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Corona Capital

20 August 2020 By Breakingviews columnists

Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.


– Nvidia’s good luck

– HVACs are heating up

Nvidia’s luck and timing. Jensen Huang’s knack for seeing where semiconductors are going, seasoned with a bit of luck, was on display again in Nvidia’s Wednesday night quarterly results. Revenue rose 50% as lockdowns boosted demand for the $300 billion firm’s data center and video gaming chips. The firm, which Huang started to produce graphics chips, has benefitted from his keen sense of direction. Data centers are now its biggest business. This quarter produced yet more blowout growth for it – 167% – as Nvidia’s processors are key for producing images and powering artificial intelligence applications.

Huang’s recently closed $6.9 billion deal for Mellanox Technologies also looks like a winner, as demand for its gear to help data move quicker between center servers is accelerating. While existing businesses are booming, Huang is considering his next step. He didn’t say much about possible interest in buying Arm Holdings, but with Huang’s record, it’s worth pondering what he sees. (By Robert Cyran)

HVAC: the face mask for buildings. Dying to see a movie in a theater? Desperate to send your kids to school? Proper air filtration is a key component to getting back to some state of normalcy. In the world of deals, that’s an opportunity. Investments involving startups that focus on heating, ventilation, and air conditioning – aka HVAC – have more than doubled since 2015 and the deal count has hit a new high tallying 39 so far this year, according to CB Insights.

The average transaction size is about $13 million. But in the age of Covid, venting is no small matter. Like face masks, vaccines, and home office equipment, picking investment winners in the midst of a pandemic could be a boon for people searching for returns. HVACs have a shining moment. Whether the investors remain warm or cold is another question. (By Jennifer Saba)

Great expectations. Sweden’s 17 billion euro EQT has been investors’ favoured punt on the private equity industry this year. A warning on Thursday by Chief Executive Christian Sinding, who said that the group probably wouldn’t be able to sell many portfolio companies in 2020 amid the pandemic, has dented its darling status. Shares were down as much as 10% in morning trading.

There’s scope for further disappointment given EQT’s puffed-up valuation. Even after the fall, Sinding’s company trades at 33 times next year’s forecast earnings, using Refinitiv estimates, compared with industry behemoth Blackstone’s multiple of 19. The premium is partly premised on fast growth as EQT raises new funds and rakes in profit from its old ones. The further Sinding pushes out his goals, the bigger the gap between reality and investors’ high expectations will be. (By Liam Proud)

Veering off course. For a few months Australia was the envy of the virus-hit world. But the airline industry’s recent struggles Down Under illustrate how Canberra has now taken a bumpier route. Competition officials are looking into Qatar Airways and others for prioritising business travellers over economy class. It’s a side effect of the country’s draconian policies on the movement of people.

Super-strict limits on arrivals are at the root of the problem: Sydney airport, for example, is allowed 350 passenger arrivals per day, making it desperately difficult for citizens to return. For carriers, however, the wrong mix of fare-payers can make flights even more commercially unviable. Qantas Airways, Australia’s national carrier, has scrapped most of its international flights. That makes the Gulf network airlines’ capacity more important. Australia has kept its fatality rate low, but the cost of success is mounting. (By Una Galani)

Rosy-fingered yawn. European credit markets are shrugging off the coronavirus. Rating agency S&P Global said on Wednesday that it expects the European corporate default rate to hit 8.5% by June 2021, up from just over 3% now, as companies struggle with a sluggish recovery and debt from the pandemic. In a pessimistic scenario, which includes a longer recession and a second wave of Covid-19, defaults could reach 11.5%.

Bond traders don’t seem fussed. The return investors demand to hold risky debt has fallen in recent months, as central banks pumped liquidity into banks and markets. The spread on the Markit iTraxx Crossover index of junk-rated credit default swaps has halved since March to around 340 basis points. That’s enough to cover losses if defaults hit around 5%, according to Breakingviews estimates. Investors may be betting on a vaccine and a speedy recovery, or may be just desperate for yield. Either way, a second wave could be painful. (By Neil Unmack)

Natural selection. A decision by the U.S. Food and Drug Administration puts extra pressure on drugmaker Gilead Sciences to get the most out of its Covid-19 treatment remdesivir. The U.S. watchdog has declined to approve filgotinib, a drug for arthritis developed by Gilead with Galapagos, a Belgo-Dutch biotechnology company, citing safety concerns.

It’s a fairly big blow for Galapagos, a rare large European biotech, whose shares were worth 10 billion euros before falling around a quarter on Wednesday. Daniel O’Day, chief executive of the $83 billion American firm, managed the filgotinib risks well. Gilead took a 22% stake in Galapagos in 2019, locking in a deal to develop the drug, but avoiding much of the risk if it flopped. For remdesivir, though, Gilead is the sole provider. Its commercial success is uncertain. O’Day will be hoping that it actually prevents deaths and does not merely speed up recovery. (By Neil Unmack)


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