Cash Scramble pt. II – Desperate measures.

SoftBank is in urgent need of cash.

• Now is the worst time to try and sell anything and this move by SoftBank shows just how desperately it needs cash to prop up both its balance sheet and investor confidence in the company as a going concern.
• SoftBank has announced a JPY4.5tn (US$41bn) asset sale program of which JPY2tn ($18bn) will be used to buy back and cancel shares.
• This in addition to the already authorised JPY0.5bn buyback will result in SoftBank buying back and retiring 45% of the outstanding equity.
• The other JPY2.5tn ($22.7bn) will be used to pay down debt and shore up the balance sheet.
• $14bn of this will come from selling part of its stake in Alibaba which has declined by 22% from its peak in February 2020.
• I think it very unlikely that the SoftBank will sell Arm as Arm is now deep in investment mode and has little if any earnings.
• Furthermore, Arm is pretty much unsellable as its position as a monopoly supplier or processor designs means that none of the potential buyers (Intel, Qualcomm, TSMC etc.) can buy it for fear of compromising its independence.
• This is the absolute worst time to be selling anything except the US dollar or the Japanese Yen, meaning that SoftBank will have to give a lot of value away in order to raise the money.
• At least SoftBank has assets to sell, unlike the Western governments where money printing on an unbelievable scale is going to cause huge headaches once the virus crisis has passed.

China indicators are not great.

• Some findings data from ZoZo Go (see here) is indicating that a lengthy U-shaped recovery is the best we can hope for, putting a quick bounce firmly out of the question.
• Commentary from Chinese automotive executives regarding demand, now that the bulk of the crisis in China has passed, is not encouraging.
• Total demand for vehicles in 2020 looks like it could fall by 20% to 25% in China which could easily to be replicated elsewhere.
• Commentary picked up by ZoZo Go includes:
  • “Creeping…super slow…taking it day by day. Some OEM customers are optimistic after June but these [forecasts] stand to be revised. A global recession is looming too”.
  • “Demand is coming back slowly. Government is discussing car demand stimulation policies. Hope they can come soon.”
  • “February down 80%. March down 50%. Full-year will be affected by around 25%”.
• The Chinese government (as usual) is more optimistic forecasting through the China Auto Dealers Association that units will decline by 10% for the full year.
• I believe the automakers.
• The automotive market is likely to be impacted more than most given the very high unit price but the read-across is clear that consumer discretionary spending is not going to recover quickly.
• The one thing in the automotive industry’s favour is that there could well be a move away from public transportation and ride-sharing by an infection-concerned public.
• This would mean higher vehicle ownership and more miles driven and therefore more purchases, but I doubt that this would be enough to offset the declines being forecasted for 2020.

Take-Home Message

• The take-home message is not to expect a rapid recovery anytime soon and that both the smartphone market and smart devices market are going to take a large hit this year.
• Even the usage driven companies like Google, Facebook and Twitter are affected as advertising volumes are way down which led to Twitter’s warning that there would be no YoY growth in Q1 2020 and a return to losses.
• Google and Facebook can easily weather this, but the question is at what point do their share prices turn?
• I think that the answer remains not yet as there is no visibility on the bottom, and I am still happy to stay out.