With the recent headlines about the U.S.-China trade deal, it’s probably a good time for investors to reassess the status of major companies with significant China risk exposure. The trade deal with China has already caused several major market moves, and although it appears Phase 1 of the deal is intact, it remains to be seen if both countries can agree to Phase 2. In a market where one trade-tension headline can greatly impact your positions, it’s definitely a good idea to understand which companies are vulnerable.
In a perfect world, the United States and China will be able to work out their differences and the previously announced trade deal will move forward smoothly. However, we have already witnessed some mixed messages from the government and it is clearly evident how much of an impact any setbacks will have on financial markets. That doesn’t mean that you should sell every one of your stocks with China risk exposure, but the more you understand which businesses are exposed to these types of headlines the better your decision-making process will be. Let’s take a look at 3 stocks with significant China risk exposure below.
When you look at a company like Nike, which is a global brand that generates a ton of international revenue each year, it’s easy to see why it has been rallying strongly after the coronavirus crash in March. Thanks to solid growth in e-commerce and a reputation for being one of the strongest brands in retail, Nike is nicely positioned to continue its growth in both the U.S. and abroad.
Part of the reason why Nike has become such a retail powerhouse has to do with its expansion into China. In fact, China has been one of the biggest growth drivers for Nike. The company earned $1.5 billion in Q3 revenue from Greater China, which represented roughly 15% of its overall revenue figure. This puts Nike at risk should there be any setbacks in the trade deal, as China would likely enforce additional tariffs in retaliation. Many of Nike’s products are imported into the United States from China, which means those imports would get a lot more expensive for the company.
Another iconic brand with significant revenue exposure to China is Starbucks. This is a company that has grown its stores in China steadily over the last few years, especially after growth in the U.S. consumer market slowed down. Currently, Starbucks operates 4,400 stores in 168 cities in mainland China and is expecting to add 500 new stores by the end of its current fiscal year. The company continues to spend heavily in China and announced that it is investing an additional $130 million to open a state of the art roasting facility there.
If trade tensions subside, Starbucks is poised to capitalize nicely and continue receiving strong revenue from China. However, should the situation deteriorate, investors should understand that Starbucks will be left vulnerable. There’s even a possible scenario where Chinese citizens boycott U.S. brands as a result of tensions between the countries, which would prove quite costly for the company.
Wynn Resorts (NASDAQ:WYNN)
Many of the hotel stocks that have locations in China are clearly exposed to revenue risk should the trade deal take a turn for the worst, but Wynn Resorts just might be the most vulnerable. Wynn actually receives the majority of its revenue from China’s gambling capital, Macau. In 2019, Macau operations accounted for $4.6 billion out of its $6.6 billion in annual operating revenue. If there are issues with Macau, Wynn Resorts will have to deal with substantial negative effects on their cash flow and profits.
The main problem here has to do with gaming license renewals. The permits for Wynn’s Macau casinos will expire in 2022. If trade tensions between the US and China increase, it could impact the gaming license renewal process for Wynn. We’ve already seen the negative impact on Wynn’s earnings during the time its Macau casinos were closed due to the pandemic, which is proof that this stock has substantial risk if the trade deal eventually falls apart.
Geopolitical Tensions Subsided for Now
For now, it appears that the Phase 1 trade deal is still fully intact which is good news for both stocks and the global economy. However, any setbacks with the existing deal can result in downside for financial markets, especially during a time when both of the world’s leading economies are in a fragile state. During a period of so much uncertainty in the markets, investors should always understand the risk exposure to China that stocks like Nike, Starbucks, and Wynn Resorts are vulnerable to.
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