Fisher Investments Editorial Staff
Into Perspective, Emerging Markets

Corporate America’s View of China

By, 08/26/2015
Ratings1124.383929

China continues to preoccupy the financial media, with many casting all the economic growth figures in doubt. We have long been skeptical of the precision of Chinese data, and it seems fair to say transparency is lacking—particularly when you consider the occasional mismatch between national and regional numbers. So it was noteworthy that amid yesterday’s panic-driven volatility, one major American executive sent an email to a well-known market analyst stating that their China business was doing a-ok. (Read The New York Times’ coverage of that here.) Additionally, aircraft giant Boeing announced Tuesday its forecast for Chinese jet demand growth is unchanged, even after the volatility. Now, this is a long-term forecast, but the affirmation is interesting nonetheless. This all gave us an idea: While it is rather opaque, China is a very big economy and key cog in the global supply chain. So one way you may get some real insight into China is to study the commentary of US firms transacting in China—you can benefit from their actual experience.

Below is a collection of commentary from all Russell 3000 firms reporting earnings in the last week that have materially discussed China. We’ve omitted ones where the commentary doesn’t provide anything substantive. The conclusion we reach from reviewing these snippets jives with what we’ve long written: Chinese growth is slowing, but little has changed recently relative to the three-year trend.

These quotations, all derived from FactSet’s CallStreet tool, are a compilation of the most directly China-related remarks made by executives during earnings conference calls in the last week. They are unedited by us, except for highlighting and the occasional bolding, so you can see what we believe are particular points of emphasis. It is possible we unintentionally missed some firms’ remarks or a transcript was not available as of this writing. And we aren’t arguing this is hugely scientific. Our intent here is simple: To give you a largely unfiltered snapshot of Corporate America’s take on China without media speculation or angle. Enjoy.

As a brief additional note: Fisher Investments’ MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight. We are not suggesting you buy, sell, hold or take any other action with these securities. The opinions and comments of the executives and analysts cited here are their own and may not reflect those of Fisher Investments or MarketMinder.

Hormel Foods

Farha Aslam
Analyst, Stephens, Inc. 

That's helpful. And then on International, you were quite positive about your Chinese business. With all that's going on in China, could you just share with us your reasons for being positive, especially given the more constrained pork supplies in China, and then your outlook for that division as it relates to exports of U.S. pork?

Jeffrey M. Ettinger
Chairman, President & Chief Executive Officer, Hormel Foods Corp.         

Okay. I mean, we're really happy with the performance of the China group. I mean, you look back even four years ago, that business was not making money, or maybe barely making money. And this year, it's going to be a solidly double-digit returning entity. We provide niche products in that market, particularly to the foodservice channel. Obviously, SKIPPY would be another retail-based item. And so to us, at least so far the macro level things going on with their currency and their stock market and so forth, we really have not seen any detrimental impact to our sales capabilities or our margins on that business.

[Continues later in response to same question]

I mean, typically, for the last four years, you've seen International deliver top line and bottom line double-digit growth, and we clearly haven't done that the last couple of quarters. So we need to turn that around. But notwithstanding that, I mean, China is growing double-digits, SKIPPY is growing double-digits. So we're very high on what International should be able to achieve overall.

Estee Lauder

Fabrizio Freda
President, Chief Executive Officer & Director, The Estée Lauder Companies, Inc.

Our China business grew 6% with every one of our 14 brands there posting gains. We now have a presence in nearly 100 cities, having added 18 new cities during the year. We continue to expand our digital presence in China, further penetrating the largest market for e-commerce in the world.

Agilent Tech.

S. Brandon Couillard
Analyst, Jefferies LLC     

Mike, I would be interested in getting some more granularity on just how China performed in the period, how the book-to-bill ended there, and what you perceive the implications of the currency revaluation are to your profitability there. And just remind us whether you price in local currency or in USD.

Michael R. McMullen
President and Chief Executive Officer, Agilent Technologies, Inc.               

Yes, sure, great question. I figure we’d probably spend some time today talking about China given some of the recent news. But in terms of our performance in China in Q3, we had very strong revenue growth. We’re low double digits, and we’re tracking through the first three quarters right on the plans we had talked about with all of you at the Analyst Meeting, the high single digit level of growth in China. In terms of the areas of strength, we’re continuing to see strength in pharma, life science research, the diagnostics, food, environmental, and the businesses really continue to develop as we had expected, albeit, some of the recent changes, which in terms of how that affects our profitability in China, it’s really neutral. We’re naturally hedged in China in terms of both the amount of revenues that we bring in, in China.

Even though it is our second largest country in terms of revenue, we also have a very large footprint there, including local manufacturing, so we’re naturally hedged in China. And in terms of your question around the mix of RMB vs. dollars, about 20% of our business is in RMB, and about 80% is in dollars.

And in terms of the overall business, just maybe one final comment here on China, we can dig into other areas of China if you like. But when we look at the devaluation, we’re not really expecting to have that significant of an impact on the business in China itself. And then it depends also how we will actually be successful and drive some more growth there. I think the bigger question is what could it mean to the economies and currency in some of the emerging markets. But hopefully I answered your question. If not, come back with another one.

L Brands

Lorraine Hutchinson
Analyst, Bank of America Merrill Lynch

Thank you. Good morning. Martin, just wanted to follow up on the International commentary. Is it fair to assume that the growth rate internationally will reaccelerate in the back half? And can you talk about any successes and challenges in opening the numbers of new stores that you've planned in the first half of this year and the back half?

Martin Waters
President-International, L Brands, Inc.

Sure. Yes, happy to take that question. Yes, happy to take that question, Lorraine. Thanks for asking. As we look forward into the back half of the year, we're very well-positioned across all of our markets. To be honest, we focus less on trying to predict exactly what that growth rate will be and more on solid execution and getting the stores open that we have in our plan. We have over 100 stores to open in the back half and getting that open on time and getting them open well is mission critical. So, I'm more focused on that than predicting precisely what the rate will be but I will tell you that there's been a great deal of consistency in our growth rate across each of the last four quarters in terms of retail sales.

Highs and lows in terms of things most pleased with, I would say China is an area of real excitement for us. We've opened 12 stores, VSBA stores. We have another seven or eight to open in the balance of this year. We're well-positioned to open full-assortment stores in China in 2016 so particularly excited about that. If I had to pull out one big challenge that we face, it's really delivering the right real estate. We've made a strategic choice not to go at a pace; that means that we need to compromise on our retail real estate. If we want the best real estate in the new malls, sometimes we have to wait for it. So there's a frustration in getting the right real estate as quickly as I would like it but by and large we work our way through that and continue to stay focused on solid execution.

Analog Devices

J. Steven Smigie
Analyst, Raymond James & Associates, Inc.        

Great. Thanks a lot, guys. I was hoping you could talk a little bit more about China, and specifically, can you talk about if industrial orders for China were any different from other regions. As you look more longer term, obviously, there's been a lot of talk in the news about this China shift to a different economy where they're not just the manufacturing hub of the world and investing more in the service economy, et cetera. So does that suggest you that maybe there's some lower opportunity for industrial growth for you guys into the future?

Vincent T. Roche
President, Chief Executive Officer & Director, Analog Devices, Inc.             

Yeah, it's a very good question. So, clearly, as you said, China's shifting from we make it to we design it and build it, so we've benefited. This will be, actually, when history is written on our fiscal 2015 here, we will have had – we will have posted very, very strong double-digit growth in the industrial sector in China, across the board, in fact, in healthcare, in energy, transmission and distribution of energy in particular and also industrial instrumentation and automation. So, clearly, China is in the process of indigenizing the tech industry there, so we're benefiting from that in terms of our engagements with emerging OEMs in way outside of the consumer – communications infrastructure and consumer businesses. So industrial's emerging, automotive's emerging, healthcare's emerging. And we're doing particularly well, and pleased with the progress we're making in building out our business there.

J. Steven Smigie
Analyst, Raymond James & Associates, Inc.        

Great. Thanks. And the part about the short term in China versus other regions in industrial?

Vincent T. Roche
President, Chief Executive Officer & Director, Analog Devices, Inc.             

It's been very, very – it's been quite strong, and it remains steady.

Fabrinet

Paul J. Chung
Analyst, JPMorgan Securities LLC

Hi. Thanks. This is actually Paul Chung on for Paul Coster. Thanks for taking my question. Can you talk about the currency dynamics in OpEx, particularly from the Thai baht and how we should think about year-over-year benefit, if any?

Toh-Seng Ng
Chief Financial Officer & Executive Vice President, Fabrinet          

Yes, Paul. This is TS. As we mentioned in the last couple of conference call, eventually the dollar cost average, we hedge our Thai baht more from a long-term basis. So the quarter-to-quarter or day-to-day spot currency change really doesn't affect us in that regard. So, yeah, the Thai currency and RMB in China has been depreciating. But again as you can imagine, the next few months, we already bought the currency about a few months ago. And obviously, that currency depreciation will benefit us more in the long-term basis. But on the quarter-to-quarter, we don't see any impact here.

SemTech

Mohan R. Maheswaran
President, Chief Executive Officer & Director, Semtech Corp.

In the communications end market, we experienced weakness from the China wireless base station market as we had anticipated. We do expect to see a gradual recovery in demand from the China wireless base station market towards the end of the year and into FY 2017. We also expect to see continued growth from the PON, datacenter and wireless base station markets over the next few years, and expect to maintain our leadership positions with our physical media device platforms and our CDR platforms from 1 gigabits per second to 100-gigabit per second.

While we saw increased demand from our China smartphone customers, including Huawei, Lenovo, and Xiaomi, demand from our Korean smartphone customers weaken as our Korean customers continue to cut back their overall build plans, and change their mix of phones for the year. We anticipate that our Korean smartphone business will decline modestly in Q3 and any excess customer and channel inventory will be consumed by the end of the year, after which we anticipate a return to growth.

Craig A. Ellis
Analyst, B. Riley & Co. LLC

And can you talk about the mix of business within protection between your large customer in Korea, and the range of China customers that you talked about when you listed some of the design wins: Huawei, Lenovo, et cetera?

Mohan R. Maheswaran
President, Chief Executive Officer & Director, Semtech Corp.        

Yeah, the China smartphone business is doing very well for us. It's really growing quite nicely. It's just at a much smaller level than our Korean business. So unfortunately we can't see the China growth offsetting any Korea decline. But the good news is that the Korea business I think is starting to stabilize. We actually have – and anticipating in Q3 slightly stronger demand from Samsung specifically in Q3, and then stabilizing in Q4 I think. And then as the channel inventory comes down, I think Korea will start to pick up. And China, we're expecting to still grow throughout the year.

Harsh V. Kumar
Analyst, Stephens, Inc. 

Great. And another question for you Mohan. I think in your comments you said, you're expecting what is the equivalent of, I think the December quarter for most of the companies, that base stations will start to come back and then accelerate. There's a lot of push and pull regarding that topic. What are you guys seeing given that you'll get – you actually get a decent visibility into that area? What are you guys – what gives you the confidence that China is going to come back or maybe it's other areas that are coming back for you?

Mohan R. Maheswaran
President, Chief Executive Officer & Director, Semtech Corp.        

Well, we just heard that it's starting to pick up again, and we anticipate in Q4. Our current outlook is that, that specific segment of the market will start to pick up again. So obviously because of the disappointing Q3 guidance, we've started to look at what's going to happen in the out quarters here. And, you know what, the good news is, I think, Q4 we see the smartphone business starting to come back, and once the inventory is depleted there, we'll see that growth. But also on the China base station business, we're starting to see a little bit of pick up there.

Keysight Technologies

Ronald S. Nersesian
President, Chief Executive Officer & Director, Keysight Technologies, Inc.

Q3 orders were down 5%, primarily due to two factors: Greater China and currency. Core orders, without currency and acquisitions, were down 1%, largely due to weakness in Greater China. While this is not desirable, it is a noticeable improvement from the Q2 core order decline of 8%.

Accuray

Joshua H. Levine
President, Chief Executive Officer & Director, Accuray, Inc.

We remain very confident about the opportunity in China. Just last night, we talked with our General Manager of the business in China, who, over the past two years, has been a very astute observer of the potential for our systems in the China market. He remains very confident about our current momentum, because of the government's continuing focus to bring modernized radiation therapy [unintelligible]. Healthcare delivery remains a key pillar in the Chinese government's social and economic philosophy going forward.

A couple of other points on China. First, our contracts with our distributor in China are in U.S. dollars, so currency does not directly impact us in this market. Second, our distributor generates a healthy margin on their sales even post evaluation. Today, we do not see any impact on the orders that are in backlog in terms of timing or revenue amount and we believe our opportunities for continued momentum from Chinese order growth during fiscal 2016 remains intact.

Nordson

John E. Franzreb
Analyst, Sidoti & Co. LLC              

Good morning. Just stick a little bit on, maybe the consumer nondurable side of the business. Can you talk a little bit about regional differences you may be seeing in order patterns that maybe you should be cognizant of?

Michael F. Hilton
President, Chief Executive Officer & Director, Nordson Corp.       

Yeah, I would – so, a lot of the consumer nondurables fit within our Adhesives business. And if you look at the sort of the at the Adhesives business in general, the nonwovens part of the business has been pretty strong, the product assembly part of the business has been pretty strong. I'd say, packaging has been solid, with the exception of parts of Asia, and particularly China has been relatively soft year-over-year in the packaging area.

So that's I think really a function of what you're seeing in the Chinese economy -- growth, but not robust growth. But everywhere else, it's been pretty solid. You can have some variations quarter to quarter based on large projects, but it's been a strong nonwovens year, it's been a strong product assembly year and a solid packaging year with the exception of overseeing in Asia, Japan softening and China being softer. And we're starting to see a pickup now in the plastic side of the business.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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