First published in Daily Maverick 168

Alibaba surpassed its previous record in last week’s Singles’ Day shopping extravaganza, which will leave the upcoming Black Friday and Cyber Monday sales at the end of November in the shade. And Richemont is hitching its wagon to the Chinese e-commerce giant. 

Sales for the 11 November Chinese holiday that celebrates people who aren’t in a relationship topped $74-billion at last count, almost double 2019’s $38.4-billion, and no doubt supported by the shift to online shopping that has been accelerated by Covid-19. Due to the pandemic, many Chinese can’t travel abroad and that has stimulated online consumption. 

The pandemic, which also emanated from China, has dented Richemont’s own sales and it’s now looking for more routes to market. Alongside the release of its interim results last week, the luxury goods group announced it was tying up with Alibaba to take a combined 25% stake in a new joint venture with online luxury fashion e-tailer Farfetch as they target rich Chinese consumers with luxury goods.

The deal is aimed at giving Richemont’s luxury brands better access to the Chinese market as well as accelerating the digitisation of the global luxury industry.

Richemont and Alibaba are no strangers. Two years ago they formed a global strategic partnership aimed at growing sales in China by getting more traction for Richemont’s Yoox Net-a-Porter (YNAP) subsidiary, which bills itself as the world’s leading online fashion retailer. Alibaba supports the JV with technology infrastructure, market, payments and logistics.

Richemont says its strong presence in China and an acceleration in its digital initiatives cushioned a decline in first-half sales as consumers there bounced back from Covid-19, while lockdowns messed up sales everywhere else. With an 83% surge in sales, China overtook the US as its largest market. And it’s expected to keep on growing. According to Reuters, the Chinese luxury market is expected to account for half of global luxury sales by 2025.

Online is a growing contributor to Richemont’s total sales. Individual businesses including Cartier, Dunhill and Chloé, which it quaintly refers to as Maisons (houses), grew online sales at a triple-digit rate over the six months. Despite a setback at its Online Distributors operation due to the temporary closure of its fulfilment centres (warehouses), the decline in sales was limited to 3%. Overall, online retail including Online Distributors increased its contribution to 22% of group sales from 17% last year. 

If, as expected, the deal with Alibaba and Farfetch is completed in the first half of 2021, Richemont will be in a strong position to sell more of its sparkly baubles and watches on the next Singles’ Day.

Investors disconnected over Telkom

The market appears pretty divided over Telkom. While many lauded the strong growth in mobile numbers and revenue when it released its interim results last week, not everyone’s a convert. The stock’s 18% rise after it released a trading statement earlier in November was partly reversed when it published its results. 

Growth in mobile has catapulted the former parastatal into third place behind Vodacom and MTN as it added 2.2 million subscribers to take its mobile customers to 13.7 million. That has largely compensated for a sharp decline in customers using its more profitable fixed-lined “copper” services, leaving revenue pretty much flat.

Free cash flow (FCF) appears more of a concern to investors — it’s not generating as much as you’d expect from a utility like Telkom. While it was positive for the six months — with adjusted FCF improving to R1.34-billion if you add back the R1.13-billion it forked out for voluntary severance and retirement packages — that’s partly because it has been holding back on capital expenditure due to Covid-19 and the resultant lockdown. 

That’s going to change; it has to if Telkom wants to get anywhere near catching up with Vodacom and MTN. It expects capex to be back on schedule in the second half of the year as it accelerates its fibre rollout programme and continues investing in mobile to support growth. Already, it has suspended dividends for the next three years in order to preserve capital in preparation for an auction of valuable radio spectrum. Investors buy utility stocks for a yield that Telkom no longer offers. As its biggest shareholder, the state is the biggest loser there. 

In the meantime, it’s looking for other ways to realise value from its portfolio of businesses as it prepares to roll out 5G. One of these is Gyro, which runs infrastructure including its more than 1,300 masts and towers and its extensive real estate portfolio of offices and client services centres. Listing Gyro is one option. So is selling a stake. But analysts don’t believe it would want to lose control of its tower business at this stage. Also, while a disposal would generate capital, the cost of leasing them back would add further pressure to operational cash flow. 

The company says significant work is also under way to enable it to perform a valuation of wholesale division Openserve to prepare it for a value unlock opportunity. And it’s reviewing its data centre portfolio so it can expand into a major infrastructure provider.

Telkom CEO Sipho Maseko confirms the company is way undervalued by the market and its shares reflect that. Even after recent gains, they are at half the level they were a year ago. MTN’s down 29% and Vodacom is only 3% lower. So while Telkom’s mobile strategy is paying off and it moves to unlock value, investors just aren’t buying it yet.

Life gets ahead of itself 

While big moves in share prices appear to have been the order of the day over the past couple of weeks, the market may have got ahead of itself in anticipation of the approval of Biogen’s new Alzheimer’s drug, sending Life Healthcare’s shares 23% higher on 5 November – a day after stock in the US biotechnology company jumped 44% when the US Food and Drug Administration (FDA) delivered a favourable review on its aducanumab drug. 

Life Healthcare toppled 15% on Monday 9 November after the FDA failed to follow that up with an endorsement, saying the late-stage study of the drug didn’t provide strong enough evidence that the drug effectively treated Alzheimer’s. Biogen fell 31% which, according to Bloomberg, wiped about $19-billion from the previous week’s rally. 

So, why is this important to Life Healthcare and why did investors buy nearly R1-billion of its shares in anticipation of the approval?

The private hospital group has invested heavily in its Alliance Medical business in Europe, which has the tools for diagnosing Alzheimer’s using its Positron Emission Tomography (PET) scan locations throughout the continent. The PET scan uses a radioactive tracer to detect beta-amyloid plaques that are linked to Alzheimer’s. The imaging operations help determine who should receive treatment using amyloid-targeting drugs. And with an ageing population in most developed countries, Alliance Medical is well placed for this. 

Like many other procedures, Biogen’s filing of the disease-modifying drug was delayed due to Covid-19. When it released its interim results back in May, Life Healthcare raised hopes by saying it was likely to happen in the second half of the year. 

The FDA could still approve aducanumab, which would make it the first drug approved to lower levels of beta-amyloid in patients’ brains and reduce declines in memory and thinking skills of those in the early stages of Alzheimer’s.

While that will be good for Life Healthcare, as it will result in a surge in scans, don’t count on it just yet. DM/BM