SALES COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH)
FOR INSTITUTIONAL CLIENT USE ONLY
It’s nice to finally be back traveling more and more! After spending time in Miami, which seems to have become the new ‘crypto capital’ of the world, it’s hard not to feel the passion across many emerging trends. We are certainly in unique times. With weather dipping into the 40s in the NY area just as the clocks turn back this weekend, it feels like this migration to Miami may be on to something!
As we near the tail end of Q3 earnings season, it feels like groundhog day as US indices unsurprisingly continued to make new all-time highs. Dovish reads from the FOMC and BOE meetings sent yields falling as central banks attempt to control inflation against an uncertain macro backdrop. Chairman Powell’s ability to straddle the fine line of being just dovish enough comforted investors to add risk in the US. However, as Powell threaded the needle and indices marched higher there was Q3 earnings carnage beneath the surface, specifically in WFH winners.
It’s an “exciting” time to be a stock picker as dispersion has picked up; Chris Metli, head of MS QDS, and the team note the ratio of dispersion between sectors vs. within sectors declined to the 0th %ile this week (more on this later). While the path of least resistance has continued to lead higher as the S&P notched a fifth consecutive weekly gain, underneath the hood there is plenty of alpha to be had for investors on both the long and short side. WFH winners are finally having to comp the comp (unsuccessfully thus far?) as the world returns to normal, while re-opening names have to prove COVID was just a temporary disruption. Meanwhile, many of the fundamental uncertainties investors continue to discuss remain: supply chain issues, inflation, and a potential fiscal cliff.
It‘s gut check time for many companies. Which business models can continue to evolve, adapt and win in any environment? So far for investors, the winning formula has been owning asset-light companies that are insulated from the above headwinds and have shown the ability to grow in a WFH or re-opening world.
To that point, investors this week continued to punish earnings misses while earnings beats were largely priced in (0% relative outperformance throughout earnings). On the WFH front, Roku (ROKU), Peloton (PTON) and Chegg (CHGG) sharply sold off after materially guiding below street consensus. On the other hand, we saw positive signaling on supply chain pressures as Under Armour (UAA) beat earnings driven by cost-cutting and staying tight on inventory, while Nike (NKE) shares climbed this week on news of its Vietnam factories returning to full operation following prior COVID-related shutdowns. Walmart (WMT) took a proactive approach to address labor shortages by holding a national supply-chain hiring event this past week, highlighting the importance of scale and brand strength as retailers attempt to hire more workers in a tight labor market. An interesting ongoing debate remains around re-opening names such as Live Nation (LYV), which bounced on positive earnings and Pfizer pill headlines (MS Media Analyst, Ben Swinburne, remains equal-weight, with the stock now above the bull case PT of $120), as the stocks are now trading well above their pre-Covid enterprise values… It will be interesting to see if these businesses continue to get better from here or whether the return to normalcy and more has already been discounted at these levels.
Outside of earnings, the FOMC meeting was one of the most highly anticipated events among investors. The Fed announced its well-telegraphed tapering schedule within consensus expectations, reflecting Powell’s efforts to be transparent in how the Fed plans to address its tapering plans in response to rising inflation levels and a recovering labor market. If the market were to come off the all-time highs we’ve seen this week, it would certainly be difficult for the Fed to deliver on the two rate hikes that markets had previously priced in by the end of next year. Friday’s jobs report included some interesting pieces as nonfarm payrolls again beat expectations and the unemployment rate dipped lower, albeit while the labor participation rate remained flat. Ultimately, it was undeniably a strong NFP (531k vs. 450k consensus), with many tailwinds to offset some recent anxiety around the labor market.
Supply chains continue to drive conversations among investors and how companies will continue to fare in an inflationary environment. With much of earnings now behind us, many investors now shift their focus towards identifying what the long-term ramifications are for current supply chain disruptions and assessing market fundamentals. Many companies are managing these extraordinary conditions, which was emphasized by continued wage growth in Friday’s jobs report as companies continue to hire more workers on the back of robust consumer demand. On the other hand, bears seek to find supply pains that may be underappreciated on a longer-term view or vulnerable to future demand destruction. For now, we will have to wait to see how these dynamics play out as Fed tapering begins and markets test the ‘flexibility’ of the Fed’s policy on reeling in inflation. Arguably, it has yet to be determined whether inflation is transitory or not.
I continue, like many of you, to have a couple observations that crossed my mind this week including…
- It’s my son’s final soccer weekend… In honor of this, the Savone Family Movie of the Week is an old favorite of ours: Kicking and Screaming
- Have the new generations lost interest in e-learning platforms and gone back to the prehistoric textbook? Software Analyst Josh Baer downgrades Chegg to EW and highlights new risks in his latest piece following their disappointing earnings report. Make sure to ask for a copy!
- Zillow came to Investors this week with a “foreclosed” sign on its home-flipping operation, Zillow Offers. After 3.5 years of capital, human, and mindshare investment in this unsuccessful space, what matters to them now? Internet Analyst Brian Nowak points out key factors to monitor and remains EW in his latest piece. Reach out to the team for a deep dive!
- The Cowboys’ backup QB Cooper Rush helped the team tack on to their impressive win-streak. They head back home for their matchup against Denver. Would love to see them bring in another win and make it 7 in a row!
- Looking over to my boys in Italy, A.S. Roma head over to Venezia to play their 16th place team— let’s hope for an overdue and much needed 3 points! Forza!
- The Atlanta Braves go out with a bang, beating the Houston Astros in 6 games to win their first World Series title since 1995.
- Automation and AI could become the backbone of the transportation industry. How will you play this theme? Transportation Analyst Ravi Shanker provides positive updates on self-driving truck company TuSimple Holdings and their two incoming catalysts in his latest report. Be sure to ask for a copy!
- MS Europe Research Team ranks the global supply chain issue as the third worst on record since 1958, and history suggests it may have another year to run. MS Europe Capital Goods Analyst Ben Uglow evaluates the current situation within a historical context in his latest piece. Make sure to ask for a copy!
- Searching for names that like to play the “beat-and-raise” game in earnings? Look no further than Retail Analyst Kimberly Greenberger’s recent note, where she expects names in the softlines space to capture notable upside on retail traffic improvement and strong full-price selling in 3Q. Check in with her team for more details!
- The revival of brick and mortar? CVS is changing the way we access healthcare and central to the company's transformation is a unique physical footprint. MS Analyst Ricky Goldwasser likes what she sees after a strong third quarter. Check out her latest report to see for yourself!
A data point I continue to follow closely is the ratio of dispersion between sectors vs dispersion within sectors (over the last two weeks), which dipped to its lowest point since November 2017 (0 %ile in last 5 years) – in other words, it’s been ~4 years since two-week dispersion was this extremely driven by moves at the single-name level as opposed to at the sector-level. A strong divergence in post-earnings performance combined with heightened retail activity/the meme stock frenzy has caused dispersion to rise, and that increase in dispersion has been driven by moves between single-names (not sectors).
On positioning, US Equity L/S gross leverage increased ~4% WoW to 204%; keep in mind that over the past three weeks long positions rallied ~2.5% and shorts by ~4.0%. Net leverage across US L/S funds rose ~1% WoW to 62% – in line with the fact that short covers have outweighed the long selling this week. Across other strategies, gross leverage for EU L/S funds rose ~1% WoW, while net leverage fell ~1% WoW. Asia fund gross leverage rose ~1% WoW, meanwhile net leverage fell~2% WoW.
Our Chief US Economist Ellen Zentner discussed how upcoming inflation data appears poised to reaccelerate, and likely necessitates upward revisions to inflation in the December SEP. At the November FOMC meeting however, Chair Powell indicated no rush to judge as the Fed awaits evidence of cooling around the middle of next year. While Powell did not tie himself to the calendar in terms of rate hikes, it seems clear that policymakers want to see sustained movement in the labor market toward maximum employment. Separately, solid October job gains came out on Friday with backward revisions upward; these details indicate that pandemic shocks are fading on the back of easing supply chain bottlenecks and more re-openings in travel-related sectors. Stronger increases in labor force participation and a 5.9% Cost-of-Living Adjustment (COLA) for Supplemental Security Income (SSI) beneficiaries will help cushion the blow of inflation in 2022, particularly should wage growth remain strong and inflationary pressures begin to recede as supply chain bottlenecks ease. Moreover, Ellen expects core PCE to ease off its peaks by late 1Q22; signs of sequential slowing would give the Fed confidence that high readings will indeed prove transitory.
As a result of the growing institutional investor interest in the crypto world, Morgan Stanley is launching a new Cryptocurrency research product. Lead Cryptocurrency Strategist Sheena Shah points out in her latest report that the most noteworthy aspects of these new coins stem from crypto deposit interest rates and decentralized finance (DeFi). Crypto lenders are offering 5%+ interest on crypto-dollars that compete with traditional banks, causing regulators/governments to respond. Given the rapid growth of the stablecoin market (now $137.7bn market cap versus $20bn a year ago), the banking industry will likely look to capitalize on the demand for stablecoin deposits as well. In his note, Midcap Bank Analyst Ken Zerbe highlights both Signature (SBNY) and Silvergate (SI) as the main names to play this theme. Make sure to ask for a copy of their reports!
MS US Equity Strategist Mike Wilson reiterates that the fundamental picture for stocks is deteriorating as the Fed starts to tighten monetary policy and earnings growth slows further into next year, turning outright negative for some companies. However, asset prices are continuing to rise as retail investors keep plowing excess cash into these same investments. Mike notes that investors have been swayed by strong seasonal headwinds and pressure to perform in 4Q to stay fully invested. His team thinks that this bullish trend can continue into Thanksgiving, but not much longer. Something to note this week was the Fed and Bank of England’s dovish signaling that set the stage for a significant drop in yields that coincided with the resurgence of Tech. Chris Metli and the QDS team believe this trend could continue into year-end, as retail demand in the sector has accelerated dramatically and institutional money is lightly positioned in large cap Tech relative to the last few years. Will we see this play out or will other pockets of strength surface as we approach the end of the year? Please ask for Mike’s full report or to be connected with Chris and the team.
Looking across the pond, MS Chief Europe Economist Jacob Nell sees the MPC's surprise decision to keep rates on hold as likely to be a pause to allow for the winding up of the QE programme and to obtain more data on the labour market after furlough. The team still expects December and February hikes to trigger QT from February 2022 onwards, but with risks tilted to less action. On the global supply chain issue, MS European Capital Goods Analyst Ben Uglow finds that the current crisis is the third worst on record and it may have another year to run. Moreover, the team projects that Industrial Production will fall toward zero, a year after the disruption peaks. For this week, after four consecutive days of the market up between 30bps and 70bps with almost no intraday volatility, SX5E spot is quietly breaking out of an otherwise bullet-proof 8% range it was in over the last 6m (tightest on record), but the overall various data points are either very far behind or very far ahead of this latest spot rally. Top price moves this week include AP Moller-Maersk (DC MAERSKB), which our MS research team is Overweight, and TeamViewer (GR TMV), Hapag-Lloyd (GR HLAG), and Raiffeisen Bank International(AV RBI). Please ask to be connected with the teams.
In his latest report, MS Chief Asia Economist Chetan Ahya responds to the recent rise in default risks in the property sector and widening credit spreads. He thinks that the default risk will not translate to broad-based disorderly defaults triggering a financial shock and China is able to stabilize its currently high debt to GDP ratio, a product of its countercyclical easing model, as the global trade cycle is conducive. MS Chief China Economist Robin Xing argues that CNY outperforms its trading partners because of its stronger trade surplus, resistance to policy divergence between the PBOC and the Fed, and he remains positive that the CNY will continue to trade strong amid regulatory tightening, property company defaults, and slower growth. Despite some near-term risk factors, China Technology Hardware analyst Andy Meng believes a recovery is likely in 2022 – a re-rating catalyst—and reiterates Overweight on Xiaomi(HK 1810) and upgrades OFILM (CH 002456) to Equalweight. Please ask to be connected with the teams.
MS China Equity Strategist Laura Wang highlights that her Global MNC China Sentiment Index shows the biggest QoQ drop on record with power shortages, the housing sector downturn, elevated PPI, and supply bottlenecks cited for her less optimistic view on China, echoing the latest concerns over Chinese company earnings. Laura remains Equalweight on China. On the back of Yellen’s comment regarding reciprocal tariff reduction that could help ease inflation, the team reiterates stocks sensitive to US/China relations as most likely to benefit from lowering tariffs. The list includes Zhongji Innolight (SZ 300308), Luxshare Precision (SZ 002475), Goertek (SZ 002241) and Universal Scientific (SS 601231). Please ask for the full list to be connected with the team.
I wanted to highlight a few MS conferences such as the Virtual Global Consumer & Retail Conference (Nov 30 – Dec 2) and the 4th Annual Space Summit (Dec 7). The Virtual Global Consumer & Retail Conference will again feature well-establish retail companies and emerging high growth companies, including Best Buy (BBY), McDonald’s (MCD), and GrubMarket (PRIVATE). These conferences are always in high demand, so be sure to reach out to your sales coverage for more information. Thank you again to the MS Global Corporate Access team for such great work around the world! Please see below for all upcoming MS Conferences & Events.
Our 9th Annual MSQA Investment Forum is being held virtually on November 17-18, and will be followed by an in-person cocktail reception in New York City on the evening of November 18. This conference is our annual flagship event that targets our quant clients and institutional investors globally; last year’s event was attended by 390+ managers and 115+ investors. The theme for this year’s forum is “Systematic Investing in an Era of Persistent Themes, Memes and Macro Catalysts.” To request additional information about the event and/or to request an invite to register, please click here.
As a last note, on behalf of Morgan Stanley Sales & Trading and the MS franchise as a whole, I would like to thank you for your support and partnership, which you once again expressed through this year’s Institutional Investor voting. Morgan Stanley is once again No. 1 in Institutional Investor’s 2021 All-America Sales Team, an annual ranking of the Wall Street firms with the best sales professionals. The bank extended its reign in specialist sales for a fifth straight year, while also defending its newly won title in the generalist sales category. Morgan Stanley also placed first for overall trading and execution in the newly returned All-America Trading Team. In Research, Morgan Stanley ranked third in the 2021 Institutional Investor All-American Research Team Poll, taking first place in Beverages & HPC, Large Cap Internet, Small & Midcap Internet, IT Hardware, Media, Restaurants, Large Cap Software, and Small & Midcap Software.
Nevertheless, please find below a selection of this week's data points, charts and research from each region (Europe, US, LatAm, Asia, Japan, EEMEA) that I believe points to an inflection or material change for individual sectors, companies and/or the macro environment this week. I have tried to avoid the obvious beats and misses and instead highlight what I thought to be the more significant trends and inflection points.
Have a great weekend. Drink lots of fluids, take Vitamin C, and make sure to wash your hands!
#FORZA
Nick
*Included in my 2021 Global Ideas Deck. Please ask for the presentation.
Please see below the list of client webcasts MS is hosting over the next few days. Please note, these are widely attended events open to Morgan Stanley’s Institutional and Corporate Client base, and appropriate Morgan Stanley personnel. Webcast link information should not be forwarded or shared beyond intended recipients.
Source: Morgan Stanley US Alpha Team & Global White Phone Teams
Time (EST)
TOPIC & SPEAKERS
WEBCAST LINK
Monday, November 8, 2021
9:00 AM
Morgan Stanley Global Macro Forum: Tapering Starts – Sticking to the Script
MS
Matt Hornbach, Global Head of Macro Strategy
Guneet Dhingra, Head of US Interest Rates Strategy
Robert Rosener, Senior US Economist
David Flowerdew, Co-Head of Global Interest Rates & Head of North America Macro Trading
11:00 AM
AVGO Credit: Chipping Away at Excess Cash
MS
Lindsay Tyler, Technology Credit Analyst
Tuesday, November 9, 2021
9:00 AM
Global Retail and Consumer: Supply Chain Disruption Update
MS
Kimberly Greenberger, US Retail Softlines & Branded Apparel & Footwear Analyst
Edouard Aubin, EU Brands & Retail Analyst
Terence Cheng, China Consumer Analyst
Elena Mariani, EU Brands & Retail Analyst
Dustin Wei, China Consumer Analyst
10:00 AM
Cryptocurrency: The Markets and Impact on Banks and Fintech
MS
Sheena Shah, Head of Cryptocurrency Research
Betsy Graseck, Global Head of Banks and Diversified Finance Research
Ken Zerbe, US Midcap Banks Analyst
James Faucette, Head of US Fintech and Payments Research
Giulia Aurora Miotto, French-Benelux Banks and Fintech Analyst
10:00 AM
A Conversation with Hakan Kara, former CBT Chief Economist
Expert
Hakan Kara, Former CBT Chief Economist
MS
Alina Slyusarchuk, Head of CEEMEA Economics
Hande Kucuk, Turkey Economist
Wednesday, November 10, 2021
9:00 AM
North America: Freight Market Overview
MS
Kimberly Greenberger, US Softlines Retail Analyst
Simeon Gutman, US Hardlines, Broadlines & Food Retail Analyst
Ravi Shanker, US Freight Transportation & Airlines Analyst
9:00 AM
Chile Political Outlook & Implications for Mining - Insights From an Expert
Expert
Patricio Navia, Chile Political Expert
MS
Carlos de Alba, Head of Americas Metals & Mining Research
Juan Ayala, Latam Strategist
Lucas Almeida, Latam Economist
Ioannis Masvoulas, European Metals & Mining Analyst
Thursday, November 11, 2021
8:00 AM
Morgan Stanley Research Global e-Learning: e-Commerce
MS
Brian Nowak, US Internet Analyst
Miriam Adisa, EU Internet Analyst
Gary Yu, China Internet & Telecom Analyst
Tetsuro Tsusaka, Japan Internet & Telecom Analyst
9:00 AM
MSQA: Inside the Mind of an Analyst - Consumer Retail
MS
Maria-Laura Adurno, European Food Retail, Morgan Stanley Research
Alex Straton, NA Softlines, Morgan Stanley Research
Lillian Lou, China Consumer, Morgan Stanley Research
Brian Kelleher, Head of Asia AlphaWise Research, Morgan Stanley Research
Victoria Maigrot, European Consumer Specialist Sales
1:00 PM
Networking Equipment Trends from a VAR’s Perspective
MS
Meta Marshall, US Networking Analyst
Friday, November 12, 2021
9:00 AM
Carbon: What is next in Global Carbon Markets
MS
Jessica Alsford, Global Head of Sustainability Research
Rob Pulleyn, Head of European Utilities & Clean Energy, and Carbon Strategist
Kevin Cheshire, Head of Investor Business EMEA (Commodities)
Wednesday, November 17, 2021 - Thursday, November 18, 2021
9th Annual MSQA Investment Forum
Tuesday, November 23, 2021
8:00 AM
Morgan Stanley Research Global e-Learning: Carbon Trading
MS
Jessica Alsford, Global Head of Sustainability Research
Rob Pulleyn, Head of European Utilities & Clean Energy, and Carbon Strategist
Tim Chan, Asia ESG Research
Simon Lee, APAC Utilities & Renewables
Monday, November 29, 2021
Morgan Stanley Cryptocurrency vs Traditional Finance
Tuesday, November 30, 2021 - Thursday, December 2, 2021
Morgan Stanley Virtual Global Consumer & Retail Conference
Tuesday, November 30, 2021
8:00 AM
MSQA: Inside the Mind of an Analyst - Autos
MS
Billy Kovanis, US Autos & Shares Mobility Research Analyst
Harald Hendrikse, EU Autos & Shared Mobility Research Analyst
Rikke Jacobson, EU Industrials Specialist Sales
Mark van der Pluym, US Industrials Specialist Sales
Reyna Venkat, Thematic Investment Strategist, Institutional Equity Division
Thursday, December 2, 2021
8:00 AM
Morgan Stanley Research Global e-Learning: Chemicals
MS
Vincent Andrews, US Chemicals & Agricultural Products
Charlie Webb, EU Chemicals
Mayank Maheshwari, ASEAN Energy & Materials
Takato Watabe, Japan Chemicals & Textiles
UPCOMING CONFERENCES –
Please reach out to your sales representative if you are interested in attending any of these conferences.
Nov 7-9 (Hollywood) I 2021 EEI Financial Conference Meetings Hosted By Morgan Stanley
Nov 9-11 (New York) I Global Chemicals, Agriculture, and Packaging Conference
Nov 17-19 (Barcelona) I European Technology, Media & Telecom Conference
Nov 17-19 (Singapore) I 20th Asia Pacific Summit
Nov 22 (New York) I Virtual Insurance Corporate Access Day: Life and P&C
Nov 30-Dec 2 (New York) I Virtual Global Consumer & Retail Conference
Nov 30-Dec 3 (London) I Virtual Nasdaq Conference
Dec 1-3 (Tokyo) I Inaugural Virtual Japan ESG Conference
Dec 7 (London) I Business Services, Leisure & Transport Corporate Access Day
Dec 7 (New York) I Virtual China New Economy Summit
Jan 4-6 (China) I Virtual China New Economy Summit
Jan 12-14 (New York) I Virtual 14thAnnual Latin America Executive Conference
Jan 18 (Asia) I Virtual Asia Symposium
Mar 7-10 (San Francisco) I TMT Conference
Mar 15-17 (London) I European Financials Conference
Mar 22-24 (Hong Kong) I Virtual Hong Kong Summit
The following comments are a summary of Morgan Stanley Research by Morgan Stanley Equity Sales & Trading:
SELECT COVID VIRUS AND TREND FOR RE-OPENING DATA POINTS
Global – Biotechnology – COVID-19 Outbreak Dynamics
US – Retail – Total Discretionary Retail Traffic
MS BROAD TRENDS & INFLECTION POINTS
Positive
ìîUS – Equities – Baskets and Indices Performance
ìîGlobal – Global Risk Indicators – % Change
ìîGlobal – Cryptocurrency – High Leverage Meets Regulation
Source: Blockdata.tech
MS Head Cryptocurrency Strategist Sheena Shah highlights that stimulus from governments and central banks has driven risky asset markets to all-time highs. She notes that cryptocurrencies are no different, trading as similarly to risky assets, rather than currencies as their name would suggest and boosted by leverage growth in the crypto world. She points out that institutional investor interest in participating in the upward price momentum is building. Additionally, she highlights that over 10,000 cryptocurrencies exist, but only a fraction trade actively daily and Bitcoin's dominance in the $2.5trn crypto market has eased as alternative coins outperform due to their lower USD prices and potential use cases. Sheena believes this battle of the blockchains will continue as each captures market share and popular ones today are not necessarily the winners in the future. She also notes that a type of crypto, the stablecoin, has seen issuance rise 20x since 2020. With $135bn in circulation, she thinks USD assets back many of these stablecoins' values so as their issuers' holdings change, it could impact broader markets too. As more institutions buy crypto (e.g. exchanges, asset managers, companies), she believes more bitcoin units are held by fewer participants (even if they hold for others), causing centralization. Download the Complete Report
ì LatAm – Latin America Equity Strategy – Top Stock Ideas – November 2021
MS LatAm Chief Strategist Gui Paiva implements one change to his list; he replaces Brazilian payments company PagSeguro with Chilean bank Santander Chile. Gui’s current top ten stocks ideas across the region are: Brazil: XP, Itau, Minerva, Vale, Gerdau and Petrobras; Mexico: Becle; Chile: Santander Chile; and regionally: Mercadolibre and dLocal. Download the Complete Report
ìJapan – Strategy –A Reduced but Stable Majority
Neutral to positive outcome with the LDP and coalition partner Komeito securing 293 seats out of 465, retaining a stable majority of 261 seats in the Diet. Two surprises however 1) the big winner in the election was the Osaka-based Ishin Party, which went from 11 seats to 41. The gains came partly at the expense of the coalition, but more at the expense of the left, which lost 18 seats. Since the Ishin Party is a centre-right, pro-reform, and pro-market party, the message is that the electorate shifted to the right, but did so in a way that sent a policy message to the coalition. 2) several senior leaders in major parties lost their races for single-member seats. Japan Economist Takeshi Yamaguchi retains above-consensus GDP growth forecast for 2022 (+2.9% for 2022, +2.8% for FY2022 (f3/23) and still expects a fiscal stimulus package to be finalized in November. Download the Complete Report
ìUS – Sports Betting – 2025 TAM to $18 Billion, Focus On Market Share
Source: Morgan Stanley Research estimates
MS Research Analysts Thomas Allen and Ed Young are updating their 2025e sports betting revenue estimate to $11.3B from $10.7B. The primary upside driver is the team’s addition of online sports betting (OSB) for FL (launched Monday) and NC (retail legal, legislative momentum for online). These two changes increase the team’s market forecast by $1.0B. The team also rolls its 2025e revenue forecast to be based on 2025e adult population vs. prior 2018, which adds ~$750m. The team also raises its long-term iGaming spend per capita assumptions to $125 from $108. Recent channel checks suggest to Thomas and Ed that CA is closer to legalizing online sports betting than it ever has been, with some tribes becoming more amenable to an online offering, though others still appear against. The team will watch to see how signature gathering goes for the Nov 2022 OSB referendum question. Download the Complete Report
ì LatAm – Metal&Rock – What's Driving Gold?
Source: Bloomberg, Morgan Stanley Research
Gold prices are being buffeted around by diverging rates and inflation/stagflation concerns. MS EU Research Analyst Amy Sergeant looks at what's priced in and where it could go from here. Is gold over or undervalued? Why the disconnect between real and nominal yields? So where next? The bull case for gold. Download the Complete Report
ìîChina – Tourism – Disappointing Margin in 3Q, but Keep OW – Hildy Ling cut FY21-22 EPS by 14% and 6% to factor in lower GPM assumptions of 35% vs 38-39% before. 3Q21 revenue -20% QoQ -12% YoY which is expected given COVID resurgence, but margin squeeze was a surprise, with GPM down to 31% due to channel mix change and higher promotion. Hence adjusted net profit fell 50% QoQ and 44% YoY. Management commented that September margin profile improved dramatically and Hildy projects 4Q21 GPM to recover to 33% and to 35% in FY22. The stock trades on 36x FY22 P/E with 36% earnings CAGR for 2021-23. Hildy cuts her PT by 8% to Rmb295, but stays OW given visible medium-term growth drivers and undemanding valuation. Download the Complete Report
ìîEEMEA – Strategy –80% Of GEM Funds In Our Sample Were Overweight Russian Equities As Of August Vs 75% In June
Our sample group of GEM funds varies month-to-month so is not directly comparable though can serve as a rough guide of changing positioning over time;
Source: FactSet, Morgan Stanley Research
MS Equity Analyst and EEMEA Strategist Regiane Yamanari summarizes average EEMEA stock & country positioning for 61 active GEM funds/c. $278bn AuM as of Aug '21. Notably, GEM funds' 1) Saudi exposure continues to creep up but remains well below bench, 2) Russia positioning keeps rising via domestics; 3) Poland exposure is reversing its LT decline. Download the Complete Report
ìî LatAm – Brazil Ecommerce – 3Q21 Preview – Operating Fundamentals Steady, But Higher Rates Bite
On higher costs of capital, MS LatAm Research Analyst Andrew Ruben’s MGLU3, VIIA3, and AMER3/LAME4 price targets decrease by ~30% on average. However, his operating estimates are largely unchanged. Despite base case upside across this group, he stays selective: OW on MGLU3, with LT above-peer growth; EW on VIIA3, AMER3, and LAME4. Download the Complete Report
ìîChina – Healthcare – Sean Wu reiterated his OW rating and top pick for the remainder of 2021 and recommends investors buy the stock on recent share price pullback. Leading indicators strengthened further in 3Q, the company raised its revenue growth guidance lifting FY21 +65% to +75%, implying 48% growth in 2H, and FY22 from 40% to 45%. The revised guidance incorporated service and manufacturing contract revenues from COVID-19 of Rmb3bn and Rmb2bn in FY21 and FY22. Leading indicators has picked up further, with the number of integrated projects at 441 as of the end of 3Q, up from 408 at end of 1H. It added 114 projects in 9M21, implying 50% market share in CDMO projects based on management’s estimates. In addition, the company put in place a global partnership program which will cover 10% of the top performing employees- a new and powerful way to motivate employees, similar to what consulting firms use. The program sets undisclosed milestones (payable in 2027), which are contingent on achieving 40% profit CAGR in 2020-2025. But 10-20% of these milestone payments must be donated to the government's "Co-Prosperity" program for alleviation of poverty. Download the Complete Report / Download the Complete Report / Download the Complete Report
ì Europe – Financials –Beats And Misses Price Reaction By Line Item
Source: Thomson Reuters, Morgan Stanley Research
~75% market cap has now reported, earnings continue to beat: 1) ~90% of banks beat on PBT at an average 24%; 2) Robust revenue trends, +3-4% vs street, fee rebound and NII recovery supportive; 3) CET1 strong at >15%; 4) Rates, cost Inflation, capital payouts & business resilience are key themes. Download the Complete Report
ì LatAm – Global EM Strategist – Time To Hold'em Credit
There are reasons to turn more constructive on both EM FX and EM credit, namely that positioning, sentiment and valuations have all adjusted. For now MS Strategist James Lord brings EM credit back to neutral, but stick to a bearish stance on EM FX with the aim of reassessing post the FOMC instead. LatAm Macro Strategy: James stays bearish on BRL via 3m USD/BRL ATMF knock-out calls (barrier at 5.90). In rates, he sticks to 1s5s COPxIBR flatteners and 10y IBR payers and enter short Mexico belly breakevens (buy Mbono March 2026s and sell MUDI Dec 2025s) amid high inflation risk premia, weak domestic inflation drivers and temporary supply-side pressures. Download the Complete Report
ìUS – Defense – As MS Research Analyst Kristine Liwag steps back and takes stock of the quarter, a few themes start to emerge. First, it is clear to her that the Defense Primes are not immune to global supply chain and labor challenges spurred by COVID-19. Second, she notes that the Primes continue to lean into share repurchases. Kristine sees the recent dip in stock prices as an opportunity for the Primes to buy back additional shares at attractive prices. Third, the points out that the Primes appear confident they can grow against the backdrop of a flattening DoD budget. Additionally, each Prime is encountering idiosyncratic headwinds 2022, which gives her confidence that underlying growth trends remain intact. She saw little in the quarter to change her fundamental views on the sector. She continues to expect companies with strong alignment to current DoD preparations for near-peer competition to experience above-market growth. In Kristine’s view, NOC (OW, $440 PT) has the best-positioned portfolio to benefit from the return of Great Power Competition and she is particularly bullish on its strength in space and exposure to the nuclear triad via B-21 and GBSD. She also sees NOC as attractively valued, currently trading at ~30% discount to the S&P 500. Download the Complete Report
ì Europe – Financials –Cryptocurrency Market Capitalisation Has Grown To Over USD 2.5trn
Source: Coinmarketcap, Macrobond, Morgan Stanley Research
Cryptocurrency companies are creating a new system of payments and transactions that competes with traditional finance. Governments and regulators are responding. As institutional investor interest intensifies, the crypto regime of leveraged price rises is moving to a regime of regulation. Download the Complete Report
ì LatAm – Latin America Equity Strategy & Economics – Covid-19 Update
Source: Morgan Stanley Research, various local government sources
MS Chief Strategist Gui Paiva highlights that the 7-day m.a. pace of daily vaccination increased to 1.62m (from 1.37m wow; +18%) in Brazil and to 1.21m (from 535k; +126%) in Mexico. The number of new infections was stable in most countries over the past week. ICU capacity utilization rates currently vary from a 30% low in Mexico to a 88% high in Chile. Meanwhile, ICU usage is at 48% in Colombia and 35% in Argentina. Last, but not least, ICU capacity utilization rate was approximately at 44% -flat wow -in Brazil (93% recent peak on March 21). Mobility figures (7-day m.a.) improved marginally both in Brazil and in Mexico vs the previous week. Download the Complete Report
Negative
îAustralia – Westpac Banking – WBC: Half-Yearly Net Interest Margins
Source: Company data, E = Morgan Stanley Research estimates
Richard Wiles was disappointed with Westpac’s 2H21 results and with the FY22 outlook for both margins and expenses coming in far worse than expected. The margin decline looks to have accelerated in recent months, largely related to competition and mix shift in retail banking. Richard cut margin MSe by 14-15bp and he expects -18bp YoY to 1.86% in FY22E. Richard believes that the Business bank franchise momentum remains weak and 2015-2020 legacy issues such as strategic inertia, weak franchise momentum, an incomplete integration of St George Bank, ineffective cost control, an inadequate risk culture and governance, and sub-optimal capital management weigh on the bank’s performance. There is a lack of clarity on how the company plans on executing its turnaround on achieving an A$8bn cost target during FY22. Richard downgrades to EW and reducing his PT by 14% to A$24.80. To become more constructive again evidence of WBC's turnaround gaining traction requires execution in 6 key areas in FY22E: sustained mortgage improvement, stabilization of business banking, more modest margin decline, high single-digit cost reduction, further progress on asset sales and positive capital generation. Download the Complete Report
îì US – Economics – Better Access To Home Equity & More Low-Income Homeowners Needed
Source: Federal Reserve, Morgan Stanley Research
MS Economist Sarah Wolfe and MS Strategist Zuri Zhao highlight that inequalities in homeownership, limited access to credit and home equity, and rising rents continue to pose challenges to low-income households even amid a housing boom. So, while the picture is healthy for the low-income consumer, the team thinks that the healing power of home price appreciation (HPA) goes only so far. The team notes that the low-income cohort has benefitted from rising home prices, experiencing the largest percentage growth in real estate wealth (19%) during Covid. Yet, the team points out that the housing boom has not helped all low-income households highlighting that only half of the bottom 20% are homeowners (vs. 80% of the top 20%), and rising HPA has coincided with escalating rents for non-homeowners. These households’ burden is outsized – the team calculates that a median rent in the bottom third nationally, per Zillow (Covered by MS Research Analyst Brian Nowak, EW, $112 PT), amounts to 62.7% of lower-income renters' income. MS ESG Strategists find that, on average, the gap in homeownership between White and Black and Hispanic households is widest among low- to moderate-income families, limiting the benefits of HPA for minorities and exacerbating racial inequality. Download the Complete Report
îAsia – Memory – Factor, positioning based rally. Fundamentals remain worrying. Fundamental picture for memory still deteriorating
Hynix outperformed Samsung (Quality) by >11% last month, as it did in previous downturns. This is not at odds with cycle outcomes, which may be less bad in 4Q before turning much worse than expected- but it has sparked a debate around the cycle again – whether risks are already in consensus estimates and multiples. Shawn Kim argues that a bounce in the middle of a downturn is normal and this cycle is reminiscent of the 2016 downturn, where excess inventory was the main cause in cycle shift and took five quarters (4Q14-1Q16) along with a ~34% decline in DRAM revenues and ~59% in P/B multiple compression to clear. Though Shawn admits that we’re moving closer to a bottom that the top from a risk/reward perspective, he believes the worst of the news flow is still ahead and would wait for things to get worse (likely in 1Q22). His checks show that the server market looks somewhat better on improving component availability but data points remain problematic with the outlook heavily dependent on supply growth. At current rate, Samsung’s wafer additions alone should drive ~20% supply growth in 2022, in excess of demand (MSe 17-18%), resulting in an eventual larger downturn in pricing and market expectations in early 2022. All in, the fundamental narrative has begun to deteriorate and Shawn is doubling down on his cautious memory view – OW Samsung (quality) vs UW SK Hynix. In addition quant strategist Gilbert Wong latest update continue to prefer Value over Growth, mainly because of the prolonged inflation. Secondly, from a trading perspectives, China Growth/Tech stocks are still trading within the range since late-July without accelerated momentum. We suggest to wait for more positive signals to rotate back to Growth/Tech. Download the Complete Report
îì LatAm – Brazil Strategy – Not Cheap Enough to Buy the Dip Yet
At the country level, Brazilian equities at 8.5x forward consensus earnings appear be attractively valued on an absolute and relative to EM basis (-1.7 S.D. below its 11-year historical average). However, the current valuation multiple for the country is materially influenced by the historically high profitability of commodity producing sectors such as energy and materials. We believe Brazilian equities still don’t offer an attractive risk reward equation despite the recent sell-off based on our normalized earnings analysis. At the super-sector level, the commodities (9.6x normalized earnings; +0.1 S.D.) and domestic defensive (15.1x; -0.1 S.D.) groups offer a better risk reward profile than their domestic cyclical ex-retail banks peer (23.7x; +0.9 S.D.). In addition, the retail banks subset (6.4x; -1.6 S.D.) looks attractively valued. Our favorite stocks in the commodity group are Vale, Gerdau, Petrobras, and Klabin. Meanwhile, our preferred companies in defensives are Sao Martinho, Natura, and Energisa. Last, but not lease, our top name in retail banks is Itau. From a size perspective, for investors with lower liquidity restrictions, the small cap cohort (bottom third by market cap) currently trades at 8.8x normalized earnings, or more than 2.0 standard deviations below its 11-year historical average (see the Appendix). Our top pick in the cohort is protein producer Minerva. Download the Complete Report
MS SINGLE NAMES CONTENT
Positive
ìUS – Salesforce.com – Improving Fundamentals Support Multiple; Top Large Cap Pick; Remain OW
Source: Morgan Stanley Research, Gartner. End markets include Gartner data for Sales, Service, Marketing, Commerce, Cross-CRM. Platform defined as High Productivity aPaaS, High Control aPaaS, Application Platform Software, Business Process Management Suites, Digital Experience Platforms, Create, Verify. Analytics and Integration defined as Full Life Cycle API Management, Integration Platform as a Service (iPaaS), Application Integration Suite, Data Integration Tools, Modern BI Platforms, Traditional BI Platforms, Analytic Applications, Data Science Platforms, Location Intelligence. Our analysis includes Workstream Collaboration TAM that is incorporated in Other in Gartner's Enterprise Software Application Tracker. Excluding Slack, our TAM analysis is $248M and 13% CAGR, in line with estimates provided at A-Day.
MS Research Analyst Keith Weiss highlights that Salesforce remains his top pick in large cap software heading into CY22, as sustainable revenue growth and durable margin expansion drive improving fundamentals, supporting a more durable multiple within a software sector trading near recent highs. His deep dive analysis into Salesforce's positioning within a $255 billion TAM makes him incrementally constructive on Salesforce's ability to execute on: 1) Further penetrating a large market opportunity allowing Salesforce to durably grow at scale; 2) Capitalizing on industry momentum with a core portfolio that addresses CIO's top priorities in Digital Transformation and a large, greenfield opportunity with Slack; 3) Margin expansion with a notable change in management tone around cost discipline following the analyst day, and Keith’s SaaS X-Ray highlighting attractive unit economics and potential for 36% long-term operating margin relative to Street's 18.5% for CY21. His revised revenue forecasts, based upon conservative market share gains, reflect a durable 20% 5-year subscription revenue CAGR, taking his CY25/FY26 total revenue estimate to $52.6 billion, and above consensus at $51.7 billion. He also notes that sustainable topline growth and expansion to mid-20% operating margin in CY25 supports a 28% FCF CAGR over the next 5-years. Stronger revenue growth flows through to FCF, which takes his DCF-based PT from $345 to $360, keeping him firmly OW. Download the Complete Report
ìChina – Netease – Monthly mobile grossing vs. NTES stock price
Source: Sensor Tower, Refinitiv, Morgan Stanley Research estimates
Alex Poon raised target price to US$140 the first name we are raising EPS and target price since the regulatory reset, as it has strong growth acceleration in 2022 (game revenue 13% YoY in 2021, 21% YoY in 2022) he has roll-forward valuation of 25x target games P/E from 2022 to 2023. Near term catalysts include 1) game license approval resuming, 2) strong 3Q results – game revenue 11% YoY; deferred revenue >10% QoQ, and positive read across from ATVI (re: Diablo Immortal), Youdao (re: cutting losses), 3) launch of Harry Potter overseas (Japan, Southeast Asia, Korea during Winter). Harry Potterʼs launch in China has exceeded expectations from first month , first full year potentially could bring Rmb 6-8bn. In addition Harry Potter overseas to be launched this Winter could be just a big as in China, and assuming a 20% share, it could contribute Rmb1bn of profit in 2022. He also sees margin tailwinds from narrowing losses from education and music as well as decline in channel fees. Valuation is at 21x FY22 P/E vs global peers at 17-30x, with 20%+ EPS CAGR for FY21-23. Download the Complete Report
ì LatAm – CCR – Dutra Road Auction Win
CCR placed the winning bid in the Nova Dutra road auction, with a 15.31% discount to the base tariff (the maximum discount) added to a concession fee of R$1.77bn. MS LatAm Research Analyst Josh Milberg’s preliminary analysis point to an NPV addition of ~R$2.4bn for the company, corresponding to ~10% of market cap as of the last close. Download the Complete Report
ìUS – ZoomInfo Techonologies Inc – MS Research Analyst Stan Zlotsky highlights that the strength of ZoomInfo’s ($87 PT) secular positioning appears undeniable, as the company once again maintained mid-50% organic growth amidst a foundational shift in how B2B selling is done. He thinks management’s ~50% organic growth target for the year likely carries upside heading into the big Q4 selling quarter.He also notes that growth confirmation was seen across organic billings coming in at 51% in Q3, on the back of a 38% point tougher compare from a year ago and vs. 68% organic billings in Q2. Although operating margins came in at 39% vs. guidance implying 39.6%-40.2%, the main source of pressure came from the two acquisitions done in the quarter. He also thinks it important to note that the S3 registration statement released in conjunction with earnings is the last part of unwinding the Up-C corporate structure, rather than insiders looking to sell. Lastly, with ZoomInfo officially achieving a single voting class and the company’s sustained profitability, Stan thinks the ingredients are there for potential inclusion in the S&P500. He remains OW and sees ZI as one of the top ideas in SMID SaaS coverage, with a 3:1 bull/bear risk/reward skew.Download the Complete Report
ì India – SBI Life –SBI Life: Valuation (P/EV)
Source: Refinitiv, company data, Morgan Stanley Research estimates
Subramanian Iyer reiterates his OW on SBI Life as his top pick among NBFIs post strong 2QF22 results. SBI Life reported 2QF22 VNB of Rs10.3bn (+89% YoY). 2QF22 VNB margin (effective tax rate basis) was 25.9% vs. 20.1% for 2QF22. The beat in VNB margin reflected a favourable product mix and stronger volumes. Non-par savings plus annuity APE doubled YoY, with share in total APE at 12.3%, one of the highest ever. Strong APE growth should be sustained as the economy recovers. VNB growth should be stronger as favourable product mix shift aids multi-year VNB margin expansion. Individual protection continues to grow; challenges are lower than for peers. MSe for VNB raised to 10-11% for F2022-24. Subbu raises price target to Rs1600, retains his OW as the absolute and relative valuations are attractive at a ~40% discount to HDFC Life think it could re-rate from 2.6x one-year forward P/EV to 3.0x and P/VNB from 19x to 23x. Download the Complete Report
ì China – Skshu Paint – SKSHU is growing at a much faster pace than the industry
Source: Company data, Morgan Stanley research.
Albert Li upgrades to OW. SKSHU’s shares down ~40% since end May on property market concerns however Albert sees the downside risks as now largely in the price. SKSHU's market share gain as industry consolidation accelerates and growing non-property business into consumer, infrastructure and government projects will continue to drive growth and margin. MSe 19-50% top line growth in 2021-23. New target price on 60x 2022E P/E (vs. 80x on 2021E previously) based on a 20% premium to the average of global peers given SKSHU's much higher growth potential than peers; we assume a PEG ratio similar to global peers. Download the Complete Report
ìUS – Alliance Data Ssytems Corp – Loyalty Ventures Spin Should Act As Catalyst, Drive Multiple Expansion; Stay OW
Source: Company data, Morgan Stanley Research estimates
MS Research Analysts Jeff Adelson and Toni Kaplan highlight that ADS (OW, $134 PT) is spinning off its Loyalty Ventures business (when-issued ticker: LYLTV, regular way ticker: LYLT). The team notes that Systems is spinning out the international Loyalty business, which accounts for 20% of revenues today, simplifying the business model into a pure-play US consumer finance, retail credit card lender. Additionally, the team points out that Loyalty Ventures is $765M revenue data-driven loyalty solutions business comprised of 2 key businesses, AIR MILES & BrandLoyalty. For LYLT, the team sees a potential base case valuation range of $27-38/share when shares begin trading, or a market cap of $655-931M. The team models Loyalty Ventures revenue CAGR of 4% in '21-25 and an adj. EBITDA CAGR of 8% in '21-25. Jeff also thinks clearing out Loyalty business to shine a light on the simplified card business should help narrow the ADS discount to card peers. Download the Complete Report
ì China – Aluminium – S/D Structural Change: China Turning from Net Exporter to Importer
MS Global Materials Research team published a global insight note on Aluminum where they expect market getting tighter as China turns from being a net exporter to importer. China accounts for 57% of global aluminum supply and previously exported 5-6 million tons per annum, or 38% of the global trade market. To achieve its carbon neutrality goals, however, China has capped capacity at 45mnt. In addition, emissions cuts and power controls have led to the suspension of 3.7mnt of capacity, or 10% of China's 2020 production. They expect China to become a net importer of 2-3mntpa, or 17% of the global market, in 2022. However, the global supply response will not be fast enough, current available idled capacity outside of China is only ~1.1mntpa, which implies 2.4mnt of deficit between 2022 and 2025. To reflect this, MS raises their near- and long-term aluminium price forecasts for 2022 and 2023 by 3% and 6%, respectively. Longer term, they increase real price forecast by 5%, from US$2050 per ton to US$2150, and their nominal forecast by 7%, from US$2335 to US$2474. In terms of stocks, global top picks are Alcoa, Norsk Hydro, South 32 ( ~31% FY22 rev exposed to Aluminum and rising given recent MCA Metal acquisition, trading at 3x EV/ EBITDA and 2x spot vs historical avg of 5x). In China Rachel likes: Chalco (2600 HK) & Shandong Nanshan(600219 CH, fully integrated supply chain including captive power enjoying higher margin direct beneficiary of higher aluminum prices).Download the Complete Report
ìUS – Alcoa Corp – MS Research Analyst Carlos de Alba highlights that AA has taken steps to shore up profitability through its recent portfolio review and is well positioned to benefit from a constructive outlook for aluminum, supported by China's supply side reform. On the back of this bullish outlook, Carlos expects accelerating FCF generation and continued shareholder returns. AA is Carlos’ top pick in his NA metal and mining coverage. Download the Complete Report
ì India – Decarbonization – COP26 Pledge Implications & Stock Picks
Five key commitments were announced by India’s Prime minister at COP26, which should accelerate India’s decarbonisation journey further. The five commitments state that by 2030, India will achieve non-fossil energy capacity to 500GW, fulfil 50% of its energy requirements from renewable resources, a reduction of projected carbon emissions by 1bn tonnes and a reduction of carbon intensity by 45%. By 2070, India should also achieve net zero emissions. The report looks at implications across sectors, and identifies key winners in India’s energy transition journey. As domestic gas supply is rising, there is higher EV two-wheelers penetration, energy/steel/utility corporates are committing to hydrogen, and government policy shifts/incentives are favoring alternative fuels like ethanol, hydrogen and bio-gas. Energy corporates are playing a key role in the energy transition journey with Reliance and GAIL being the key enablers. Private sector investments and FDI flows in the renewable energy sector, component eco-system and EV charging infrastructure are expected to increase sharply over the next few decades. NTPC, Renew Power, L&T and Tata Power are key names for this sector. On autos, our research team expects the two-wheeler industry to shift to electric. Motherson Sumi is a key OW here. Download the Complete Report
ìîAsia – Economics – China Leverage Concerns rise but L-T deleveraging trend intact
Concerns around China’s leverage have re-emerged of late triggered by the recent rise in default risks in the property sector and reflected in widening credit spreads. Chetan Ahya maintains his view that China will avoid a financial shock and stabilize its debt to GDP, as policy makers retain significant control over domestic financial conditions and the global trade backdrop is conducive. China’s debt to GDP remains significantly above the pre-Covid level of 269% vs. 284% as of 3Q21 however we expect it should decline in 2021 and continue to stabilize over 2022-23. At the core, China’s high debt to GDP ratio is a product of its countercyclical easing model. Over the medium term, China’s growth should continue to be driven more by exports and private capex rather than policy stimulus. This handoff to more productive sources of growth should also contribute to a relatively smooth de-leveraging process, as policy makers continue to push efforts to reduce leverage in the highly levered sectors of property and construction. Overnight bond payments are made by players in the Evergrande space (Longan and Ronshine) which was seen as a positive for the market. Download the Complete Report
ìîUS – Lyft Inc – MS Research Analyst Brian Nowak highlights that LYFT's (EW, $67 PT) 3Q results (revenue ~1% below MSe) and 4Q guide (revenue 9% below his previous estimates) speak to the continued rideshare recovery, though at a slightly slower than expected pace than previously modeled. $67mn of 3Q adjusted EBITDA was ~$3mn above MSe driven entirely by $18mn in 1-time items (gains from flexdrive selling vehicles and legal and released approval in G&A). Updating his model, Brian lowers his '22/'23 Revenue by ~6%/4% on slower than expected LYFT rides recovery as expected sequential m/m weakness in November and December as well as LYFT's geographic skew (west coast slower to recover). For perspective, his '22 estimated gross bookings are now ~20% above '19 levels vs ~26% previously. It will be important to monitor UBER's (OW, $72 PT) commentary on pace of recovery as Brian evaluates potential share shifts coming out of COVID.Download the Complete Report
ì China – Economics – Milder New Covid Wave. But Easing measures expected in housing sector and corp tax cuts.
Robin Xing notes the scale and the impact of the current COVID wave so far has been smaller and milder than that of the summer wave, as the number of medium to high risk districts is only 1/3 of that of the summer (~250 medium to high districts), and mostly in less populated areas, although the number of daily cases of 93 is approaching previous peak of 108. Inter- and intra-city mobility has held up relatively well, and the impact on domestic supply chains has been modest, with container shipment and manufacturing activity tracking well. Robin maintains MSe 4Q GDP forecast at 3.3% as he does not expect the COVID resurgence to result in meaningful supply chain disruptions or export price reflation. Beijing recognized renewed downward pressure on growth for the first time in 18 months and confirmed piecemeal easing in housing sector, while considering corporate tax cut for 2022.Download the Complete Report
ì India – Financials – Solid results. Reiterate OW and Raise PT
Sumeet Kariwala reiterates OW and raises target price for SBI post good earnings for F2Q22 particularly strong on asset quality/margin. Underlying profits were significantly better than expected, with PBT rising 152% YoY and was 29% above MSe, driven by lower provisions (13bp vs. MSe of 112bp) and strong NII beat (3% above MSe). As macro cycle turns, he expects continued uplift to earnings – provisions will undershoot more often, and PPoP growth will accelerate as growth/rate cycle turns (key incremental catalyst) – this will drive 0.9% RoA/15% RoE and further re-rating. New PT of Rs680 implies 1.2x book, in line with long-term average.Download the Complete Report
ìîUS – DraftKings Inc – MS Research Analyst resumes coverage of DKNG at EW with a $53 PT. He sees a relatively balanced catalyst path for DKNG over the near-term. He believes that his updated 2025 market estimate of $18B is relatively in line with consensus, and as a result, sees DKNG's market share and signs of profitability as the key near-term drivers of the stock. On the positive side, Thomas believes 1) DKNG's much lower market share in September will be transitory, driven by odds boosts similar to September 2020; 2) it is in the process of developing new products that could help drive incremental share in the coming months; 3) its SBTech integration and GNOG acquisition should give it more capabilities and scale to out-innovate; and 4) it could be able to give some positive news on NJ profits around year-end. However, on the negative side, 1) the market is becoming more competitive with CZR spending heavily and PENN entering new states. And 2) DKNG over the past two years has been losing share as it has lagged peers in product innovation. This remains a risk as DKNG still lacks the scale of infrastructure that its two main competitors, Fanduel and BetMGM, have. Thomas sees the near-term legislative path as relatively neutral; and expects OH to legalize in the next few weeks, but MA and NC not to, where there has been some hope. Download the Complete Report
ì China – Hardware – China Smartphone tally. Xiaomi best positioned. Upgrade Ofilm to EW.
Despite some near-term risk factors 1) regulation changes in the gaming industry; 2) data security issues in EU; and 3) power shortages the latest MS proprietary AlphaWise survey raises Andy Meng’s conviction of a non-consensus 4% shipment recovery in 2022. He reiterates OW on Xiaomi as the best positioned for smartphone recovery in China with close collaboration with telecom carriers, offline expansion and LT technology innovation leading its outperformance. He also likes Transsion (688036 SS) the Xiaomi of Africa he lifts target price. Andy upgrades Ofilm to EW, following the Hefei Government's strategic investment helping company to sustain and develop its handset/vehicle module business. He cuts target price of BYDE but reiterates OW given the company's e-cigarette manufacturing business has successfully made breakthroughs while the IoT businesses have positive long-term growth potential. Download the Complete Report
Negative
îUS – Activision Blizzard Inc – MS Research Analyst Brian Nowak notes that he was wrong about ATVI’s ability to execute and deliver its Overwatch 2 and Diablo IV pipeline in the middle of a period of high internal turmoil related to harassment challenges, multiple management changes (including the newly-announced departure of Jen O’Neal only 3 months into the role of co-head of Blizzard), and work from home. He also believes new management at Blizzard (now led by Mike Ybarra, with Rod Fergusson/Aaron Keller in key positions at Diablo/Overwatch) determined the game staffing levels were too low to deliver sustained high quality in-game content (post launch) to drive multi-quarter (and year) engagement and monetization. As such, ATVI announced it is delaying the launch of Overwatch 2 and Diablo IV. Brian also expects hiring to increase in 2022 ahead of the new title launches. He now models Diablo IV to release in '24 (vs '22 previously) and Overwatch 2 in 2023. His ‘22/’23 EPS falls by 30%/23% from the delay as he now models $3.30/$3.70 of EPS. Given the materiality of this delay (and company-level misexecution given ATVI publicly felt confident about the pipeline only 90 days ago at 2Q:21 earnings) he sees ATVI being more range-bound and moves to EW. His new $65 PT implies paying 20x ’22 earnings of EPS. Download the Complete Report
îUS – Zillow Group Inc – MS Research Analyst Brian Nowak highlights that Z’s surprising shutdown of Zillow Offers after 3.5 years of capital, human and mindshare investment was due to weaker than expected execution on developing/scaling effective pricing algorithms. He notes that this resulted in higher than expected earnings volatility and long-term potential capital commitments. As he adjusts his model, he lowers his PT by -32% to $76. In effect, he is removing the $22 value associated with Z Offers and lowering his core mortgage assumptions due to lower assumed attach and traffic conversion. Brian is also lowering his implied multiple on the remaining IMT and mortgage businesses from ~19x '23e EBITDA to ~17x '23e EBITDA due to greater uncertainty and execution risk that he sees weighing on the multiple investors will pay for the name. He remains EW, with the Zillow 360 strategy now critical to forward performance. Download the Complete Report
îUS – Chegg Inc – MS Research Analyst Josh Baer downgrades Chegg to EW with a new $53 PT. While he highlighted increased risk as far as the Chegg setup into earnings results and he previously cut his price target and 2022 estimates, he remained OW and was wrong on several fronts: 1) generally that the risks were already factored into the price, 2) he saw more risk in potential 2022 guidance and did not expect Q4/2021 guidance to get revised lower, and 3) he thought that management would still have enough visibility to guide to 2022, but investors did not receive any guidance. As such, he has re-based his forecasts from the lower starting point in Q4, with 4.34 million subscribers in 4Q21, -2% YoY, and Chegg Services relatively flat YoY. International subscriber strength (crossed 1 million subscribers and likely growing rapidly) should help to offset domestic weakness leading to sequential subscriber additions similar to 2018-2019 trends, in his view, but with the lower 4Q21 starting point this equates to low single digit growth overall in FY22 subscribers. This yields 10% YoY Services growth in CY22, still benefitting from increased ARPU from the bundle adoption, but well below Josh’s prior estimate looking for 25.5% YoY growth (and now off a lower 2021 base). Download the Complete Report
Nick Savone, Managing Director
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