To market, to market to buy a fat pig. We basically ended the day where we started, flat. OK, up a few points. The fixed income markets in the US were closed yesterday as a result of Veterans Day, or Armistice Day in Europe. The day that the first World War ended, the war that was supposed to end all the wars. Fat chance. Supposedly the peace treaty was signed at 11, but that is not right, I learnt yesterday that it was signed at around 5 in the morning. Always learn something new, otherwise what is the point, right!!! But today, if you date your calendar like the Americans it is 11.12.13. The 12th day of the 11th month of 2013. For ourselves down here you will have to wait four weeks to reach 11th of December of 2013. 11/12/13. Lovely! Across the seas in the US markets traded sideways for much of the session, the Dow Jones closing 21 points higher (0.14 percent nowadays!), whilst the S&P 500, the broader market measure added half of that, from a percentage gain point of view. Tech stocks were about flat!
That storm in the Philippines and the aftermath with the associated visuals breaks your heart, the human toll not known yet, the damage estimated to be 14 billion Dollars (around 3 percent of GDP) with only 2 billion Dollars of that insured. It is normally poor folks that are uninsured, because of course insurance takes a back seat when it comes matters of the stomach and day to day living. If you struggle to make ends meet, you are almost always uninsured.
Talking of such matters of making ends meet, Michael came across a figure that baffled him initially, the Chinese savings rate, 51 percent of GDP. And then I explained that the capital markets are relatively new, and the social security net is fragile at best. So if you are not saving like crazy, then you are likely to spend your retirement not having the means to find your way through. Your golden years are more likely to be dusty. And if you are a set of Grandparents in China and living in the rural areas then you are more than likely to have only one grandchild. One child, one grandchild. So do not expect those folks below you to look after you, it is not going to happen. That is one of the reasons for the savings rate being so incredibly high. And the results of the third plenum of the 18th Central Committee? I think more private sector reforms and the migrant worker (Hukou privileges) issues must and will be addressed. We wait, these meetings take place behind closed doors, no media, no commentary during the event.
China watching and interpretation, that has always been incredibly hard. Read up today about the marriage and dating circles in the big cities, how the men outnumber the woman and as such men with higher savings are more stable. In fact yesterday in China, the 11th of the 11th month is singles day, the anti Valentines Day if you will. Not only is it filled with lonely hearts, BUT it is the single biggest online shopping day. Check out the Bloomberg story: Alibaba Breaks Sales Record Amid China Singles-Day Discounts. There are many, many things that we will not understand about each other, but the internet is slowly demystifying our secrets and quirks.
As promised, we head towards the Richemont six month numbers that were released on Friday. The company is the owner of 18 brands, some of them associated with Uber luxury, some a little more affordable, but all quality. You cannot lie to your core clientele with luxury, if it is not the very finest piece then your clients can tell the difference. After all clients who shop at luxury stores might have the money for these purchases, but these are big ticket items and as such more time and care will be taken before a purchase. This is natural.
The brands include Cartier, Van Cleef and Arpels, Piaget, Alfred Dunhill, Panerai, Baume & Mercier, Montblanc, Vacheron Constantin, Shanghai Tang and Roger Dubuis. All well known iconic watch, jewellery and pen manufacturers, more recently Richemont has bought Net-a-porter and clothing brand Peter Millar in the US. Quality is paramount to their existence as a business, we said that already. Recently there have been murmurs of the company selling off some brands, but they dispelled that thought process. Nothing is for sale, no brands will be spun off. Personally I would not mind seeing the shotguns (Purdey), luggage (Lancel) and the pens part (Montblanc) being sold, perhaps the online portal too, slimming it down. But on Net-a-porter you can get basically anything that you want, anything that deals with luxury. Your one stop shop. Design gowns, clothing, accessories, shoes, beauty products and, and, and... the list goes on. Perhaps it fits better. In fact the company made an announcement back in October the 10th - Net-A-Porter group not for sale. Three whole sentences squashed pages of speculation and hours of talk.
Here are the unaudited consolidated results for the six month period ended 30 September 2013. Sales (5.324 billion Euros) grew by 4 percent in Euros, 9 percent in constant currencies, operating profits were impacted by the same currency headwinds, down 1 percent to 1.370 billion Euros. Operating margins were 130 basis points lower to 25.7 percent, but notwithstanding that, absolutely fabulous margins. At the end of the period, Richemont have a net cash position of 3.855 billion Euros, an increase over the year of 810 million Euros. The company has a market cap of 51.33 billion Swiss Francs, which translates to 41.63 billion Euros. 9.2 percent of the market cap is cash!
Don't stress too much about the currency moving all over the show, the company engages in currency hedging (it must be hard work!), I have taken a screen grab from the release, I was struggling to do a copy and paste:
Wow. See that? I am not too sure what to make of the hedging strategy, but in a world where the currency fluctuations have been more severe than at any other time in recent history, I guess if you think back to George Soros as the man who broke the bank of England, perhaps that was much worse. Soros made one billion Pounds on Black Wednesday back in 1992, September 16th.
EPS increased 9 percent to 2.118 Euros, divide by ten for the GDR's (the local listed stock is one tenth of the Swiss listed entity) to get to 0.2118 Euro cents, convert to ZAR and you are at 2.93 ZAR for the half year.
The dividend is a major irritation. No, let me rephrase that, the Swiss government has a withholding tax of 35 percent, locally that amount is 15 percent, local shareholders can apply for a refund of the difference. I am not too sure why you should tax a dividend, it has been taxed already, but of course it is meant to close the gap between the corporate tax rate and the individual tax rates. In Switzerland however, taxes make up 29.3 percent of GDP, which is slightly more than here, at 26.9 percent. Switzerland however have a corporate tax rate of 18.01 percent, South Africa has a corporate tax rate of 28 percent.
The income tax rate in Switzerland is low, but there are lots of people, so they collect a lot. 13.2 percent at a Federal rate, whereas in South Africa it is 40 percent at the top end. The Swiss authorities have to close the gap somewhere, so their dividend tax is much higher than many other places. But as a GDR (Global depositary receipt) holder, you have to claim that money back. And that means going down to you local SARS office, filling in a form and waiting for the refund less the processing cost. In effect, it is twenty percent of the dividend of 10 Swiss Franc cents (conversion done for the GDR's to 1.13 ZAR), about 22,6 ZA cents on the last dividend that was paid on the 27th of September. Not the best yield, and then the Swiss government go and smash it further. As a shareholder no doubt you have seen the message in the post.
So what now for the business? In Zurich the stock is up nearly 29 percent year to date. But we live sleep and eat in a Rand environment, the stock is up a whopping 48 percent locally. The weakening Rand has certainly protected you a lot! The next question is, do you sell, or just stay put after such a fabulous run? At 20 times earnings is it wildly expensive? No. The growth rates will pick up. There are many more consumers of their products than at any other time in history. And they are getting richer. Provided the quality of the brands remains, people will pay up. We continue to add to new portfolios.
Home again, home again, jiggety-jog. What a terrible one liner here yesterday. It is an action packed week on the economic front, and earnings continue to rush at us. We need time to check out those and we will take time, unfortunately to cram everything in makes for heavy reading. So tomorrow we can get to Vodacom and ABIL, explaining the rights issue again, the N shares are trading. We will advise. European inflation numbers across the board look low, lower than anticipated. British CPI was also lower than anticipated. Markets are lower here to start with, slow leaks from the Chinese wrap ups is starting to hit the wires.
Sasha Naryshkine and Michael Treherne
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