Takeaway: Long China, Hong Kong and Singapore continues to be our top idea across Asian equities with respect to the TREND duration.



  • The balance or risks – both fundamentally and quantitatively speaking – continue to support our bullish biases on Chinese, Hong Kong and Singaporean equities.
  • As such, we expect these ideas to continue generating absolute gains and relative outperformance over the intermediate term.
  • On absolute tears, it's admittedly tough to run out and buy 'em up here; that said, however, we certainly do support increasing allocations to these asset classes on any pullback(s).


Over the weekend we received more JAN PMI data out of China on the Non-Manufacturing front and we also received Singapore’s JAN Manufacturing PMI data this morning. The indicators all showed sequential strength, which is incrementally supportive of our broader regional #GrowthStabilizing theme – which itself is underpinned by our fundamental call for continued improvement in the Chinese economy.














On the strength of the aforementioned investment theme(s), we’re seeing continued strength across the associated financial market indicators we have liked and continue to like on the long side with respect to the intermediate term.


The MSCI China Consumer Discretionary Index is up +9%, Hong Kong’s Hang Seng Index is up +11.9% and Singapore’s FTSE Straits Times Index is up +4.2% since we turned the corner on each – which was on 12/10, 11/16 and 12/21, respectively. That compares to +7.1%, +10.7% and +3.4% for the MSCI China Index, the MSCI AC Asia Pacific Index and the MSCI AC Asia Pacific Index, respectively, over the associated durations.


We expect these ideas to continue generating absolute gains and relative outperformance over the intermediate term. Our quantitative risk management overlay suggests the same.








We’ll get Hong Kong’s JAN Manufacturing PMI data tonight and China’s JAN Social Financing, Money Supply and Trade Data on Thursday. We expect continued improvements – particularly in all the YoY figures, as the timing of the China’s Lunar New Year celebration is favorable for the JAN ‘13 figures. Specifically, China’s Lunar New Year festivities begin FEB 10 this year vs. JAN 23 in 2012.


For those in search of a deeper discussion on the aforementioned investment ideas and themes, please email us and/or refer to the following research notes:



From a top-down factor risk perspective, the key callouts from each of the aforementioned geographies are as follows:


  • China
    • Legitimately cheap, as the Shanghai Composite’s index P/E multiple has compressed by -6.8 turns over the past 3Y;
    • Expensive names outperforming by a factor of ~2x on a 1M basis implies potential for broader market multiple expansion, which is augmented by high-beta and small caps outperforming on that duration as well; and
    • China’s still-pancaked yield curve (10Y-2Y Spread at 52bps wide) supports our view for relatively muted upside to official growth figures, while the lack of meaningful adjustment being priced into Chinese rate markets (NTM OIS 16bps higher than Benchmark Household Savings Deposit Rate) supports our view of status quo policy over the intermediate term.
  • Hong Kong
    • The +48bps 1M expansion in Hong Kong’s 10Y-2Y Spread has augured and should continue to augur very well for Hang Seng financials stocks, which are 53.8% of the index; and
    • We take solace in the fact that the index hasn’t gotten ahead of itself from a economic perspective – which equity markets have tended to do with great regularity in the post-crisis era of institutionalized yield chasing. Specifically, the Hang Seng is only +3.3% above where it “should” be based on the economic expectations being priced into the 10Y-2Y Spread, which we consider among the best proxies for growth. We correct for divergences in the relative z-scores to arrive at this nontraditional valuation metric.
  • Singapore
    • Defensive names are still outperforming across multiple durations (i.e. low debt, low beta, low sales and EPS growth and high dividend yield), suggesting the market doesn’t necessarily think growth is back. In light of our view on Singapore’s growth outlook, there exists an opportunity to reallocate to some of the more cyclical names.
    • A great deal of macro-related volatility is likely already priced into Singapore’s equity market, as indicated by the spread between 3M Implied FX Volatility and 3M Historical FX Volatility. We correct for divergences in the relative z-scores to arrive at this nontraditional valuation metric.








The key idiosyncratic policy risks from each of the aforementioned geographies are as follows:


  • China
    • From here, all eyes should be on the 12th National People’s Congress (likely convening in MAR), where the new Politburo leaders will assume their official roles in the Chinese state government. Moreover, we anticipate they will introduce some much needed practical (i.e. > lip service) reforms designed to aid the structural rebalancing of the Chinese economy, such as broadening social security expenditures and widening VAT reform to more regions and/or industries.
  • Hong Kong and Singapore
    • The key idiosyncratic catalyst for each country/territory is shared: macroprudential measures designed to reign in speculative activity in the associated property market. Singapore recently unveiled a series of dramatic measures on this front, so we don’t anticipate anything further from the MAS over the intermediate term. The HKMA could, however, roll out additional measures (per Chief Norman Chan’s recent commentary), but we anticipate any new measures will be in-line with previous ones (i.e. mere slaps on the wrists).


All in, the balance or risks – both fundamentally and quantitatively speaking – continue to support our bullish biases on Chinese, Hong Kong and Singaporean equities. On absolute tears, it's admittedly tough to run out and buy 'em up here; that said, however, we do support increasing allocations to these asset classes on any pullback(s).


Darius Dale

Senior Analyst


Ahead of Green Mountain Coffee Roasters releasing 1QFY13 earnings on Wednesday, we wanted to highlight an apparent accounting change that may have boosted FY12 free cash flow.  We have written in the past of the mounting pressure on sales and margin in GMCR’s core businesses and believe that investors should pay close attention to the reporting conventions being used by the company when releasing earnings.


Green Mountain’s FY12 cash flow seemed surprisingly strong to us when results emerged in November of 2012. 


Specifically, we were not expecting the company to generate free cash flow.  A closer look at the footnotes, however, shows that in FY12 the company may have used an aggressive accounting practice to produce more attractive cash flow than otherwise may have shown up in the financial statements.


The FY12 10-K makes for some interesting reading; the footnotes, in particular, have raised some important questions in our thinking on the company’s ability to generate cash going forward.  FY2012 was the first time that GMCR acquired assets through capital lease obligations.  The company’s accounting practices have been scrutinized in the past and it looks like the cloud of suspicion may linger on, despite the appointment of a new CEO.  His tenure is still new, so it is far too early to judge, but addressing investor skepticism must be one of his foremost priorities. 


The key question, by our thinking, is to learn what was behind the company’s decision to begin acquiring assets through capital leases.  Was the switch made to inflate the cash flow numbers or is there another explanation? 


The cash flow statement from Green Mountain’s most recent 10-K shows reported “fixed assets acquired under capital lease and financing obligations” of $66.5mm .  This figure amounts to 86% of the reported $76.6mm of free cash flow reported for FY12.  Some forensic accountants suggest that the acquisition of fixed assets under capital lease and financing obligations can serve as a means to “overstate” a company’s cash flow generation. 





The classification of a lease depends on a number of criteria.  Specifically, a lease is considered a capital lease if it fulfils any one of the following conditions:

  1. The agreement specifies that ownership of the asset transfers to the lessee
  2. The agreement contains a bargain purchase option
  3. The non-cancelable lease term is equal or greater than 75% of the expected economic life of the asset
  4. The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset


Assets acquired through capital leases are, in terms of their impact on the financial statements, substantially similar to assets purchased and financed through credit. 


As a refresher: “When assets are acquired through capital lease transactions, they are reported on the asset side of the balance sheet. The capital lease obligation is shown on the liability side. Depreciation on these assets and interest on the related obligations are represented as expenses. Since cash is not dispensed when the assets are acquired, they are not included with capital expenditures reported in the investing section of the statement of cash flows. Subsequent principal payments made on the capital leases are reported in the financing section of the cash flow statement.  Note that while the company acquires the asset for use, cash flows related to the acquisition of the asset are never shown in the investing section of the cash flow statement. Although this is in keeping with the guidelines provided by SAFS No. 95, it can lead to miscalculated amounts of free cash flow.”


Understanding Green Mountain’s reasons for deciding to acquire assets through capital leases is important.  One reason the company might have taken this step is that the appearance of strong cash flow generation could succeed in taking some momentum out of the short theses that were dominating the news flow around the company.  The most well-known GMCR bear is, of course, Greenlight Capital’s David Einhorn.  One of the most important components of his thesis was the idea that the company’s cash flows were unlikely to be sufficient to cover the bloated capital spending plans going forward.  One way to help the company’s free cash flow numbers could have been to acquire $66.5mm of fixed assets under capital leases and financing obligations in 2012. 


The company expects capital expenditures in the range of $380-430 million in FY13, versus $401mm in FY12.  The company also expects free cash flow of $100-150 million in FY13.  Our focus will be on the “assets acquired under capital lease and financing obligations line item” this year.


The company is reporting EPS on 2/6.  Like other’s following the stock, we are eager to hear the new CEO, Brian Kelley’s, input as the Street develops a more complete picture of his vision for the future of Green Mountain Coffee Roasters.  In particular, he will need to assure investors that the SEC investigations and class action lawsuits are in the rear view mirror, and unlikely to command much of his team’s attention going forward.   Such issues aside, the company has plenty of competitive issues to address, so Kelly will need all minds focused on GMCR’s profitability rather than worrying about investigations or litigation.



Howard Penney

Managing Director


Rory Green

Senior Analyst


European uncertainty and higher costs outweighing a better North American yield outlook 




"Excluding the Pullmantur impairment charges, our operating results came in remarkably close to our forecast from a year ago, which is notable given the challenging environment.  Looking forward, we see a tale of two continents; North America is doing well, while parts of Europe continue to be a challenge. Nonetheless, we are encouraged that the former will countervail the latter allowing us to drive meaningful yield growth in 2013."


- Richard D. Fain, chairman and chief executive officer




  • Spain and the UK are weak, US is strong.  It's really the weakness in Southern Europe that is holding back RCL's yield.
  • Pullmantur is aggressively trying to reduce their reliance on weak markets in Spain by moving their capacity. In 2013 they expect a 10% reduction in their capacity in Europe and moving capacity to Asia. 
  • China and Australia are doing exceptionally well, especially in light of the China-Japan dispute due to the large capacity increases they are absorbing
  • Seeing a significant deterioration in cruise demand in Spain.  This has resulted in significant expectations for the Pullmantur brand which is why they took the write down.  They have incorporated a grim view of the Spanish economy in their forecast.
  • Remaining Pullmantur goodwill is $144MM and the value of the trademarks and name was $208MM
  • As of today, our total booked load factors and booked APDs are slightly better than at the same time last year and better than this point in time in 2011.  Booking activity in the fourth quarter was slightly lower than the same time last year with a greatest decline coming in the aftermath of Hurricane Sandy. With each consecutive week after the storm, we saw improvement though. During the first part of January, bookings were in-line with the same time last year. 

  • Asian and Australia bookings have more than kept pace with the added capacity we have placed in both markets.  The UK has been disappointing from a volume standpoint, but pricing is above last year.  Spain however, is down significantly in both volume and pricing. 

  • Caribeean will account for 44% of their 2013 capacity, 4% increase from 2012.
    • Seeing solid booking trends for this product group. Expect record yields in 2013 in the Caribbean
  • Europe will account for 27% of their capacity (down 10% YoY)
    • Booked load factors are similar to the same time last year at higher APDs. However, they have sold less than 50% of their capacity so far.  Still too early to have a definitive view on how much yield we can recover in 2013.
  • Asia Pacific will account for 10% of 2013 capacity, up 45% YoY
    • Booked load factors look strong for sailings in 1H13, although pricing is behind a year ago. Expect yields to be flat for this year despite large capacity increases
  • Alaska is 4% of their capacity. Early bookings and looking good with both load factors and pricing running higher than a year ago.
  • Remaining 15% of our inventory is spread across many other products including South America, Bermuda, Panama Canal and Transatlantic itineraries.  In aggregate, load factors are higher than last year with pricing running slightly ahead.
  • Have seen an increase of more than 50% of their protection and indemnity insurance as a resiult of the Concordia incident
  • 10% change in Fuel = $43MM impact for the year. Swaps provide a $65MM benefit.  Included in their guidance is an incremental expense of $11MM due to the ECA regulation that went into effect last year.
  • Europe:  Expect yield increase in 2013 relative to 2012 & 2011.  Seeing more interest for the US source markets for the European cruise market.
  • China:  2 Voyager Class ships will be in the market this year. In the short term, the rift between China and Japan are impacting their itineraries and demand. They have already eliminated all Japanese port calls for their June cruises from China.


  • Insurance cost increase: how much is incremental to what they were already expecting
    • Insurance cost in total are up $20MM YoY (60bps). Anticipate a 10% increase in hull and machinery but the P&I insurance was much larger than they anticipated.
  • They are also investing more on their online presentation (marketing) and their tech side to do better yield management. Hope to get benefit from these investments in 2015 & 2016.
    • Need to continue to invest in ways to improve their distribution systems (i.e. incentivizing travel agents to push their products) 
    • Also need to keep investing in new marketing capacibilies in nascent market
  • Mediterrean season: It's a bit too early to tell. 
  • % from the US is usually a little below 25% of their European business, now expect a little more than 25% of their business in Europe
  • New onboard revenue opportunities:  Effort across all brands to create upside
    • Getting better at providing attractive shore excursion
    • F&B has been productive for them through the introduction of various packages
    • Getting better at catering to diverse nationalities
  • Surprised that UK is lagging
    • UK is under some stress economically 
    • Adding some capacity to Southampton
    • There is always a lot of promotional activity around this time of the year.  Will just have to wait and see how effective the promotions are - another few months -before they get a good sense of how the summer will shake out.
  • Maintenance capex is usually about $250MM/year but may be higher over the next few years due to their IT initiatives
  • Celebrity Brand:  A lot of the improvement they are looking for are coming out of the Celebrity brand, but early indications are quite positive and that's part of what is driving their positive yield guidance
  • US is in-line with a year ago on the booking curve.  There are some pockets where people are beginning to book further out.
  • Europe: Southern Europe is booking about a month closer to sailings than a year ago; Northern European is similar YoY.
  • The investments that they are looking at aren't going to reduce commissions by shifting more to direct bookings but hope that it will just make it easier for them and their travel agents to distribute and yield manage their products. 
  • The weather this season so far is helping them. Their travel agents are telling them that the consumer is taking some comfort in a recovering US real estate market and the fact that we didn't fall off the fiscal cliff.



  • "Booking activity in the fourth quarter was slightly lower than the same time last year, with the greatest decline coming in the aftermath of super-storm Sandy. However, the company has observed a much stronger booking pattern since the beginning of WAVE season and demand trends have been quite healthy."
  • "In recent weeks, booking volumes have been running approximately 20% ahead of the same time last year, due in part to the slower booking trends the company experienced after the Costa Concordia grounding in January of 2012.  Normalizing for this favorable comparison, the company still considers the WAVE season to be off to a strong start, particularly from U.S. points of sale.  Booking volumes are exceeding those during the same period in 2011 and in the aggregate, forward booked load factors and pricing are higher than at this time in both 2011 and 2012." 
  • "We were proactive in reducing our deployment and guest sourcing programs from Europe due to uncertain consumer spending patterns as austerity measures continue to pressure the region. Encouragingly though, demand from our other source markets, especially the U.S., is strong and should more than offset any ongoing weakness in Europe.  In fact, we are optimistic that we will achieve record yields in the Caribbean and Alaska this year."
  • "While the 2013 WAVE season is broadly off to a promising start, booking volumes and pricing are down substantially in Spain due to the impact of additional austerity measures there, the lingering impact of the Costa Concordia tragedy and other factors.  Accordingly, the company has recorded a total impairment charge of $413.9 million.  Of this amount, approximately$319.2 million relates to goodwill and the balance relates to a valuation allowance for deferred tax assets, a reduction in the value of the trademarks and an impairment charge related to three aircraft that Pullmantur owns and operates."
  • "Both close-in bookings and onboard spending were stronger than expected for the fourth quarter, resulting in a Net Yield increase of 1.8% on a Constant-Currency basis versus prior guidance of up approximately 1%"
  • "Approximately 110 basis points of the Net Yield improvement and approximately 60 basis points of the NCC excluding fuel increases during the quarter relate to previously announced deployment initiatives and changes to the company's international distribution system."
  • Liquidity: $2.2BN
  • "Scheduled debt maturities for 2013, 2014, 2015 and 2016 are $1.5 billion, $1.5 billion, $1.1 billion and $1.0 billion, respectively.  The company will continue to opportunistically approach the prepayment and refinancing of its 2013 and 2014 scheduled maturities."     
  • "Projected capital expenditures for 2013, 2014, 2015 and 2016 are $700 million, $1.2 billion, $1.2 billion and $1.3 billion, respectively." 
  • "Capacity increases for 2013, 2014, 2015 and 2016 are 1.4%, 1.0%, 6.8% and 4.8%, respectively.  The company's annualized capacity growth rate from 2012 to 2016 remains at a historically low rate of 3.5%."


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In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance




  • MIXED:  2013 net yield guidance of +2-4% is solid and underpinned by record US volumes and easy Costa Concordia comps.  European markets, especially Spain, remain the laggard with poor visibility.  2013 Cost guidance (+2-3%) was the negative surprise, which the company blamed on higher insurance, marketing, and technology costs. 


RCL 4Q 2012 REPORT CARD - 11



  • WORSE:  RCL has seen a 50% increase in their protection and indemnity insurance costs.  Their reinsurance costs incurred by the P&I clubs due to Costa Concordia was higher than previous estimates. 2013 insurance costs will be up $20MM YoY (60bps increase in costs), mainly related to P&I.  Increases in investments/marketing will impact costs equally.  The cruising space continues to be competitive and RCL needs to invest global marketing capabilities to maintain its edge.
  • PREVIOUSLY:  "I think we've talked about on the capital side that we are investing in IT and trying to upgrade a lot of our systems, both shore side and shipboard. Not all those expenses are capitalized, so we may feel some pressure there. I think we're looking at some modest increases in insurance, but I think they'll be manageable. We do have a number of revites, as Adam alluded to, over the next year, and there are costs that hit the P&L that come from there. And we're still evaluating things like food inflation and freight and whatnot. So there are some pockets of pressure, but again, I think we have pretty disciplined environment here that, hopefully, we can help keep this to a minimum."


  • SLIGHTLY BETTER:  Post-Costa Concordia bookings have been up 20% YoY.  Significant challenges remain in Spain with pricing and volumes lower; hence, the impairment charge for the Pullmantour brand in 4Q.  UK volumes have been disappointing at higher pricing.  Having sold less than 50% of European itineraries, Europe will be the largest swing factor in RCL's guidance.  Northern Europe booking curve is the same YoY.  Southern Europe booking curve are about 1 month closer than a year ago.  
  • PREVIOUSLY:  “The last few months of booking activity have been fairly stable. Our deployment has been adjusted slightly to accommodate for the stronger markets and the early order book for 2013 is encouraging....We are seeing a much more normalized booking curve from the North American market. Europe and particular Southern Europe has had a contracted booking curve. Northern Europe has actually had a pretty normal booking curve as we look out."


  • BETTER:  Caribbean yields are up in the mid-single digits while European itineraries were down slightly.
  • PREVIOUSLY:  “Currently, the fourth quarter sailings, our load factors are slightly below last year, but at slightly higher APDs. Caribbean itineraries, which account for 42% of our inventory in the fourth quarter, are showing the greatest strength. On the other hand, European itineraries, which account for 27% of our capacity, are forecasted to be down slightly."


  • SAME:  Cautiously optimistic for 2013.  Short excursions and beverage (introductions of new options) outperformed in 2012.  The revitalization programs have benefited onboard revenues and will continue in 2013.
  • PREVIOUSLY:  “We saw some strength in gaming, in retail and in short excursions."


  • SAME:  New ECA regulations will negatively impact fuel expenses by $11 million in 2013
  • PREVIOUSLY:  "While the ECA came into effect on August 1 of 2012, it isn't really until 2015 that the very – much more significant burden of sulfur requirements kicks into effect. So while we are facing a somewhat extra burden of fuel costs because of the first stage of the ECA right now and that will continue through the end of 2014, it's really not significant in the scheme of things for us and, I think, for the industry in general. The question is really what more will happen as we approach 2015? Will the ECA regime stay exactly in a fact as it is, or will there be potentially some adjustments through political or legislative process."


RCL 4Q 2012 REPORT CARD - 23

CLX - Solid Quarter, Top Line Flattered by Items

Clorox (CLX) reported Q2 ’13 EPS this morning, a solid result of $0.90 ($0.03 gain in the quarter included in reported results) versus consensus of $0.81.  We didn’t see much to do into the quarter, as our estimate was ahead of consensus.  Our bias is to look to be short the name, as we view its multiple (18.6x ’13) as disproportionate to its long-term growth rate (3-5% top line).  However, valuation isn’t a sufficient catalyst for us, so we will remain on the sidelines waiting for a clearer path to an EPS or top line miss is apparent.  We may not have to wait long, depending upon how consensus shakes out for Q3.

The clear standout in the quarter was the company’s 7.1% constant currency organic top line growth (against a 4.1% in the year ago quarter).  However, it appears that the number was flattered by:

  1. Early shipments (in Household, specifically charcoal)
  2. Robust flu season (disinfecting wipes – strong retailer buy-in, takeaway was very good as well, unclear what inventory status is) - not sustainable
  3. New products (bleach, lip care and dressings)

We should point out that the only segment that didn't have some sort of volume "noise" associated with it was International, which saw volumes decline 3 percent.

The upcoming quarter represents the most difficult year over year top line comparison (+5.9%) and will likely suffer from what flattered this quarter’s results.  We will wait and see where consensus shakes out.




Robert  Campagnino

Managing Director





Matthew Hedrick

Senior Analyst

#QuadrillYen Continues

Japan’s plan to devalue the Yen has worked well over the last three months, with the CurrencyShares Japanese Yen Trust ETF (FXY) falling -13.31% since then. Japanese Finance Minister and Prime Minister Taro Aso and Shinzo Abe have worked meticulously on “stabilizing” the Yen; if they continue down this path, they very well could get more than they bargained for.


#QuadrillYen Continues - YEN

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