Weekly Equity Review
Ucap Hong Kong Asset Management Limited
24th May 2016
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
24 May, 2016
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.
24 May, 2016
EUROPEAN TELCOS
24 May, 2016
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
24 May, 2016
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.
24 May, 2016
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.
24 May, 2016
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.
24 May, 2016
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.
24 May, 2016
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
Performance – Total Return
24 May, 2016
80%
90%
100%
110%
120%
130%
140%
150%
BT GROUP PLC
DEUTSCHE TELEKOM
SWISSCOM AG-REG
VODAFONE GROUP
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.
24 May, 2016
INVESTMENT IDEAS
24 May, 2016
Global Leaders
24 May, 2016
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
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
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.
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
24 May, 2016
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.
SECTOR VIEWS
24 May, 2016
Our Strategic Views - Sectors
24 May, 2016
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.
Our Strategic Views - Sectors
24 May, 2016
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
Our Strategic Views - Sectors
24 May, 2016
The Following charts are a recap of our sector view as well as the relative size of each sector.
How to Invest
24 May, 2016
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.
How to Invest
24 May, 2016
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.
How to Invest
24 May, 2016
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.
Disclaimer
24 May, 2016
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
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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.
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