10 ★ FINANCIAL TIMES Thursday9 April 2020

COMPANIES & MARKETS

Henny Sender

Markets Insight

W

hen one Hong Kong-

based hedge fund

founder was reviewing

the prospectus for

Xiamen-based Luckin

Coffee’s New Yorklisting n May lasti

year, his first thought was the revenue

numbers were exaggerated. “The

performance seemed overdone,” he

recalled.“Overdone—butnotcriminal.”

Anybody familiar with consumer

tech companies, a group in which

Luckin claimed to belong thanks to its

cashless stores, will recognise that

investmentmanager’sassessment.

Until recently, many of these busi-

nesses — whether in ride sharing, food

delivery or online education — boasted

of their sales prowess, even as they

heavilysubsidisedthosesales.

Theywerecaughtinatrap—themore

they sold, the more money they lost,

whether the product was cars or coffee.

Revenuesneverturnedintoprofits.

The listing of Uber — down more than

40 per cent from its float price last May

— was the first sign that public market

investors were less forgiving of such

business models than investors in

private markets. But with the debacle of

thescrapped eWork initial publicW

offering and its effect on the fortunes of

SoftBank, sentiment began to shift.

Moneybegandryingup.

Luckin — which said last week that

hundreds of millions of dollars of sales

had beenfabricated should prove to—

be another nail in the coffin of the

growthwithoutprofitsbusinessmodel.

The effects ofits fraud ill have pro-w

found reverberations, particularly in

the private market for young start-ups

in Asia and for the venture capitalists

whoinvestinthem.

A public company, especially one

listed in the US, has strict rules to follow

onsalesvolumesandrevenues.

To make up numbers is to take a step

across a red line into accounting fraud.

Yet the line in private markets, pre-

listing,tendstobemoreblurred.

If, for example, a client cancels a con-

tract with an online education company

midway through the stipulated period,

how promptly does a company reverse

thesaleandtherevenueitrecorded?

A lot of the numbers “do not pass the

eye test,” said the head of south-east

Asia for one major private equity firm

thatinvestsinyoungtechcompanies.

Some of them “juice” results, the

investor said, with metrics like

WeWork’s notorious “community

adjusted” ebitda. “These are disinfor-

mation campaigns and sometimes their

investorscondoneit,”theinvestorsaid.

Had Luckin stayed private, it might

have been able to get away with its

fictitious numbers for longer. From its

debut on Nasdaq 11 months ago, it was

clearthattheexecutivesatthecompany

hadbeeninahurrytogopublic.

On the sidelines of the listing cere-

mony in New York, I asked finance chief

Reinout Schakel why the chain was sell-

ing $561m of shares at a time when its

losses were widening and it still had not

received regulatory approvals for many

of its facilities, according to its own dis-

closures.Buthedeclinedtoanswer.

He also declined to comment on curi-

ous related-party transactions such as a

Rmb148m ($21m) loan to a group affili-

atedwiththechairman.

After years of venture capital invest-

ment, the deflation of China’s start-up

valuation bubble is combining with the

effects of the pandemic to inflict even

more hardship on many consumer tech

firms. Investors will be faced with

difficult choices on which ventures to

supportandwhichtoabandon.

“We will see internal rounds at a

discount,” predicts the head of Asia for

one Silicon Valley-based investor. “And

entrepreneurs will resist because they

won’twanttobediluted.”

Big investors will still be there to offer

covertosomebusinessessufferinginthe

consumer demand slump. Last month,

for example, Sequoia led a $200m

follow-on investment in the business

behindGuazi,ausedcarplatform,inthe

faceofaneconomicdownturn.

But other start-ups may struggle.

Most investors say they expect distress

both from companies that lack a clear

path to profitability or a deep-pocketed

backer. Many fundraisings, both for VC

firms and newly minted entrepreneurs,

areonholdatatimewhenfinancialcen-

tresremaininlockdown.

There will also be consolidation as the

strong acquire the weak, whether the

predatorsarefinancialinvestorssuchas

buyout firms or strategic investors such

astechgiantsTencentorAlibaba.

In the past, investors took comfort

from another tech behemoth, Amazon,

whichburntcashprodigiouslybeforeits

cloud services division provided

anotherfirmproptoitsbusinessmodel.

There is no such salvation for Luckin

—oritsinvestors.

[email protected]

Luckin puts another

nail in coffin of growth

without profits model

The listing of Uber

was the first sign that

public market investors

were less forgiving

Marathon Petroleum ed energy stocksl

higher as hopes that Opec’s meeting

today will conclude with a production cut

helped to rally oil prices.

Wider market demand was focused

among this year’s worst performers such

asAlliance Data, the loyalty card scheme

operator, and retailers such asGap nda

Nordstrom.

Travel companies extended a recent

rally withWynn Resorts,Royal Caribbean

Cruises nda United Airlines ll climbing.a

Zoom, the video conferencing app

maker widely criticised for security and

privacy failings, surged after hiring Alex

Stamos, Facebook’s former head of

security, as an adviser.

Height Analytics argued that, while the

claims against Zoom had “more hype

than substance”, the company’s

potentially deceptive promises around

encryption meant it was still likely to face

the Federal Trade Commission.

Depending on the number of users

affected, the FTC would probably accept

a settlement in the tens of millions of

dollars, it said.

Aerospace engineerTransDigm oser

after Canaccord Genuity repeated “buy”

advice on the back of a recent debt

offering.

Liquidity looks enough to get through

the crisis while cost cuts should help

margins, Canaccord said.Bryce Elder

Wall Street Eurozone London

Heineken dged lower after withdrawinge

all 2020 guidance.

Its first-quarter beer volumes were

down about 2 per cent and that trend was

likely to worsen in the current quarter.

Kepler Cheuvreux forecast that

Heineken volumes would drop by 26 per

cent this quarter after Mexico, a key

market for the Dutch brewer thanks to

brands such as Dos Equis and Sol,

declared beer a non-essential product.

ICA, the Swedish supermarket operator,

dropped after cautioning that a sharp

acceleration in sales through March had

not been sustained.

Swedbank umbled after warning thatt

both costs and loan loss provisions will be

higher than expected in 2020.

The lender blamed higher costs and

remediation work tied to anti money-

laundering probes, loan loss provisions,

and Covid-19 disruption to its back office

systems and foreign exchange hedges.

Deutsche Post etreated afterr

postponing its annual meeting, which

pushed back a dividend payment.

Telecoms groupOrange Belgium ellf

after the Belgian regulator proposed

raising wholesale fibre pricing.

“We view this as a negative for Orange,

which is hoping for more favourable

wholesale pricing to be able to compete

successfully in the fixed broadband

market,” said Barclays.Bryce Elder

UK insurers dropped afterAviva,Direct

Line,Hiscox nda RSA ll bowed toa

regulatory pressure and scrapped

dividends to protect capital.

This raised fresh doubts about peers

such asLegal & General, which pledged

last week to retain its 2019 payout.

J Sainsbury as weakest among thew

supermarkets afterTesco arned that itsw

banking division would be lossmaking in

the current year as the pandemic affects

demand for credit cards, loans and travel

money.

Tesco itself ended little changed on

in-line full-year figures and cautious

guidance with management saying sales

were stabilising following the March rush.

A rally among the year’s biggest fallers

meantWhitbread, the Premier Inn owner,

was lifted to the top of the FTSE 100.

The rebound came even after weekly

lodging industry data showed UK

occupancy and revenue per available

room dropping 83 per cent and 87 per

cent, respectively.

Hyve, the events and exhibitions

group, gained after setting out cost-

cutting measures and saying talks with its

lenders had been constructive, with a

covenant test for June now waived.

Restaurant Group, the Wagamama

owner, rallied sharply ahead of news after

the close of trade that it would raise

funds with an share placing.Bryce Elder

3 Wall Street climbs on hopes that the

rate of coronavirus cases is peaking

3 Gloomy GDP predictions hit European

markets

3 Crude oil clings on to gains ahead of

crunch producer meeting

Stocks on Wall Street edged ahead of

European peers yesterday as investors

kept a close watch on the spread and

repercussions of the pandemic.

A two-day rally for Frankfurt’s Xetra

Dax ended after the release of data

showing Europe’s largest economy was in

the grips of a historic recession.

Germany’s economy was set to shrink

almost 10 per cent in the three months to

June, according to the country’s economic

research institutes — the sharpest

decline since quarterly national accounts

began in 1970.

In Paris, the CAC 40 edged up 0.1 per

cent following grim projections for

France’s gross domestic product. French

economic output was expected to fall by

its sharpest rate since the second world

war, said Banque de France, which

forecast that GDP would contract 6 per

cent in the first three months of the year.

Also weighing on market sentiment

was the failure of EU finance ministers to

agree a package intended to support the

region during public health crisis.

“The impression it gives the world is

that Europe is disjointed and that will

reinforce the view that the overall

response will be slower and less

impressive than elsewhere,” said Kit

Juckes, an analyst at Société Générale.

Across the Atlantic, Wall Street was

higher by midday on hopes that the

country’s virus cases were nearing a peak.

Cases in the US increased 8.1 per cent

yesterday, marking a fifth straight decline

in the rate of those infected.

Both the S&P 500 and Dow Jones

Industrial Average were up 2.5 per cent

while the tech-heavy Nasdaq Composite

was 2 per cent higher.

But Marija Veitmane, multi-asset class

strategist at State Street Global Markets,

warned that the optimism driving equity

markets would “be difficult to maintain

until we see more clarity on the corporate

earnings outlook”.

In an unscheduled update, McDonald’s

shelved $1bn worth of upgrades and

openings after coronavirus disruption

caused sales at the fast-food chain to

slump more than a fifth last month.

Stocks were mixed in Asia with Tokyo’s

Topix rising 1.6 per cent while Hong

Kong’s Hang Seng slid 1.2 per cent.

Ahead of a pivotal meeting today

where the world’s leading oil producers

will discuss cutting global output, the

price of crude clung on to recent gains.

Brent, the global benchmark, rose 0.

per cent to $32 a barrel while WTI, the US

marker, climbed 2 per cent to $24.10 a

barrel.Ray Douglas

What you need to know

Grim growth forecasts weigh on Europe’s largest economies

Indices rebased

Source: Refinitiv







Jan  Apr

Germany’s Xetra Dax France’s CAC 

The day in the markets

Markets update

US Eurozone Japan UK China Brazil

Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa

Level 2716.11 1282.95 19353.24 5677.73 2815.37 77739.

% change on day 2.13 -0.16 2.13 -0.47 -0.19 1.

Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $

Level 100.067 1.086 108.745 1.238 7.068 5.

% change on day 0.167 -0.184 -0.229 0.569 0.187 -0.

Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond

Yield 0.748 -0.307 0.012 0.380 2.513 7.

Basis point change on day -2.880 0.800 1.000 -2.800 -1.400 18.

World index, Commods FTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)

Level 302.72 32.43 24.37 1649.25 15.08 2338.

% change on day 1.31 0.00 0.29 0.06 3.57 2.

Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

| |||||||||||||||| |||

Feb 2020 Apr

1920

2560

3200

3840

| ||| |||||||| ||||||||

Feb 2020 Apr

960

1280

1600

1920

| |||||| |||||||| |||||

Feb 2020 Apr

3840

5120

6400

7680

Biggest movers

% US Eurozone UK

Ups

Transdigm 14.

Alliance Data Systems 14.

Gap (the) 12.

Hanesbrands 12.

Marriott Int 11.

Seadrill 6.

Infineon Tech 6.

Dassault Systemes 5.

Edenred 5.

Airbus 4.

Whitbread 9.

Itv 7.

Hargreaves Lansdown 5.

Aveva 5.

Evraz 5.

%

Downs

Carrier Global -7.

Kroger Co (the) -2.

Cabot Oil & Gas -1.

Vertex Pharmaceuticals -1.

Otis Worldwide -1.

Prices taken at 17:00 GMT

Adp -4.

Bureau Veritas -4.

Commerzbank -4.

Cnp Assurances -3.

Novozymes -3.

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Fresnillo -5.

Rsa Insurance -5.

Aviva -4.

Vodafone -4.

Sainsbury (j) -3.

All data provided by Morningstar unless otherwise noted.

APRIL 9 2020 Section:Markets Time: 4/20208/ - 18:56 User: stephen.smith Page Name:Markets-002, Part,Page,Edition:EUR , 10, 1