Update on Casper, Coronavirus

Before I get to more of my thoughts on the coronavirus, I wanted to highlight this article on the pricing of Casper’s IPO. It is coming in at around $770m, which puts it at 1.7x 2019e revenue, or about in line with Tempur-Pedic and below Purple.

Just to follow up on my early post. I want to say that Purple has a very weird shareholding structure that I don’t really understand, so I caution that some of the valuation metrics (including the P/Sales) might be off. But its multiples would likely be too low at worst (not too high), therefore implying a lower valuation for Casper. In terms of margins and profits, though, the figures are comparable and really highlight how much worse Casper is doing. And remember that Purple is by far the worst of the currently publicly-traded companies: TPX, LZB and SNBR all have an operating margin of between 7-10%, compared to Casper’s -23% (yes, negative) and Purple’s 2% (all TTM).

Two final comments: 1) this is a downround for those that invested in Casper less than a year ago, and that’s gotta be disappointing. But remember that some of those investors had invested in multiple rounds, so they probably did alright. 2) The market, despite being very strong (at least until the coronavirus started freaking out people), is unwilling to give massive valuations to companies that lose money. Especially if growth is not extraordinary, and it really isn’t at Casper. One more thing: I was right!

Stock market and the coronavirus

Source: Bloomberg, chart by Vietecon.com

Everyone is waiting to see what will happen with the stock market post-Lunar New Year given the impact of the coronavirus on markets globally.

As you can see in the chart at the right, the stock market was moving higher at the beginning of January. It was up over 3% since the end of 2019, and it seemed like sentiment was improving, helped by growth in banking assets in 2019 (although remember, it is almost impossible to tell why the market was up on a particular period except to say that there were more buyers than sellers).

The market has been closed since the 22nd, and won’t be open until tomorrow morning. If the market was off on its own, that might mean we wouldn’t have any idea how the market has been trending. But actually, with the VNM ETF, we have a somewhat good idea of what will happen with some of the stocks in the market.

Source: Yahoo.com, chart by Vietecon.com

The chart on the left shows what’s happening with the VNM ETF. From Dec. 31 to Jan. 23, it was up just 0.6%, so it wasn’t exactly tracking the VN Index (which is just stocks that trade on the HCMC exchange).

But since the high on Jan. 23, it has fallen more than 3%. The currency has barely changed, so that’s not the reason for the fall.

As we have discussed, many of the stocks in the VNM ETF are not Vietnamese, and generally these have not done that well since the beginning of the year, although it is really a mixed bag. The stock with the largest weighting, BH Inc. (090460 KS) is up 7% and it has almost a 5% weighting in the ETF.

Since 30 Jan. 2019Source: Vietecon.com, Van Eck

But lots of stocks have performed poorly, although their weighting is much less. Both Pharos (an energy company) and Hansae (textiles) were down 11% so far this year. But overall, this can only explain about 0.6% of the decline since the end of the year. Since Jan. 23, they have fallen 0.9%, so we should expect the rest of the index has fallen about 240bps (on a weighted basis).

That’s not that bad, to be honest. The S&P fell 2.5% from Thursday to the close of Monday (Jan. 27). It has since rebounded more than half of that and is now down just 1%, but still the VNM ETF isn’t that far off, given how close China is to Vietnam, both geographically and economically.

I expect the market is going to correct much more when it opens. There are a number of ways that China will affect Vietnam and its economy, which I believe will drive the stock market down:

• Coronavirus spreading: So far, there are few cases in Vietnam, but there is now a case of someone that has not even been to China getting the virus. That’s not great because it means that so many more people are now at risk.

• Tourism: Chinese made up about a third of tourists in Vietnam in 2019. If they can’t come, and it seems like China is trying to stop travel, then hotels, flights, restaurants, retail stores are all going to suffer. Vietnam has already banned some travel (flights from Wuhan have already stopped, some border crossings are closed, etc.).

• Cross-border trade: This directly affects people on the border (as the Nikkei article linked to above talks about). Trade in the border regions is going to come to a halt.

• Inputs into Vietnamese goods: Manufacturing has moved to Vietnam from China, but Chinese inputs are still essential to a number of factories in Vietnam. If these inputs can’t be brought across the border, things are going to be hard.

In the past 20 years, China has become a central node on the global economic highway, and everyone is going to suffer if the threat of the coronavirus continues to grow.