes longer to regulate smuggling activities.

Commentary from luxury management (Mixed)

Recent commentary we received from earnings briefing and roadshows of luxury companies are more of a mixture bag. On the bright

side, Kering stated that at Gucci, the Chinese cluster has sustained at a similar pace in Q3 compares to Q2 and even faster than Q1. At

Moncler, the management indicated that Chinese consumer base grew at a similar rate in Q3 versus H1. Watch maker Patek Philip com-

mented that mainland China demand is strong and growing steadily.

In contrary, LVMH commented that Chinese outbound consumption in Asia has slowed down. Ermenegildo Zegna CEO highlighted a

slowdown of consumption trends in mainland China. HK listed Jewelry retailer Luk Fook was the main disappointment on the topic of

Golden week: after a strong Q3 result, it commented that in the first 2 weeks of Oct, mainland China LFL growth was down double digit.

In our view, compared to hard luxuries, soft luxuries will show a more resilient demand amid intensive consumption concerns. We are

aware that Chinese consumption are crucial to both soft and hard luxury, but we do see difference in consumer groups. Soft luxury’s

confidence and more resilient performance over hard luxury is probably due to their stronger abilities to catch up fashion trends and

lower ticket size. Therefore, in-style and stronger marketing brands tend to gain market shares regardless of the different stage on eco-

nomic cycle. Meanwhile, the higher percentage of Millennials in soft luxury brands, who are less sensitive for spending changes, might

be a turning point.

6



Luxury brands quarterly organic growth % of sales to Millennial customers, by brands

Source: company data, street estimations

Income tax cut – is there a silver lining?

In mid of October, Beijing announced details of personal income tax cut, which is estimated to reduce tax payment by RMB500-600

billion, or roughly 0.5% of China GDP in 2019. The income tax cut could be split into RMB320bn from tax bracket changes and about

RMB200-300bn from new tax allowance. This is a good news to the market.

Tax cut would undoubtfully offset some of the on downside risks from trade war and RMB depreciation. However, if we take a closer

into the income group exposure, mid-income group with allowance (with parent and kids, or under education, etc.) will be the primary

beneficial, as the percentage of tax savings to their pre-tax income is significant, compared to the high values. The latter are traditional-

ly the main consumer group for luxury and is less benefited from this tax reform. Therefore, we assume the actual impact by income tax

cut to luxury consumption will be limited.

New income tax cut will be more meaningful

Source: government announcement, street estimation

7



OPTIMAS GLOBAL ALPHA FUND PERFORMANCE SUMMARY

The Optimas Global Alpha Fund recorded a net return of +0.69% in October 2018, compared with -10.2% of Hang Seng Index and -11.5% of MSCI China

Index. This brought the 2018 YTD return of the fund to 15.5%, outperform Hang Seng Index/MSCI China Index by 29.5%/35.0% in 2018 YTD and

9.0%/4.5% since inception. In October, global equity market tumbled with MSCI World Index down by 7.3%, the largest decline since May 2012; our fund

managed to weather through the market correction under prudent risk management. During the month, the fund performance was mainly driven by

positions in Consumer/Real Estate sector. Our cautious view on China consumption is confirmed by the 3Q results of listed companies, and the outlook

remains challenging at this moment. But the recent stimulus policies by the government, such as income tax cut, should be able to gradually boost con-

sumer spending and improve fundamentals. Valuation for selected sectors have come down to reasonable levels. We might see some great buying op-

portunities in the next 6-12 months.

Note: Top 10 positions based on exposure (in absolute amount), could be long or short positions.

Source: Optimas Capital, as of October 31, 2018.

Return (Last 12 Months) 18.38%

Volatility (Last 12 Months) 7.72%

Maximum Drawdown (Last 12 Months) -1.12%

Sharpe Ratio (Last 12 Months) 2.18

Avg. Net Exposure (Last 12 Months) 9%

Avg.Gross Exposure (Last 12 Months) 188%

Return (Since Inception) 30.71%

Sharpe Ratio (Since Inception) 2.98

Avg. Net Exposure (Since Inception) 12%

Avg. Gross Exposure (Since Inception) 154%

Top 10 Positions

China Oilfield Services

AIA

Hengan

China Petroleum & Chemical

ICBC

CCB

Kunlun

HSBC

CMB

Henderson Land

Return (2018 YTD) 15.5%

Volatility (2018 YTD) 7.6%

Maximum Drawdown (2018 YTD) -1.1%

Sharpe Ratio (2018 YTD) 1.8

Avg. Net Exposure (2018 YTD) -1%

Avg.Gross Exposure (2018 YTD) 164%

Return (Since Inception) 31.6%

Sharpe Ratio (Since Inception) 2.9

Avg. Net Exposure (Since Inception) 10%

Avg. Gross Exposure (Since Inception) 153%

8



LEGAL NOTICE

This report is intended exclusively for the person to whom it was given by Optimas Capital Limited and does not constitute an offer to

sell or a solicitation to buy any securities or an offer of any investment advisory services. The statistics presented are based on estimates

and assumptions which may be materially incorrect. No representation is made as to their accuracy. Past performance is not indicative of

future results.

References to market or composite indices, benchmarks, or other measures of relative market performance (indices) over a specified

period of time are provided for the intended recipient’s information only and do not imply that a portfolio will achieve similar returns,

volatilities or other results.

This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the

public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has

been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis and may not

be reproduced in any form or transmitted to any person other than the person to who it is addressed.

Thank you for your continued support and interest in our fund. Please contact us with any questions or to request additional

information at [email protected]

OPTIMAS GLOAL ALPHA FUND - Optimas Capital Limited · The key question from investors is whether...

Documents

Transcript of OPTIMAS GLOAL ALPHA FUND - Optimas Capital Limited · The key question from investors is whether...