DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access 29 September 2014 Global Equity Research Global Equity Themes Connections Series Investing for growth Source: Credit Suisse research Looking for growth: The aim of this report is to identify stocks that have structural growth characteristics in their immediate investment case. We have used a thematic framework of four factors capturing 10 specific micro themes that we view as key to the prevailing investment landscape. Why now? Looking into 2015, we expect the cycle in the US to mature further. Moreover, an enduring low nominal growth world where profit margins for many companies are close to historical highs puts the emphasis on top line drivers. Stock picking? Over time, investors (and analysts) have tended to be better at identifying growth than knowing what to pay for it. Growth as a style has not always rewarded. Leveraging our CS HOLT ® framework and combining factors of quality and momentum has helped us pick stocks from our 10 themes. Ticking all the boxes: Within our analysts' top picks, the HOLT overlay identifies these stocks among the key plays on the theme: Tencent, Baidu, Priceline, ITV, SIIC Environment, Sun Pharmaceuticals, Continental, Halliburton, Pioneer Natural Resources, China Singyes Solar, SAP and Coloplast. To view the accompanying key stocks presentation, click here. The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Research Analysts Richard Kersley 44 20 7888 0313 [email protected]Andrew Garthwaite 44 20 7883 6477 [email protected]Ashlee Ramanathan 44 20 7883 9934 [email protected]Eugene Klerk 44 20 7883 4678 [email protected]HOLT Specialist Contact®: Michel Lerner 44 20 7883 3649 [email protected]For the accompanying key stocks report, please click here.
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
29 September 2014
Global
Equity Research
Global Equity Themes Connections Series
Investing for growth
Source: Credit Suisse research
Looking for growth: The aim of this report is to identify stocks that have
structural growth characteristics in their immediate investment case. We have
used a thematic framework of four factors capturing 10 specific micro themes
that we view as key to the prevailing investment landscape.
Why now? Looking into 2015, we expect the cycle in the US to mature further.
Moreover, an enduring low nominal growth world where profit margins for many
companies are close to historical highs puts the emphasis on top line drivers.
Stock picking? Over time, investors (and analysts) have tended to be better at
identifying growth than knowing what to pay for it. Growth as a style has not
always rewarded. Leveraging our CS HOLT® framework and combining factors
of quality and momentum has helped us pick stocks from our 10 themes.
Ticking all the boxes: Within our analysts' top picks, the HOLT overlay
identifies these stocks among the key plays on the theme: Tencent, Baidu,
Priceline, ITV, SIIC Environment, Sun Pharmaceuticals, Continental, Halliburton,
Pioneer Natural Resources, China Singyes Solar, SAP and Coloplast. To view
the accompanying key stocks presentation, click here.
Key themes and stock selections Figure 1: Key stocks exposed to our themes
Theme Drivers Disruptive Impact Key Stocks
The Untapped Potential of the Internet
− Rising global smartphone penetration, with internet enabled phones currently at 27% globally the penetration rate is expected to reach 52% in 2017
− Infrastructure roll out in Emerging Markets supporting demand for an "enabling" tool of choice. Huge potential for E-commerce in EM.
− Security a growing related theme.
− Price
transparency
− Need for scale
presence
Tencent, Baidu,
Palo Alto Networks, Priceline,
Naspers
Content – Still King in Global Media
− The proliferation of online business models with options for monetising video, audio
and written content
− Rising power of new customers for content and growing viability of direct-to-
consumer models
− Structural growth in the value of the owners of content IP
− Development of aggregator business models has achieved critical mass
− The value add shifts away from
the aggregators with rising cost pressures
Sony, ITV
China Environment - Real Efforts and Real Moves
− Rapidly deteriorating air and water quality, as well as rising public demand calling
for action. Policy announcements and targets now being established.
− China’s “water stress” likely to intensify given demand projections.
− A robust waste treatment and EPC demand growth rate as collection/treatment
share rises as a share of FAI.
− Emerging large players, especially waste treatment operators, driven by M&A
activities and higher scale and standards requirements
− Potential costs
and regulation on basic material
industries
SIIC
Environment, Bejing
Enterprises
Water
Healthcare - Immuno-oncology – an Emerging $25bn Market
− Oncology (cancer) accounts for c $95bn of sales, 9% of the 2013 global market and new medicines have the potential to significantly drive oncology drug sales
growth
− With baby-boomers aging and rates of diagnosis increasing, if new cancer
therapies emerge, a blue sky scenario could see oncology demand growth of between 20% and 100%.
− Risk for existing
therapeutic treatments
Bristol Myers, Roche, Ono
Ageing in Emerging Markets
− The growth rate of the older share of the population will be almost double in
Emerging Markets than Developed Markets. China, Brazil & Korea stand out.
− Incidence of illness tends inevitably to increase with age requiring healthcare spend
− A more affluent population has sufficient income to afford a general shift away
from physical infrastructure toward more healthcare and social infrastructure.
− A long term mix shift in
consumer spending
Sun Pharma, AIA,
Prudential, L'oreal,
Coloplast
Resource Efficiency: Demand Management
− Three powerful long term macro drivers: population growth, urbanisation and the expansion of the emerging middle class.
− Tightening environmental legislation increases impact. Buildings (34%), transport (30%) and industry (32%) are the key energy consumers.
− Technology and equipment suppliers tied to this trend of downward demand management represent key opportunities.
− Rising potential
costs on incumbents and
displacement of energy demand
Continental, Infineon, United
Technologies Corp
Shale – Vive la Revolution
− A global hydrocarbon growth story for the next decade and beyond. North America shale having un-and under-explored geological opportunities. Shale prospectivity is
high in multiple countries including Argentina, China and Russia
− The accelerated development of technology to support production efficiencies with
the introduction of down-spacing and stacked pay drilling drive further production.
− Energy transportation, E&C distribution and logistics have been and will be heavily
influenced by the Shale Revolution.
− High return drilling locations
allowing lower breakevens
− Shift in cost curve creates winners/losers
Halliburton, Pioneer,
Wood Group
A Solar “Inflection Point”
− The inflection point in solar adoption is here, given relative cost competitiveness of solar power due to its ~50% decline in costs over the past six years
− Tremendous growth opportunity as solar only representing 0.003% of total power generation capacity globally, a mere 1% global penetration rate equates to $86
billion opportunity
− We expect demand to grow at a 16% CAGR over the decade
− Long term
market share risks for
traditional energy
China Singyes,
SolarCity
The Big Bang of Data
− The most important unifying product across technology as more business processing becoming digitized. Connected devices to grow from 15 billion to
potentially 50 billion by 2020
− Exponential growth in volume and complexity of data with demand for rapid cross-
correlation between different types.
− Need for real time processing of data into usable business analytics. Multiple end
user markets.
− A data divide
between those who “get” data
analytics and those that don’t
SAP, Splunk, Micron, SanDisk
Automation – The Second Wave
− Automation/robotics demand in China/EM due to rising labour costs.
− Rising IT software penetration in manufacturing automation given increasing complexity of production and the ability to reduce time-to-market. This can drive a second wave of automation in the developed world.
− Increasing connectivity throughout the industrial world onto the factory floor with Enterprise Resource Planning (ERP), Product Lifecycle Mgmt (PLM), Mfg
Execution System (MES), Metrology and Spatial Info Mgmt
− Need to retain a
productivity edge. China to
move up value chain?
Keyence, Emerson,
Siemens
Source: Credit Suisse research
29 September 2014
Global Equity Themes 4
Themes: investing for growth In this report, we have sought to identify structural growth stocks. With the stage of the
macro cycle, particularly in the US, moving to a more mature phase, profit margins high
and the world still one of low nominal growth, we think investors should focus on top line
growth, rather than simply how a recovery can deliver widespread restructuring
opportunities. The question is how to select such stocks. While this has to be a bottom up
exercise in many respects, we have also chosen to do this within a thematic framework.
However, this does pose three questions: Why themes? Which themes? How to invest in
these themes?
Why themes?
In terms of the first question, Figure 2 provides a simple context. Over the last 10 (if not
30) years, the diversification - and indeed excess return - to be reaped driven by purely
regional investment allocations and, more recently, by sector allocation has steadily
eroded. The standard deviation of country and sector returns is at historic lows, with the
latter, if anything, taking another recent leg down. Only periods of market and economic
dislocation such as 2008 have seen significant changes that have broken this trend.
This should not be a tremendous surprise amidst a world of increasing globalisation.
However, in our view, the implication is that we need to look for investment ideas that cut
across regions and/or across sectors to generate premium returns. The key is "what
themes drive such an investment process?", the second of our three questions.
Figure 2: Standard deviation in country and sector returns
The public internet has been around for the past two decades; so why are we revisiting the
story now?
i) The internet is currently hitting another level of critical mass owing largely to the rise in
broadband and smartphone penetration.
ii) The sector is back to its average 12m forward P/E relative to the market. Earnings
momentum is positive.
Figure 14: Global internet software and services trade
only 62% above global markets on 12m forward P/E…
(20th
Sep)
Figure 15: … and relative earnings momentum is clearly
positive (24th
Sep)
20%
120%
220%
320%
420%
520%
620%
2004 2006 2008 2010 2012 2014
Global Internet software and services rel mkt: 12m fwd P/E
Average (+/- 1SD)
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2004 2006 2008 2010 2012 2014
Global Internet software and services
Rel mkt
3m breadth of revisions
Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research
Potential Advertising spend
We believe there is substantial potential upside for marketing spend on the internet.
According to Nielsen, individuals in developed countries spend on average 22% of their
time on the internet, a trend that is likely to increase. Corporates, however, are only
spending 20% of their marketing budget on the internet, suggesting there is significant
upside potential for online marketing spend.
29 September 2014
Global Equity Themes 13
Figure 16: We still see potential upside for ad spending on the internet and mobile
phones
39.8%
24.8%
13.2%11.7%
3.1%2.3%
38.9%
20.9%
9.3%
1.6%
11.5%
9.2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
TV* Online Radio Mobile (non voice) Newspapers** Magazine**
Time spent share Ad spending share
* TV time spent includes live, DVR and other prerecorded video such as video dowloaded from the internet but saved locally; TV ad spending inlcludes broadcast TV(network, syndication and spot ) and cable TV** offline reading only
Source: Credit Suisse Media team, ZenithOptimedia, eMarketer Sep/Oct 2012
The potential of e-commerce
In our opinion, the combination of improved web services, faster internet speeds, a better
online shopping experience and more integrated solutions should ensure high and
sustainable growth rates within the e-commerce space over the coming years.
E-commerce still makes up only 5% of the retail sales in the US, although the CAGR is
now running at 10%. In the UK, where the population is generally more comfortable
shopping over the internet, online retail sales account for more than 11% with the CAGR
of 17% (e.g. in the UK 17% of clothing and shoes are sold online). Within the online retail
space, we would note that areas such as homeware, furniture and groceries in particular
remain underdeveloped. In our view, as distribution networks improve and consumers
become accustomed to shopping online, e-commerce trends should accelerate further.
Amazon already has c3x the product offerings of Walmart, but only a third of the sales.
Figure 17: Internet retail sales account for a steadily
growing share of total retail sales
Figure 18: Music, books and electricals stand out in terms
of internet penetration; the other categories lag notably
behind
0
2
4
6
8
10
12
2000 2002 2004 2006 2008 2010 2012 2014
US internet retail sales, % total
UK internet retail sales, % total,12 month moving average
0% 20% 40% 60% 80%
Furniture & floorcoverings
DIY & gardening
Homewares
Food & grocery
Health & beauty
Electricals
Music & video
Books
Clothing & footwear
Share of internet shoppers
Source: Thomson Reuters Source: Credit Suisse General Retail team
29 September 2014
Global Equity Themes 14
From the perspective of the consumer, the shift from offline to online purchasing has
greatly improved the price visibility across the market; companies such as
Moneysupermarket have eliminated the need for consumers to travel between stores to
compare prices of goods. This is most visible in the financial products market where,
according to Moneysupermarket, 80% of all new car insurance is purchased online. This
shift to cashless online transfers has implications for payment system providers such as
Visa and MasterCard.
Figure 19: Many financial products are bought online
Policies/Products
New/switch as % of
existing
New/switch done
onlineAvg. customer savings
Motor Ins 44% 81% £398
Home Ins 26% 55% £104
Travel Ins 78% 43% £34
Savings 15% 30% £25
Cards 13% 56% £279
Loans 20% 50% £84
Energy 16% 32% £103 Source: Moneysupermarket
As much as the West, emerging markets, particularly in APAC, offer significant potential.
China is already the single largest e-commerce market despite lacking comprehensive
infrastructure – broadband, smartphones, payment systems and logistics. Combining
development in these areas with the fact that per capita spend is low at US$1,000, and
should increase with improving incomes, the potential for growth is clear. Our APAC
internet research team projects the e-commerce market size—at US$500bn in 2013—to
almost double by 2016, with APAC e-commerce growth accounting for the majority of
global growth. While in China we acknowledge that it is hard to get precise data, we note
that according to McKinsey, China's internet economy – all internet-related expenditure from
retail to infrastructure to broadband bills – as a percentage of GDP was 4.4%. This
proportion has risen one-quarter over three years (FT, 27 August 14).
Figure 20: APAC to drive more than 50% of global e-commerce sales growth
$311
$434$522
$650
$788
$936
40%
42%
44%
46%
48%
50%
52%
54%
56%
58%
60%
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2011 2012 2013 2014E 2015E 2016E
APAC E-commerce sales (US$ bn) APAC Share of Global E-commerce Growth
As mentioned in the "Limitations" section below, security is key for internet companies and
will be one of the most important trends over the coming years. We believe the biggest
beneficiaries of this trend would be vendors that are able to offer state-of-the-art enterprise
and network security, as the security-related reputation and business risk will require
online companies to make substantial investments to ensure a safe shopping environment
for their customers
29 September 2014
Global Equity Themes 15
Health Monitoring
With an ageing and more health-concerned population in most developed
countries, health monitoring is an increasing trend for several tech companies. The
iPhone’s new operating system has several apps helping users to keep track of health and
fitness data, the Apple Watch is able to measure heart rate and calories burned and
Google's new contact lenses are able to monitor glucose levels (on the back of which
Google formed a JV with Novartis).
Smart home
Google’s purchase of Nest shows the potential for the internet to help control home
heating, home lighting, and home security, therefore opening up new areas of revenue.
Potential valuation upside
Below, we present our Global Equity Strategy team's blue-sky scenario.
The Reuters Datastream World Internet Index currently has a market cap of around
$875bn. If we add Amazon and non-listed companies, the value would be higher. The
question is: what are the potential revenue streams (and their value) – and can they justify
such a market cap?
We believe the internet sector has two key revenue streams:
■ Advertising revenues: We believe it is possible that in 10 years' time, 40% of
advertising revenues will be spent on internet advertising. If we assume global
advertising spend is roughly 2% of GDP, a 15% net margin on the advertising
business (currently Google's net margin is roughly 25%) and an ex-growth multiple of
12x (below the market multiple of 15x), the capitalised ad-related earnings should be
valued at roughly US$1.5trn in future dollar terms (this assumes 5% nominal GDP
growth over the next 10 years).
■ Retail sales: If we assume 20% of retail sales globally will be carried out via the
internet in five years' time at a net margin of just 1% (additionally assuming that retail
sales are 70% of a consumer share of GDP of two-thirds), the resulting earnings can
also be valued at roughly US$981bn in future dollar terms (assuming 5% nominal
GDP growth over the next five years and a conservative P/E multiple of 12x). This
does not even include any potential food and grocery sales yet, a market which is
increasingly targeted by internet companies owing to their improved distribution
networks and the ability to offer short-term delivery.
Even on cautious assumptions, retail and advertising earnings already sum up to
capitalised earnings of nearly US$2.4trn in future dollar terms. Assuming a conservative
discount rate of 10% and discounting advertising retail earnings over a 10- and a five-year
period, respectively, these earnings would still have a present value of US$1.2trn.
Figure 21: Even on conservative assumptions, retail and advertising earnings are worth
close to US$1.2trn
in bn USDAdvertising earnings (in
10 years)
Retail earnings (in 5
years)Total
Capitalized earnings (FV) 1,500 980 2,480
Present value (PV - 10%
discount rate) 578 609 1,187
Source: Credit Suisse estimates
In addition, there is the potential for additional B2B sales through the internet as well as
taking a fee for other consumer services such as Google's efforts to organise home
security, and heating.
29 September 2014
Global Equity Themes 16
Content is king
We have devoted a specific section of the report to this topic (Content – still king in global
media), though we would flag that the platform provided by the internet provides a new
source of demand for content in its various forms – entertainment (eg. music and video
streaming, gaming and education). The proliferation of new channels requires content to
fill them. It is also increasingly the conduit for the rapidly growing demand for education in
the emerging world.
Barriers to Entry
A history of new and rapidly growing entrants in the internet space creates the impression
of very low barriers to entry. However, we believe the major players in the sector have built
up sizeable protection from new competition, leveraging powerful network effects to do so:
(1) R&D and capital spend – To keep up with the latest technological developments, internet companies are required to spend significant amounts on IT infrastructure and the development of new technologies and services. Furthermore, to be able to compete with Amazon on speed and efficiency, a competitor would need to copy Amazon's extremely advanced and expensive distribution network (which enables Amazon to offer 23% of the US population same-day delivery). We proxy the capital intensity of the internet sector by looking at capital spending to sales and capitalised R&D relative to sales. We can see that it is one of the highest of any sector with a capitalised R&D to sales of nearly 35%, ensuring a CFROI of 15%; in fact, Google's capitalised R&D as a percentage of sales is nearly 50%.
Figure 22: Internet services offer high barriers to entry
and high profitability
Figure 23: Google's capitalised R&D is nearly 50% of
sales
Autos
Cap Gds
Cons Dur
Cons SVs
Materials
Media
Retailing Comm. Eqpt
Elec. Eqpt
Int. S/w
IT Svs
Semis
Software
Tech H/W
0%
5%
10%
15%
20%
25%
0% 10% 20% 30% 40% 50% 60% 70%
Capitalized R&D as % of sales
2014
e C
FR
OI
Global
Company
Capitalized R&D as
% of salesCapex to Sales
Amazon 19% 5%
Facebook 23% 18%
Google 48% 14%
Source: Credit Suisse estimates Source: Thomson Reuters, Credit Suisse research
(2) Networking – Most internet companies depend heavily on the number of users they have, as there is little use being in a social network if there are only a few other users. This creates a strong first-mover advantage for companies such as LinkedIn and Facebook and makes it exceptionally difficult even for other dominant internet players to enter this market (e.g. Google+ struggles to compete with Facebook). In addition, having a large number of users helps online companies to attract unique content, a diversity of applications and varied products (e.g. eBay's liquidity and market depth are strongly correlated with its number of users).
(3) Access to data – Established internet companies have access to large databases on customer behaviour, owing mainly to their large client base. We have highlighted in Theme IX Big Fast Data the vulnerability for companies that lack sophisticated business data analytics. Amazon's database of historical sales data, for example, enables the firm to provide clients with customised recommendations on products that are compatible with their recent purchases and preferences. According to Stephen Ju,
29 September 2014
Global Equity Themes 17
our US internet analyst, a quarter of Amazon's sales are a result of these targeted recommendations. This gives especially "data rich" companies such as Google, Facebook, Tencent and Baidu a strong advantage over their competitors.
(4) Service integration – The critical mass that has been built has stimulated powerful network effects that have generated new and diversified revenue streams. The likes of Google and Amazon are heavily investing in their infrastructure to provide the client with more integrated solutions/eco-systems. Examples of recent efforts include new integrated hardware solutions such as the Amazon phone and Google Glass and other “wearables”, as well as services such as Amazon Prime, which tries to lock in customers by offering them faster delivery, access to a video-streaming service and free e-books against an annual fee. Google’s acquisition of Nest potentially establishes a platform for connectivity throughout the home leveraging further and locking in their existing customer base. Online travel agents (OTAs) are increasingly offering integrated packages, with flights, hotels, transfers, for example, booked together.
(5) Market leaders have the wallet to buy competitors – In contrast to the tech names
in the previous tech boom, the major players now are highly cash generative, which enables them to react quickly to rising competition, by acquiring any potential threat, and invest heavily in new areas of innovation. At a deal value of US$119bn in 1H14, global technology M&A is 70% higher than in 1H13, and looks to be on course to annualise the highest level since the peak of the dotcom bubble.
Figure 24: Directional view of select 2Q14 deal-driving
trends
Figure 25: Cash reserves of the top 25 technology
companies have been growing steadily
300
400
500
600
700
800
2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Source: EY Global Technology M&A update Source: EY Global Technology M&A update
We believe that as long as tax regulations prevent tech companies from bringing their cash "home" to pay dividends and shareholders continue to be rewarded through rising stock prices, big players with deep pockets are likely to continue to be consolidators, creating a powerful barrier to entry.
Figure 26: Selected M&A deals announced in 2Q14
Acquirer AcquireeDisclosed
value ($m)Announced
Premium
offeredDetails
Oracle MICROS Systems 5,300 23-Jun 69% MICROS builds technology for the hospoitality and retail industries
Zebra Tech Enterprise business of Motorola solutions 3,450 15-Apr N/A Mobile-computing services for businesses that need to track employees and products
Priceline Group OpenTable 2,600 13-Jun N/A Positioning for further growth
Alibaba Group AutoNavi Holdings 1,580 11-Apr 32% Purchased the remaining 72% of the online mapping service which it didn't already own
EPISTAR Formosa Epitaxy 693 30-Jun 24% Semiconductor M&A with a view to seeking scale through consolidation Source: EY Global Technology M&A update
29 September 2014
Global Equity Themes 18
Limitations
However, we also see seven areas of concern:
1. Conventional valuations
One of the key concerns is valuation, with Amazon and Facebook trading on 230x and 40x
consensus earnings, respectively, compared with the market trading on roughly 22x 12-
month forward earnings.
However, we would highlight that on Credit Suisse HOLT®, the economic P/E is
significantly less demanding than the actual P/E. For Amazon the economic P/E is only
86% higher than the market and in line with its long-run average. This is mainly due to
generation firewall platform is well positioned to consolidate features onto a single system
and, therefore, continue to gain share in network security. Palo Alto also announced a
partnership with VMware to provide integrated network security for VMware NSX, which
we view as a positive given our expectation for increased adoption of VMware NSX over
the next few years
29 September 2014
Global Equity Themes 20
Check Point (Analyst: Philip Winslow) – Outperform-rated Check Point continues to
enhance its Software Blade Architecture (e.g., Anti-Bot, and Threat Emulation), which we
believe positions the company to gain share from Juniper and Cisco Systems, both of
which continue to struggle in the network security market (from which Palo Alto Networks
continues to also benefit).
Proofpoint (Analyst: Philip Winslow) – Outperform-rated Proofpoint announced a new
"malvertising" (malicious advertising) protection solution that tracks the flow of
malvertisements and warns about problematic ad networks. We remain encouraged by
Proofpoint's potential to capitalise on the opportunities for (1) increased adoption of
Targeted Attack Protection and (2) competitive displacements in messaging security and
archiving.
29 September 2014
Global Equity Themes 21
Figure 28: Selected stocks exposed to the Internet theme
Company Ticker CS rating Region Exposure to
the theme
Explanation
Tencent 0700.HK O/P China High China's leading social network is exposed to social networking,
e-commerce, web-based gaming and online-based financial
services. Key advantage over Western companies such as FB
is that the WeChat app allows access to the potentially
profitable Chinese market.
Baidu BIDU.OQ O/P China High Strong revenue growth is driven by mobile monetisation. New
products and initiatives such as exploring of internet finance
opportunities are supportive of future growth.
Vipshop VIPS.N O/P China High Leading online discount retailer in China with a first-mover
advantage. Able to influence suppliers through large-scale
execution capability.
Naspers NPNJn.J O/P Africa High Naspers is building the largest portfolio of (Craigslist-like) online
classifieds websites in emerging markets, spanning more than
100 countries. It also has strong ecommerce marketplaces in
Central Europe
Facebook FB.OQ O/P USA High World's largest social network. Looking to capitalise on the
expanding of the budgets of the online brand advertisers. Other
products such as Whatsapp still indicate potential upside.
Amazon AMZN.OQ O/P USA High Online retailer with dominant market position and exposure to
key segments of ecommerce (e.g. online retail, video on
demand)
Google GOOG.OQ O/P USA High Leading search engine with exposure to smartphones and
online advertising, underpinned by rapid adoption of mobile
devices.
Priceline PCLN.OQ O/P USA High Exposure to online retail/booking. Strong growth story coming
off a low base, CS work suggests that PCLN currently only has
c7% share of fillable rooms.
Yandex YNDX.OQ O/P Russia High Key player in the fast-growing Russian online market which CS
estimates can reach a c20% market share. This is based on a
strong technical platform similar to Google.
Palo Alto PANW.N O/P USA High Unique next-generation firewall platform is well positioned to
consolidate features onto a single system, continuing to gain
market share.
Check Point CHKP.OQ O/P Israel High Providing network and data security, taking market share from
companies such as Cisco which have struggled in the network
security market.
Proofpoint PFPT.OQ O/P USA High Levered into fast-growing market for email security, outbound
data loss prevention, privacy protection and email encryption.
GLP GLPL.SI N APAC Medium Rapid e-commerce growth triggers strong demand for logistics
services in China. One of the world's leading logistics providers
with market leadership in china, Japan and Brazil.
TAL Education XRS.N O/P China Medium Chinese online education play. TAL has favourable exposure
to the K-12 market, enabling the fastest earnings growth
amongst its peers.
New Oriental EDU.N O/P China Medium Chinese online education play. Largest English tutoring
company in China with a superior brand recognition
Dangdang DANG.N N APAC Medium Rapid e-commerce growth triggers strong demand for logistics
services in China. Comprehensive B2C retailer.
Haier 1169.HK O/P APAC Medium Rapid e-commerce growth triggers strong demand for logistics
services in China. Provision of Integrated channel services
(ICS).
Deutsche Post
DHL
DPWGn.DE O/P Europe Medium The PEP segment is most exposed to e-commerce through
B2C deliveries in the fast growing online retailing German
market.
Visa V.N O/P USA Medium Global payments technology company that connects
consumers, enabling them to use digital currency instead of
cash and cheques.
Mastercard MA.N O/P USA Medium Global payments solutions company offering services in
support of the credit, debit and related programs of financial
institutions.
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 22
Figure 29: The untapped potential of the internet – Relevant research
Report Date Highlight
Smartphones: Theme - A Lasting Disruptive Force
11-July-13 Primer: We summarize the key stats, drivers, the competitive situation, and ultimately the lasting disruption that has come with the rise of today's smartphone.
China Internet Finance: Tides beneath the sea surface
27-Aug-14 We believe Internet finance is still at a very nascent stage in China, and continue to prefer large-cap names on this theme.
Cloud fears continue to ebb 25-Aug-14 Broad cloud adoption will take time, but these dynamics are critical to monitor as they are beginning to impact our coverage universe at the margin. We would note a bifurcation across the IT Hardware space.
Russian Internet/Media: Sector Review - Reduce adspend estimates further
4-Sep-14 Yandex continues to be our preferred fundamental story even with our more conservative growth assumptions, a lower profitability outlook and more demanding valuations.
Updating Our Thoughts on Google Play – Data Points Suggest Upward Bias to Estimates
4-Sep-14
We update our thoughts on Google Play, which we first published on 14 July 2014 (Google Play – The Next and More Important Multibillion Dollar Opportunity), as we collect global gross booking data from mobile game as well as mobile messenger companies.
Google Play - The Next and More Important Multibillion Dollar Opportunity
14-July-14 We layer in explicit contribution from Google Play into our updated model, which we have rebuilt to take into account more granular product-by-product estimates.
IT Hardware & Global Comm. Equipment: Amazon continues to innovate and disrupt
5-Jun-14 Amazon's new technology will now enable workloads to be transported from on-premise to public cloud datacentres. We fear that the technology poses a risk to on-premise capacity and may curtail demand for traditional enterprise gear over time.
Internet: Facebook - Ideas Engine - Time to Rebuild Your Facebook Models
21-Apr-14 We upgrade FB shares to Outperform (from Neutral) as we increase our mid-to-longer-term user ARPU growth trajectory expectation, following extensive analysis, to layer in monetization from the company's upcoming product releases.
IT Hardware & Global Communications Technology: 2014 Outlook: Spending muted, with a Cloud shift to boot
6-Jan-14
The macro backdrop to IT spending points to muted cyclical recovery; Real cloud drivers exist, disruption to incumbents ahead; Amazon: the CIA contract is no one off; Storage: A shift to DIY is under way but traditional storage continues to grow; SDN is real and will have an impact over 2-5 years.
Magazines - print Magazines - digital Newspapers - print Newspapers - digital Books - print Books - digital
Source: PwC Source: PwC
29 September 2014
Global Equity Themes 29
Companies exposed to the theme
Potential beneficiaries: Owners of movie, TV, music and sports content, eg. movie/TV
studios, recorded music labels; sports leagues, sports clubs.
Potentially adversely affected: Traditional (offline) aggregators of content, eg. DTH satellite
broadcasters; analogue radio stations.
We outline the key players' positioning below, with a summary in Figure 45.
Disney (NR) – Disney owns key movie and TV studio content (Walt Disney Studios, Pixar,
and Marvel Studios), as well as the ESPN cable network and ABC broadcast network. The
company therefore controls some of the most strategically valuable global content assets.
These assets contributed just under 70% of group EBIT in 2013.
Time Warner (NR) – Time Warner's key assets are the Warner Bros. movie and TV
studios and the Turner and HBO cable networks. Networks and Filmed Entertainment
contributed just under 95% of group EBIT in 2013. Post the spin-off of its publishing assets,
the group is a "pure play" content company, with 100% of EBIT coming from its content
assets. On 16 July 2014, Time Warner confirmed that it had rejected a proposal from 21st
Century Fox to acquire all the outstanding shares for 1.531 FOXA shares plus $32.42 in
cash, which valued TWX's equity at approximately $73bn (as at 28 July 2014). On
5 August, Fox announced that it had withdrawn its proposal, citing Time Warner
management's refusal to engage and the negative reaction in the Fox stock price, while
highlighting the "significant strategic merit" of the proposed deal.
Viacom (NR) – Viacom owns the Paramount movie studio and various cable networks,
including MTV and Nickelodeon, which are distributed by pay-TV platforms globally.
Viacom's content assets contributed close to 100% of group EBIT in 2013.
21st
Century Fox (NR) – Fox owns the Twentieth Century Fox studio, the Fox broadcast
network, various cable networks and a 39% stake in UK pay TV platform BSkyB. On 25
July 2014, Fox confirmed that it will transfer its 100% ownership in Sky Italia and its 57%
interest in Sky Deutschland to BSkyB for a total of $9.3bn before tax, which effectively
reduces Fox's exposure to distribution and increases its exposure to content. On 16 July
2014, Fox confirmed that it had approached Time Warner about combining the two
companies, which would have moved the group further towards being a "pure play"
content company. On 5 August, Fox withdrew its proposal.
Sony (OP, TP ¥2,600) – Sony owns Sony Music, the world's second largest recorded
music group. While the EBITDA contribution of Sony Music to the group is low currently
(<20% of EBITDA), we believe its value could rise from around ¥500−600/share to ¥700-
900/share, equating to 35-45% of the group's market value. We expect the stock market to
remain concerned about downside from smartphone and TV operations over the near term,
but the share price has already reached levels that we believe price in asset-impairment
writedowns for goodwill and intangible fixed assets.
ITV (OP, TP 250p) – ITV owns the largest commercial TV studio in Europe, ITV Studios,
which represents 25% of group EBITDA. We value ITVS at £3bn, which leaves the
broadcasting and online assets trading at just 10.1x 2015 EV/EBITDA, on our forecasts
(as at 2 September 2014). ITVS specialises in Drama and Entertainment programming—
after a period of investment under new management, the content pipeline has been
replenished and demand for this type of content is robust, driven by traditional
broadcasting customers globally and online aggregators.
Vivendi (RESTRICTED) – Owner of Universal Music, largest recorded music group.
29 September 2014
Global Equity Themes 30
Figure 45: Stocks exposed to the Content theme
Positive
Company Ticker Rating Region Exposure to the
theme
Explanation
Disney DIS.N NR US High Owner of Disney and Pixar studios, ABC, ESPN networks
Vivendi VIV.PA RES Europe High Owner of Universal Music, largest recorded music group
Time Warner TWX.N NR US High Owner of Warner Bros studio, and HBO cable network
Viacom VIAB.N NR US Medium Owner of Paramount Pictures and various cable networks
21st Century Fox FOX.N NR US Medium Owner of Twentieth Century Fox studio, Fox network
ITV ITV.L O/P Europe Medium Owner of ITV Studios, largest European TV studio
Sony 6758.T O/P Asia Pacific Medium Owner of Sony Music, second largest music label
Negative
Company Ticker Rating Region Exposure to the
theme
Explanation
BSkyB BSY.L U/P Europe High Aggregator of TV content, faces challenges from online
aggregators
Source: Company data, Credit Suisse estimates for rated companies
Figure 46: Content – Still King in Global Media – Relevant research
Report Date Highlight
Agencies - The Digital Transition 18-Sep-14
The consensus on programmatic buying : Agencies should be net beneficiaries; digital should be a positive for the Agencies; Technology is increasingly important but message/creativity/content, core competences of Agencies, still dominate – even more so in the viral digital age.
Global Media - Fox/Time Warner - building scale in content
17-Jul-14
We outline our initial assessment of the proposed acquisition of Time Warner by 21st Century Fox. While no negotiations are ongoing between the two companies, and it remains possible that no deal will take place, we believe the proposal itself illustrates the growing strategic value of content assets. This has positive implications for all owners of TV networks, TV studios and movie studios, in our view.
Global Music - Dancing to a New Tune 25-June-14 We analyse how the rapid shift in music consumption towards paid streaming will drive a period of structural growth in the industry and refocus investors on the value of owning music content.
Figure 64: Selected M&A activities in waste water treatment
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2006
Apr
-07
Mar
-08
Aug
-08
Sep
-08
Sep
-08
Oct
-08
2009
Sep
-11
Jun-
12
Feb
-13
May
-13
Jun-
13
Sep
-13
Sep
-13
Feb
-14
Mar
-14
Jun-
14
Jun-
14
Implied EV/capacity-day (Rmb/m3)
Source: Company data, Credit Suisse estimates
Global names in China
We believe growth in the Chinese environmental sector also provides opportunities for
global companies, with most benefit likely for equipment/EPC companies. Given the
localised nature of waste treatment, global operators' presence in China would be limited,
in our observation, mostly in the form of local JVs. Global EPC companies have a unique
position in China.
On equipment and EPC, we note meaningful presence at Chinese water plants:
■ Asahi-Kasei (membrane)
■ ITT Corp (pumps for waste plant)
■ Siemens Turbo (air blower)
■ Andritz (dehydration equipment)
■ ABB and Schneider Electric (frequency conversion equipment)
■ HACH, a major subsidiary of Danaher (online monitoring system)
Global established environment operators such as Veolia China and Suez China also
have operations in China. We estimate Veolia operates 2.7mt/day water assets and Suez
6mt/day, accounting for 6% of China's market shares. Veolia Environment entered the
Chinese market as early as the 1990s and has two main sub-branches, namely Veolia
Water and Veolia Environmental Services. Veolia Environment operates nearly 30 projects
29 September 2014
Global Equity Themes 40
including landfills, methane to power, hazardous waste treatment centres, WTE plants and
municipal waste cleaning services, while Veolia Water operates in half of the 34 provinces
and provides both municipal water/sewage treatment and industrial water/sewage
treatment services.
Suez China operates its China business through three subsidiaries—Degremont, SITA
Waste Services Ltd. and a JV between Sino-French Holdings and NWS Holdings Ltd.
Degremont provides water treatment solutions and services to municipalities and various
industrial customers. Degremont entered China as early as the 1970s and has signed
more than 200 projects including municipal water supply, wastewater, industrial water
supply and sewage treatment. SITA Waste Services specialises in waste management. It
designs, builds and operates a 60,000tpa HW incineration plant for Shanghai Chemical
Industry Park, which is a pioneer for China in terms of size and technology. Sino French
Water is a JV between Suez Environment and NWS Holdings Ltd of Hong Kong. Since its
establishment in 1992, Sino French has been active in China's water industry and
operated around 30 projects including water production, industrial water treatment,
sewage treatment and sludge treatment. As the CEO of Sino French said at a recent
conference: "We never gave up in bad times, and will never get carried away or be too
aggressive in good times."
Figure 65: Revenue exposure to China/ Asia
Source: Company data, Credit Suisse research
Companies exposed to this theme
Our stock preference is for waste treatment operators, with exposure to solid waste
segments, and/or strong consolidators in the waste water segment. The flip side of the
environmental effort is the higher costs of waste generators, with losers tending to be the
ones with poor S/D where it is difficult to pass on the higher environment costs.
BEW (0371.HK) – Fundamentals of the company remain intact with most M&A on track in
1H14. BEW has signed over 0.9mt/day new capacity YTD and believes 2mt/day new
addition target can be achieved. With much of 2013 acquired assets consolidating in
1H14E, we estimate that the existing project pipeline can support 50% treatment volume
growth in 2014. Besides, existing pipeline projects should be able to boost capacity by
80% from 2013A to 2015E. We believe the company will continue to benefit from a solid
uptrend from the industry.
SIIC Env (SIIC.SI) – We expect the company to expand water capacity from 3.9mt/day in
2013A to 10.2mt/day in 2017E. Potential parent asset injections could add a further 4.3mt,
implying a 27-39% CAGR. With gearing currently at 22% on our estimates, SIIC is better
prepared for stronger growth than peers, in our view. On an ex-construction income basis,
the stock is on a par with BEW on 2014E (30x), yet becomes more attractive as operations
ramp up (2016-17E P/E is 10-16x, or a 25-40% discount to BEW).
Dongjiang (0895.HK) – Dongjiang should also benefit from strong growth in hazardous
waste treatment. Earnings growth is expected to reach 15% for 2014E and 75% for 2015E.
29 September 2014
Global Equity Themes 41
Based on organic expansion projects on hand, we expect industrial waste treatment
volume tripling from 402kt in 2013A to 1,349kt in 2016E. Although the tightened regulatory
focus led to higher treatment costs in 2H13 due to the higher discharge standard, we
believe margins bottomed in 2H13 as Dongjiang will gradually pass through the cost hike
to downstream industrial customers.
CEI (0257.HK) – Following industry consolidation trends, CEI recently announced the
proposed acquisition of Hankore and aims to inject CEI’s own wastewater assets in
exchange for 79% of shares in the enlarged company. Besides, China recently revised
waste incineration emission standards and this will lead to higher capex and operating
costs (a potential Rmb50-60/t cost increase for low-end incineration operators). On a
relative basis, big operators should benefit, in our view.
Figure 66: Selected stocks exposed to the China Environment theme
Beneficiaries
Company Ticker CS Rating Region Exposure to the theme Explanation
Beijing enterprise
water
0371. HK O/P China High Strong consolidator in the waste water
segment, solid management team also with
operational focus
SIIC Environment SIIC.SI O/P China High Right ingredients to capture the sector’s
growth, potentially the strongest growth profit
among peers in China’s water sector
China Everbright
International
0257.HK O/P China High Highest exposure to WTE segment. Further
upside from incineration equipment and
HWT.
Dongjiang 0895.HK O/P China High Established player in hazardous waste
treatment segment, strong growth set to
come to meet demand in 2015-2016E
Sound Global 0967.HK O/P China Medium Established water EPC player and emerging
waste water BOT operator, should benefit
from China's waste water market expansion.
Uniquely positioned for higher growth in small
town/waste water market.
BJ Capital 600008.SS O/P China Medium Diversified player in the Chinese municipal
waste water market, with exposures in waste
water, tap water supply and solid waste
treatment.
Adversely impacted
Company Ticker CS Rating Region Exposure to the theme Explanation
Chinacoal 1898.HK U/P China high High-cost producer as the coal market moves
to severe oversupply, partly due to China
coastal regions' efforts in cutting coal
demand
Source: Company data, Credit Suisse estimates
Figure 67: China environment – real efforts and real moves – Relevant research
Report Date Highlight
China Environment Sector: Ideas Engine - Water: Scarcity Costs
18-Aug-14
The rising marginal cost of incremental water supplies in China, in the context of heightened water stress, along with the depressed investment return in water supply/treatment, requires fundamental changes in China's water sector. Beyond the volume growth story, we expect higher tariffs and improving returns for water operators in the coming years.
China Environment Sector: Refining policy, higher demand and standards
26-May-14 We highlight feedback from our recent China Environment Conference and trip, from companies and industry contacts in waste water, municipal solid waste, industrial waste, EPC and equipment, as well as government policy and regulators.
China Environment Sector: Time to look at soil pollution: Industrial waste treatment to benefit
21-Apr-14
We believe the Chinese government's publication, “National Soil Pollution Survey Report”, represents escalated determination of the government in environment clean-up, broadening efforts from just air emission control to water, and now the toughest of all—soil.
(generic) Indication Mechanism of Action Region Prob
Launch
Date
29 September 2014
Global Equity Themes 48
Figure 73: Stocks exposed to the Healthcare theme
Company Ticker CS Rating Region Exposure to the
theme
Explanation
Bristol Myers BMY O/P US High BMY has the most advanced portfolio in I-O with Yervoy
on the market for melanoma. Nivolumab is also in
development in combination trials with multiple other
agents. BMY also has a broad pipeline of other immuno-
oncology agents in mid- and early development. Credit
Suisse PharmaValues estimates assume $14.5bn peak
sales in immuno-oncology for BMY
Ono 4528.T O/P Japan High In Japan, Ono's lead I-O candidate is Opdivo
(nivolumab), recently approved for the treatment of
melanoma. Ono has a direct interest in Japan and a
royalty on ex Japanese sales by BMY of Opdivo. We
estimate that 40% of Ono's NPV comes from immuno
oncology.
Roche ROG.VX O/P Europe Medium Roche/Genentech is the market leader in cancer today
and a leader in immuno-oncology research. Roche's lead
programme, PD-L1, is in P3 development in lung and
bladder cancer and in P2 combination trials with multiple
other agents. Roche's in-market product, Avastin, may
also have potential in enhancing the efficacy of other I-O
drugs. Data to test this hypothesis should be available
during 2014. Roche also has a broad pipeline of other
immuno-oncology agents in early development. Credit
Suisse PharmaValues estimates assume $3bn peak
sales for PD-L1. Positive combination data with Avastin
could accelerate growth in this $8bn franchise.
AstraZeneca AZN.L N Europe High AZN is a 'fast follower' in immuno-oncology with a broad
portfolio slightly behind the leaders in terms of timing.
AZN is in a good position to develop in-house
combination therapies that may avoid having to negotiate
shared economics. An oncology heritage suggests that
AZN will be able to access the correct opinion leaders
and design smart studies to get to the market as fast as
possible
Merck MRK N US Medium MRK's lead I-O candidate pembrolizumab was approved
in the US in September 2014 for the treatment of
melanoma. Credit Suisse PharmaValues estimates
assume $7.3bn peak sales for pembrolizumab WW.
Source: Company data, Credit Suisse estimates
Figure 74: Growth in healthcare – Relevant research
Report Date Highlight
The Appeal of Consumer Health 18-Jul-14
For our universe, we see historical underlying sales CAGR of only 2.2% rising to 4.8% (2014E-18E) with a recovery from manufacturing issues, product launches and synergies from M&A more than compensating for increasing own brand pressures, particularly in the US.
An older, more affluent population not only spends more on healthcare, but also on life
insurance products. Life insurance premiums as a percentage of GDP (a crude proxy for
savings products) are particularly low in emerging markets (and, if anything, the data
understate the scale of the GEM shortfall as US 401Ks and UK ISA/PEPs are not
accounted for).
Figure 87: Life insurance product penetration is low in emerging markets
Australia
Brazil
Canada
China
France
Germany
IndiaIndonesia
Japan
Mexico
Nigeria
Poland
South Korea
Spain
Turkey
UK
US
0
10,000
20,000
30,000
40,000
50,000
60,000
0 1 2 3 4 5 6 7 8 9 10
2014
GD
P pe
r cap
ita ($
PPP)
Life insurance premiums, % GDP
Source: Swiss Re, IMF, Credit Suisse research
As the population of emerging markets ages, we think that governments will encourage
greater private provisioning for old age via tax incentives. In China, for example, the
government is planning to introduce deferred tax pension products similar to 401Ks in the
US. And, once inheritance tax is introduced in China, investors will be more likely to buy
insurance products as they will be tax exempt.
Swiss Re forecasts that growth in life premiums within emerging markets will be almost
three times that in developed markets over the coming years (forecasting 3.2% growth in
DM against 9.2% premium growth in GEMs in 2015), while according to our life insurance
analyst, Chris Esson, the Asian life insurance industry has experienced a CAGR of above
15% over the past decade.
In our view, the potential beneficiaries of this trend will continue to be AIA, with 100% of its
revenues coming from Asia, and Prudential, which has a 40% market share in Asia, with
a third of its business coming from emerging markets. Crucially, both have established
significant sales forces (and the barrier to entry tends to be the distribution system via
agents and bank channels), and this, in turn, allows them to generate structurally higher
margins than in developed markets.
Chinese life insurance companies that should also benefit from this trend and are rated
Outperform by our Asian insurance analysts are China Pacific, which has new business
growth in high-margin agency channels, and Ping An which has strong growth momentum
in life insurance in China.
Asset management
The other play on this theme is wealth and asset management. The leader in this space is
OCBC which is largely an ASEAN savings play (where 25-30% of OCBC's profits are from
wealth management). To some extent China Everbright is also a potential beneficiary (a
diversified financial services group that trades at a discount to the sector on both P/E and
P/B, according to our analysts) and Value Partners (60% of its assets are from the HK
compulsory savings scheme, the Mandatory Provident Fund).
29 September 2014
Global Equity Themes 57
Potential and Limitations
The main threats to the growth of life products in Asia are as follows, in our view
1) If governments make non-life-related products more tax efficient at the point of entry or
exit (e.g. as in the US or UK allowing ISA, PEPs or 401k);
2) If regulations force payments into a state pension scheme (such as the
Superannuation Fund in Australia) or a state social security safety net operated at a
higher level, which would serve to lessen the need for individual savings;
3) Margins are higher because of the degree of vertical integration: regulations could
threaten this;
4) Most importantly, there is a strong cyclical risk. As we have discussed elsewhere, we
remain concerned about the outlook for Chinese economic growth. Were our concerns
to crystallise, consumers could be reluctant to invest in a 10-year product if they fear
that they will not have a job.
29 September 2014
Global Equity Themes 58
Selected stocks exposed to this theme
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names which are not mutually exclusive.
Beneficiaries
Company Ticker CS
rating
Region Exposure to
the theme
Explanation
Sun Pharma SUN.BO O/P India High First, around a quarter of its drugs focus on lifestyle diseases; second, it has a portfolio of difficult to formulate generics (where pricing tends to be stronger); and third, it is market leader in high-growth areas such as dermatology.
Sihuan Pharma 0460.HK O/P China High About 70-80% of its products are generic, and it is on the list of approved Chinese drug suppliers, which affords it a degree of revenue as this list is refreshed only once every 4-5 years.
Fresenius Medical Care
FMEG.DE O/P Europe Medium Provides dialysis treatment, and therefore benefits from the growth in diabetes, a key cause of end-stage renal disease.
AIA 1299.HK O/P Asia High 100% exposed to the Asian insurance market, where premium growth looks set to be three times that in developed markets. Large established sales force a significant barrier to entry.
Prudential PRU.L O/P Europe High 40% market share in Asia, with a third of its business coming from GEM.
Bumrungrad Hospital
BH.BK N Asia Medium Dominates the high-end hospital market in Thailand, and is a beneficiary of rising health tourism in the region. Its market dominance also allows it to enjoy greater bargaining power with suppliers and economies of scale, driving an RoE of 26% in 2014 on our analysts' estimates.
Siloam SILO.JK O/P Asia High A hospital operator with a dominant position in what our analysts believe to be one of the most attractive markets, Indonesia. Hospital bed penetration in Indonesia is low even by GEM standards, and it is one of the most attractive markets in NJA in terms of prospective healthcare expenditure growth.
Essilor ESSI.PA N/R Europe Medium Market leader in eye care products, especially vision correction lenses. The company estimates that there are about 300m uncorrected elderly persons. Further, the company projects the number of presbyopic persons to grow at a CAGR 2013-20 of 2-2.5% or 2-3x world population growth on ageing effects as after 50 years, almost everybody has presbyopia. This should also help the penetration with progressive lenses, which is only about 15% globally.
Straumann/
Nobel Biocare
STMN.S
NOBN.S
O/P
R
Europe Medium Market leader in dental implants. Demand for complex dental work, maintenance and peri-implantitis checks increase with age. In the US; the number of decayed, missing or filled teeth stands at about 15-20 for patients over 65 years old vs. about 7-12 for persons 20-50 years old.
Smith & Nephew SN.L N Europe Medium The company has substantial market positions in hip and knee replacement, an indication that occurs increasingly with elderly patients as joints degenerate over time. The company also holds positions in sports medicine and trauma, which are more accident related, but are also more frequent as age progresses, e.g. osteoporotic bone, etc.
Coloplast COLOb.CO O/P Europe Medium Market leader in ostomy and continence care in emerging markets. Growth is largely driven by ageing populations. The company has core growth markets in China, Brazil, Argentina, Greece, Poland and Russia. Organic growth in emerging markets was 24% in the 9 months to August 2014 and emerging market sales are 13% of the total currently but expected to increase to c25%.
L'Oreal OREP.PA O/P Europe High The company has high exposure to GEMs as its "New Markets" category, which includes Brazil, China and Russia, was its number one contributor to revenues over FY 2013 (39.8% of total sales). In emerging markets it has sustained a 10% growth rate, ahead of 7-8% growth in the cosmetics market.
Natura NATU3.SA N Brazil Medium Brazil's leading manufacturer and marketer of beauty products, skin care, cosmetics etc.
Unicharm 8113.T U/P Japan Medium Downstream toiletry manufacturing play in Japan.
Kao 4452.T O/P Japan Medium The consumer product section of Kao focuses on disposable diapers as well as beauty care etc.
Netcare NTCJ.J N/R South
Africa
Medium South African hospitals which are potential beneficiaries of the demographic shift of the population; increasing the proportion of over 60 year olds.
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 59
Theme #3 – Resource Scarcity
Source: Credit Suisse research
VI Resource Efficiency: Demand Management
We see the need for greater resource and specifically energy efficiency as amongst the
greatest challenges facing the global economy during the next few decades. The reason
for this relates to the impact of three powerful long-term macro drivers - population growth,
urbanisation and the rapidly emerging economy middle class. There are two mechanisms
to address the underlying imbalance – exploiting new sources of supply or managing down
demand. We focus on the latter and the investment opportunities that exist in building and
transport.
VII Shale: Vive la Revolution
In our reports on The Shale Revolution I and The Shale Revolution II, we set out the
transformational influence unconventional energy would have across not just the energy
sector but across the whole related supply chain. Much has happened but it is by no
means played out. In our view shale is set to underpin the global (not just US)
hydrocarbon growth story for the next decade and beyond, supporting faster than average
growth from the Oil Field Service companies specialising in shale and the upstream
companies with productive shale acreage. In turn it provides growth end markets for a
wide range of connected companies and industries.
VIII Solar: An inflection point
Alternative and unconventional sources of energy are new supply drivers bringing
disruptive impacts with them. On the alternative side, we believe the inflection point in
solar adoption is here given relative cost-competitiveness. Not only are environmental
policies supporting the adoption of renewable power sources, but the cost of solar energy
has declined ~50% over the past six years, making it a cost-competitive resource in many
markets. The growth opportunity is tremendous, with solar representing only 0.003% of
total power generation capacity globally today. A mere 1% global penetration rate equates
to an $86bn opportunity for solar companies.
29 September 2014
Global Equity Themes 60
VI Resource Efficiency What are the key drivers of the theme?
The availability of the world's key resources—energy, water and land—is being challenged.
We see the need for improved resource efficiency as one of the greatest challenges facing
the global economy during the next few decades. The reason for this relates to the impact
of three powerful long term macro drivers: population growth, urbanisation and the
expansion of the emerging middle class.
Figure 88: The demand for resources
Resource Demand
WaterEnergy
Industry Buildings Transport
Land
Source: Credit Suisse research
■ World's population may increase by up to 3bn by 2050
The expansion of the world's population from less than 3 billion people in 1950 to 6-7bn
today has already put significant pressure on the available level of key resources such as
fresh water, land and energy. For example during the past 40 years total primary energy
consumption has more than doubled.
Figure 89: Primary energy consumption has more than doubled since 1970 (Mtoe)
Figure 90: Increasing share of transport more recently has been driven by emerging markets growth
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1970 1980 1990 2000 2010
Th
ou
sand
s Other Transport Industry Buildings
10%
15%
20%
25%
30%
35%
40%
1971 1981 1991 2001 2011
OECD Non-OECD World
Source: IEA, OECD, Credit Suisse research Source: Company data, Credit Suisse estimates
However, without greater resource efficiency we believe that supply-demand frictions for
these resources are likely to increase significantly, given that the world's population may
expand by an additional 3bn or almost 50% between now and 2050.
Source: International Council on Clean Transportation Source: IATA Technology roadmap 2013
Surveys among corporates continue to suggest that legislation in combination with
financial stimulus packages are key drivers for investments in improved resource
efficiency (see for example the annual surveys by the Global Energy Efficiency Institute
run by Johnson Controls). As the global economy continues its recovery following the
financial crisis we believe that governments will be in a better position to expand support
programmes.
Corporate interest reaching critical levels
One of the key issues for investors when reviewing the opportunity set in resource
efficiency is finding credible support that the theme is actually investible. Indicators that
this is happening in our view relate to corporate investment in products and services
aimed at increasing resource efficiency. There is evidence across the spectrum of
resource efficiency in support of this.
For example we note that c70% of corporates now view energy efficiency as a key part of
their corporate strategy and invest in various products and services related to it. Green
building construction is also rapidly expanding while within the area of transport efficiency
we note that investments in electrical vehicles and even driverless cars are accelerating.
29 September 2014
Global Equity Themes 64
In the airline industry we find that fleet renewal is showing strong growth as new aircraft
are typically up to 20% more fuel efficient than the ones they replace.
Finally, we notice a strong increase in the development of technological solutions that will
play an increasingly important role in energy efficiency. Examples include smart building
products, the development of driverless cars and dynamic traffic and routing optimisation.
Developments like these continue to raise the profile of resource efficiency, which in turn
lifts the credibility of the theme in our view.
Figure 100: % of companies with an energy efficiency goal
Figure 101: Level of green building activity set to rise
0%
10%
20%
30%
40%
50%
60%
70%
80%
2011 2012 2013
Goal No goal
0%
10%
20%
30%
40%
50%
60%
No Green 1%-15% 16%-30% 31%-60% More than 60%
2009 2012 2015
Source: Institute for Building Efficiency Source: McGraw-Hill Construction, 2013
Potential and Limitations
What is the magnitude of the growth potential on offer in terms of subgroups?
The potential size of the market for products and services relating to improving resource
efficiency is very significant and covers a wide range of end markets. For the purpose of
this note we limit ourselves to opportunities related to energy efficiency.
■ Building energy efficiency opportunities
In the case of energy efficiency relating to buildings, we estimate that refurbishing existing
homes across the developed world already accounts for a US$2trn investment opportunity.
Improving the efficiency of non-residential buildings represents total investment
requirements of at least US$500bn in our view. End markets that are exposed to this
include the product manufacturers relating to heating and cooling equipment, insulation
products and energy management technologies. In addition we believe that service
companies involved in design and consultancy or installation services also stand to benefit.
29 September 2014
Global Equity Themes 65
Figure 102: The residential opportunity: energy savings of up to 95% can be achieved (Kwh/m2)
Figure 103: Total residential refurbishment opportunity (for buildings built before 1980, (€bn)
0
50
100
150
200
250
300
350
before1977
Today'savg.
1977 1982 1994 2001 PassivHaus
Average energyconsumption
can fall 95%
0
50
100
150
200
250
300
350
400
US
Ge
rm
an
y
Ita
ly
UK
Fra
nce
Sp
ain
Po
lan
d
Ro
ma
nia
Ne
th
erla
nd
s
Be
lgiu
m
Sw
ed
en
Cze
ch
Re
p.
Au
stria
Hu
ng
ary
Gre
ece
De
nm
ark
Po
rtu
ga
l
Bu
lga
ria
Fin
lan
d
Slo
va
kia
Lit
hu
an
ia
US: €600bn
Source: PassivHaus Source: Eurostat, Enerdata, Credit Suisse research
■ Transport efficiency opportunities
Energy consumption from cars, airplanes, boats and trains account for 30% of final energy
demand but has been growing more rapidly than either industry or buildings during the
past 40 years. The need to further improve efficiency levels for these transport modes is
high given that demand for transport services globally is showing sustained strong growth.
Some of the more high-profile investment opportunities exposed to transport include:
Road: Energy consumption from cars accounts for 77% of total transport usage.
Companies that should see structural growth from further efficiency improvements in this
area include those that produce batteries related to electric vehicles, develop testing
facilities to be used as part of the design phase, car component manufacturers, software
developers related to traffic optimisation, and tyre manufacturers. The ability to improve
fuel efficiency beyond current targets would provide an annual savings opportunity of
c$700bn by 2035 on our estimates.
Air: Fuel efficiency for aircraft has been improving steadily during the past 40 years.
Further gains are likely through the development of new technologies and materials.
Design changes and new industrial processes (3D printing for example) add to this. In
combination with bio-fuel deployment, savings could reach up to 80% from current levels.
Shipping: International shipping accounts for c10% of global transport energy
consumption, however, it carries c90% of world trade. Fuel efficiency and emission
savings opportunities are driven by stricter sulphur emission targets, the energy efficiency
design index (EEDI) and the Ship Efficiency Management Plan (SEMP). These should
allow emissions to fall by c23% by 2030. Total annual fuel cost savings could reach $50bn
by 2020 and $200bn by 2030 if IMO standards are met.
■ Significant potential to improve "quality of life"
Global warming is a significant side effect of the continued increase in energy
consumption. Targeting of so-called "short-lived climate pollutants", which account for
c40% of the current warming, is the quickest way to address these problems. Short-lived
climate pollutants include black carbon and methane which are also air pollutants that
harm human health. Research from the World Bank shows that a reduction of these
pollutants could prevent the deaths of 2.4m people and boost crop production by 32m tons.
The annual benefits of these policies could add $1.8-$2.6trn to GDP growth, avoid
production of 8.5bn metric tons of carbon dioxide equivalent and save 16bn kilowatt-hours
of energy which is equivalent to taking 2bn cars off the road. Currently there are only
about 1.1bn cars on the road, so this is equivalent to removing the emissions of almost
twice the entire end-market automotive industry.
29 September 2014
Global Equity Themes 66
What are the limitations/risks to the story?
General acceptance for the need to further increase resource efficiency is high in our view,
but there are limitations, including:
■ Weak macro environment: Resource efficiency measures have tended to work best
in a strong GDP growth environment where companies and governments are more
willing or able to invest towards these initiatives. A lack of economic growth might
therefore impact the investment case in the short term.
■ Lack of regulatory pressures: While acceptance for the need to improve efficiency
appears high, we find that government incentive schemes and regulation more broadly
are critical. A loosening in legislation would not be positive in our view.
■ Rebound effect: Research into consumer behaviour has shown that consumption
may increase owing to the belief that savings are made as a result of efficiency
improvements. This so-called "rebound effect" therefore limits the full savings potential
that can be achieved.
Stocks exposed to the theme
■ Potential winners
Using the input from our research analysts across Credit Suisse we have put together a
list of c200 companies exposed to building energy efficiency and a list of c350 companies
exposed to transport energy efficiency.
The companies exposed to building energy efficiency can be grouped into a few key sub-
sectors: consulting engineers, construction firms/home builders, technical service
companies, original equipment manufacturers (OEMs) and property owners. Reviewing
these sub-sectors within a Credit Suisse HOLT® framework indicates that value creation
through time has been better than for the wider equity market. In addition we note that
risk-return characteristics have been superior to the overall equity market (Figure 104).
At this point, from Figure 105, we believe that the most undervalued subsectors are
Lighting, Tech. Services and Cooling. Heating and Insulation/Energy management on the
other hand appear to carry consensus forecasts that look stretched when compared to the
past 5 and 10 year median.
Figure 104: Cooling is the stand-out subsector on a risk-returns basis
Figure 105: Lighting looks the best valued sector. The building universe as a whole is also slightly undervalued
Universe
Consultancy
Construction
Technical
Services
OEM
Cooling
Lightingenergy
Insulation
Appliances
heating
Property
Owners
MSCI
World
MSCI
Industrials
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
15% 20% 25% 30%
CA
GR
sin
ce 2
003
Annualised monthly volatility since 2003
0
2
4
6
8
10
12
14
16
18
10yr Last fiscal year Forecast Market implied CFROI
Undervalued Overvalued
Global Credit Suisse HOLT Source: Credit Suisse HOLT, Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 67
Figure 106: Performance by activity and transport subsector: water/shipping has been weak more recently, while rail and infra appear strong
Figure 107: CFROI® improvements for most sectors
except water and infrastructure. Road is most undervalued from a HOLT perspective
Universe
Road
Air
Water
Rail
Multi
Transport Infrastructure
5%
10%
15%
20%
25%
30%
5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
1yr
shar
e p
rice
ret
urn
10yr average share price return
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Road Universe Multi Rail Air Water Infrastructure
10yr Last FY Forecast Market implied
Undervalued Overvalued
Source: Thomson Reuters, Credit Suisse Research Source: Credit Suisse HOLT, Credit Suisse Research
As for transport energy efficiency we believe that the key subsectors affected include the
transport modes: Road (autos, trucks, buses and bicycles), Rail, Air, Shipping and
construction and design companies exposed to transport infrastructure. The performance
of these subsectors during the past 10 years and most recent 12 months suggests that
rail-related companies performed best (Figure 106). Shipping (water) companies on the
other hand, whilst having a strong performance longer term, were the weakest across the
transport universe more recently. This in our view may be the result of upcoming
tightening legislation.
From a valuation perspective, we find that water and infrastructure companies look
overvalued whereas consensus estimates for road-related transport companies appear to
be undemanding (Figure 107).
■ Potential losers
A strong improvement in resource efficiency, especially if it were to reduce total usage
would in our view have a negative impact on the companies that supply conventional
energy and are unable or unwilling to broaden their product offering. Therefore utility
companies and oil and gas companies are most likely to be negatively affected if
technological improvements and government programmes manage to improve resource
efficiency.
Selected stocks exposed to this theme
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names across our coverage. These are not mutually exclusive.
United Technologies Corp: Leading global player in commercial and military aircraft
engines (Pratt & Whitney), and in commercial and residential HVAC equipment & controls
as well as transport refrigeration (Carrier, Transicold); collectively these account for 40%
of sales. The company has leading positions in global markets, offering relatively high
aftermarket content and strong returns.
Solarcity: SCTY leases solar systems to homeowners, allowing no upfront capital
investment for consumers while also delivering immediate savings relative to the
incumbent utility rates. Distributed rooftop solar has grown at a ~40% CAGR for the last 4
years yet still represents less than 0.6% of rooftops. Reaching a 10% penetration level
implies a CAGR of >13% through the next decade (or >50% CAGR if reached in 5 years).
29 September 2014
Global Equity Themes 68
First-mover states have already indicated these penetration levels may be obtainable:
13.4% of residential rooftops in Hawaii have solar, while California is approaching 2.2%
penetration.
Infineon: Infineon appears well positioned to benefit from a secular trend around rising
semiconductor chip content in Automotive driven by the adoption of a broad range of semi
chips (e.g., power controls, microcontrollers, sensors, voltage regulators and radio
frequency applications) used in cars. Infineon's key markets – Automotive and Industrial
Power, which we estimate will account for ~45%/40% and ~20%/25% of group
revenues/profits in FY14E – suggests that the company is likely to see continued share
gains in both these markets, driven by its strong presence in the IGBT category
(transistors which operate in a high-voltage environment with applications in areas such as
hybrid cars, industrial automation, renewable energy and train/transit systems).
Arcadis: Arcadis has strong exposure to building energy efficiency as 30% of revenues
are from building-related consultancy work while 27% are derived from infrastructure, 15%
from water and 26% from environmental consultancy work. Through the acquisitions of EC
Harris and Langdon and Seah a few years ago, Arcadis has become one of the world's
largest building consultancy firms. The company provides a full life cycle offering from
planning and environmental impact studies to project management during the construction
phase, asset management consultancy during the operating phase of a building and
refurbishment with possible environmental remediation work during the redevelopment
phase.
Continental: Increasing powertrain content—2020 emissions targets for OEMs are even
more difficult to achieve vs. the last period given the tougher starting point; thus we expect
the increase of powertrain content in a vehicle to provide structural tailwinds.
Shimano: The global leader in sports bicycle parts with a market share of about 70%. Its
share is even higher, over 80%, in critical parts such as shifters that directly impact
performance. Bicycles, being human-powered, are the ultimate eco-friendly transport
vehicles. Governments around the world are taking active measures to promote the
spread of bicycle use, based on aims such as ecology, public health, easing traffic
congestion, and reducing air pollution.
J.B. Hunt: The largest division functions as an asset-based truckload intermodal company,
boasting the largest fleet of company-owned 53 ft. containers in the world with ~50k rail
containers in operation. The company derives ~75% of EBIT from its intermodal division
and partners with railroads BNSF and Norfolk Southern to deliver rail intermodal service to
customers. The intermodal rail service is expected to continue to take freight share away
from truckload movements in the US as truckload capacity is constrained by multiple
factors including highway congestion and driver recruitment challenges.
Boeing: An aircraft OEM, and frankly any company exposed to the aerospace original
equipment cycle, is exposed to the transport efficiency theme as airlines strive to improve
their operating costs. The bellwether of this in our coverage is Boeing, which is in the
midst of a product line upgrade that offers new aircraft with greater operating efficiencies.
Rockwell Collins: A leading supplier of communications and aviation electronics
equipment, and thus benefits directly from the heightened investment in new, more fuel
efficient aircraft. We forecast that Commercial Aerospace revenues will account for ~56%
of total group sales in FY’15, and become a larger percentage in future years as the entry
into service of new aircraft and production ramps on existing models drive commercial
growth higher than that in COL’s defense-oriented businesses.
29 September 2014
Global Equity Themes 69
Figure 108: Stocks exposed to the resource efficiency theme
Beneficiari
es
Company Ticker Rating Region Exposure to
the theme
Explanation
Infineon IFXGn.DE O/P Europe High German semiconductor company with market leading position in
Automotive (outside Japan) and Industrial Power.
Arcadis ARDS.AS O/P Europe High One third of revenues originate from resource efficiency. 30% of revenues
from buildings, 28% from environmental consultancy, 15% from water
advisory and 27% from infrastructure work.
United
Tech Corp
UTX O/P US High UTX is a leading global player in commercial and military aircraft engines
(Pratt & Whitney), and in commercial and residential HVAC equipment &
controls as well as transport refrigeration (Carrier, Transicold); collectively
these account for 40% of sales.
Alfa Laval ALFA.ST O/P Europe Medium Three key product groups which are Heat Transfer, Separation and Flow
Technology. Their exposure is primarily in the Marine segment. In Marine
they offer products from each of the above three groups which can enhance
the operating efficiency of ships.
Tesla TSLA.OQ O/P US High Tesla designs, develops, manufactures and sells electric vehicles and
electric powertrains. The company distributes its vehicles in North America,
Europe, and China through its own network of sales and service centers.
Continental CONG.DE O/P Europe Medium Earnings growth to be driven by advances in powertrain efficiency in the
mid term e.g. fuel injection, turbochargers and dual clutch transmission.
BYD 1211.HK O/P China High One of the leading local brand car makers in China. BYD is China's most
competitive electric vehicle (EV) manufacturer, in our view, given its
technology leadership with an integrated EV solution., strong EV product
pipeline and the longest EV commercial operation experience.
Denso 6902.T O/P Japan High Largest exposure to the electronics field among auto parts sector. Denso
handles products ranging from HEV ECUs to inverters, DC/DC converters,
battery monitoring units, current sensors, high-voltage batteries, and motor
generators.
Shimano 7309.T O/P Japan High Global leader in sports bicycle parts with a market share of c70%.
Honeywell HON O/P US High Exposure to energy efficiency in both Aerospace and ACS segment
Cummins CMI.N O/P US High Leading global manufacturer of diesel and natural gas engines
Rockwood ROC.N O/P US High Low cost producer in Lithium supply chain
J.B. Hunt JBHT.OQ O/P US High Largest division of company functions as an asset-based truckload
intermodal company.
Boeing BA.N O/P US High Product line upgrade offers new aircraft with greater operating efficiencies
Source: Company data, Credit Suisse research
Figure 109: Resource Efficiency: Demand Management – Relevant Research
Report Date Highlight
Themes in Energy Efficiency 3-Apr-14 Primer: As part of our global energy efficiency research, this report reviews building energy efficiency challenges and investment opportunities.
US Autos & Auto Parts Coverage Initiation
13-Aug-14
We favor the suppliers over the automakers: Strong earnings growth for the suppliers should accelerate, driven by global secular growth trends, modestly recovering volumes (and strong incremental margins) in Europe, and content growth / margin expansion in China. Continued strong returns, strong balance sheets, and potential for increased M&A activity could drive a further re-rating of these stocks.
Auto, Auto Parts, Electronic Components Sector - Vol.1 Electrification
16-July-14 We present the findings of a cross-sector survey we conducted to explore current developments within major trends currently dominate automotive technology: electrification, automation, and informatization.
Battery Technology - Electrifying Future
1-July-14
While there are many new battery technologies emerging that claim to be 10 times better than lithium-ion in some of the above criteria, right now, lithium-ion batteries are the only proven technology that scores well on all of those, and possibly the only technology in the next 10 years that can be used in commercial applications.
Lithium – Ideas Engine: A Powerful Story for Investors
27-May-14 Based on our detailed analysis of the global lithium supply/demand balance, we believe the industry is poised for significant volume growth, with a reasonable amount of risk to the upside around pricing as well.
Battery / Battery Materials 28-Feb-14 Supply chain implications of Tesla's Gigafactory: We present our thoughts on its implications for the battery and the battery materials industry.
Clean Tech in 2013 17-Jan-14 We see reasons to be optimistic for the sector . Lower oil & natural gas prices and a sluggish economy have not derailed the prospects for the sector.
Oil & Gas Equipment Services Government Chemicals & Agriculture
Anton Oilfield Services, Baker
Hughes, Cameron, Dresser-Rand,
Enbridge, Halliburton,Hilong,
Honghua, Kinder, Schlumberger,
SPT Energy, Superior Energy
Services, Transcananda
Weatherford and Yantai Jerah,
Tenaris, Vallourec
Agrium Inc
CF Industries
Exploration & Production Dow Chemical
Formosa Plastics
Flowserve, Vallourec, Pentair,
Rotork, Weir, CIMC Enric, Energy
Recovery, Mitsubishi Heavy, KBR,
Luxfer, JGC
Clean Energy Fuels
Phillips 66
Eastman Chemical
Westlake Chemical
Lyondellbasell Industries
Bioamber
Tesoro Corp
Western Refining
Access Midstream, Caterpillar,
Crosstex, Fluor, Markwest Energy,
Plains, Targa Resources Utilities
Industrial Machinery
Environ & Facilities Services Dominion Resources
Nuverra, Republic Services, Waste
Mgmt and Waste Connections
Korea Gas
Perusahaan Gas Negara Persero
Railroads Steel
Union Pacific, Canadian Pacific and
Kansas City Southern. Yamato Kogyo
Osaka Gas
Electrical Equipment Tokyo Gas
Dongfang Electric, Harbin Electric
and Emerson.
Chubu Electric Power
NextEra Energy
Nucor
Other Voestalpine
Siemens, General Electric,
Honeywell, Inpex, Canadian Natural
Resources, Rolls Royce, Denso,
Keihin and Itron
Auto's & Tech
Maruti, Westport Innovation,
Cummins
ABM Investama, Adaro Energy,
Alpha Natural Resources, Arch Coal,
Cloud Peak Energy, Harum Energy,
Indika Energy, Peabody Energy and
Tambang Batubara.
Tenaska Uralkali, PhosAgro
Transalta Yara Intl,
Qinghai Salt Lake Potash
Coal & Consumable Fuels Independent Power Producers Chemicals & Fertilizers
Source: Credit Suisse research
29 September 2014
Global Equity Themes 79
Figure 121: Selected stocks exposed to the Shale theme
Beneficiaries
Company CS
Rating
Ticker Region Exposure to
the theme
Explanation
Halliburton O/P HAL US High Dominant shale Oil Field Service provider
Pioneer O/P PXD US High Largest resource holder in the Northern Midland basin
EOG O/P EOG US High Diversified shale portfolio and industry leader
Phillips
Petroleum
N PSX US High PSX benefits in its chemical business from cheap ethane, refining
business from cheaper crude, lower energy costs and
infrastructure opportunities in the MLP
Enterprise
Products
Partners, LP
O/P EPD US High EPD has significant growth potential in infrastructure
YPF N YPF Latin America High YPF has the largest acreage position in Argentina shale.
New Standard N/R NSE.AU US/Australia High Eagle Ford prod., Canning JV's with Conoco and Petrochina
Energy Transfer
Equity
O/P ETE US High ETE has significant growth potential in infrastructure
Sinopec O/P 0386.HK China High Successful commercial development of Fuling shale gas field –
China's pilot shale gas development
PetroChina N 0857.HK China Medium Largest shale resources owner in China, lukewarm on shale
development in the initial phase but impact could be material
towards the end of the decade
LyondellBasell O/P LYB US Medium LYB benefits from low cost ethane
Beach Energy N BPT.AX Australia Medium Phase 1 JV with Chevron, phase 2 would be material
Senex O/P SXY.AX Australia Medium Phase 1 JV with Origin, phase 2 would be material
Drill Search N/R DLS.AX Australia Medium Cooper JV with QGC, exploration upside later this year
Buru N/R BRU.AX Australia Medium Canning JV's with Mitsubishi and Apache, exploration upside
Chevron O/P CVX Global Low CVX is the key partner of YPF to develop shale thus far.
Schlumberger O/P SLB Global Low Service provider. Possible beneficiary to Argentina shale capex
cycle
Baker Hughes O/P BHI Global Low Service provider. Possible beneficiary to Argentina shale capex
cycle
Dow Chemical O/P DOW US High Cost beneficiary of shale gas until at least 2015E.
BioAmber O/P BIOA.N US High A beneficiary of the shale boom since it supports high prices for
BioAmber's products.
Caterpillar O/P CAT US Medium Intentions to launch LNG powered locomotives.
Union Pacific O/P UNP US High Crude by rail, inbound drilling materials
Fluor O/P FLR US High Leading player in construction of LNG facilities
Canadian Natural
Resources
O/P CNQ.TO North America High Current sellers of shale/tight gas resource
Agrium O/P AGU US High Could benefit from low cost shale, at least to 2016
Weir Group O/P WEIR.L Europe High Could benefit from increased demand in pressure pumps, fluid
ends and related services
KBR Inc O/P KBR US High Well positioned based on verticals in place
Negatively
impacted
Company Rating Ticker Region Exposure to
the theme
Explanation
Transocean N RIG US Medium Offshore drillers. With the industry growth shifting to the onshore
and an oversupply of offshore rigs, RIG's 2015-2016 earnings
power is being negatively impacted.
Diamond
Offshore Drilling
N DO US Medium Offshore drillers. With the industry capex shifting to the onshore
and an oversupply of offshore rigs, 2015-2016 earnings power is
being negatively impacted.
Shell O/P RDSa.L UK Low Arrow gas holds a major un-developed CSG acreage which is likely to be high cost. Shale could impact project margins.
PetroChina N 0857.HK China Low
BHP U/P BHP.AX Australia Low Major conventional gas producers in the Gippsland, direct beneficiaries of higher gas prices. Small in terms of scale of companies.
Esso N XOM US Low
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 80
Figure 122: Shale – Vive la Revolution – Relevant Research
Report Date Highlight
The Shale Revolution 13-Dec-12 Primer I: This report leverages the expertise of over 40 research strategists and analysts and paints a clear geographic and sector picture of the shale phenomenon, uncovering significant investment opportunities globally.
The Shale Revolution II 1-Oct-13 Primer II: We draw on the insights of over 50 global equity analysts, economists and strategists to revisit the key investment theme of the shale revolution and chart new developments.
Marcellus Shale: Inside the Numbers 11-Sep-14 Analysis of Unconventional Marcellus Shale production data in Pennsylvania suggests that the ‘rate of change’ continues to improve, with a step change in gas well productivity noted during 1H14.
Bakken Deep Dive: A "Client Flex" Basin Model
28-Jul-14 We introduce a client excel flex model for the key players where clients can model common assumptions for downspacing by county, by operator, across core acreage and the fringe acreage.
Exploration & Production: U.S. Upstream Deep Dive
28-Jul-14 We provide an update to our "US Upstream Deep Dive" which tracks select North American basin activity and expected operational catalysts as we head into the 2Q14 earnings season.
The Unbearable Lightness of Condensate - Impact On Chemicals, Refining, E&P and MLPs
12-Jun-14 The strong expected growth in condensate rich shale plays could have a significant impact on global naphtha markets over time, given the high naphtha (and pentanes) yield of condensate (up to 50+%).
Shale Day Takeaways 14-May-14 US tight oil production boom continues to have running room across the key plays; the Northern Midland and Wattenberg remain king on a per acre value basis; rising oil production will continue to keep the US refiners and Gulf Coast crude prices in focus.
Managed Shale - How to Get Paid for Know-How
10-Apr-14 This shift in business model means larger revenue opportunities, higher margins, and longer-term, stickier contracts for large, diversified, oilfield service companies that can offer a full suite of products.
If You Believe in Shale, You Gotta Love Rail
26-Mar-14 We turn our attention to the Natural Gas Value Chain, and the broader, long term impact of sustainably low natural gas prices.
Exploration and Production - Marcellus Shale: Inside the Numbers
12-Mar-14 Analysis of Unconventional Marcellus Shale production data in Pennsylvania suggests that the ‘rate of change’ continues to improve albeit at a slower pace than in recent history.
CS Conference Call: The Shale Revolution - Why it Still Matters
25-Feb-14
In N.A., efficiencies driving costs lower, recoveries are still improving. focus remains on the core of the key shale plays; shale is most impactful to GAS and NGL markets; shale oil won’t derail global oil markets for some time; global shale will take longer to be meaningful.
Energy in 2014 – Resilience 18-Dec-13 Shale efficiency and recovery are still improving for E&Ps with low-cost rocks in the right zip code. We continue to believe the low-cost shale E&Ps have upside.
Solar demand has traditionally been supported by subsidies. Demand growth in the 2000s
was mainly supported by a feed-in-tariff (FiT) structure in Europe. This decade, we believe
regulatory growth will be supported to an extent by FiT in China and Japan, Investment
Tax Credits (ITC) and Renewable Portfolio Standards (RPS) in the US, reverse auction–
based subsidies in India, and similar programmes in other countries. Cost
competitiveness, discussed below, should help to reduce reliance on these incentives and
provide reasonable returns to solar project developers.
■ US: Demand in the US is mainly supported by a 30% ITC on the installation price of
the solar system. The tax credit will decline to 10% starting in 2017. In addition, most of
the states require utilities to source a portion of their electricity from renewables. The
US installed 4.75GW of solar in 2013 and has a cumulative installed base of 11.8GW.
Based on the various state RPS mandates, we calculate incremental solar demand of
~34GW if solar meets 20% of the renewable mix (remainder mainly wind) and 85GW if
the solar/wind mix is 50%.
■ China: Starting in July 2013, the central government issued policies specifying
subsidies, on-grid tariffs, provincial quotas, and execution details, which removed
uncertainties, clarified returns and simplified solar project initiations. In March 2014, the
NDRC set the 2017 installed solar capacity target at 70GW, suggesting additions of
12.7GW per year in 2014-17. The government also set an Rmb0.9-1.0/kWh feed-in
tariff for utility-scale solar farms and an Rmb0.42/kWh subsidy on top of the normal
tariff for DG solar projects in 2014. We expect the government to review and potentially
reduce FiT on an annual basis as installation cost declines.
■ Japan: The FiT for solar was first re-introduced in the Renewable Energy Act in July
2012 primarily to decrease the country's dependence on fuel imports. The FiT is
designed to decline every year and offers ~JPY32-37/kWh in the current financial year
(ending March). Recent widespread media reports suggest that the government may
cap renewable volumes, or reduce FiT for higher volumes, or revise FiT more than
once a year to curb strong growth in renewables. The FiT is now passed on as a
renewable surcharge to all electric customers.
Driver #2: Cost-competitiveness spurring demand
We view the demand growth as particularly healthy, not only because of the relative
geographical diversity but because of the balanced reliance on subsidies. Solar is now a
more cost-competitive resource in many markets (see Figure 124) – both utility scale and
distributed generation (ie rooftop residential). All else being equal, this should reduce
resistance to overturning renewable targets, in addition to encouraging new policy
measures to adopt solar as the cost burden for ratepayers/governments becomes less
onerous. Levelized cost of energy (LCOE) for a US-based utility project has declined from
$200/MWh in 2011 to $80/MWh today (includes 30% ITC with 5.5hrs of average daily
sunshine, see Figure 126). Meanwhile solar demand in the US has seen a CAGR of 71%
to 4,751MW in 2013 from 949MW in 2014.
29 September 2014
Global Equity Themes 83
Figure 124: Levelized Cost of Electricity (LCOE) comparison of generation technologies
Solar Thermal
Nuclear
Geothermal
Fuel cell DG
Coal
Solar PV (Thin Film)
Solar PV (Crystalline)
Wind
Nat Gas
LED
0 25 50 75 100 125 150 175 200 225 250
$/MWh
Consumer retail rates range from $70/MWh to $340/MWh
Source: Company data, Credit Suisse estimates Note: Solar PV, thin film, thermal and fuel cell includes 30% investment tax credit (US). Solar PV installation cost of $2/watt, natural gas at $4.5/MMBtu. No production tax credit assumed for new wind/geothermal projects.
Figure 125: Lower cost of solar power makes it competitive in many markets
$ (0.13)
$ (0.09)
$ (0.08)
$ (0.06)
$ (0.05)
$ (0.04)
$ (0.02)
$ (0.02)
$ 0.01
$ 0.01
$ 0.03
$ 0.04
$ 0.05
$ 0.05
$ 0.08
$ 0.09
$ 0.10
$ 0.12
$ 0.16
$ 0.16
$ 0.30
Russia
Canada
China
South Korea
Saudi Arabia
India
Turkey
US
UK
Taiwan
Japan
France
Brazil
South Africa
Iran
Mexico
Italy
Chile
Germany
Spain
Australia
DG saving over residential retail rate, $/kWh
$ (0.10)
$ (0.09)
$ (0.04)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.01)
$ (0.01)
$ 0.01
$ 0.01
$ 0.02
$ 0.02
$ 0.03
$ 0.05
$ 0.05
$ 0.05
$ 0.05
$ 0.06
$ 0.08
$ 0.08
Russia
Canada
US
UK
Mexico
Iran
Saudi Arabia
Germany
France
Turkey
Italy
Spain
Brazil
South Africa
Japan
South Korea
China
Taiwan
Australia
India
Chile
Utility Solar savings over natural gas, $/kWh
Source: Company data, Credit Suisse estimates Note: LCOE base case assumes WACC of 6%, no subsidies, Solar installation cost of $3/watt for DG and $2/watt for utility scale
forward: The principal driver for the panel ASP reduction has been the decline in the
cost of polysilicon (see Figure 126), and to a lesser extent, increased cell efficiencies
29 September 2014
Global Equity Themes 84
and compression in manufacturing margins. Polysilicon prices fell from >$300/kg in
2008 (~$2/watt) to $16-18/kg ($0.09/watt) in 2013, enabling the majority of the cost
reductions in solar module pricing. Module pricing has stabilized at $0.54-0.75/watt
today, depending on the market. Certain markets have premium pricing, such as Japan
(which has started to correct towards the global price), Europe (following a price floor
trade agreement reached of €53c/watt) and the US (following anti-dumping and
countervailing duty against Chinese panels with ASPs of ~$0.74/watt), but certain
markets, particularly China, have had low pricing (in the low ~$0.54/watt) which is
starting to normalize due to tightening supply. We expect prices to remain at these
levels in the short term, and decline further in the long term as companies lower their
non-silicon costs.
Figure 126: Panel prices have declined nearly 85% over 5 years
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Silicon $/W Non-Si cost $/W Margin $/W
LCOE ~20c/kWH
LCOE ~9c/kWH
LCOE ~8c/kWH
Source: Company data, PV Insight, PV Energy Trend, Credit Suisse NOTE: LCOE for a utility scale project includes BOS cost, 30% ITC with 5.5hrs of average daily sunshine
■ Distributed generation a bright spot for growth: The cost-competitiveness of solar
power is particularly evident in the distributed generation market where solar power
competes with higher retail prices of electricity. According to the latest EIA and
SEIA/GTM data, the US residential market grew 58% y/y in 2013. More than 360,000
homes in the US now have rooftop solar which equates to >2.3 GW of capacity.
Distributed rooftop solar has grown at a ~40% CAGR for the last 4 years yet still
represents less than 0.6% of rooftops. Reaching a 10% penetration level in the US
implies a CAGR of >13% through the next decade (or >50% CAGR if reached in 5
years). First-mover states have already demonstrated these penetration levels could
be obtainable: 13.4% of residential rooftops in Hawaii have solar, California is
approaching 2.2% penetration.
29 September 2014
Global Equity Themes 85
Figure 127: Decline in system costs should open up new markets
China
US
Japan
India
Germany
Canada
France
Brazil
South Korea
UK
Spain
Italy
Mexico
South Africa
Saudi Arabia
Iran
Taiwan
Turkey
Chile
$ -
$ 0.05
$ 0.10
$ 0.15
$ 0.20
$ 0.25
$ 0.30
$ 0.35
$ 0.40
3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0
Res
iden
tial r
etai
l tar
iff/L
CO
E $
/kW
h
Average Daily Sunshine hours
$1.5/W $2.0/W $2.5/W $3.0/W $3.5/W $4.0/W
Source: Company data, Credit Suisse estimates
Note: LCOE base case assumes WACC of 6%, no subsidies, Solar installation cost of $3/watt for DG
Driver #3: Access to lower cost of capital accelerating cost-competitiveness
Emergence of financing vehicles in 2014 will likely increase cost-competiveness of
solar further and increase value capture for developers
Solar project developers typically develop projects and sell them to private investors which
often demand returns in the 7-9% range, partially due to the tax attributes and partially due
to friction in single-project transactions.
Solar developers are looking at tapping new forms of lower-cost capital, including
launching YieldCos (C-corps paying a dividend to take advantage of the disconnect
between private project capital and the public market's yield appetite) and asset backed
securities (ABS), further increasing shareholder value capture and unlocking new markets.
Recent financial innovations in the solar sector include (i) SolarCity – initiated the first ever
solar asset backed security with a 4.8% interest rate in November 2013, followed by
4.59% in April and 4.32% in July 2014 (ii) Hannon Armstrong – launched a renewable
asset REIT, (iii) NRG Yield (NYLD) – launched a YieldCo by combining renewable assets
with conventional generation assets to take advantage of the tax benefits, (iv) Abengoa
yield (ABY) launched by combining transmission and renewable generation assets, and (v)
NextEra (NEE) launched a YieldCo – NextEra Partners (NEP) by combining wind and
solar generation assets, and (vi) SunEdison successfully launched their TerraForm
(TERP) yield vehicle that currently trades at a 3% dividend yield (and ~6% on 2016).
29 September 2014
Global Equity Themes 86
Figure 128: Low-cost financing can expand available markets (or increase value-capture for developers)
China
US
Japan
India
Germany
Canada
France
Brazil
South Korea
UK
Spain
Italy
Mexico
South Africa
Saudi Arabia
Iran
Taiwan
Turkey
Chile
$ 0.05
$ 0.10
$ 0.15
$ 0.20
$ 0.25
$ 0.30
$ 0.35
3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0
Res
iden
tial r
etai
l tar
iff/L
CO
E $
/kW
h
Average Daily Sunshine Hours
3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
Source: Company data, Credit Suisse estimates Note: Installation cost of $3.0/watt, 25 year life; TAM represents total accessible market of annual energy payments for residential electric customers in $bb and TWh
If solar project developers were to lower the LCOE by roughly 2c/kWh to an average of
13c/kWh due to a 200bps improvement in WACC (at the same price per Watt), the market
opportunity for distributed generation in the US (pegged against retail rates) could
increase roughly 50% to about $90bb per year, according to US EIA data.
Figure 129: Lower Cost of Capital can Reduce Solar PPA rates and Increase Solar TAM
US utilities' retail TWh Solar PPA rate c/kWh US utilities' retail revenue Solar PPA rate c/kWh
above solar rates 13 15 17 above solar rates 13 15 17
As first highlighted in our deep-dive reports on Fast Data (see The Need for Speed) and
Big Data (see Does Size Matter Only?), we believe there is a data revolution under way in
the business intelligence/analytics/data warehouse environment. Specifically, changing
business requirements have placed demands on data warehousing technology to do more
things faster and to extract value from more types of data that organizations collect outside
of traditional transactional systems.
Enterprise IT departments are having to deal with two contradictory forces: (1) the volume
and complexity of the types of data are continuously increasing (i.e., Big Data), while (2)
the processing of data into usable business analytics needs to be more real time to react
to fast-changing business needs (i.e., Fast Data).6
Owing to the two aforementioned contradictory pressures on IT departments, we expect
that the lines between Fast Data and Big Data will begin to blur into a new category that
we are referring to as Big Fast Data (BFD). Specifically, we expect enterprises to
supplement data warehouses to support MapReduce in order to optimize for larger and
more diverse datasets, while new data architectures will enhance real-time analytics for
complex models (i.e., rapid cross-correlation between different types of unstructured and
structured data).
Figure 134: Next Evolutions of Business Intelligence (BI), Business Analytics, and Data Warehousing
Data Management
Initial processing and standards
Data integration
Reporting
Standardized business processes
Evaluation criteria
Data Analysis
Focus less on what happened and more on why it happened
Drill-downs in an OLAP environment
Modeling & Predicting
Leverage information for predictive purposes
Utilize advanced data mining and the predictive power of algorithms
“Fast Data”
Information must be real-time
Query response times in seconds to accommodate real-time, operational decision-making
Agility to create temporary analytics in an end-user driven, scalable environment
The line between data warehousing and CEP blurs
“Big Fast Data (BFD)”
Structured and multi-structured data must be extremely up to date and query response times must be measured in seconds
More operational decisions become executed with pattern-based, event-driven triggers to initiate automated decision processes
The lines between data warehousing, CEP, and “Big Data” blur with seamless integration of historical, operational, and predictive data analytics in real-time at massive scale
Complex Event Processing
Analyze streams of data, identify significant events, and alert other systems
“Big Data”
Leverage large volumes of multi-structured data for advanced data mining and predictive purposes
Figure 141: The Big Bang of Data – Relevant research
Report Date Highlight
The Next Big Thing: The Next Big Thing - Wearables Are In Fashion
17-May-13 Primer: Wearables Are In Fashion - We are at a potential inflection point in market adoption for wearable technology.
Does Size Matter Only?: Big Data’s Complexity + Fast Data = Dynamic Data
18-Oct-11 Primer: We view MapReduce and Hadoop as opening up new data analytics scenarios that were previously not achievable or economically practical.
The Need for Speed: The Next "Killer Apps"
30-Mar-11 Primer: The enterprise IT industry is approaching another tectonic shift that will drive a new breed of “killer apps” is the merging of columnar databases and in-memory computing.
Feeling G(rowth)-Forces: It's Time to Get Back into High-Growth Software
12-June-14 We recommend investors begin to re-accumulate stock in the high-growth software sector. We believe that the high-growth software universe is bottoming, as EV/Revenue multiples have generally fallen in line to historical levels.
MU: Big Data Drives Even Bigger DRAM
10-June-14 We see ecosystem dynamics around Big Data which is setting the foundation for significant upside to Enterprise DRAM demand.
Data Deposition - DAC 2014: More Signs of Moore’s Stress
8-June-14 SNPS and Imagination indicated that IoT (energy, Healthcare and agriculture), Wearables, Automotive and Big Data are the expected to be the growth drivers for Semiconductor industry.
Semiconductors: Semis 2014 Outlook : Data Growth, the Best Product Cycle
14-Jan-14 The most important unifying product cycle in our opinion is Data Growth – it is perhaps the only demand curve in all of Tech that we are certain investors are underestimating.
Software Decoded 2014 6-Jan-14 We expect the expanded capabilities of Hunk, Hadoop Connect, and DB Connect to result in even more spending on Splunk, as users extend their use of the Splunk platform to include Big Data-related tasks.
A Hunk-y, Splunk-y Platform = BFD 26-Nov-13 We believe that the Splunk platform is uniquely positioned to emerge as a key, next-generation unified data platform real-time and batch data analytics.
Agencies: Managing the digital transition
18-Sep-13 There's upside for the Agencies to tap into new, incremental CIO/CTO budgets, e.g. in eCommerce, Big Data.
DATA: Big DATA, But Big Valuation Too
11-June-13 The potential for increased adoption of business intelligence solutions offers a sizeable opportunity to meaningfully to increase its market.
SAP: HANA's Bringing Sexy Back to Database
8-Apr-13 We view SAP HANA as the most disruptive product to database market share since SQL Server’s emergence in the 1990s.
■ EMR – the company is 'cleaning up' its non-core assets (embedded computing &
power, power transmission, potentially parts of Commercial & Resi Solutions), while
Industrial Automation is enjoying a cyclical recovery, and Process is winning market
share.
29 September 2014
Global Equity Themes 108
■ Siemens – the stock should benefit from improving short-cycle momentum, on-going
buyback support, cost savings execution and potential for further portfolio alignment.
■ Fanuc - Investors had harboured concerns over structural problems in the RoboDrill
business until the beginning of 2014, but the market now appears concerned over the
risk of falling orders after the sharp recovery in RoboDrill We view the current price as
effective for accumulating on weakness ahead of a pick-up in machine tool orders
from June and the release of positive 1Q results in late July.
■ Hollysys - We think HOLI will continue to grow in FY15 on the back of: (1) strong
government capex on railway equipment and rapid construction of high-speed rail and
inter-city lines, and (2) gradual market share expansion in the industrial automation
segment, thanks to its growing track record and government support to Chinese
suppliers. We expect subway CBTC and track circuit new products to add to growth in
FY15 and FY16.
■ Teco – Automation sales are expected to see strong growth this year, helped by share
gains in China, while motors demand in the US is improving. Wind power may also
become a new earnings contributor by year-end.
Some of the characteristics we favour are as follows:
■ Companies with industrial robotics exposure (such as ABB, Fanuc, and Yaskawa)
given the growth rates we expect in Chinese robot installations;
■ Companies with a strong software footprint in industrial automation (such as Siemens,
and Schneider), as this is likely to be a higher growth part of the spend within a
factory, given the emergence of Big Data, and its impact on the manufacturing sector;
■ Emerging Asian companies who are taking market share (Airtac, Teco, Hiwin,
Hollysys);
■ Process instrument manufacturers (Emerson, Rotork).
Credit Suisse has a Delta One Basket on the Automation theme: CSERATMN (Bloomberg
<GO>).
Figure 158: Performance of the Delta One Automation
basket since inception
Figure 159: Relative performance of the Delta One
Automation basket since inception
90
100
110
120
130
140
150
Nov 12 Feb 13 Jun 13 Oct 13 Jan 14 May 14 Aug 14
CSERATMN Index MXWO INDEX
95
100
105
110
115
120
Nov 12 Feb 13 Jun 13 Oct 13 Jan 14 May 14 Aug 14
CSERATMN Index relative to MXWO INDEX
Past performance should not be taken as an indication or guarantee
of future performance
Source: Thomson Reuters, Credit Suisse estimates
Past performance should not be taken as an indication or guarantee
of future performance
Source: Thomson Reuters, Credit Suisse estimates
29 September 2014
Global Equity Themes 109
We show below the major industrial automation plays globally.
Figure 160: Stocks exposed to the industrial automation theme
Beneficiaries
Company Ticker Rating Region Exposure to
the theme
Explanation
Emerson EMR O/P US High Process instrumentation global leader
Rockwell
Automation
ROK N US High Top 3 global player in discrete automation
Siemens SIEGn.DE O/P Europe High Global market leader in discrete automation with the broadest product ranger
Schneider SCHN.PA N Europe High Global player in discrete and process automation
Rotork ROR.L N Europe/UK High Strong position in process and industrial controls
Fanuc 6954 N Japan High Robot and CNC equipment for machine tools
Yaskawa 6506 N Japan High Robot and Servo motor with invertor
SMC 6273 O/P Japan High Pneumatic equipment for Automation e.g. robot hands
THK 6481 O/P Japan High Linear motion guide and parts for robots
Hollysys HOLI O/P China High Leading Chinese automation & control provider; strong in rail
ABB ABBN.VX O/P Europe High Strong presence in industrial robotics
Airtac 1590.TW N Asia Pac Medium Pneumatic products for equipment
Teco 1504.TW O/P Asia Pac Medium Large motor and servo motor with invertor
Hiwin 2049.TW N Asia Pac Medium Linear motion products for machine tools and automation equipment
Source: Credit Suisse research
Figure 161: Automation – the second wave – Relevant research
Report Date Highlight
Global Industrial Automation – The Next Growth Phase
14-Aug-12 Primer: We explain why we think the industrial automation market is an attractive long-term investment opportunity, identify key trends, and provide an overview of key products, technologies, and vendors.
Industry Software Deep-Dive 15-Jul-13 Primer: Our core thesis is that traditional IA vendors should focus their capital and attention on software.
Additive Manufacturing 17-Sep-13 Primer: We launch coverage of three 3D printing companies; DDD, SSYS, XONE. Our main conclusion is that additive manufacturing revenue growth could potentially exceed consensus forecasts for ~20% annual sales growth in the coming years.
Advanced manufacturing - IMTS: ROK-Fanuc Controls Alliance; Asimov's First Law; Mobile Manipulation
12-Sep-14
There are a number of interesting themes evident in manufacturing technology ("convergence," integration, ease-of-use, mobile manipulation, collaborative robotics, additive manufacturing), which are driving customer spending, and strategic shifts by automation vendors.
Additive Manufacturing: GE and the rise of 3D metal production
25-Jul-14
3D stocks implications: GE had multiple SSYS and DDD plastic printing machines, using materials manufactured by those OEMs; given the high margins associated with materials, we are encouraged to see industrial customer use of OE materials in a high utilization environment.
ABB: PA to improve; Low Voltage fairly valued?
21-Jul-14 We continue to believe that ABB currently offers the most attractive investment case over the next 12m in European Electricals.
Hannover Automation Fair - Software and data analytics on the rise; Industry 4.0
11-Apr-14 Data analytics was the dominant theme at this year's Automation Fair. All companies that we met with were more positive on current demand conditions than they were at last year's fair.
Additive Manufacturing 21-Jan-14 We focus on the 3D printing pro-sumer, consumer, and education-type end markets which we now estimate are a ~$800m annual revenue opportunity in 2016.
EE/MI 2014 Outlook 1-Jun-14 Themes we highlight for 2014: Industrial Automation convergence will accelerate; Increased competition in 3D printing /additive manufacturing.
European Capital Goods Sector Outlook 2014
Dec-13 ABB and Siemens balance sheet re-leveraging potential, focus in automation acquisitions.
Process Automation Market: Intensifying Competition Underway
22-Nov-13
Our Global Capital Goods team finds that the Process Automation (PA) industry's strong top-line outlook is attracting numerous other players, particularly in the petrochemical / oil & gas sector. They consider further consequences of a "convergence" trend.
Appendix Figure 162: Selected thematic reports published
Report Date Highlight
The Shale Revolution 13-Dec-12
• This report leverages the expertise of over 40 research strategists and analysts and paints a
clear geographic and sector picture of the shale phenomenon, uncovering significant
investment opportunities globally.
The Shale Revolution II 1-Oct-13• We draw on the insights of over 50 global equity analysts, economists and strategists to
revisit the key investment theme of the shale revolution and chart new developments.
Global Industrial Automation – The Next
Growth Phase14-Aug-12
• We explain why we think the industrial automation market is an attractive long-term investment
opportunity, identify key trends, and provide an overview of key products, technologies, and
vendors.
Industry Software Deep-Dive 15-Jul-13• Our core thesis is that traditional IA vendors should focus their capital and attention on
software.
Additive Manufacturing 17-Sep-13• We launch coverage of three 3D printing companies; DDD, SSYS, XONE. Our main conclusion
is that additive manufacturing revenue growth could potentially exceed consensus forecasts for
~20% annual sales growth in the coming years.
Themes in Energy Efficiency 3-April-14• As part of our global energy efficiency research, this report reviews building energy
efficiency challenges and investment opportunities.
Sugar: Consumption at a crossroads 11-Sep-13• In the long term we see lower demand growth for sugar and high-fructose corn syrup (HFCS)
and potentially a decline in consumption.
Does Size Matter Only? 18-Oct-11• We view MapReduce and Hadoop as opening up new data analytics scenarios that were
previously not achievable or economically practical.
The Need for Speed 30-Mar-11• The enterprise IT industry is approaching another tectonic shift that will drive a new breed of
“killer apps” is the merging of columnar databases and in-memory computing.
Smartphones – A Lasting Disruptive
Force11-Jul-13
• We summarize the key stats, drivers, the competitive situation, and ultimately the lasting
disruption that has come with the rise of today's smartphone.
Technology – The Next Big Thing 17-May-13• Wearables are in fashion and we are at a potential inflection point in market adoption for
wearable technology
ESG Investing Themes 11-Oct-12
• A focus on social responsibility and sustainability has become a key focus of portfolio
construction and style analysis – both implicitly and explicitly. A key question is whether
incremental return is added from such strategies.
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 111
Companies Mentioned (Price as of 22-Sep-2014)
Harum Energy (HRUM.JK, Rp2,105) 3D Systems (DDD.N, $47.83) 3Legs Resources (3LEG.L, 16.375p) ABB (ABBN.VX, SFr21.58) ABM Investama (ABMM.JK, Rp2,700) AIA Group (1299.HK, HK$41.6) ARC Resources Ltd. (ARX.TO, C$29.7) ARCADIS (ARDS.AS, €26.56) AT&T (T.N, $35.5) AVEVA (AVV.L, 1574.0p) Abengoa Yield (ABY.OQ, $36.3) Access Midstream Partners, LP (ACMP.N, $63.61) Adaro Energy (ADRO.JK, Rp1,255) Airtac (1590.TW, NT$262.5) Alfa Laval (ALFA.ST, Skr152.4) Altera Corp. (ALTR.OQ, $36.08) Amazon com Inc. (AMZN.OQ, $324.5) Anadarko Petroleum Corp. (APC.N, $103.54) Andritz AG (ANDR.VI, €42.97) Anritsu (6754.T, ¥909) Anton Oilfield Services Group (3337.HK, HK$2.98) Apollo Hospitals Enterprise (APLH.NS, Rs1142.6) Apple Inc (AAPL.OQ, $101.06) Arch Coal, Inc. (ACI.N, $2.43) Arista Networks (ANET.N, $83.84) Asahi Kasei (3407.T, ¥918) Aspen Pharmacare Holdings Ltd (APNJ.J, R329.0) Aspen Technology (AZPN.OQ, $38.74) AstraZeneca (AZN.L, 4577.5p) Athlon Energy Inc. (ATHL.N, $44.29) Autodesk Inc. (ADSK.OQ, $54.88) Avago Technologies Ltd. (AVGO.OQ, $87.18) BHP Billiton (BHP.AX, A$34.86) BYD Co Ltd (1211.HK, HK$51.55) Baidu Inc (BIDU.OQ, $214.86) Baker Hughes Inc. (BHI.N, $66.15) Baytex Energy Corp. (BTE.TO, C$42.41) Beach Energy (BPT.AX, A$1.48) Beijing Capital Co., Ltd (600008.SS, Rmb7.62) Beijing Enterprises Water Group Limited (0371.HK, HK$5.35) BioAmber Inc. (BIOA.N, $10.75) Boeing (BA.N, $128.61) Bristol Myers Squibb Co. (BMY.N, $51.67) British Sky Broadcasting (BSY.L, 888.0p) Broadcom Corp. (BRCM.OQ, $40.28) Bumrungrad Hospital Pcl (BH.BK, Bt129.5) Buru Energy (BRU.AX, A$0.77) CF Industries Holding Inc. (CF.N, $255.78) CIMC Enric (3899.HK, HK$8.17) CNOOC Ltd (0883.HK, HK$14.1) CONCHO RESOURCES, INC. (CXO.N, $126.63) Cameron International Corp. (CAM.N, $69.36) Canadian Natural Resources Limited (CNQ.TO, C$43.56) Canadian Pacific Railways (CP.N, $202.98) Carrizo Oil & Gas Inc. (CRZO.OQ, $54.98) Caterpillar Inc. (CAT.N, $100.9) Celladon (CLDN.OQ, $10.08) Centrica (CNA.L, 320.0p) Check Point Software Technologies Ltd. (CHKP.OQ, $69.79) Chevron Corp. (CVX.N, $123.49) China Coal Energy Co. (1898.HK, HK$4.48) China Everbright (0165.HK, HK$15.18) China Everbright International Ltd (0257.HK, HK$10.74) China Pacific (601601.SS, Rmb18.79) China Petroleum & Chemical Corporation - H (0386.HK, HK$6.89) China Singyes Solar Technologies Holdings Limited (0750.HK, HK$13.84) Chubu Electric Power (9502.T, ¥1,265) Cimarex Energy Co. (XEC.N, $127.8) Cisco Systems Inc. (CSCO.OQ, $24.97) Clean Enrgy Fuel (CLNE.OQ, $8.33) Coloplast B (COLOb.CO, Dkr489.5) ConocoPhillips (COP.N, $79.68) Continental (CONG.DE, €159.7) Continental Resources Inc. (CLR.N, $67.44) Ctrip.com International (CTRP.OQ, $59.95) Cummins Inc. (CMI.N, $136.04) DELPHI Automotive PLC (DLPH.N, $65.01) DMG Mori Seiki (6141.T, ¥1,406) Daikin Industries (6367.T, ¥6,991) Danaher Corporation (DHR.N, $78.16) Dassault Systemes (DAST.PA, €52.57)
Denso (6902.T, ¥4,902) Deutsche Post DHL (DPWGn.DE, €26.09) Devon Energy Corp (DVN.N, $69.98) Diamond Offshore Drilling, Inc (DO.N, $37.29) Diamondback Energy, Inc. (FANG.OQ, $73.46) Dominion Resources (D.N, $68.3) Dongfang Elec (600875.SS, Rmb12.94) Dongjiang Environmental Company Limited (0895.HK, HK$32.9) Dow Chemical Company (DOW.N, $52.86) Drillsearch (DLS.AX, A$1.31) E-commerce China Dangdang Inc. (DANG.N, $12.31) EOG Resources (EOG.N, $101.74) Eastman Chemical (EMN.N, $83.83) Eli Lilly & Co. (LLY.N, $66.08) Emerson (EMR.N, $64.25) Enbridge Inc. (ENB.TO, C$55.61) Encana Corp. (ECA.N, $21.32) Energy Recovery Inc. (ERII.OQ, $3.89) Energy Transfer Equity, LP (ETE.N, $60.8) Enterprise Products Partners, LP (EPD.N, $40.31) Epistar Corporation (2448.TW, NT$56.8) Essilor (ESSI.PA, €87.46) ExOne (XONE.OQ, $25.74) Experian (EXPN.L, 1037.0p) ExxonMobil Corporation (XOM.N, $96.54) FOREPI (3061.TW, NT$16.15) Facebook Inc. (FB.OQ, $76.8) Fanuc (6954.T, ¥19,265) Faroe Petroleum (FPM.L, 109.75p) First Solar (FSLR.OQ, $67.17) Flowserve Corp. (FLS.N, $72.95) Fluor (FLR.N, $68.54) Formosa Plastics (1301.TW, NT$73.5) Fortis Health (FOHE.NS, Rs123.3) Freescale Semiconductor Inc. (FSL.N, $21.61) Fresenius Medical Care AG & Co. (FMEG.DE, €54.25) General Electric (GE.N, $26.08) Global Logistic Properties (GLPL.SI, S$2.78) Google (GOOG.OQ, $587.37) Google, Inc. (GOOGL.OQ, $597.27) Guangdong Investment Limited (0270.HK, HK$8.92) Gulfport Energy (GPOR.OQ, $54.51) Haier Electronics Group Co., Ltd. (1169.HK, HK$21.0) Halliburton (HAL.N, $64.68) Halma (HLMA.L, 622.0p) HanKore Envrnmnt (HETG.SI, S$0.805) Hannon Armstrong (HASI.N, $14.07) Harbin Electric Company Limited (1133.HK, HK$4.56) Hexagon AB (HEXAb.ST, Skr235.4) Hikma Pharmaceuticals Plc (HIK.L, 1663.0p) Hilong Holdings Ltd (1623.HK, HK$3.8) Hiwin (2049.TW, NT$280.0) Hollysys Automation Technologies Ltd. (HOLI.OQ, $22.03) Honeywell International Inc. (HON.N, $94.7) Honghua Group Ltd (0196.HK, HK$1.88) Hyundai Wia Corp. (011210.KS, W225,000) IGas Energy (IGAS.L, 92.25p) IHH Healthcare (IHHH.KL, RM5.0) IMI Plc (IMI.L, 1323.0p) INPEX Corporation (1605.T, ¥1,529) ITT (ITT.N, $46.76) ITV (ITV.L, 212.3p) Indika Energy (INDY.JK, Rp780) Infineon Technologies AG (IFXGn.DE, €8.8) Informatica (INFA.OQ, $33.1) Intel Corp. (INTC.OQ, $34.71) International Business Machines Corp. (IBM.N, $193.11) Intouch Limited (INTUCH.BK, Bt70.75) Itron (ITRI.OQ, $40.04) JB Hunt Transport Services (JBHT.OQ, $73.63) JGC Corporation (1963.T, ¥2,942) Japan Airlines (9201.T, ¥5,880) Jinko Solar (JKS.N, $30.21) Juniper Networks (JNPR.N, $22.6) KBR Inc. (KBR.N, $20.1) KPJ Healthcare Bhd (KPJH.KL, RM3.85) Kansas City Southern (KSU.N, $119.66) Kao (4452.T, ¥4,210) Keihin (7251.T, ¥1,526) Keyence (6861.T, ¥46,790) Kinder Morgan, Inc. (KMI.N, $37.5) Korea Gas Corp (036460.KS, W55,200)
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Global Equity Themes 112
Kuka (KU2G.DE, €48.4) L'Oreal (OREP.PA, €126.05) Legrand SA (LEGD.PA, €43.32) LinkedIn (LNKD.N, $206.89) Luxfer (LXFR.N, $16.78) LyondellBasell Industries (LYB.N, $112.61) Marathon Oil Corp (MRO.N, $38.71) MarkWest Energy Partners, LP (MWE.N, $77.43) Maruti Suzuki (MRTI.NS, Rs3066.2) Marvell Technology Group Ltd. (MRVL.OQ, $13.57) MasterCard Inc. (MA.N, $76.16) Mediclinic International (MDCJ.J, R93.61) Mellanox Technologies Ltd. (MLNX.OQ, $42.06) Merck & Co., Inc. (MRK.N, $60.58) Merck KGaA (MRCG.DE, €72.63) Merida Industry Co Ltd (9914.TW, NT$208.0) Microchip Technology Inc. (MCHP.OQ, $48.0) Micron Technology Inc. (MU.OQ, $30.6) Micros Syst (MCRS.OQ, $67.99) Microsoft Corporation (MSFT.OQ, $47.06)
Mitsubishi Corp (8058.T, ¥2,332) Mitsubishi Heavy Industries (7011.T, ¥711) Molopo Australia (MPO.AX, A$0.145) Moneysupermarket.com (MONY.L, 198.0p) Motorola Solutions (MSI.N, $61.68) Mylan Inc. (MYL.OQ, $46.53) NRG Yield, Inc (NYLD.N, $49.07) NXP Semiconductors N.V. (NXPI.OQ, $70.8) Naspers (NPNJn.J, R1299.0) Netcare Limited (NTCJ.J, R32.89) Netflix, Inc. (NFLX.OQ, $442.78) New Oriental Education (EDU.N, $21.93) News Corporation (NWS.AX, A$18.75) NextEra Energy Inc. (NEE.N, $94.62) NextEra Energy Partners, LP (NEP.N, $35.2) Nextera (NXRA.PK, $1.0E-4) Nobel Biocare (NOBN.S, SFr17.0) Noble Energy (NBL.N, $70.36) Novartis (NOVN.VX, SFr88.25) Novo Nordisk A/S (NOVOb.CO, Dkr279.8) Nucor Corporation (NUE.N, $56.96) Nuverra Environmental Solutions (NES.N, $14.92) Omron (6645.T, ¥4,780) Ono Pharmaceutical (4528.T, ¥9,600) Oracle Corporation (ORCL.N, $39.58) Osaka Gas (9532.T, ¥446) Oversea-Chinese Banking Corporation (OCBC.SI, S$9.72) PDC Energy (PDCE.OQ, $53.38) PTC (PTC.OQ, $37.33) Palo Alto Networks (PANW.N, $97.93) Peabody Energy Corp (BTU.N, $12.65) Penn Virginia Corp (PVA.N, $11.69) Pentair PLC (PNR.N, $67.07) Perusahaan Gas Negara (PGAS.JK, Rp6,050) PetroChina (0857.HK, HK$10.26) Pfizer (PFE.N, $30.18) Phillips 66 (PSX.N, $83.84) PhosAgro (PHOR.MM, Rbl1347.0) Ping An (2318.HK, HK$60.8) Pioneer Natural Resources (PXD.N, $195.91) Plains All American Pipeline, LP (PAA.N, $58.01) Priceline.com (PCLN.OQ, $1165.79) Proofpoint (PFPT.OQ, $38.45) Prudential (PRU.L, 1414.0p) Qinghai Potash (000792.SZ, Rmb17.36) Raffles Medical Group (RAFG.SI, S$3.96) Range Resources (RRC.N, $70.25) Renishaw (RSW.L, 1666.0p) Roche (ROG.VX, SFr283.2) Rockwell Automation (ROK.N, $115.0) Rolls-Royce (RR.L, 1003.0p) Rosetta Resources Inc. (ROSE.OQ, $44.2) Rotork plc (ROR.L, 2812.0p) Royal Dutch Shell plc (RDSa.L, 2400.5p) SAP (SAPG.F, €58.0) SIIC Environment Holdings (SIIC.SI, S$0.18) SMC (6273.T, ¥29,710) SPT Energy (1251.HK, HK$3.44)
Sage Group (SGE.L, 377.0p) Salesforce.com Inc. (CRM.N, $57.32) Samsung Electronics (005930.KS, W1,188,000) San Leon (SLEN.L, 2.3p) SanDisk Corp. (SNDK.OQ, $98.78) Sanofi (SASY.PA, €88.87) Santos Ltd (STO.AX, A$14.23) Schlumberger (SLB.N, $101.72) Schneider Electric (SCHN.PA, €62.11) Senex Energy Limited (SXY.AX, A$0.58) Shimano (7309.T, ¥12,780) Siemens (SIEGn.DE, €95.97) Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK, HK$6.02) Siloam International Hospitals (SILO.JK, Rp15,825) Smith & Nephew (SN.L, 1068.0p) SolarCity (SCTY.OQ, $60.84) Sonova Holding (SOON.VX, SFr150.7) Sony (6758.T, ¥1,896) Sound Global Co. Ltd (0967.HK, HK$8.15) Splunk (SPLK.OQ, $54.59)
Stratasys (SSYS.OQ, $122.37) Straumann (STMN.S, SFr215.9) Suez Environnement (SEVI.PA, €13.47) Sun Pharmaceuticals Industries Limited (SUN.BO, Rs797.35) SunEdison Inc. (SUNE.N, $19.5) SunPower Corp. (SPWR.OQ, $34.92) Superior Energy Services, Inc. (SPN.N, $32.84) TAG Oil Ltd. (TAO.TO, C$1.82) TAL Education Group (XRS.N, $34.59) THK (6481.T, ¥2,751) TRG Pakistan (TRGP.KA, PRs11.21) Tableau Software, Inc. (DATA.N, $72.07) Tambang Batubara Bukit Asam (PTBA.JK, Rp12,825) Teco (1504.TW, NT$34.8) Tenaris (TENR.MI, €17.86) Tencent Holdings (0700.HK, HK$121.1) Teradyne Inc. (TER.N, $20.16) Tesla Motors Inc. (TSLA.OQ, $250.03) Tianjin Capital Environmental Protection (1065.HK, HK$5.74) Time Warner, Inc (TWX.N, $75.67) Tokyo Gas (9531.T, ¥622) Total (TOTF.PA, €50.13) TransAlta Corporation (TA.TO, C$12.02) TransCanada Corp. (TRP.TO, C$60.68) Transocean Inc. (RIG.N, $33.63) Twitter (TWTR.N, $51.94) Union Pacific (UNP.N, $108.5) United Technologies Corp (UTX.N, $106.47) Uralkalii (URKA.MM, Rbl141.61) Vallourec (VLLP.PA, €36.49) Value Partners (0806.HK, HK$5.74) Veolia Environnement (VIE.PA, €14.1) Verint Systems Inc. (VRNT.OQ, $54.06) Viacom (VIAB.OQ, $79.42) Vipshop Holdings Limited (VIPS.N, $200.68) Visa Inc. (V.N, $213.88) Vivendi (VIV.PA, €19.46) Voestalpine (VOES.VI, €33.44) Wal-Mart Stores, Inc. (WMT.N, $76.31) Walt Disney Company (DIS.N, $89.29) Weatherford International, Inc. (WFT.N, $21.18) Weir Group (WEIR.L, 2593.0p) Western Refining Inc. (WNR.N, $42.23) Westport Innov (WPT.TO, C$12.01) Wood Group (WG.L, 750.0p) Xilinx (XLNX.OQ, $43.59) YPF Sociedad Anonima (YPF.N, $36.26) Yamato Kogyo (5444.T, ¥3,670) Yandex (YNDX.OQ, $28.74) Yara International ASA (YAR.OL, Nkr312.9) Yaskawa Electric Corporation (6506.T, ¥1,512) Yokogawa Electric Corporation (6841.T, ¥1,453) Zebra Tech (ZBRA.OQ, $73.56) eBay Inc. (EBAY.OQ, $52.47) Agrium Inc. (AGU.N, $92.29) Natura Cosméticos S.A. (NATU3.SA, R$37.9) Rockwell Collins, Inc. (COL.N, $79.36) Unicharm (8113.T, ¥2,413)
Disclosure Appendix
29 September 2014
Global Equity Themes 113
Important Global Disclosures
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 44% (55% banking clients)
Neutral/Hold* 39% (50% banking clients)
Underperform/Sell* 14% (43% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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See the Companies Mentioned section for full company names
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0700.HK, MSFT.OQ, ROG.VX, ABBN.VX, 8058.T, CHKP.OQ, PRU.L, IBM.N, HON.N, GE.N, XOM.N, CONG.DE, CSCO.OQ, BRCM.OQ, 2318.HK, DOW.N) within the past 12 months
Credit Suisse may have interest in (KPJH.KL, IHHH.KL)
29 September 2014
Global Equity Themes 115
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Credit Suisse has a material conflict of interest with the subject company (INTC.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO).
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Credit Suisse has a material conflict of interest with the subject company (1299.HK) . Jack So (IB in HK) is an Independent Non-Exec Director of AIA (previously was a Non-Executive Director).
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As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (ORCL.N). As of the date of this report, an analyst involved in the preparation of this report, Sitikantha Panigrahi, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in call options of Oracle Corporation (ORCL.N).
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Vamil Divan, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common stock Pfizer (PFE.N). A member of the analyst's household is an employee of Pfizer (PFE.N).
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Ronak Shah, has the following material conflict of interest with the subject company. The analyst has a long position in the common stock Pfizer (PFE.N).
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Important Regional Disclosures
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The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1504.TW, 0700.HK, BHP.AX, INTC.OQ, TOTF.PA, SCTY.OQ, HLMA.L, XONE.OQ, SSYS.OQ, EOG.N, 1169.HK, DAST.PA, MSFT.OQ, ROK.N, 0967.HK, 0895.HK, MCHP.OQ, YPF.N, DANG.N, FSLR.OQ, PXD.N, LEGD.PA, IFXGn.DE, ORCL.N, ORCL.N, 6481.T, CVX.N, INTUCH.BK, MA.N, SNDK.OQ, ADSK.OQ, EPD.N, SPLK.OQ, NFLX.OQ, DHR.N, VIV.PA, RDSa.L, 6954.T, ROG.VX, XRS.N, SPWR.OQ, 0270.HK, YNDX.OQ, 0750.HK, PCLN.OQ, 1299.HK, VIPS.N,
An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ, TA.TO, DPWGn.DE, ENB.TO, CNQ.TO, TRP.TO) within the past 12 months
The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses.
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
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Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (HLMA.L, ITV.L, WG.L, MONY.L).
The following disclosed European company/ies have estimates that comply with IFRS: (HLMA.L, DAST.PA, LEGD.PA, VIV.PA, RDSa.L, SAPG.F, AZN.L, ITV.L, SGE.L, IMI.L, ABBN.VX, SCHN.PA, FMEG.DE, SIEGn.DE, 6141.T, PRU.L, BSY.L, BMY.N, WG.L, XOM.N, EXPN.L, SOON.VX, CONG.DE, VLLP.PA, SASY.PA, YAR.OL, SN.L, 3407.T, DPWGn.DE, VIE.PA, CNA.L, TENR.MI, RR.L, ALFA.ST, OREP.PA, VOES.VI, WEIR.L, NOBN.S).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0700.HK, TOTF.PA, SCTY.OQ, EOG.N, MSFT.OQ, FSLR.OQ, PXD.N, INTUCH.BK, SNDK.OQ, SPLK.OQ, VIV.PA, SPWR.OQ, 0270.HK, 1299.HK, FB.OQ, PFPT.OQ, ABBN.VX, PANW.N, GOOGL.OQ, FMEG.DE, LYB.N, SIEGn.DE, 600008.SS, PRU.L, SIIC.SI, BMY.N, IBM.N, JKS.N, 0460.HK, WG.L, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, XOM.N, WMT.N, 0883.HK, BTE.TO, BIOA.N, CRZO.OQ, CONG.DE, ROSE.OQ, ANET.N, ACMP.N, OCBC.SI, DATA.N, CLDN.OQ, PFE.N, NXPI.OQ, 601601.SS, SEVI.PA, UNP.N, FANG.OQ, CSCO.OQ, ATHL.N, MONY.L, CNA.L, ENB.TO, DVN.N, IHHH.KL, NOVN.VX, SILO.JK, RRC.N, MSI.N, VRNT.OQ, DLPH.N, EBAY.OQ, FSL.N, ARX.TO, TAO.TO, APC.N, PVA.N, TRP.TO, 2318.HK, NEE.N, NEP.N, T.N, WNR.N, ETE.N, COP.N, CP.N, CAM.N, BA.N, ECA.N) within the past 3 years.
As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% or more of STMN.S
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
For Thai listed companies mentioned in this report, the independent 2013 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Intouch Limited (Excellent) , Bumrungrad Hospital Pcl (Very Good)
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse Securities (Europe) Limited......................................... Richard Kersley ; Andrew Garthwaite ; Eugene Klerk ; Ashlee Ramanathan
Important Credit Suisse HOLT Disclosures
With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.
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For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
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Global Equity Themes 118
29 September 2014
Global Equity Themes 119
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Global Equity Themes 120
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