Alf2, I have a bit of a theory as to what might be behind the...

Alf2, I have a bit of a theory as to what might be behind the enthusiastic buying today.


Over the weekend I was intending to respond to that question from Andrey on the other thread, but  my computer malfunctioned, so unfortunately I never got  around to replying.

However, in preparing my response I did a little research into the topic of scooters, and I stumbled across something which may explain that sudden Vmoto profit downgrade.

To briefly recap, on the 2/11/16, Vmoto put out a 'Market Update' announcement, which suggested everything was going swimmingly.

On the 24/11/16, only three weeks later, the company announced a downward revision of their earning guidance: whereas previously they expected a net profit of $1.8 - $2 million, they now expected a net loss of around $1 million due to lower than expected 4th quarter sales, with a fall in international orders being the main culprit.

Unsurprisingly, the market didn't take this well: a downgrade just three weeks after an upbeat announcement is not a good look.

However,there was one significant event that took place in-between these two announcements that could have potentially caused significant disruption to Vmoto's sales in the 4th quarter: demonetisation in India.

On the 8th of November, the Indian government announced that all 500 and 1,000 rupee notes would no longer be legal tender. These notes account for over 80% of total bills in circulation in India. Only around 50% of these are expected to be replaced by the new rupee notes before the year is out.

This has had a big impact on India's cash based economy, including adversely impacting Indian scooter and motorcycle sales, as is suggested by this Indian website:

Car purchases, a main indicator of manufacturing demand, grew at the slowest pace in nine months in November while sales of motorcycles and scooters -- where about 65 per cent of payments are in cash -- fell for the first time in almost a year.

As far as I know, Vmoto doesn't have any Indian customers, so this shouldn't have any direct impact on the company.

However, India has a massive economy, and so it has a significant influence on smaller neighbouring countries. In Nepal and Sri Lanka, for example, the Indian rupee is widely used for trade alongside local currencies.

As a result, demonetisation would have a significant disruptive impact on these countries as well, and we know from past Vmoto announcements that Vmoto has customers in both Nepal and Sri Lanka.

There is also the indirect impact to be considered. As a result of the demonetisation situation, Indians have been forced to cancel their end of year holidays, which has hit the economies of Thailand and Malaysia, both of which are destinations popular with Indian tourists. Thailand and Malaysia are also countries that Vmoto has shipped units to in the past.

So, a large chunk of Vmoto's international sales might have become tied up by the Indian demonetisation situation. This could easily explain why it was that, out of the blue, their international sales expectations were so out of kilter: basically, a significant number of their international customers have been left out of pocket, and can't buy anything until the new rupee notes come into circulation.

It might also explain the crazy buying today, as presumably some buyers may have an inkling that the downgrade is due to a one-off macro event, rather than being a company specific issue.

This raises a question: assuming that this theory is correct, why didn't the company didn't mention the demonetisation situation in their 'Revised Earnings Guidance' announcement?.  Is it possible, given that the company has no footprint in India, they simply might not have joined the dots?.