25 February 2020

Coronavirus: How the epidemic is impacting the Asian consumer sector and M&A market

Since the coronavirus (COVID-19) outbreak in December 2019, it’s become evident that the disruption to the economy will impact not just China but the rest of the world. Obviously, there is still a lot of uncertainty about what will happen –but the effects are already dramatic. Major cities are locked down. A mass quarantine of tens of millions of people. Millions are stuck and banned from travelling in and out of China. Thousands have died.

Businesses are taking drastic measures. Thousands of Chinese factories are yet to reopen. Tens of millions of professionals are working from home or on rotation. Students are on extended breaks.

Global airlines have mostly suspended flights to China. Travel and visa restrictions have been established in almost 100 countries.

The global supply chain has been disrupted. Countless businesses have been impacted by the outbreak of the coronavirus.

Not surprisingly, demand for most discretionary goods has dropped dramatically across the region. Tourism, hotels and airlines are decimated. Retail stores and restaurants are in deep trouble. Consumer staples such as groceries, rice, instant food and toilet paper have remained resilient. The epidemic has helped supermarkets and e-stores attract new online customers without extensive marketing and promotional efforts.

Some sectors might benefit from the virus outbreak –but not most. Anything that is related to digital, direct-to-consumer, healthcare: online supermarket, food delivery, digital home entertainment, online games, online education, healthy foods, consumer health and drugs, will benefit.

Surgical masks, alcohol sanitizers and other hygiene products are the most obvious beneficiaries of the coronavirus disruption.

We think the coronavirus outbreak will accelerate the shift towards online shopping and entertainment, boosting online segments. The new O2O, ecommerce delivery model fits well with consumer needs when they are asked to stay at home. The new habits people pick up in the next few months will last, in many cases, forever.

We saw US$40bn in global lost productivity due to SARS in 2003 and US$55bn during the 2009 H1N1 swine flu pandemic, both of which involved China. Those numbers could be dwarfed by this new virus –which could delay growth of hundreds of billions of dollars.

Global growth will resume as long as the coronavirus doesn’t last too long. Three lost months will be a big hit. Six lost months could mean some countries tip into recession. It is too early to assess how big the impact is, but we are impressed by a sense of calm and resilience by financial players.

Q1 profitability will be negatively impacted globally. M&A deals will slow down dramatically in the next couple of months. Valuations may drop in the short term but should bounce back sharply. Post-virus, there will be pent up demand, from delayed consumer discretionary spending, and delayed spending on consumer durables. We expect deals to rebound once the virus is contained. In the meantime, there will be good buying opportunities in China and beyond.


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