personal_noteS – Page 26

Boeing…

Twin Accidents

On October 29, 2018, Lion Air Flight 610, a 737 MAX 8 registration PK-LQP, crashed into the Java Sea 13 minutes after takeoff, killing all 189 passengers and crew.
On March 10, 2019, Ethiopian Airlines Flight 302, a 737 MAX 8 registration ET-AVJ, crashed approximately 6 minutes after takeoff, killing all 149 passengers and 8 crew members on board.

Countries Ordered Grounding

On March 11, 2019, China was the first country to order all 96 of its 737 MAX aircraft grounded
On March 12, 2019, Europe and India join wave of countries grounding the 737 Max
On March 13, 2019, U.S. regulators joined the global chorus by grounding the plane

Undelivered Orders

Boeing produces 52 aircraft per month and its newest version, the MAX, represents the lion’s share of production, although Boeing declined to break out exact numbers. [oann.com]

As of January 2019, Boeing had 5,011 firm orders from 78 identified customers for the 737 MAX. The top three identified airline customers for the 737 MAX are Southwest Airlines with 280 orders, Flydubai with 251 orders, and Lion Air with 201 orders. [Wikipedia]

The order book for its 737 Max is worth more than $600 billion according to Bloomberg.

Boeing’s stock closed at $422.54 per share before the accident and closed at $377.14 per share on March 11. ( -10.74%, after 3 days and all major markets grounded the plane)

With its 564.99M shares outstanding, the market value decreased by ~$25.8 billion. It seems that investors are more optimistic than I thought. With immediate delivery delayed/cancelled, the order value should shrink by a lot (50% discount * 10% profit * $600 billion = $30 billion; 2018 total net income ~$10 billion), plus the future loss of revenue on maintenance, loss of orders/bargain power due to the trust/brand damage.

Airlines may just switch to Boeing’s other aircrafts tho.

Tech Companies = Governments

This will be a large topic and won’t be easy to discuss in a systematic way. I will write down some thoughts in bullet points and revisit later.

The idea has occurred to me several times. Essentially, government is an organization and so does a company. Although organizations have different scopes, different formats of running, there must be some similarities.
We usually say companies are to maximize shareholders’ value (short-run and long-run). But when the long-run is long enough, we shall see something interesting: the companies are paying extreme attention to building an ecosystem, to maintaining a healthy community/marketplace, to maximizing users’ satisfaction, etc.
Tech companies very much rely on users’ opinion. They listen to users. Users have the option to walk away just like immigration. Tech companies need users’ inputs/choices to build apps they use, to maintain the virtual world they live. The self-governance is impressive, especially in blockchain-based applications that users can decide/vote.
Tech companies are responsible to protect users from malware or harmful contents/users. They can block an IP address or a user account just like putting someone into prison. They can reject his/her entrance into the community.
Tech companies have their own rules or bottom lines that act as laws/judges, with the help of self-governance.
There are many free services as long as you are one of its users (or citizens)
They provide infrastructures and ways to interact (emails, postal services, freeways)
Users pay taxes such as data. In other cases, users share what they earned through tech companies (e.g. marketplace organizers by them)

FDA’s Updated Biosimilars Naming Policy

Two days after Mr. Gottlieb announced his departure from the FDA within a month on March 5, he released an updated draft guidance on biologics naming policy, adding another accomplishment in the last month of his tenure.

The question at the core is how to market “generic versions” of biologics, aka biosimilars. Unlike generic versions of traditional drugs, which could achieve a very confident level of equivalence to their original forms, the difference between biosimilars and their originals are “theoretically” high.

A biosimilar is a biological product that is highly similar to and has no clinically meaningful differences from an existing FDA-approved reference product.

– FDA

The naming policy comes into play to assert that difference.

For interchangeable biosimilars, the agency will designate a proper name that combines the core name and a distinguishing suffix that is devoid of meaning and composed of 4 lowercase letters.

– FDA

It is another confirmation that, biosimilars will not provide the similar competition as generics [to traditional drugs].

Biosimilars can be seen as lower-priced branded drugs. And it will really need real-world experiences to tell the interchangeability and other considerations.

A new biosimilar approval could be seen as providing a new solution, instead of providing a less expensive version of the current solution, to patients.

MSCI China A Shares Inclusion (2): 253 Large-cap and 168 Mid-cap

Following up on the previous post of MSCI’s inclusion of 236 China A Shares last year, I created another list (in excel format) according to the recent update.

MSCI A-share List_2019Feb

MSCI will increase the weight of China A shares in the MSCI Indexes according to the following schedule:

Step 1: MSCI will increase the index inclusion factor of all China A Large Cap shares in the MSCI Indexes from 5% to 10% and add ChiNext Large Cap shares with a 10% inclusion factor coinciding with the May 2019 Semi Annual Index Review.

Step 2: MSCI will increase the inclusion factor of all China A Large Cap shares in the MSCI Indexes from 10% to 15% coinciding with the August 2019 Quarterly Index Review.

Step 3: MSCI will increase the inclusion factor of all China A Large Cap shares in the MSCI Indexes from 15% to 20% and add China A Mid Cap shares, including eligible ChiNext shares, with a 20% inclusion factor to the MSCI Indexes coinciding with the November 2019 Semi-Annual Index Review.

On completion of this three-step implementation, there will be 253 Large and 168 Mid Cap China A shares, including 27 ChiNext shares, on a pro forma basis in the MSCI Emerging Markets Index, representing a weight of 3.3% in the pro forma index.

Again, there is no clear/editable list publicly available… Always a list in jpeg/png format.

Compared to the list of 236 large-cap stocks last year, there are 24 additions and 7 deletions, listed in separate sheets. (236+24-7=253)

MSCI China A Shares Inclusion (1): 234 -> 226 -> 236 Large-cap

One thing I found very odd when doing some research on the recent inclusion of China’s A-shares into MSCI’s indexes – there is even no easily-accessible and “readable” list…

“Lists” I saw are in the format of pictures.. not usable, considering the number of stocks are in hundreds.

(Really don’t understand why a simple list is protected… and available in uneditable form…)

And there is no consistent track of inclusion/exclusion of stocks publicly available.

Given that, I created excel lists [MSCI China A Shares List] of tickers proposed by MSCI with a history of different versions in 2018.

[For 2019 versions, please see the next post]

In this post, three versions are shared:

5/15/2018 version with 234 stocks ->
5/31/2018 version with 226 stocks (8 are removed due to reasons like suspension of trading, lack of buying opportunity, etc.) ->
8/31/2018 version with 236 stocks (10 are added)

From 1 to 2, the 8 deleted stocks are:

002310 东方园林 (停牌原因)
600170 上海建工 (调出沪股通标的)
601390 中国中铁 (停牌原因)
600369 西南证券 (调出沪股通标的)
002450 ST康得新 (停牌原因)
000825 太钢不锈 (停牌原因)
601118 海南橡胶 (调出沪股通标的, 停牌原因)
000063 中兴通讯 (停牌原因)

From 2 to 3, the 10 added stocks are:

600760 中航沈飞
601088 中国神华
600050 中国联通
600795 国电电力
600346 恒力股份
600406 国电南瑞
000100 TCL 集团
000063 中兴通讯
600588 用友网络
601966 玲珑轮胎

Mark Zuckerberg’s Post on Privacy

Today, the person at the center of today’s privacy/data issues commented with his thoughts and future moves of Facebook.

[Read Zuckerberg’s original post here]

End-to-end encryption and secure data centers are the two most important things touted by Facebook’s CEO.

“In a few years, I expect future versions of Messenger and WhatsApp to become the main ways people communicate on the Facebook network.”

[WhatsApp is the leader in end-to-end encryption and was acquired by Facebook in 2014 for $22 billion total]

[Read more on the conflict between Facebook and WhatsApp after acquisition]

However, there is one big mismatch – users don’t care what technics FB is using; they care if people they don’t know know them well. Essentially, users will still feel their information is sold if they saw tailored ads in WhatsApp. They only care about results. And that’s where Apple’s iMessenger wins. Users don’t know what efforts Apple is making but they don’t see ads.

What’s more…

“Beyond that, significant thought needs to go into all of the services we build on top of that foundation — from how people do payments and financial transactions, to the role of businesses and advertising, to how we can offer a platform for other private services.”

Yes Facebook will do payments and issue blockchain-related or other forms of cryptocurrencies/units.

FDA Head Will Resign In A Month (Not Good..)

Scott Gottlieb, the commissioner of the Food and Drug Administration, will leave the office after a tenure of 23 month.

I’m immensely grateful for the opportunity to help lead this wonderful agency, for the support of my colleagues, for the public health goals we advanced together, and the strong support of @SecAzar and @realDonaldTrump – This has been a wonderful journey and parting is very hard. https://t.co/1Zu9y7NTwR

— Scott Gottlieb, M.D. (@SGottliebFDA) March 5, 2019

[Original Resignation Letter]

In a previous post, I listed some of the agency’s innovative approvals during the past two years under Mr. Gottlieb’s lead. The departure of the head of this crucial regulatory body will negatively impact the overall (biotech, pharma, medical devices, etc.) industry. (possible slower, less innovative approvals)

What seems odd here: 1. Mr. Gottlieb publicly has said in January on Twitter: “I want to be very clear — I’m not leaving. We’ve got a lot important policy we’ll advance this year.” 2. Mr. Gottlieb was working throughout the morning

There should be an increasing intensified pressure from industries that are experiencing headwinds due to his policies and the end users/stakeholders that are complaining about some current situations (but not in total control of FDA I believe), such as opioid abuse, prevailing of e-cigarettes among teens, etc.

Some of topics he is intervening include: 1) brand drug companies withholding samples needed by generic drug makers 2) rebate traps and other anti-competitive abuses in the pharmaceutical supply chain 3) rising use of electronic cigarettes (e.g. JUUL Labs).

[Warning Letter from FDA to JUUl Labs]

Last December, Altria invested $12.8 billion into JUUL for a 35% ownership. JUUL projected revenue of $940 million in 2018, with gross margins of 70 percent, and its 2018 projected EBITDA approximately $250 million. [Crunchbase News]

(So assuming 100% growth -> 1.84 billion in revenue in 2019, it’s valued at ~20.0x revenue multiple)

Last year, FDA issued more than 1,300 warning letters and fines to convenience stores, gas stations and other stores over the summer for selling e-cigarettes to minors, Gottlieb says. The FDA says it’s the agency’s largest such action in history. [npr.org]

Mr. Gottlieb also planned to seek a ban on menthol cigarettes.

Mr. Gottlieb has received criticism for the approval of Dsuvia, a powerful opioid painkiller.

Update on March 6: Tobacco giants’ stocks rising…

Altria Group Inc (NYSE: MO)

British American Tobacco PLC (NYSE: BTI)

China’s New Nasdaq-style “Technology Innovation Board”

Although China’s economy and stock market size has been growing fast, the underlying capital market mechanisms are not as advanced.

China has made several efforts to modernize its stock market, but mostly remained in the previous framework or didn’t become a game-changer.

This time is different.

Regulatory approvals are replaced by general registration processes (guidance and regulations still there). Any company that fulfills certain requirements can go public.

Pre-profit companies can go public. Previously, the stock market was heavily leaning towards sectors with profits like banking.

Different share structures are allowed. Super voting power is allowed.

Lock-up period is higher than NASDAQ’s.

—

Attached is a presentation from a major investment bank in China.

20190302.pdf

Too Low The Value For Bristol Shareholders

The $74 billion merger between Bristol and Celgene was an uncertain one, opposed by Wellington (more than 8% of BMY) & Starboard (recently added position of less than 0.5% of BMY).

The merger in assets actually makes sense to me and should make sense to many investors. But the question of BMY-only shareholders, who don’t own much CELG stocks, is that the benefits are probably captured unevenly by Celgene.

Suppose the base case for Celgene stock price without acquisition is $75 and the merger price is $50 cash + 1 BMY share ($52 value) + $9 option ($3 value) -> $105 per share – when it was traded at $90/share, the market suggested a probability 50% of a successful merger. [75*(1-p) + 105*p = 90]

When CELG was traded at $84, the market suggested a success rate of 30%. [75*(1-p) + 105*p = 84]

(Yes, the market just take simple numbers… )

Wellington/Starboard might just want to add more negotiation power to get some other benefits (special board treatment e.g.) or to load up some CELG…

BMY alone probably won’t perform very well, they should understand that.

China’s Greater Bay Area vs. San Francisco Bay Area – Transit

SF Bay Area’s rail transit

SF Bay Area BART (one of the major rail transits above) service’s map, including planned projects

SF Bay Area airports map (3 major airports: SFO, SJC, OAK)

China’s Greater Bay Area newly-built bridge

Hong Kong-Zhuhai-Macau bridge is adding Hong Kong’s direct conenction with Zhuhai. To some extent, it is reducing the unparalleled weight of Hong Kong-Shenzhen bond.

China’s Greater Bay Area transit map

China’s Greater Bay Area airports map

Shenzhen and Hong Kong’s airports will be the dual core. Macau’s airport will gain more importance (towards tourists). Guangzhou’s airport will probably share more responsibility as the connecting point for all other cities China (the connecting hub was Hong Kong).