HSBC Holdings yesterday flagged a softer revenue growth outlook and dropped a key growth target for next year, after posting a more-than-expected 18% drop in quarterly pre-tax profit.
HSBC has been looking to step up cost-cutting efforts amid a gloomier business outlook brought about by an escalating trade war between China and the United States, an easing monetary policy cycle, unrest in its key Hong Kong market, and Brexit.
Pre-tax profit at Europe’s biggest bank by assets was $4.8bn for the third quarter ended September 30, versus $5.9bn a year earlier, HSBC said in a statement to the Hong Kong stock exchange.
The profit was lower than the $5.3bn average of analysts’ estimates compiled by the bank.
The Hong Kong-listed shares of HSBC fell more than 2% as trading resumed after the mid-day break.
The results are HSBC’s first under interim chief executive Noel Quinn, and are widely seen by shareholders and insiders as a report card on his auditioning for the role full time. Quinn flagged more changes ahead for the bank yesterday.
“Parts of our business, especially Asia, held up well in a challenging environment in the third quarter,” he said in the earnings statement.
“However, in some parts, performance was not acceptable...
Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth.”
HSBC said it did not expect to meet its return on tangible equity target (RoTE) of 11% in 2020, citing a “more challenging” revenue outlook compared to the first half of this year.
The London-headquartered lender, which generates the bulk of its revenue and profit in Asia, said it would rebalance capital away from low-return businesses and adjust its cost base.
“These actions, or any continuing deterioration in the revenue environment, could result in significant charges in 4Q19 and subsequent periods, including the possible impairment of goodwill and additional restructuring charges.”
Quinn, 57, has made no secret that he is keen to secure the permanent appointment from Chairman Mark Tucker, who said in August the search for a CEO would take six to 12 months.
A veteran of the bank since 1987, Quinn faces the tough task of showing progress on HSBC’s key priorities of further cost reduction and turning around its perennially underperforming US business.
The near- to medium-term outlook for the bank has also been clouded by the five month-old anti-government protests in Hong Kong, its single-biggest profit centre.
Sasol
The joint chief executives of South African petrochemicals group Sasol will step down this month after the company’s review of the difficulties that beset its Lake Charles Chemicals project (LCCP) in the United States. The cost of the Louisiana plant, which converts natural gas into plastics ingredient ethylene, is expected to reach as high as $12.9bn — up from an originally envisioned $8.9bn — hit by poor weather conditions, delays and oversights including duplicate credits and procurement back-charges. Bongani Nqwababa and Stephen Cornell will step down at the end of this month to restore trust in Sasol, the company said yesterday, adding that the decision was made after talks with the two executives and that neither were found to have been guilty of misconduct or incompetence.
“It is a matter of profound regret for the Board that shortcomings in the execution of the LCCP have negatively impacted our overall reputation, led to a serious erosion of confidence in the leadership of the company and weakened the company financially,” Sasol said in a statement.
Reuters was unable to contact Nqwababa and Cornell to seek comment.
Sasol said that some factors behind the cost increases and delays were common in projects of the size and nature of LCCP, but some shortcomings could have been avoided.
“The primary responsibility for shortcomings in relation to LCCP lies with the former leadership of LCCP’s Project Management Team,” Sasol said, citing inappropriate conduct and a lack of competence. The review found no intent to defraud the company, it added.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell 9% year on year, it said, citing lower chemical product prices and higher operating costs at LCCP. “It will probably take eight to nine years from an EBITDA perspective to pay off the $12.6mn to $12.9mn capital (cost of the project),” said Sasol finance chief Paul Victor.
Sasol’s net debt ratio for the year was 2.6 times EBITDA, against a bank-agreed covenant level of 3 times.
Spotify Technology
Spotify Technology posted a surprise profit and beat Wall Street expectations for third-quarter revenue as the music streaming company added more-than-expected subscribers to its premium service, sending its shares up 12%.
The Swedish company, which has outstripped Apple Music in the race to dominate music streaming globally, said its number of premium subscribers had risen by 26mn in the past year to 113mn at the end of September.
“The fact that it’s delivering growth against an increasingly competitive backdrop is particularly impressive — especially when that competition is Amazon and Apple,” said Hargreaves Lansdown analyst Nicholas Hyett.
Spotify said in a letter to shareholders it was adding roughly twice as many subscribers per month as Apple. However, lower-than-expected addition of new subscribers in the second quarter had led to concerns that rivals might be gaining on Spotify, particularly in countries where Spotify faces home-grown competitors.
“Investors were concerned that competition within the streaming music market was beginning to impact Spotify,” Atlantic Equities analyst James Cordwell said.”But the Q3 results seems to put this concern to rest.”
Spotify said it had also reduced artist marketing and research and development costs in the quarter, contributing to the surprise profit.
Spotify, which launched its service over a decade ago, has overcome resistance from large record labels and some major music artists to reshape how people listen to music.
The world’s most popular music streaming service forecast fourth-quarter total premium subscribers of 120mn to 125mn, largely in line with analysts’ expectations of 122.6mn.
The company expects its broader measure of monthly average users to grow to between 255mn and 270mn in the current quarter.
Net income attributable to shareholders rose to €241mn, or 36 cents per share, for the third quarter, compared with €43mn, or 23 cents per share, a year earlier. Analysts were expecting a loss of 29 cents per share. Revenue rose 28% to €1.73bn ($1.92bn) for the three months ended September 30.
ZTE
Chinese telecoms equipment maker ZTE Corporation said yesterday that its third-quarter net profit more than quadrupled as the company continued to rebound after being hit by crippling US sanctions last year.
US sanctions forced ZTE to stop most of its business between April and July last year after US Commerce Department officials said the company had breached an agreement and was caught illegally shipping US-origin goods to Iran and North Korea.
The sanctions were lifted after ZTE paid $1.4bn in penalties. ZTE said its net profit for July-September rose more 370% from a year earlier to 2.66bn yuan ($377mn) and net profit for the first three quarters of 2019 was 4.13bn yuan.
Operating revenue rose 1.55% in the third quarter from a year earlier to 19.63bn yuan, it said, but did not provide further details.
ZTE said it expects full-year profits in the range of 4.3bn yuan to 5.3bn yuan, a turnaround after losses of 6.98bn yuan in 2018. The company’s big customers include China Unicom, China Telecom and China Mobile and it said last month that the Chinese market accounted for 61% of its operating revenue during the first half of this year. US sanctions prohibited US companies such as Qualcomm from selling components that are vital to ZTE’s cellular networks.
Walgreens
Drugstore chain Walgreens Boots Alliance Inc reported quarterly profit above market expectations yesterday, benefiting from higher prices for branded drugs and an increase in prescription volume. Shares rose 2% before the bell after the company said it expects fiscal 2020 earnings to be roughly flat and “very much in line” with its expectations. Walgreens’ stock has been under pressure since the start of the year as investor expectations over the company’s growth prospects took a hit in the face of low reimbursement rates for filling prescriptions.
“While we still face headwinds, I am encouraged by the improvement in US comparable sales performance in the second half of fiscal 2019 and our progress in managing costs,” chief executive officer Stefano Pessina said in a statement.
Same-store sales at the retail pharmacy division in the United States rose 3.4% from a year earlier.
Walgreens said it now expects annual savings of $1.8bn by fiscal 2022 from its cost-cut plan that was announced late last year, up from $1.5bn.
As part of the plan, it had decided in August to close 200 US stores.
Net income attributable to the company fell to $677mn, or 75 cents per share, in the fourth quarter ended August 31, from $1.51bn, or $1.55 per share, a year earlier. Excluding items, Walgreens earned $1.43 per share, beating analysts’ expectations of $1.41 per share. Revenue rose 1.53% from a year earlier to $33.95bn. Shares of the company were trading higher at $56.31 before the bell.
Philips
Electronics giant Philips said yesterday that trade tariffs had begun to bite into the profit margins at one of its medical equipment units and that orders were flat in the third quarter.
The Dutch firm that has largely shifted to building medical equipment in recent years reported that net profits fell by nearly 30% to €208mn ($231mn) in the three months to September, thanks largely to €78mn in write-downs.
It was in the business line which makes equipment that helps doctors and hospital staff monitor patients that Philips said tariffs have begun to erode margins.
The operating profit margin in the Connected Care businesses declined to 11.3% from 15.8%, “due to increasing headwinds from tariffs,” chief executive Frans van Houten said in a statement.
He also cited the delayed impact of measures meant to mitigate the impact of tariffs, under-utilisation of factories and its product mix as factors for the unit’s performance.
Overall, sales rose by 6% on a comparable basis, with China leading the way with double-digit growth.
But order intake was flat after surging 11% in the third quarter of last year.
While van Houten described the third quarter performance as “mixed results” for the firm, he said Philips still expects adjusted sales growth of 4.0%-6.0% for the year, with its overall operating margin to rise slightly.
Shares in Philips fell 3.2% on the Amsterdam exchange, where the AEX index was 0.2 % lower.
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