Weekly Equity Review

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Weekly Equity Review Ucap Hong Kong Asset Management Limited 24 th May 2016

Transcript of Weekly Equity Review

Page 1: Weekly Equity Review

Weekly Equity Review

Ucap Hong Kong Asset Management Limited

24th May 2016

Page 2: Weekly Equity Review

Equity Strategy Highlights

� Global Markets Highlights

� Global markets were taken by surprise by the relatively hawkish FOMC minutes. The impact was mostly

felts on the Dollar and bonds while equity markets remained rangy since last week.

� We took profits on J&J and Bristol in our stock-picking list and reshuffled our US Global Leaders portfolios

by adding Accenture, Exxon, JPMorgan, and removing Tiffany. We will make some additional moves as

the portfolio has been lagging the S&P since February after a very strong performance in the prior

months.

� Important Events This Week

� Tuesday: German GDP, German ZEW, US New Home Sales

� Wednesday: German IFO, US Markit PMI

� Thursday: US Jobless Claims, US Durable Good Orders

� Friday: Japan CPI, US GDP

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Equity Strategy Highlights

� Global Leaders – 2016

� The US portfolio is still lagging in the rebound as the latest has been driven by short covering and a

recovery of “lower quality” stocks that strongly underperformed in 2015.

� The European Portfolio remains very resilient compared to indices.

� Europe: -3% YTD vs Euro Stoxx at -7.2% YTD (4.2% alpha).

� US: -2.0% YTD vs S&P at +1.3% YTD (-3.3% alpha).

� Stock-Picking List – 2016

� The average performance of our Stock-Picking YTD is +0.30%. The average alpha is +271 bps.

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EUROPEAN TELCOS

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European Telcos – Industry Trends

� The telco sector in Europe has been historically fragmented having a primary carrier in each

country owning a network and renting it out to peers.

� Ex. Deutsche Telekom in Germany, Swisscom in Switzerland and Orange in France.

� In recent years, competition in the industry has intensified as new low cost entrants threaten to

gain market share at the expense of major players.

� Margins are projected to grow as companies lower their capex budgets as most of the upgrades to their

networks are already done. On top of this, no spectrum auctions are expected this year.

� Given the maturity state of the sector, future growth is to be driven by:

� Higher Average Revenue Per User (ARPU)

� Expected to come from the adoption of 4G and fiber networks.

� As more users watch videos on their phones, mobile data usage is expected to continue to pick up and slowly reach

the monthly usage of the US (1.8GB), which is substantially higher than in Europe (900MB.) 4G smartphones account

for less than 20% of handsets in Europe.

� Bundled services

� Established players in the sector are offering TV, internet, mobile and voice services as a package to retain

customers.

� Consolidation in the sector… though the regulatory environment is uncertain

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Adverse Regulations on M&A

� Telco operators have been seeking consolidation in the sector as a way to reduce costs and

increase investments. However the EC has blocked several mergers over the past year, on

concerns these would translate into higher costs to customers.

� The European Commission recently blocked a £10.5bn merger between Hutchinson and Telefonica’s

British operator O2, on competition concerns that would have reduced the number of operators from

four to three in England.

� The deal would have created the largest mobile operator in the country with 34M subscribers, seeking to compete

with BT Group following its acquisition of EE.

� Hutchinson offered a £5bn investment, while opening up 45% of its network to rivals such as Sky and Virgin and

freezing prices for five years, but failed to meet regulators approval.

� Last year a merger attempt in the Danish market between Telenor and TeliaSonera was blocked by the

EC, as the companies looked to combined operations as a way to reduce costs.

� With higher competition and lower consolidation in the sector, investments will likely be driven

by the industry leaders given their larger source of capital and easier access to debt thanks to the

low rates environment. This will be necessary in order to meet higher customer demand data.

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Our selection

� Over the past year, the telco companies have been one of the best performers in the region,

given the attractiveness of their dividends in a low rate environment. We have identified the

following companies as the most attractive and safest players given their level of cash flow

generation.

� Vodafone

� The British phone operator is still transitioning to an integrated firm after the sale of Verizon in 2014. Its

diversified and leading business across the region has given the business a top reputation.

� Last year, the company posted its first annual growth in sales and EBITDA since 2010 .

� Mobile data consumption still has room to grow as only 27% of its customers uses its 4G network with an

avg. monthly data usage of 927mb per month.

� It has recently increased its position in the Netherlands after its deal with Liberty Global.

� BT Group

� Largest fixed-line telecom operator in the UK, providing more than 1/3 of the UK’s 25M residential

telecom lines through its own infrastructure – other companies rent it out.

� The company recently became a major player in the mobile sector following the acquisition of EE.

� This has led to bundle offerings that include fixed-line, mobile, broadband and TV.

� Its ARPU growth has been top of the line in the industry, consistently growing for the past four years.

� Gained rights to broadcast the UEFA Champions League and Europa League for next three years.

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Our selection

� Swisscom

� The company has a 60% market share in Switzerland giving it pricing and cost advantages, while also

counting with a superior and more reliable network than its peers.

� Its superior offering of bundled services has helped lower the pressure from low cost operators such as

Sunrise and Salt. Its roaming service is also much cheaper than its competitors.

� It introduced its M-Budget plan as a way to battle low-cost carriers.

� Acquisition of FastWeb (Italian provider) has expanded its business into Italy, diversifying its revenue

stream – growing market share by 0.5-1% per year.

� Deutsche Telekom

� Major established player in the German market.

� The company continues to reap the benefits from the continuous growth of T-Mobile in the US, which is

expected to further drive its margins.

� Despite pricing pressure by competitors in the sector, its bundled offerings are proving to be an attractive

service for customers.

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Financial Metrics

� EBIT/Total Interest (Interest Coverage Ratio)

� Measures the margin of safety a company has for paying interest during a given period.

� Debt/Capital

� Measure of leverage that provides a basic picture of a company’s financial structure in terms of how it is capitalizing

its operations.

� Debt/Equity

� Provides a comparison of debt financing to equity financing, showing a company’s ability to meet its outstanding

debt obligation.

� Dividend Coverage Ratio

� Measures the amount of earnings paid out as dividends.

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BT Group 63,471 28,758 5.9% 13.5 33.4% 20.9% 33.5 5.3 58% 137% 3.2% 2.0Vodafone 88,008 61,779 -3.0% 32.3 27.5% 4.9% 33.9 1.0 40% 67% 5.0% 1.9Deutsche Telekom 82,482 77,323 10.5% 15.9 26.6% 9.4% 42.7 2.5 61% 160% 3.5% 1.3Swisscom 25,453 12,007 -0.2% 15.9 35.1% 19.5% 40.0 11.0 64% 175% 4.6% 1.2

RevenueMkt Cap

(USD)Name

EBIT Margin

EBITDA Margin

Fwd. P/E Rev 1 Yr Growth

Dividend Coverage

Debt/EquityDebt/CapitalEBIT/Total

InterestDebt/Assets

Dividend Yield

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Performance – Total Return

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80%

90%

100%

110%

120%

130%

140%

150%

BT GROUP PLC

DEUTSCHE TELEKOM

SWISSCOM AG-REG

VODAFONE GROUP

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Risks

� Stagnant revenue growth has led to discounted prices and bundled packages, which are in turn

pressuring margins.

� Search for continuous cost cutting measures will be necessary moving forward.

� The continuing penetration of low cost carriers gaining popularity in the sector posts a threat to

major players.

� The demand for higher mobile data as more users stay connected and watch videos on their

phones requires investments to improve networks and differentiate from peers.

� Adverse regulations is stopping consolidation translating into higher costs.

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INVESTMENT IDEAS

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Global Leaders

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The Global Leaders are quality companies that we believe are fit for a long-term investment.

We launched this strategy in August 2011. Please read our special report for a full explanation of this strategy.

Benchmark: S&P 500Benchmark: Euro Stoxx 50

� European Portfolio � US Portfolio

*Since

August 2011

Portfolio Benchmark Delta Annualized Portfolio Benchmark Delta Annualized

Performance 89% 56% 32.6% 14% Performance 104% 86% 18.3% 16%

Performance 5D 0.8% 0.4% 0.4% Performance 5D -0.3% 0.4% -0.7%

Performance YTD -3.0% -7.2% 4.2% Performance YTD -2.0% 1.3% -3.3%

Volatility 16% 22% -6% Volatility 14% 14% -1%

Max DrawDown -19% -28% 9% Max DrawDown -13% -13% 0%

-15

5

25

45

65

85

105

EU Global Leaders Benchmark

-11

9

29

49

69

89

109

US Global Leaders Benchmark

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Global Leaders - Current List

� European Portfolio � US Portfolio

24 May, 2016

Name WeightMkt Cap

($bn)Sector

Novo Nordisk 7.08% 141 Health Care

Sanofi 6.68% 103 Health Care

Inditex 6.61% 100 Consumer Discretionary

Nestlé 5.91% 239 Consumer Staples

Vinci 5.60% 44 Industrials

Fresenius 5.52% 40 Health Care

Unilever 5.29% 137 Consumer Staples

Essilor 5.13% 28 Health Care

BATS 5.10% 115 Consumer Staples

Philips 5.00% 24 Industrials

L'Oréal 4.99% 102 Consumer Staples

Dassault Systemes 4.80% 20 Information Technology

Reckitt Benckiser 4.62% 70 Consumer Staples

Roche 3.87% 217 Health Care

ABInbev 3.82% 202 Consumer Staples

Novartis 3.79% 199 Health Care

LVMH 3.20% 84 Consumer Discretionary

Allianz 3.10% 72 Financials

AXA 2.97% 58 Financials

Heineken 2.93% 54 Consumer Staples

Daimler 2.05% 72 Consumer Discretionary

BMW 1.95% 55 Consumer Discretionary

Name Weight Mkt Cap ($bn) Sector

Apple 7.81% 529 Information Technology

Alphabet 7.68% 489 Information Technology

Microsoft 7.36% 395 Information Technology

Exxon 7.26% 370 Energy

Facebook 7.12% 333 Information Technology

Johnson & Johnson 7.00% 308 Health Care

JP Morgan 6.62% 232 Financials

Merck & Co 6.08% 152 Health Care

Pepsico 6.02% 145 Consumer Staples

Bristol Myers 5.77% 116 Health Care

Nike 5.54% 95 Consumer Discretionary

Honeywell 5.43% 86 Industrials

Starbucks 5.34% 80 Consumer Discretionary

Accenture 5.29% 76 Information Technology

Costco 5.09% 63 Consumer Staples

Amazon 3.55% 330 Consumer Discretionary

Wells Fargo 3.35% 247 Financials

AT&T 3.32% 236 Telecommunication Services

Verizon 3.22% 201 Telecommunication Services

Visa 3.16% 184 Information Technology

Walt Disney 3.08% 162 Consumer Discretionary

Philip Morris 3.04% 152 Consumer Staples

Altria 2.91% 124 Consumer Staples

CVS 2.83% 106 Consumer Staples

Mastercard 2.82% 105 Information Technology

Walgreen 2.69% 83 Consumer Staples

Reynolds 2.61% 71 Consumer Staples

Goldman Sachs 2.58% 67 Financials

Time Warner 2.50% 57 Consumer Discretionary

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Stock Picking

� Within those Global Leaders, we identify a number of stocks that benefit from an attractive

technical pattern or from a near term catalyst.

� Tactical Stock Picking

� Apart from those long term investment stocks, we also have a number of stocks we like as a tactical

investment:

24 May, 2016

Way Name Ticker Exch Code Date Last Price Next Target Stop Level

Long Syngenta SYNN VX 18-Feb -2.1% 394.50 480.00 390.00

Long IBM IBM US 18-Feb 11.5% 147.72 160.00 145.00

Long Accenture ACN US 18-Feb 18.3% 115.44 120.00 113.00

Long PayPal PYPL US 18-Feb 8.7% 39.48 42.00 37.50

Long Ctrip.com CTRP US 5-Apr -1.6% 43.01 53.50 42.20

Ref. Perf.

Way Name Ticker Exch Code Date Last Price Next Target Stop Level

Long Time Warner TWX US 31-Dec 12.6% 72.44 78.00 71.26

Long Vinci DG FP 31-Dec 12.2% 66.35 67.50 63.70

Long Facebook FB US 18-Feb 12.5% 116.42 120.00 110.00

Long Novo Nordisk NOVOB DC 4-Mar -4.6% 355.90 400.00 358.00

Ref. Perf.

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Stock-Picking List - Performance

� Hit Ratio 35%

� Hit Ratio Alpha 58%

� Average Perf. 0.30%

� Average Alpha 2.71%

� Nb. of Trades 31

� Open Trades 9

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Average alpha of each stock strategy when compared to its

index (S&P or Euro Stoxx) over the same holding period.

Average performance of each stock strategy.

Please ask for more details.

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SECTOR VIEWS

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Our Strategic Views - Sectors

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GICS

SectorUS EUROPE

Information

Technology

US Technology remains the most attractive investment space in

terms of:

� Growth potential,

� Reasonable valuation,

� Potential cash return,

� Stock picking opportunities.

Stay long but the Tech sector is tiny in

Europe.

Financials

US Banks will ultimately benefit from the US economic recovery and

rising interest rates. This scenario has been pushed back in time as

interest rate hike anticipations for 2016 have lowered following last

weeks Fed announcement.

Stay long insurers for their dividends and as

Solvency 2 should actually benefit a well

prepared industry.

European banks continue to face headwinds

from low rates and structural issues.

Healthcare

Pharma are on multi-years upcycle:

� Earnings, M&A activity and positive drug developments continue to support the sector.

� Prices and valuations have risen, but the sector has lagged on Q4 2015, offering investors an opportunity to

accumulate positions.

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Our Strategic Views - Sectors

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GICS

SectorUS EUROPE

Consumer

Discretionary

Continue to play the exposure to the US growth with Consumer

Discretionary stocks.Those three sectors are heavily tilted

towards exporters. Their relative

performance will be mostly driven by FX

rates.

Staples continue to be supported by low

rates.

Consumer

Staples

Consumer Staples are expensive but continue to be supported by

low US long rates.

IndustrialsOverweight as 2015 headwinds are abating. Stay long defense stocks

as geopolitical factors will keep the pressure on defense spending.

Energy Despite a recent rise in oil prices, stay neutral as crude oil remain under pressure due to excess supply.

MaterialsCommodities remain under pressure due to declining emerging markets demand, overcapacity and a strong dollar.

-> Be careful with miners. Stay neutral chemicals.

UtilitiesStay Neutral as the sector is a play on long rates and other sectors

offer better fundamentals.

Avoid the sector as it is plagued by political

intervention in France and Germany.

Telecom

ServicesStay Long on low interest rates. Stay neutral

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Our Strategic Views - Sectors

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The Following charts are a recap of our sector view as well as the relative size of each sector.

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How to Invest

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GICS Sector US EUROPE

Information

Technology

Best Investment proxy:

• Technology SPDR ETF (XLK).

Favorite Stocks:

• Payment Technologies: Visa, MasterCard, PayPal.

• Software: Microsoft, Adobe.

• Hardware: Apple.

• Media: Facebook, Alphabet.

• IT Services: Accenture, IBM.

Best Investment proxy: No Liquid Tracker.

Favorite Stocks:

• Software: Dassault Systèmes.

• Semis : ASML

Financials

Best Investment proxy:

• Financials SPDR ETF (XLF).

• Banks only: Banks SPDR ETF (KBE).

Favorite Stocks:

• Banks: Wells Fargo, Goldman Sachs.

Best Investment proxy:

• Eurozone Banks: iShares Estoxx Banks ETF (SX7EEX

GY Index).

• Pan-European Banks: Lyxor Stoxx 600 Banks (BNK

FP).

Favorite Stocks:

• Insurance: Allianz, AXA.

Healthcare

Best Investment proxy:

• Healthcare SPDR ETF (XLV).

• Pharmas only: Pharmaceuticals SPDR ETF (XPH).

Favorite Stocks:

• Pharmaceuticals: Bristol-Myers, J&J, Merck.

Best Investment proxy:

• Lyxor Stoxx 600 Healthcare (HLT FP).

Favorite Stocks:

• Pharmaceuticals: Novo Nordisk, Roche, Sanofi.

• Equipment and Services: Fresenius, Essilor.

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How to Invest

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GICS Sector US EUROPE

Consumer

Discretionary

Best Investment proxy:

• Cons. Disc. SPDR ETF (XLY).

Favorite Stocks:

• Media: Disney, Time Warner.

• E-Commerce: Amazon, Priceline, Ctrip.

• Restaurant: Starbucks.

• Apparel: Nike.

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks:

• Apparel: Inditex, LVMH.

• Carmakers: BMW, Daimler.

Consumer Staples

Best Investment proxy:

• Cons. Staples SPDR ETF (XLP).

Favorite Stocks:

• Pharmacies: CVS, Walgreens.

• Food & Beverage: Pepsi.

• Packaged Food: Kraft Heinz, Mondelez, ConAgra,

Tyson.

• Tobacco: Altria, Reynolds.

• Retail: Costco, Wal-Mart, Kroger, Dollar Tree.

• Confectionary: Hershey.

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks:

• Food & Beverage: Nestlé, AB Inbev, Heineken,

Danone.

• HPC: Unilever, Reckitt, L'Oréal.

• Tobacco: BAT.

• Retail: Carrefour.

• Confectionary: Lindt, Barry Callebaut.

Industrials

Best Investment proxy:

• Industrials SPDR ETF (XLI).

Favorite Stocks:

• Conglomerates: GE, Honeywell, 3M, United Tech.

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks:

• Infrastructure: Vinci.

• Diversified: Philips.

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How to Invest

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GICS Sector US EUROPE

Energy

Best Investment proxy:

• Energy: Energy SPDR ETF (XLE).

• Oil services: Market Vectors Oil services ETF (OIH).

Favorite Stocks:

• Exploration & Production: Occidental, Hess, Noble

Energy, Anadarko.

• Oil Refining: Philips 66, Valero.

• Integrated: Exxon, Chevron.

• Equipment & Services: Schlumberger, Halliburton.

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks:

• Integrated: Total, RDSA.

• Refining: Neste OYJ.

Materials

Best Investment proxy:

• Materials: Materials SPDR ETF (XLB).

• Gold Miners: Market Vectors Gold Miners ETF

(GDX).

Favorite Stocks:

• Gold Miners: Newmont, Barrick Gold, Newcrest.

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks: na.

• Gold Miners: Randgold.

Utilities

Best Investment proxy:

• Utilities SPDR ETF (XLU).

Favorite Stocks: na.

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks: na.

Telecom Services

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks:

• Diversified: Verizon, AT&T.

Best Investment proxy:

• No Liquid Tracker.

Favorite Stocks: na.

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Disclaimer

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Ucap Hong Kong Asset Management Ltd has issued this document for information purposes only. This document may not be distributed to the United States, Canada,

Australia or to any other jurisdiction in which its distribution is unlawful. If you require investment advice or wish to discuss the suitability of any investment decision,

you should contact your professional advisers for financial, legal or tax advice when appropriate. This document is not and should not be construed as an offer to sell or

a solicitation of an offer to purchase or subscribe for any investment or service.

Ucap Hong Kong Asset Management Ltd has based this document on information obtained from sources it believes to be reliable but which it has not independently

verified. Ucap Hong Kong Asset Management Ltd makes no guarantees, representations or warranties, and accepts no responsibility or liability as to its accuracy or

completeness. Expressions of opinion herein are subject to change without notice.

Members of the Ucap Hong Kong Asset Management Ltd and/or their officers, directors and employees may have positions in any securities mentioned in this

document (or any related investment) and may from time to time add to or dispose of any such securities (or investment).

In the case where this document is distributed in the United Kingdom by a person who is not authorized by the United Kingdom Financial Services Authority; it is only

intended for persons who (i) have professional experience in matters related to investments or (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth

companies, unincorporated associations, etc") of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) or to whom it may

otherwise lawfully be communicated by such an unauthorized person (all such persons together being "relevant persons"). This communication must not be acted on

or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only to relevant persons and

will be engaged in only with relevant persons.

Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not receive back

the full amount invested. When an investment is denominated in a currency other than your local or reporting currency, changes in exchange rates may have an

adverse effect on the value, price or income of that investment. In the case of investments for which there is no recognized market, it may be difficult for investors to

sell their investments or to obtain reliable information about their value or the extent of the risk to which they are exposed. Investment in any market may be

extremely volatile and subject to sudden fluctuations of varying magnitude due to a wide range of direct and indirect, influences. Such characteristics can lead to

considerable losses being incurred by those exposed to such markets.

© Copyright. Ucap Hong Kong Asset Management Ltd 2015 ALL RIGHTS RESERVED

No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, whether electronic, mechanical, photocopying,

recording or otherwise, without the prior written permission of Ucap Hong Kong Asset Management Ltd.