ABSI - Supply chain pain continues thanks to Chinese lockdowns

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Covid hasn’t been in the headlines much recently, which isn’t a bad thing. However, a big news story that isn’t getting a lot of airtime is the lockdowns in China due to a recent Covid outbreak. Since China is still pursuing a zero-covid strategy, the world’s most populous nation is under strict lockdowns, which is impacting every industry, especially manufacturing. ABSI this week discusses the Chinese lockdown and the next supply chain shock that will result from this antiquated lockdown policy.


The Chinese people have not experienced such extensive lockdowns since the initial outbreak in Wuhan, back in 2020. Entering their 5th week, entire metropolises are in lockdown, including major cities Shanghai and Guangzhou, home to ~46 million people. The lockdown has shut down production of everything in these regions, from cars to smartphones. Additionally, major ports, such as Yangshan Container Terminal in Shanghai, critical to the global supply chain, are closed with cargo starting to pile up.

Screen Shot 2022-04-26 at 11.28.17 am

Source: Our World In Data

If we look back 12 months, the Port of Shenzhen had a 4 week reduction in productivity of 30% due to Covid, which caused a massive bottleneck in the supply chain for months following full reopening. The magnitude of the latest lockdown is materially higher, as it involves the largest container port in the world and 100% of the facility has been shut down with no sight of reopening.

 Screen Shot 2022-04-26 at 11.37.26 am

Source: Freight Waves

It’s difficult to overstate the importance of Shanghai as one of the world’s largest global manufacturing centres. It is the home to numerous international companies across a range of sectors but particularly, automotives and electronics. Tesla is a great example of the supply tsunami that is approaching with its gigafactory in Shanghai closed on March 28 and only recently begun limited operations again on April 17. Giga Shanghai is Tesla’s largest production facility and produced 473,078 vehicles at a daily rate of ~2,100 cars per day. This shut down has resulted in a production loss of over 45,000 vehicles equating to about ~US$2b in revenue.

Screen Shot 2022-04-26 at 11.40.10 amSource: China Briefing

Unfortunately, just as the light at the end of the tunnel was approaching for China, through gradual ease in sanctions on Shanghai, there are reports of rising cases in Beijing which is sparking fears that a similar lockdown of the Chinese capital will wreak havoc. The city is home to ~20m residents and is the political epicentre of the country. As a result, Chinese stock prices were hit hard yesterday, iron ore futures slumped 11%, and oil dropped 3% to trade below US$100/barrel.

As the Covid-19 virus enters its endemic stage globally and life seemingly returns back to normal, it's frustrating to see China continue to maintain a Covid-zero policy. The effect of these policies will continue to exacerbate global supply chain logistics and stoke the fires of inflation, whilst creating headwinds for post-pandemic growth.


The Latest from BPC Research


Brambles Ltd (ASX:BXB) -

A$10.73 Share Price | A$15.4b Market Cap


BXB is a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP brand. BXB specialises in the pooling of unit-load equipment and the provision of associated services. BXB is focusing on the outsourced management of reusable pallets, crates and containers.brambles graph

Source: Google Finance

In a recent, third-quarter trading update, BXB reported sales revenue from continuing operations of US$4,067m for the first nine months of FY22. This represented an increase of 7% reflecting ongoing strong price realisation to recover cost-to-serve increases in all regions, including sustained high levels of input cost inflation and increased capital cost of pallets. Group sales volumes were broadly in line with the prior period, while new business wins in EU pallets and Australian RPCs offsetting lower like-for-like volumes with existing customers in North American and EU pallets, as these businesses cycled strong demand in the prior year. Finally, pallet availability constraints also continued to limit current period growth with new and existing customers in all regions.

BXB full-year FY22 sales revenue growth is expected to be 8-9% (previous guidance of 6-8%) and underlying profit growth of 6-7% (previous guidance of 3-5%) including approximately US$50m of short-term transformation costs.

BXB currently trades on a one-year forward P/E ratio of 19.0x and has a gross yield of 3.5%.

BPC Research holds an UNDERPERFORM rating for BXB, with a target price of A$8.86.

Bega Cheese Limited (ASX:BGA) -

A$5.11 Share Price | A$1.6b Market Cap

Bega Cheese Limited (BGA)


BGA engages in receiving, processing, manufacturing, and distributing dairy and other food-related products in Australia for domestic and international markets.


bega graph

Source: Google Finance

BGA recently updated the market with a FY22 trading update that recognised that a series of unfortunate events would result in one-off costs impacting performance in excess of A$40m. In addition to Covid-related issues, the recent east coast flood disaster has significantly disrupted customer deliveries and will increase logistical costs in these regions. Furthermore, the war in Ukraine was resulting in inflation in several input costs such as wheat and fertiliser. Finally, the Shanghai lockdown is impacting product delivery schedules in China.

On the positive side, global dairy demand and commodity prices remain strong with the competition for milk being robust and transferring to higher farm gate milk prices. The Company will continue to execute its capital program with a particular focus on site and supply chain efficiencies, capacity increases, and product innovation in high growth segments. FY22 EBITDA earnings guidance will be between A$175m and A$190m. There is expectation that its leverage ratio will continue to reduce to ~2.0 by year end.

BGA currently trades on a one-year forward P/E ratio of 31.7x and has a gross yield of 2.7%.

BPC Research has a HOLD rating on BGA, with a target price of A$5.63.



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