Weekly Equity Review - ucap-am.hk · 6/7/2016 · Adobe Systems (ADBE) Adobe is the largest...

Weekly Equity Review

Ucap Hong Kong Asset Management Limited

7th Jun 2016

Equity Strategy Highlights

� Global Markets Highlights

� Last Friday’s payroll was surprisingly weak and pushed back hike rate expectations to September or later.

In that context, the Dollar weakened and long rates fell, impacting negatively the banking sector but

supporting defensive stocks. Overall, the equity market fell only slightly, hinting that the market in

general is still underweight stocks.

� The OPEC meeting ended with no agreement on a output ceiling. But participant seemed to believe that

the market was self-rebalancing and crude oil prices remained firm despite the lack of agreement.

� Important Events This Week

� Tuesday: EU GDP

� Thursday: US Jobless Claims, US Wholesale Inventories

� Friday: US Michigan Consumer Sentiment Index

7 June, 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: -0.5% YTD vs Euro Stoxx at -5.6% YTD (5.1% alpha).

� US: -0.3% YTD vs S&P at 3.7% YTD (-4.0% alpha).

� Stock-Picking List – 2016

� The average performance of our Stock-Picking YTD is +1.33%. The average alpha is +301 bps.

7 June, 2016

ASCO Annual Meeting

� The ASCO annual meeting started last Friday in Chicago and marks the single most important

oncology event of the year, uniting more than 30,000 professionals in the field.

� The most exciting results came from the Immuno-Oncology field.

� Biotech companies such as Kite Pharma and Juno Therapeutics presenting some innovative drugs for their CAR-T

therapies, hinting these could receive regulatory approval as soon as next year.

� Bristol Myers, the leading company in the field, rose to a new high on news the combination of two its

drugs benefitted patients with a deadly form of lung cancer. Stay Long.

7 June, 2016

TECH COMPANIES

7 June, 2016

Adobe Systems (ADBE)

� Adobe is the largest digital-media software vendor in the world, with a broad portfolio of

products divided into three segments: Digital Media, Digital Marketing and Print & Publishing.

� The company owns highly regarded and best in-class products such as Photoshop, Acrobat Reader (pdf),

Dreamweaver, Illustrator and Stock.

� Being one of the early adopters of subscription based software products, Adobe has experienced

tremendous growth by increasing its subscriber base by 30% on lower upfront costs.

� At the same time piracy has decreased.

� Adobe faces little to no competition in its Digital Media business, while competition in its Digital

Marketing segment is intensifying but the company is among the stronger players.

� In the latest quarter revenue jumped 25% YoY, and the company raised its FY outlook after strong

performance of its primary segments, with an addition of 800k new subscribers.

� Digital Media (64.5% of revenue) +33% YoY, Digital Marketing (31.5%) +14% YoY.

� Projections now call for a 20% revenue growth in the years to 2018, with 30% EPS growth on strong

demand for enterprise digitalization and subscriber growth (still 8M users using its install base product).

7 June, 2016

Adobe – Marketing Cloud

� Adobe’s Marketing Cloud offers analytical tools for the optimization of marketing campaigns in

order to better understand the degree of effectiveness of these. The segment faces strong

competition, Salesforce, Alphabet and IBM, but has consistently experienced revenue growth

over the past three years.

7 June, 2016

Adobe – Subscription Based Model Driver of Growth

7 June, 2016

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Q1

2015

Q2

2015

Q3

2015

Q4

2015

Q1

2016

Revenue Growth

Adobe announces

introduction of subscription

based software.

0

200

400

600

800

1000

1200

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

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Q4

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Q1

2015

Q2

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Q3

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Change in Revenue

Subscription Revenue Product Revenue

The introduction of subscription based model

has taken the company to new highs, taking

advantage from strong momentum fueled by

the penetration of smartphones.

0

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120

05/2010 05/2011 05/2012 05/2013 05/2014 05/2015 05/2016

Adobe Share Price

Stagnant growth.

Performance since

subscription based model.

Broadcom Limited (AVGO)

� Broadcom, formed after the merger between Broadcom Corp. and Avago Technologies, designs,

develops and supplies semiconductors and integrated circuits, offering products such as

broadband carrier cables, switches, network processors and wireless connectors.

� The company serves four primary end markets:

� Wired Infrastructure: Set-top box, broadband access, fiber optics – (58% of revenue).

� Wireless Communications: Handsets and tablets RF, wireless connectors and custom solutions – (22% of revenue).

� Enterprise Storage: Server storage and connectivity, custom flash controllers – (15% of revenue).

� Industrial & Other: Factory automation, power generation and conversion – (5% of revenue).

� Broadcom is still in the early stages of consolidation with Avago, and last week it reported its first

quarterly results as a combined company, beating expectations.

� The addition of Broadcom Corp. increases its presence in the chip market used in communications and data-center

equipment.

� 50% of revenue now derives from wired infrastructure, which helps offset a possibly volatile wireless business.

� Broadcom is one of the 10 largest chipmakers and some of its primary customers include Apple, Samsung

and Cisco.

� Its RF chips are considered best in-class, being able to filter signal interference in phones operating on several

different spectrum bands.

� Targeting a 40% operating margin to be realized within the next few quarters from cost synergies of up to

$750M per year.

7 June, 2016

Broadcom – Leading Market Share

7 June, 2016

Broadcom is the leading infrastructure provider for cloud and mobile communications

given its highly renown and superior tools that include data centers, switches and

broadband carrier cables, among many others.

PayPal – Mobile Payment Services

� The mass adoption of mobile devices is leading to the digitalization of money. New services are

allowing customers to shop without the need of a carrying a wallet, as these services are

simplified through smart gadgets.

� According to Citibank, by 2023 17% of the $1.2trn in revenue generated from individuals and small

businesses in the US and Europe may be vulnerable to fintech companies, compared to 1% in 2015.

� Competition exists and is intensifying, but it is fragmented with a specific focus.

� Major card payment companies, such as Visa and MasterCard, are focused on retail businesses, while PayPal focuses

on online merchants.

� Smaller players (ex. Venmo) are rising but immediately getting acquired as companies seek consolidation.

7 June, 2016

PayPal – Mobile Payment Growth

� US mobile payments are projected to reach $142bn by 2019 from $52bn in 2014.

� Average total expenditure is set to climb from $375 in 2015 to $721 in 2016 and to $3,017 by

2019, as more users rely on mobile payments.

� In app purchase is favored by consumers given payment convenience, speed and ease of use as there is

no need to use cash or card.

7 June, 2016

Focus point are millennials and

younger generations. Age < 34

PayPal (PYPL)

� PayPal (independent from eBay since 2014) is a global payment platform offering digital and

mobile payments for consumers and merchants using customer account balances held by PayPal,

bank accounts, or credit/debit cards.

� Its services are available in more than 200 markets, serving with more than 184M customers and more

than 10M merchants.

� PayPal processes 30% of all e-commerce transactions in the US, being available in 75% of the top 100 e-

retailers.

� Serves as the primary payment solution for small e-retailers being used five times more than peers.

� Over the past couple of years, the company has expanded its business beyond its payment services

through strategic acquisitions.

� The recent acquisition of Venmo (peer-to-peer payments) and Xoom (send money and pay bills), while PayPal Credit

gives customers financing solutions.

� Acquisition of Braintree and Modest facilitate the setup of e-commerce apps and sites for merchants.

� Growth in coming years looks promising…

� Bank like features as customers held more than $13bn in accounts at PayPal , 23% higher YoY. The company invests

the balance in short-term liquid instruments.

� PayPal processed 4.9bn payments in 2015 with a total payment volume of $282bn, 28% coming from mobile

devices.

� Monetization of Venmo – processed $7.5bn in 2015, 213% higher than in the previous year.

7 June, 2016

PayPal Growth

7 June, 2016

53.656.7 58.2

6663

67 69.7

81.581

Q1 Q2 Q3 Q4

Total Payment Volume

2014 2015 2016

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2,600

Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16

Revenue Growth

800

900

1,000

1,100

1,200

1,300

1,400

1,500

140

145

150

155

160

165

170

175

180

185

190

Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16

Active Customer Accounts and Number of Transactions in MM

Active Customer Accounts (lhs) Number of Mobile Payment Transactions (rhs)

Tech Valuation Levels Are Getting Cheaper

7 June, 2016

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Adobe Price vs. P/E Multiple

Last Price (lhs) P/E (rhs)

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0

20

40

60

80

100

120

140

160

180Broadcom Price vs. P/E Multiple


Repetitive trend among major tech companies, with valuation getting cheaper as its price

rises supported by revenue growth.

PayPal’s chart is still insignificant given its

recent spin off of eBay having reported as

an independent company for almost a year.

10

15

20

25

30

35

0

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20

30

40

50

10.07.2015 10.10.2015 10.01.2016 10.04.2016

PayPal Price vs. P/E Multiple


INVESTMENT IDEAS

7 June, 2016

Global Leaders

7 June, 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 94% 59% 34.7% 15% Performance 108% 91% 16.7% 17%

Performance 5D -1.4% -2.5% 1.1% Performance 5D -0.2% 0.0% -0.3%

Performance YTD -0.5% -5.6% 5.1% Performance YTD -0.3% 3.7% -4.0%

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

7 June, 2016

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

Name Weight Mkt 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

Ab InBev 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

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:

7 June, 2016

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

Long Syngenta SYNN VX 18-Feb -2.1% 394.70 480.00 390.00

Long IBM IBM US 18-Feb 15.4% 152.81 160.00 145.00

Long Accenture ACN US 18-Feb 22.3% 119.35 120.00 113.00

Long PayPal PYPL US 18-Feb 5.4% 38.28 42.00 37.50

Long Ctrip.com CTRP US 5-Apr 2.8% 44.93 53.50 42.20

Ref. Perf.

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

Long Bristol-Myers BMY US 31-Dec 8.4% 74.21 75.00 63.50

Long Time Warner TWX US 31-Dec 18.6% 75.88 78.00 71.26

Long Vinci DG FP 31-Dec 13.0% 66.83 67.50 63.70

Long Facebook FB US 18-Feb 14.8% 118.80 120.00 110.00

Long Novo Nordisk NOVOB DC 4-Mar 0.1% 373.60 400.00 358.00

Ref. Perf.

Stock-Picking List - Performance

� Hit Ratio 42%

� Hit Ratio Alpha 58%

� Average Perf. 1.33%

� Average Alpha 3.01%

� Nb. of Trades 31

� Open Trades 10

7 June, 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

7 June, 2016

Our Strategic Views - Sectors

7 June, 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. However, despite the expected rate hike,

inflation remains low and yield curves continue to flatten.

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.


7 June, 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


7 June, 2016

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

How to Invest

7 June, 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


• Financials SPDR ETF (XLF).

• Banks only: Banks SPDR ETF (KBE).

Favorite Stocks:

• Banks: Wells Fargo, Goldman Sachs.


• Eurozone Banks: iShares Estoxx Banks ETF (SX7EEX

GY Index).

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

FP).

Favorite Stocks:

• Insurance: Allianz, AXA.

Healthcare


• Healthcare SPDR ETF (XLV).

• Pharmas only: Pharmaceuticals SPDR ETF (XPH).

Favorite Stocks:

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


• Lyxor Stoxx 600 Healthcare (HLT FP).

Favorite Stocks:

• Pharmaceuticals: Novo Nordisk, Roche, Sanofi.

• Equipment and Services: Fresenius, Essilor.

How to Invest

7 June, 2016


Consumer

Discretionary


• Cons. Disc. SPDR ETF (XLY).

Favorite Stocks:

• Media: Disney, Time Warner.

• E-Commerce: Amazon, Priceline, Ctrip.

• Restaurant: Starbucks.

• Apparel: Nike.


• No Liquid Tracker.

Favorite Stocks:

• Apparel: Inditex, LVMH.

• Carmakers: BMW, Daimler.

Consumer Staples


• 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.



Favorite Stocks:

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

Danone.

• HPC: Unilever, Reckitt, L'Oréal.

• Tobacco: BAT.

• Retail: Carrefour.

• Confectionary: Lindt, Barry Callebaut.

Industrials


• Industrials SPDR ETF (XLI).

Favorite Stocks:

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



Favorite Stocks:

• Infrastructure: Vinci.

• Diversified: Philips.

How to Invest

7 June, 2016


Energy


• 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.



Favorite Stocks:

• Integrated: Total, RDSA.

• Refining: Neste OYJ.

Materials


• Materials: Materials SPDR ETF (XLB).

• Gold Miners: Market Vectors Gold Miners ETF

(GDX).

Favorite Stocks:

• Gold Miners: Newmont, Barrick Gold, Newcrest.



Favorite Stocks: na.

• Gold Miners: Randgold.

Utilities


• Utilities SPDR ETF (XLU).





Telecom Services



Favorite Stocks:

• Diversified: Verizon, AT&T.




Disclaimer

7 June, 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

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.

Weekly Equity Review - ucap-am.hk · 6/7/2016 · Adobe Systems (ADBE) Adobe is the largest...

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Transcript of Weekly Equity Review - ucap-am.hk · 6/7/2016 · Adobe Systems (ADBE) Adobe is the largest...