FT : Playtech shares surge after agreeing to takeover by Aristocrat

Playtech shares surge after agreeing to takeover by Aristocrat
Online gaming software company founded by Teddy Sagi gains 50%

Shares in online gambling software company Playtech soared by more than 50 per cent on Monday after the group agreed to a £2.7bn takeover by Australian slot machine developer Aristocrat Leisure.

The acquisition of Playtech, which was founded by Israeli billionaire Teddy Sagi, will help to increase Aristocrat’s scale in the online sports betting market in the US. Isle of Man-based Playtech has recently expanded in North America as states including New Jersey have relaxed rules allowing online gambling and sports betting to take place.

The deal is also expected to provide growth channels for Aristocrat’s casino business.

The offer agreed by Playtech values the company at 680p per share, a 58 per cent premium to Friday’s closing price. Peel Hunt analysts raised their target price from 600p to 680p. Playtech’s shares rose 57 per cent on Monday to 675p. 

Playtech was founded in 1999 by Sagi to provide online gaming software to many of the world’s biggest gambling companies. He floated the company 15 years ago and sold his remaining shares in the group in 2018.

Aristocrat said it hoped to benefit from Playtech’s presence in North America and Europe, which it expanded via the 2018 takeover of Italy-based Snaitech and a series of launches in US states in recent years.

Aristocrat is an Australian gaming company that operates in more than 90 countries. It produces games and manufactures gambling machines for physical casinos.

“The business will be ideally positioned to unlock sustainable shareholder value by seizing opportunities in the fast-growing global online segment as they continue to open up, particularly in North America,” said Trevor Croker, Aristocrat’s chief executive.

Aristocrat expected to realise additional earnings per share in the high single digits in the first year after purchase, the company said.

Mor Weizer, chief of Playtech, said the deal “has the potential to enhance our distribution, our capacity to build new and deeper relationships with partners, and bolsters our technological capabilities”.

The companies expect the deal to complete in the second quarter of 2022, subject to shareholder approval.

FT : BMW left to play electric car catch-up after a pioneering charge

BMW left to play electric car catch-up after a pioneering charge
The carmaker led the market in 2013, but has no plans for an early end to production of combustion engine models

On stage at the launch of BMW’s all-electric i3 in 2013, Herbert Diess claimed the company had “completely redesigned mobility”. The model, one of the first mass-market electric cars, would, he predicted, “rewrite the rule book of our industry”.

Eight years on, Diess is indeed rewriting the rule book. But at Volkswagen, where he is the driving force behind the group’s €35bn push into battery-powered vehicles in the aftermath of the diesel emissions scandal.

Meanwhile the company he left in 2015 is playing catch-up in the EV market.

Electric models made by its closest competitors, such as the Mercedes luxury EQS and VW’s Audi e-tron range, are already on sale. Both brands are also adding several new electric models to their line-ups. BMW will only start delivering its flagship ​​iX and i4 electric cars to customers in November.


Far from being rewarded for its pioneering spirit, BMW was punished for being “too early”, said Michael Muders, a fund manager at Union Investment, a top 20 BMW shareholder.

“They burnt €2bn on the i3, and the market was not ready yet,” he said. Faced with steady, but muted demand for the vehicle, BMW did not follow up with the widely expected i5, and several of the engineers and designers who worked on the i range left, mostly for EV start-ups.

When electric vehicles finally began to take hold in the past couple of years — more than 3m are expected to be sold in 2021 — Muders said, BMW “were not prepared, they were late”. The company “had to start from zero, or almost from zero,” said Ingo Speich, portfolio manager at Deka, another BMW investor.

BMW chief executive Oliver Zipse strongly disagrees. “I don’t think we are slower,” he said last month, on the sidelines of the Munich car show. “Among premium manufacturers we have sold the most electrified cars this year.”

Certainly, in the nine months to the end of September, BMW sold almost 232,000 electrified cars, putting it behind only Tesla, China’s BYD and micro EV manufacturer Shanghai GM Wuling worldwide, according to figures compiled by Bernstein.

However only 60,000 of those were pure electric cars, such as the model sold by BMW-owned Mini. The rest were plug-in hybrids, which contain a combustion engine but can run on battery only for short periods.

More pure electric BMWs are on the way. As well as the iX and i4, BMW will offer a battery-powered model in “every single relevant segment” by 2023, chief financial officer Nicolas Peter told the Financial Times, including versions of the bestselling 5 Series and the X1 SUV. Over the next 10 years, BMW plans to deliver 10m fully electric vehicles.

Yet the company is also decidedly not planning to bring its combustion-engine line-up to an early end. Its assumption is that half of the cars sold in 2030 will be petrol or diesel models, and Zipse said in September “when you say you are not going to serve [this half of the market], you are setting yourself on a course to shrink”.

BMW’s public position is at something of a contrast with its key competitors, who have been battling it out to deliver ever more ambitious EV targets. Mercedes-owner Daimler said in July it would be “in a position” to go all-electric by 2030, while Audi announced in August that 2026 would be the last year it launched a petrol or diesel model.

Their positioning is backed up by a forecast from consultancy McKinsey, which predicted last month that the three largest car markets — Europe, the US and China — would be about 70 per cent electric by the end of the decade.

But Zipse said that BMW was not sure the change would happen so quickly. “I can now only look at the time between 2021 and 2030 . . . everything else is ambition,” he said. BMW, he added, “wants to remain profitable”.

His frankness has not been rewarded by investors. While Daimler shares have risen 42 per cent this year and VW, which owns Audi, is up by more than 30 per cent, BMW stock has risen just over 20 per cent.

And while the company, which is more than 45 per cent owned by the Quandt-Klatten family, is not under as much pressure from shareholders, “we are not happy with our capital market valuation,” Zipse said.

BMW’s announcement last month that it was raising its profit margin guidance from between 7 and 9 per cent, to between 9.5 and 10.5 per cent — in the midst of a semiconductor crisis that has devastated the sector and caused sales to drop by a third — certainly helps.


Jürgen Pieper, an auto analyst at German private bank Metzler, believes it will not be long before the market takes a second look at BMW. On profitability, “they are the winners of the last four or five quarters among the premium brands”, he said.

“Maybe the VWs and the Teslas have the more consequential [electric vehicle] platforms,” Pieper added, “but then you sit in a BMW and think: this product is just great.”

BMW also said it would be ready for a more rapidly growing electric vehicle market if its predictions were wrong, with its dedicated all-electric “Neue Klasse” range due to be unveiled in 2025.

It has committed to using recycled and recyclable materials in future models, and recently invested in Lilac Solutions, a US start-up that claims it can extract lithium for EV batteries from salt water.

But there are no plans to follow rivals with higher electric vehicle targets.

“We think twice before we communicate something,” Peter told the FT. “We are not going to change and overpromise against something which we are not going to deliver.”

FT : ECB considers boosting purchases of EU recovery fund debt

ECB considers boosting purchases of EU recovery fund debt
Central bank examines ways to retain flexibility in bond markets afforded by pandemic relief scheme

The European Central Bank is exploring raising its limit on purchases of EU-issued bonds, in a move that would enhance its flexibility in asset-buying schemes and boost the status of the bloc’s groundbreaking joint debt programme launched this year.

Four ECB governing council members told the Financial Times they would support increasing the share of public sector bond purchases that target debt issued by international bodies such as the EU, from the current cap of 10 per cent. They expect to discuss the idea at two special council meetings starting in November to decide how much support to provide for financial markets from next year. The plan would need majority support from the ECB council’s 25 members. The ECB declined to comment.

The mooted shift in ECB strategy comes as the European Commission plans to expand the amount of bonds it issues next year under its €800bn NextGenerationEU recovery fund — the vehicle agreed in the summer of 2020 to fund the pandemic response with debt backed jointly by member states.

Brussels aims to issue €80bn of bonds for the fund this year and almost double that amount next year, transforming the EU itself into one of Europe’s biggest bond issuers. Any extra support from the ECB would be likely to cut the EU’s funding costs and help to boost the status of the bloc’s bonds as a regional benchmark — a role previously dominated by German Bunds.

A tilt towards buying more EU bonds would also help the ECB to support financial markets without butting up against rules that bar it from owning more than a third of any individual country’s government debt. Some analysts think it could hit those limits on German and Dutch debt by 2023.

“Lifting the limit on supranational purchases would be a way for the ECB to generate more room for manoeuvre on government bond purchases and to also show support for this important EU programme,” said Elga Bartsch, head of macro research at the BlackRock Investment Institute.

The ECB is expected to announce in December that its pandemic emergency purchase programme (PEPP), the €1.85tn bond-buying scheme that it launched in response to the Covid-19 crisis, will end in March.

The four council members said they expected the central bank would examine ways to retain at least some of the extra flexibility that came with PEPP, which is exempt from the limit on national government purchases.

One of them said the ECB was also working on ways to continue buying Greek government debt, which would otherwise be excluded by its rule against buying bonds with credit ratings below investment grade — another restriction lifted under PEPP.

However, the idea of expanding asset purchases is likely to meet opposition from more conservative members of the ECB’s governing council, including Germany’s Jens Weidmann and Klaas Knot of the Netherlands.

These so-called hawks are typically uncomfortable with the ECB snapping up bonds, especially outside of acute periods of crisis, worrying about the over-reliance of governments on the purchases to support high debt levels.

A crucial factor in the debate will be whether the ECB continues to forecast that inflation will fall back below its 2 per cent target next year and stay there over the next two years. The central bank is due to update its inflation forecasts and issue a new prediction for 2024 in December.

Soaring energy prices and supply chain bottlenecks have prompted some ECB policymakers to fret that the bank is underestimating future price growth. Nonetheless, few analysts expect a hard stop in the ECB’s debt-market support once PEPP expires. Instead, they widely forecast that the central bank will expand its traditional asset purchase programme, which has been buying €20bn of bonds a month alongside PEPP purchases.

“I expect they will continue to revise up their inflation forecasts until the second half of next year,” said Frederik Ducrozet, strategist at Pictet Wealth Management. “But I still think the asset purchase programme will continue to the end of 2023.”

Several of the council members said the ECB could shift from buying a fixed monthly amount of debt in the traditional asset purchase programme to targeting a total of overall purchases. They said it could also create a new “backstop fund” on top of the asset purchase programme, to be used only in response to disruption in financial markets.

François Villeroy de Galhau, the French central bank governor and an ECB council member, said last week that the bank could maintain capacity for extra asset purchases in emergencies, adding that “the theoretical possibility of their use, would mean that we would probably not have to actually use them”.

>>> MS's Global Reflections

SALES COMMENTARY ONLY (NOT A PRODUCT OF RESEARCH)

FOR INSTITUTIONAL CLIENT USE ONLY

 

It’s hard to believe we are already two weeks into Q4. The temperature and weather have been amenable to being outside, and the scene is a constant reminder that slowly but surely our world is returning to some sense of ‘normalcy’, perhaps not exactly like the kind we had before March 2020. Nevertheless, I’d be hard pressed to find a better time of year in the northeast than the middle of fall.. What I am excited for is next week marks the heart of Q3 earnings season, what is shaping up arguably to be a potential inflection point for both bulls and bears. Thus far, this earnings season has yet to disappoint.

 

The major focus for investors going into Q3 earnings has been the debate around inflationary headwinds relating to supply chain pressures and the resilience of consumer demand. With headlines and sentiment turning definitively negative heading into earnings, perhaps we were due for a relief rally. And after rates stabilized, and at one point were ~10 bps off recent highs, bulls took the opportunity to once again aggressively buy the dip. The end result was the best week for indices in over two months. Additionally, performance in the US was buoyed by better-than-expected large cap bank earnings. Beat rates within the Financials sector were strong on the back of improving expense trends and loan growth—85% of companies that have reported surprised to the upside. Financials aside, beat rates for the SPX more broadly are actually tracking lower than the eight quarter historical average (76%), but still quite supportive given the incremental degree of skepticism. So far, only 67% of companies in the SPX that have reported earnings have delivered an EPS beat, which is in line with Mike Wilson & team’s call for lower beat rates this quarter amidst supply chain pressures, demand pulled forward, and cost challenges.

 

The bull vs. bear debate centering around the risks to growth and margins in the face of resilient demand continues to reverberate. Bears continue to highlight concerns around margin pressures, inflationary headwinds, rising interest rates and a demand payback that they say pose a risk to growth. On this point, bears were vindicated this week when AAPL reported iPhone production cuts due to material shortages, yet the stock actually closed the week up +136bps, begging the question of exactly what is currently priced in or not at this junction. The concerns around supply chains are well documented, and price action may be indicating that with this narrative driven home recently, the risk/reward may currently skew to the upside, as the perception of demand is thwarting supply constrictions in the near-term. Taking the glass half full approach, investors shrugged off Apple’s sourcing issues on the belief that customer loyalty and non-perishable demand for iPhones will merely push sales into 2022. While this ambivalent narrative may work for Apple, one may question whether smaller companies facing similar supply squeezes will fare as well without the scale and brand strength that Apple boasts. Who are the winners and losers in this environment?

 

Going forward, there is still much to debate around whether companies will continue to beat against still elevated expectations for 3Q and 2H21 as we dive deeper into earnings season. While Financials provided bulls with plenty to be excited about, bears would point towards the sector being one of the least affected by the supply chain disruptions being felt across the broader market landscape. Bulls continue to look past near-term supply chain headwinds and margin pressures, as they believe robust consumer demand and wallet trends are good enough to continue supporting corporate bottom lines. Today’s retail sales beat may give credence to this point of view. The next few weeks will undoubtedly be crucial in gauging the severity and impact of supply chain issues and the broader read through to inflationary fears as more companies comment on the current environment. However, looking at an index trading ~21x fwd earnings, another factor to note is the current Equity Risk Premium levels in the market, which is measured by the MS ticker on Bloomberg (MSRPSPX). We are now around 325 as of today’s close. To contextualize, 325 is in the lower quintile of the historical range post 2008 which has been 300-465, signaling sell at the low end and buy at the high end. With the levels having been range-bound from 320-360 since July, any directional moves outside of this range may be worth taking a view on. While these ERP levels may be comparatively lower than pre-covid, nonetheless we have seen the ERP steadily rebound from its 5-year low of ~281 seen earlier in April. Bears will continue pounding the table on how punchy valuations are, but for now the trend into year-end may be easier to the upside as the markets continue to climb the perpetual wall of worries, or so goes the debate.

 

Further tailwinds to risk sentiment this week came from a softer-than-expected CPI numbers and jobless claims dropping below 300,000 for the first time since the pandemic began in March 2020. On Thursday, markets rallied on positive sentiment around economic strength as the S&P 500 notched its best day since early March with a 1.7% gain. Bulls were happy to see the VIX continue its decline from last week to settle at 16.30, inching closer towards the year-low of 15.07 than recent levels in the 20s…. Looking ahead to next week, 15% of the SPX market cap is expected to report and the bulk of the reports will come from the Health Care and Staples sectors. Some of the largest companies to report will include Tesla (TSLA), Johnson & Johnson (JNJ), Procter & Gamble (PG), and Netflix (NFLX).

 

I continue, like many of you, to have a couple observations that crossed my mind this week including…

  • One city I've been hoping to get back to is Chicago (maybe not in the winter)...just like Robert De Niro in the SAVONE family movie of the week, “Midnight Run”!
  • One topic of discussion that I continue to pay attention to is the energy transition. MS Clean Tech Analyst Stephen Byrd upgraded PLUG to OW this week ahead of their Investor Day and argues that a potential infrastructure bill would be a major positive catalyst. What do you think the final outcome is on infrastructure?
  • Succession season 3 begins on Sunday and I couldn't be more excited...one of my favorite dramas out there. Fittingly, Media Analyst Ben Swinburne is out with a note analyzing the future of the film industry and where names like NFLX and DIS fit in. Be sure to ask for the report!
  • Amidst the spikes in commodity prices, one discrepancy I have noticed is in the price of Silver, which has fallen as rates have risen. In addition to the pure commodity play, it is an important component in things like semis and solar panels. How are you playing the current volatility in commodities?
  • What a weekend of sports! Fortunately, the timing lines up just right so I think I'll be able to watch my Roma squad take down Juventus and then drive with my daughter to watch the Cowboys play the Patriots at Gillette. What a world where we can consider the Cowboys to be the favorites in that matchup!
  • JNJ Covid booster shot was endorsed by FDA advisors today. Have you gotten your booster? In terms of the stocks, I've heard the most enthusiasm around MRNA and the potential of m-RNA. TBD on whether this will influence my decision...
  • Not a Red Sox fan but what a series against Tampa! Not sure they have what it takes to win the World Series (Boston folks, keep in mind this is coming from a Yankees fan), but I will say that I've had a great time watching them play and may even root for them against Houston...(just kidding, I hate the Red Sox. Long live the Great Bambino!)
  • China flows also seeing an inflection point with investors adding to US-listed China Internet. This follows a massive drawdown in the past few months driving HF exposure to the lowest levels since 4Q18 and seems driven by a recent string of events (Jack Ma sighting, Meituan lower fine, Tencent game approval) along with expectations for economic stimulus into next year's Olympics. Are you bottom fishing?
  • With SPCE down this week and William Shatner up in space on a Blue Origin flight, I've been reading a lot of Aerospace Analysts Kristine Liwag and Adam Jonas' reports. Would you ever go? I'm not sure I'm ready for galactic reflections just yet but am interested to see how the space evolves...
  • While I may be showing my age in my reluctance to buy cryptos, I have been following Midcap Banks Analyst Ken Zerbe's work on crypto-focused banks like Silvergate. Ken came out with a great note today with some key metrics on the growing adoption of crypto so be sure to ask...

 

On positioning, US L/S gross exposure rose 3% WoW to 198%, 40th %tile on TTM view but 94th %tile on 10y view. US L/S net exposure rose ~1% WoW to 61% as funds covered shorts, which still places the current level at the 45th %-tile over the last 12M, but 95th %-tile on a 10y view. EU L/S fund gross exposure was unchanged WoW, while net exposure for the cohort rose 2% WoW. Asia fund gross exposure was unchanged WoW, and net exposure rose ~3% WoW.

 

Another busy week of data along with the release of Fed Minutes. There were no surprises from the Minutes release; it conveyed a general sense of agreement to proceed with a taper decision at the November meeting which is expected to conclude around the middle of 2022. Outside of the US, the UK reported a second miss in a row for GDP (0.4% m/m vs 0.5% m/m consensus) on weaker services while the previous month was revised lower. China’s trade surplus topped expectations by a wide margin coming in at $66.8bn vs the consensus $46.8bn. Data showing sentiment is indicating more concerns towards longer lasting inflation, and that is starting to weigh on sentiment within some of the surveys. However, the retail sales number was one of the strongest data points of the week. It is significant that for the 2nd month in a row, retail sales are strong and beating expectations. The consumer appears very healthy and despite unemployment benefits expiring and stimulus rolling off, there is plenty of money in bank accounts to be spent.

 

The consumer price index (CPI) for September came in somewhat below MS Chief US Economist Ellen Zentner’s expectations, but with notable details that showed stronger underlying cyclical components, while more volatile used car prices and airfares, among other factors dragged down the top-line figures. The core CPI rose 0.24% in September, below Ellen’s estimate for a 0.32% increase. On the other hand, the producer price index (PPI) for September was somewhat softer than expected, with the headline index rising 0.5% on the month, boosted by energy prices, while the core PPI (ex food, energy, and trade services) came in below expectations, increasing just 0.1% on the month. Consequently, Ellen finalizes her core PCE inflation forecast at +0.14%M for September, holding the year-over-year rate steady at 3.6%. Headline PCE inflation should rise +0.27%M in September, lifting the year-over-year rate to 4.4% from 4.3%. Ellen’s outlook for inflation and the labor market suggests that the decline in real wages will not be sustained, though it will take some time for them to return to the black and stay there. She is also currently tracking 3Q GDP at 2.3%, up 0.3pp from 2.0% one week ago incorporating new data on inflation, retail sales, and inventories. Please ask to speak to Ellen and team.

 

As we come to the end of the quarter, MS Chief US Equity Strategist Mike Wilson highlights that higher rates and a stronger USD have led to multiple compression, a process that remains unfinished. He notes that whether the final chapter of the transition ends with a 10% or 20% correction in the S&P 500 will be determined by how much earnings growth decelerates or has to outright decline. He continues to see downside risk to earnings revisions breadth as 3Q earnings season kicks off—a headwind for price. Importantly, his work shows that Y/Y change in earnings revisions breadth tends to lead forward earnings growth by 26 weeks. Further, the Y/Y change in earnings revisions breadth has already started to decelerate, pointing to notable downside to earnings growth as he looks ahead 6 months. He now highlights MS Analysts’ key OW picks within his sector preference for Consumer Services: McDonalds (MCD), Yum! Brands (YUM), Boyd Gaming (BYD), and Caesars Entertainment Inc. (CZR). Please ask for the full report.

 

As we enter an earnings season replete with uncertainties — supply chain pressures, tenuous price / cost dynamics, ebbing macro tailwinds — Mike and the equity strategy team highlight 16 stocks for which Morgan Stanley Research analysts have high conviction that the print will drive a material move in the share price. Some OW names on the list include Evercore (EVR), Lamar (LAMR), TuSimple (TSP), and Iridium (IRDM). On the negative side, MS Analysts have high conviction on UW-rated Cateripllar (CAT), Pentair (PNR), and Lumen (LUMN), among others. Please ask for the full list.

 

Looking across the pond to Europe, this 3Q21 earnings season MS Equity Strategist Ross MacDonald is expecting a modest beat, relative to the record consensus EPS upgrades exhibited in the last few quarters; keep in mind that 2Q21 saw 36% of companies beating on EPS. His conviction is backed by mixed macro data, consensus EPS estimates having continued to rise, the abundance of near-term cross-currents for corporate margins, and a balanced/modest sentiment received from the MS Analyst Survey on EPS estimates. Specifically on the latter, expectations for EPS growth in 2022 remain low at sub-7%. Ahead of results, Ross highlights that the Europe Equity Analysts have a positive view on Acerinox (ACX SM), Elis SA (ELIS FP), Hugo Boss (BOSS GR), Societe Generale (GLE FP), Teleperformance (TEP FP), UniCredit S.p.A (UCG IM), Whitbread (WTB LN), and Moncler (MONC IM). On the other hand, MS Analysts have a negative view on Banco Sabadell (SAB SM) and Geberit AG (GEBN SW). Please ask for the full report.

 

Looking to Asia, the central theme is occupied with macroeconomic improvement and policy support. MS Chief China Economist Robin Xing and MS Head of China Financials Analyst Richard Xu argue that the recent release of Sept Broad credit growth +10.2% represents a bottom. The team notes that the MoM SAAR growth edged up by 10bps to 9.9%, and there is a clear path forward in terms of policy relief. MS Head of China Renewables/Utilities Analyst Simon Lee highlights that the government is focused on having enough coal supply to avoid severe power cuts in the winter. The Harbin government in Northeast China announced easing measures for the local property market, on the back of the PBoC/CBIRC meeting asking for a ‘healthy and steady property market. MS China Property Analyst Elly Chen also upgraded her industry view to attractive and added Sunac (1918 HK) to her top picks list. Please ask to be connected with the teams.

 

Top of mind, headlines around internet names like Meituan (3690 HK) and Tencent (700HK) have improved, and the resolutions of investigations around companies like Kanzhun (BZ US) could serve as more positive catalysts. Meituan’s anti-monopoly fine was finalized at US$530mn, which marks a major overhang removal from one of the major driving engines in HSI and HSTech, and should spill over into other Chinese internet names especially if games approval resumes later this month. For JD (JD), the team forecasts 23% YoY revenue growth in 3Q21 despite a weak consumption trend starting from August owing to macro headwinds. JD's revenue growth is expected to remain resilient in 4Q21 despite the continuing weak consumption trend. Please ask to be connected with the team.

 

MS Japan Economist Takeshi Yamaguchi notes that the market may have already discounted a large-scale supplementary budget. That being said, re-openings catalysts still remain, as evidenced in a +12.9% MoM increase in the outlook DIs, the largest since May 2020, along with falling Covid cases and expectations of normalized economic activities building confidence in the macro outlook. Please ask to be connected with the team.

 

As our busy conference season continues, I wanted to highlight a few MS Conferences, such as the Morgan Stanley Sustainable Investing Summit (Oct 27), the Virtual Insurance Corporate Access Day (Nov 22), and the Virtual Global Consumer & Retail Conference (Nov 30 – Dec 2). As a reminder, our Global Chemicals, Agriculture & Packaging Conference will still take place during the 2nd week of November but will now be a hybrid event with an in-person portion on the 1st day, followed by 2 virtual days. 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.

 

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

 

UPCOMING CONFERENCES –

Please reach out to your sales representative if you are interested in attending any of these conferences.

Oct 19 (Singapore) I Virtual ASEAN Private Company Day

Oct 19 (Sydney) I Emerging Companies: Alpha ex-100 Conference

Oct 27 (New York) I Morgan Stanley Sustainable Investing Summit

Nov 3-4 (China) I Virtual China Materials Symposium

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) | European Technology, Media & Telecom Conference

Nov 17-19 (Singapore) | 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 7 (London) | 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 14th Annual Latin America Executive Conference

Jan 18 (Asia) I Virtual Asia Symposium

Mar 7-10 (San Francisco) I TMT 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

 

ìGlobal – Asset Management – The Future of Private Markets: How Long Will the Golden Age Last?

Source:  Morgan Stanley Research

MS Research Analyst Mike Cyprys highlights that private markets are an ~$8tr AuM industry today. Heading into 2022, he notes that elevated valuations and prospects for central bank tapering and rising yields/rates are leading to concerns about the private market growth outlook. A pullback in private market valuations as growth moderates may be healthy, but even if the 10-yr yield does climb to 3%, Mike expects double-digit asset and revenue growth over the next five years. Under-allocation forms the backdrop for the secular growth he expects in private markets, particularly among retail investors and insurance companies, with institutional investors expanding allocations. He also thinks strategic activity (M&A and IPOs) looks poised to ramp as the industry grows and matures. Mike sees Alt managers embarking on tech-driven acquisitions, partnerships, and key hires to digitize their business. Over time, he believes Alts' growing insurance relationships and expanded credit capabilities could raise competitive pressures on more traditional money managers as the Alts' business model evolves to transcend liquid and illiquid markets. Globally across MS coverage, Apollo (Mike’s Top Pick, OW, $73 PT), StepStone (OW, $56 PT), and EQT (Covered by MS Research Analyst Bruce Hamilton, EQT SS OW, $476 PT) stand out to the asset managers team as under-appreciated growth stories in private markets where growth should prove better than expected.Download the Complete Report

 

ìîUS – Internet – Six Key Debates Heading into 2022

Source:  Morgan Stanley Research, Company Data

MS Research Analyst Brian Nowak and the internet team highlight 6 key debates heading into 2022: 1) what the key drivers are to the ’22 online ad markets and which names he prefers. On this front, Brian remains most optimistic on GOOGL (and a still-growing retail suite of offerings, OW, $3000 PT), FB (Reels, Shopping, Messenger, Optionality around Ad Load, OW, $400 PT), and SNAP (growing Discover content, lens kit, augmented reality, OW, $85 PT); 2) how investors should think about GOOG/FB ’22 investment and FCF. Brian expects GOOGL/FB gross profit to be $77bn/$60bn (~80%/100%) larger in ’22 than in ’19. This scaling gross profit can fuel record hiring, investment and free cash flow; 3) what factors to focus on in budding connected TV. Brian highlights that this is the next under-monetized engagement battleground for ad dollars; 4) how fast eCommerce will grow from here and which companies are best positioned to deliver outperformance in last mile. Brian expects heavy investment from AMZN (OW, $4100 PT)/UBER (OW, $72 PT)/DASH (Not Covered) and multiple privates to address this opportunity; 5) how fast UBER/LYFT (EW, $72 PT) rideshare bookings will grow in ’23-’25. His base models call for Uber/Lyft bookings to grow at 13%/12% ’23-'25 CAGRs; And 6) how the Metaverse will evolve. Brian sees considerable upside to ATVI (OW, $120 PT) from trends and the expected pipeline but from a big picture perspective, he is even more focused on the blurring lines between social and gaming. Download the Complete Report

 

ìS.Korea – Autos & Shared Mobility – US Industry Inventory

Source: Motor Intelligence, Morgan Stanley Research

Youngsuk Shin upgrades Korea Auto Parts names across board – Hyundai Mobis & Mando to OW, and Hanon to EW, expecting their underperformance vs OEMs to reverse in 4Q and into 2022 as a leveraged play on production recoveries (on easing Malaysia bottlenecks). This, coupled with restocking demand against record-low inventory levels and accelerating EV parts mix, indicate further support to earnings into 2022. Youngsuk expects 3Q21 to mark the earnings lows for auto parts and thinks much of the earnings downside risk is priced in following a ~15% pullback in shares during the quarter. Valuation is also very cheap, with all parts stocks trading at the low-end of the historical avg. Meanwhile, Youngsuk keeps his counter-consensus EW on both OEMs – Hyundai and Kia. Though he agrees a rising tide should lift all boats, including the OEMs, the same headwinds (slowing ASP/mix, cost inflation and eventual pick up in incentives) that drove his downgrade back in 1H21 still remain, likely keeping the momentum in check. As a result, Youngsuk prefers auto parts suppliers over OEMs into 2022 and makes Mando his top pick in the Korea Autos & Parts space, followed by SNT Motive and Hyundai Mobis. Download the Complete Report

 

ìJapan – Autos & Shared Mobility – LCA (Life Cycle Assessment) CO2 emissions (t/unit): Higher Emissions For BEVs During Manufacturing (Mainly Batteries), Power Generation(According To Generation Mix) And Disposal

Source: Morgan Stanley Research estimates

As a follow up to his initiation on Japan OEMs early this week, Kakiuchi-san is out with a Primer on Japan OEMs, discussing a wide range of topics including global penetration outlook, life cycle assessment of CO2 emissions, J-OEMs’ BEV strategies, battery supply & Japan’s BEV market. General consensus is that J-OEMs are laggards in the BEV race with lower targets than overseas counterparts, but Kakiuchi-san thinks this underestimates the J-OEM’s technology leadership and knowhow from electric power trains that could be easily to put use in BEVs as well as their ability to adapt to changing consumer needs + CO2 emission regulations. Three J-OEMs have different BEV strategies across component sourcing and battery production and have a slew of BEV models lined up for launch in coming years – which offers both risks and opportunities for Japanese auto makers. Kakiuchi-san likes Toyota (OW) for its adaptability to changes in the business environment as well as software opportunities. Download the Complete Report

 

ìIndia – Technology – Revenue differential (actual vs. consensus): Wipro Has Been Beating Consensus Expectations For The Last Four Quarters

Source: Refinitiv, Morgan Stanley Research

Wipro: MS research upgrades the stock to EW. The demand cycle has been favorable, but Wipro's execution and strategy have been working well, driving good order intake and conversion of that to revenue. Co posted a second consecutive quarter of organic growth rate of 4.5%+ QoQ in cc terms; guidance for 3Q also implies 2-4% QoQ. Given strong 2Q performance and good guidance for 3Q, the stock should open up strong, post which MS research sees limited upside in the near term.Mindtree: Reported cc revenue growth of 13.4% qoq, better than MS research estimates of 10.2%. EBITDA margin at 20.5% was ahead of MSe of 20.3%. Mgmt commentary was constructive on revenue growth but supply-side challenges could pressure margins in 2HF22e, limiting EPS upgrades. High valuation multiples makes risk-reward balanced. Infosys: Reported cc revenue growth of 6.3% qoq vs MSe of 7%. Key highlight was company's stable margin performance. As per co, it is witnessing broad-based growth. Mgmt commentary was consistent with industry peers' and highlighted good activity within mid- to relatively smaller-sized deals. Despite good 2Q, MS research doesn’t see EPS upgrades as FY22's revised revenue growth guidance of 16.5%-17.5% YoY in cc terms is already there in expectations. Also, large deal signings declined 17% qoq. MS research sees multiple headwinds to margins in 2H. Expect 2H margin to be weaker vs. 1H and forecast FY22 margin of 23.1% and FY23 at 23% (vs Street estimates of 23.7% and 23.8%, resp). Download the Complete Report | Download the Complete Report | Download the Complete Report

 

ìChina – Financials – Over The Past 6+ Years, We Have Seen Successful Financial Cleanup In Different Areas With Experience Accumulated To Help Resolve Potential Future Risk Cases

Source: Morgan Stanley Research

Richard Xu and team revisits stress test of the China financial system, and do not see risk factors that will notably reduce the financial system's ability and willingness to support reasonable credit growth, which tend to be the cause of systemic risks. Their analysis shows that China's banks can digest up to 15% NPLs for non-mortgage property loans in one year. They also still see many mechanisms to prevent systemic risks: 1) Market mechanisms to lower interest rates if mortgage demand really weakens given stable new mortgage quota in 2022; 2) Different policy transmission mechanism in China on credit demand and supply dynamic will also mitigate risks.

  • Ping An Bank - Catalyst Driven Idea - Richard Xu also has a separate note on PAB where he sees two catalysts over the next 45 days supporting Ping An Bank's share price: 1) expects solid operating results in 3Q21 earnings on Oct 21; and 2) positive comments from management on Corporate Day featuring corporate banking business on the same day. Download the Complete Report | Download the Complete Report

 

ìUS – Media – The Future of the Movie Business, Unmatched Content & Distribution Scale

Source:  Morgan Stanley Research, Company Data

MS Research Analyst Ben Swinburne highlights that since the onset of the pandemic, he has seen film production and theaters shutter and restart. He notes that this has coincided with an accelerating strategic pivot towards streaming by major media companies. He also points out that most recently, as vaccinations have ramped so have box office results. Ben assesses and analyzes both the pandemic-related and secular changes to the film business. His conclusions are: 1) The pandemic accelerated the strategic shift to streaming, which counter-intuitively has increased the value of film studio assets, and 2) Exclusive theatrical windows will stick for tent-pole films, leaving a substantial global box office industry for years to come - albeit likely smaller than pre-pandemic levels. He reiterates his OW ratings on DIS ($210 PT) and NFLX ($675 PT) given unmatched content and distribution scale, sees rising strategic optionality at EW LGFb (Covered by MS Research Analyst Thomas Yeh, $14 PT), and sees the pro-forma Discovery's Warner Bros. studio as an underappreciated asset inside EW DISCK ($32 PT). Finally, Ben raises his PT on EW CNK ($24 PT) and sees upside to consensus in '22. Download the Complete Report

 

ìUS – Software – 3Q21 Security VAR Survey Shows No Signs of a Slowdown

Source: AlphaWise, Morgan Stanley Research. N=20 (US and EU data)

MS Research Analyst Hamza Fodderwala highlights that the recent MS September survey of large Value Added Resellers (VARs) suggests an accelerating security spending environment on the back of rising threats as well as an expanding attack surface area from increased WFH and Cloud migration. These results are consistent with the software team’s Chief Security Officer (CSO) survey from July and stronger Q2 results from security vendors. In particular, 85% of VARs cited improving security demand in the past 6 months, up ~10pts from the survey a year ago, while none reported any deterioration in demand. Net, Hamza thinks the market is in the early innings of the up-cycle in security spending that likely began in late-Q2 and should sustain through 1H of next year before beginning to normalize, based on current pipeline visibility. The results make him incrementally confident in his recent OKTA (OW, $315 PT) upgrade, in particular, as well as SAIL (OW, $75 PT) and CYBR (OW, $200 PT). Download the Complete Report

 

ìîUS – Hardline/Broadline/Food Retail – Mean Reversion; Downgrade BBBY and W to Underweight; Upgrade EYE to OW

Source: Bureau of Economic Analysis, Morgan Stanley Research

MS Research Analyst Simeon Gutman’s work indicates that despite a pullback in durables, strong labor income and the drawdown of stimulus savings will support PCE, hence mean reversion will be less dramatic than feared. His model's reversion path suggests Durable goods could decline in both 2022 and 2023 (-4.3%/-5.2), but land at a higher level than consensus appreciates (~$100b/6% higher). As a result, he thinks consensus revenue estimates may be too low in '21/'22. Simeon also sees modest upside to '23 revenue estimates. Additionally, he concludes that while his categories will experience declines in ’22 and ’23, these will be moderate, and that share gains for many of his covered companies will provide offsets. Simeon upgrades EYE ($70 PT) from EW to OW as he sees healthy Optical category growth in '22 and '23, amplified by EYE's continued share gains. He is downgrading BBBY ($12 PT) from EW to UW as the Home Furnishings category could decline in both '22 and '23, which could be compounded by share loss in line with BBBY's history. He is also downgrading W ($195 PT) from EW to UW given the possibility of Home Furnishings category declines in both '22 and '23 leading to declining near term sales and negative profit implications.Download the Complete Report

 

ìî LatAm – Latin American Technology –LatAm Research Analyst Cesar Medina highlights that Latam tech has not been immune to global headwinds and a Brazilian sell-off. However, history suggests the bulk of top-down headwinds may be priced in and fundamentals should prevail. Key OWs: GLOB, VTEX & LWSA. Download the Complete Report

 

ìîEurope – Internet – Sector performance has been weak over the past three months but we remain cautious as we think earnings are yet to bottom, and we therefore see downside risk into Q3 earnings season. Our preferred names are Adevinta, Yandex and JET.Download the Complete Report

 

ìEurope – Financials – This Appears To Translate Into Outperformance Of Companies With Improving Corporate Governance

Based on simple average performance; top vs bottom quartile. Ranks are applied with a 2 year lag, rebalanced every year. Source: Bloomberg, Morgan Stanley Research

As the impact of climate change comes into focus, Nida Iqbal and the Team assess EEMEA banks for green transition risk exposure and green financing opportunities in the coming years. They note that analyzing  ESG for EEMEA banks is challenging due to the lack of disclosures and comparability across regions. However, their analysis finds CEE (Hungary, Greece and Poland) and South African banks are those with the most transparent and comprehensive ESG disclosures. These banks also tend to show more explicit ESG targets and commitments than the rest of EEMEA banks. They also see the CEE banks as having the largest near-term green financing opportunities driven by investments in sectors through the EU Recovery Fund including renewable energy, energy efficient housing and renovation projects. In contrast, they see the Russian banks as more exposed to green transition risk. How to play the ESG theme in EEMEA Banks: Green financing opportunity: Greek banks (Eurobank, Alpha Bank), OTP (Hungary). Upside from improvement in ESG disclosures: Sberbank, First Abu Dhabi Bank (FAB). Social opportunities (financial inclusion): South African banks (Standard Bank with its Sub-Saharan Africa reach), Saudi Arabian banks (Al Rajhi Bank and SNB in home finance), and Tinkoff (Russia). Download the Complete Report

 

ì LatAm – LatAm Real Estate & Logistics – LatAm real estate is trading near Covid lows. Yet MS LatAm Research Analyst Nikolaj Lippmann’s latest AlphaWise survey shows demand momentum across the space for malls, homebuilders. Rates concerns are real, but growth matters and today he sees material upside for RE, particularly Chile (+90%). Nikolaj reiterates OWs BRML, PARAUCO, MRV, CYRE. Download the Complete Report

 

ìîJapan – Macro – Japan equities have given up most of its pre-election gains, which many foreign investors have attributed to low approval rating for PM Kishida + uninspiring cabinet member choices as well as policy uncertainties around corporate governance reforms and income redistribution policy including a possible hike in the financial income tax. MS Japan Economist Yamaguchi notes that the market may have already discounted a large-scale supplementary budget however re-openings catalysts still remain, as evidenced in a +12.9% MoM increase in the outlook DIs, the largest since May 2020, along with falling Covid cases and expectations of normalized economic activities builds confidence in the macro outlook. On Oct 11th Kishida was on Fuji TV saying he’s not considering capital gains taxes and rather looking to focus on tax system that benefits firms raising wages and protecting small subcontractors… these comments should be minor positive.  Download the Complete Report | Download the Complete Report

 

ìChina – Property – Although near-term risks linger around default risk and regulation, with the sectors trading at 10-year and 3-year trough for China Property & Property Management companies, Elly Chen and Chloe Liu are upgrading their respective sector views from In-Line to Attractive. Elly thinks that the PBoC and CBIRC meetings on September 29 will mark the bottom of policy tightening, requiring financial institutions to maintain steady and healthy development of the real estate market. We also expect further easing of mortgage quotas, which started in late August. On property management side, Chloe expects the M&A trend to continue, and it will help leading PMCs in further consolidation of the market, with the benefits of achieving larger GFA scale and higher project density. In 2020, the top 100 PMCs had market share of 50% and the top 10 had 10% -valuation for PMCs is divergent. Large-cap PMCs are trading at 21x 2022E P/E on average, while small- and mid-cap PMCs are trading at 9x 2022E P/E on average. Some unlisted small-mid sized PMCs gave up IPO plans, preferring instead to be sold to large PMCs. Stock picks: prefer the ones with lower liquidity risk – Poly A, CR Land, Longfor and Sunac (newly added - improving balance sheet, strong asset liquidity in high-tier cities, and attractive valuation at 2.5x 2021E P/E due to investor misperception about its liquidity situation) for China Property and Sunac Services, Ever Sunshine, and CR Mixc for China Property Management. Download the Complete Report | Download the Complete Report

 

ìîEurope – Economics –The Market Is Pricing Almost Full 15bp Hikes At The Next Four Meetings

Source: Bloomberg, Morgan Stanley Research forecasts

With higher inflation but deteriorating exports, we expect the NBH to strike a balance and to deliver another 15bp hike at the upcoming October 19 meeting. Yet, we see risks for a one-off 30bp hike and a protracted hiking cycle. On the strategy side, we remain paid HUF 5y IRS and keep HUF as our preferred currency in the CEE region.Download the Complete Report

 

ìîEurope – Economics –Spolu And Pirati-STAN Have Enough Votes (108 Out Of 200) To Form A New Coalition Government...

Source: CSO, Morgan Stanley Research

A surprise victory for the opposition... In a surprise, the incumbent ANO party lost the general election at the weekend by a narrow margin, receiving 27.12% of the votes against 27.79% for the Spolu opposition coalition. ANO won the largest number of seats – 72 out of 200 in the Chamber of Deputies – but its junior coalition partner the CSSD did not clear the 5% threshold, and neither did the KSCM party, which has been supporting the minority government. Download the Complete Report

 

ìîChina – Strategy – Cumulative Relative Return Of Running QUANTSUMER Nine-Factor Model On China/Hk Consumer Universe

Source: FactSet, Morgan Stanley Research; backtest period: January 2009 to September 2021. The performance data provided is a hypothetical illustration of mathematical principles, it does not predict or project the performance of an investment or investment strategy. Past performance is no guarantee of future results.

As the China/HK consumer industry continues to grow into a wider spectrum, its alpha opportunities have been diverging across sub-industries and phases of revenue cycles. Gilbert Wong launches QUANTSUMER to establish a systematic framework to drive both top-down and bottom-up ideas. Three unique insights and biggest surprises: Insight #1 – Look for Intrinsic Value with Growth, Sustainable Returns and Visibility; Insight #2 – Measuring the “Wealth effect” with China features to guide consumer discretionary stock performance; Insight #3 – Tilting stock selection criteria by market regime to boost alpha of Consumer Staples. Together with MS Quant team's launch of the QUANTSUMER model, Lillian Lou integrates a quant-based stock selection framework into her fundamental research to provide a more holistic, timely and disciplined consumer portfolio strategy against the backdrop of volatile market conditions. Lillian retains an In-Line view of the China/HK Consumer industry. She thinks it is still too early to call for a major directional change for the whole sector amid a bottoming macro economy and mixed but stabilizing market sentiment. Combining the quant scores from the nine factors with her forward looking fundamental views, she identifies cosmetics, other specialty retail, sportswear, beer, dairy, general F&B, and seasoning as the better positioned segments, while she thinks OEM, food retail and restaurants are still under pressure. Her most favored stock picks are Proya, CRB, Mengniu, Zhou Hei Ya, CTGDF, and Li Ning, and her least favored are Yonghui, Supor, Techtronic, Regina Miracle, Shangpin Home and Tsingtao A. Download the Complete Report | Download the Complete Report

 

ìîJapan – Autos – Upside To Our Price Targets: Shinji Kakiuchi Thinks Toyota Can Be Evaluated More Positively From The Viewpoint Of Its Balanced Comprehensive Capability And Adaptability

Source: Thomson Reuters, Morgan Stanley Research, Note: Stock price as of Oct 6

Shinji Kakiuchi initiates coverage on the Japan Auto industry with an In-Line view and three Japan Auto OEMs –Toyota (7203 JP) at OW, Honda (7267 JP) at EW and Nissan (7201 JP) at UW. Kakiuchi sees a recovery trade for the sector on improving auto chip conditions hence production, however he is more cautious than Street into next year, expecting a margin headwind on normalizing used car prices, inventory levels and incentive spending that put our F3/23 and F/24 OP estimates 8-10% below consensus. However, contrary to market’s lukewarm stance on Japan OEMs for their lower BEV exposure, Kakiuchi believes Toyota as one of the more nimble, agile automakers with supplier ecosystem and alliance/partnerships is better positioned than Honda/Nissan which suffer from low profitability and narrow range of model offerings (limited exposure to SUV and light truck) and sees scope for Toyota’s reach 3mn BEV shipments by 2030, exceeding the company’s target of 2mn units by leveraging its ties with partners Mazda, Subaru and Isuzu for efficiency gains. Between OEMs and suppliers, Kakiuchi prefers suppliers for their bigger leverage to production recovery and earnings growth potential – OW Aisin, Stanley Electric, Toyota Boshoku, NOK. Download the Complete Report

 

Negative

 

î US – Tobacco – MS Research Analyst Pam Kaufman highlights that in the US, into 3Q MO (OW, $52 PT) faces a combination of weakening cigarette volumes as the industry laps last year's COVID-driven strength, greater regulatory uncertainty from the current proposal to increase the FET on cigarettes and smokeless products, and experienced a setback in the ITC's ruling that IQOS infringes on BAT's (Covered by MS Research Analyst Sanath Sudarsan, BATS LN OW, GBp3210 PT) patents. Pam is cautious on the prospects for the FET increase being finalized in its current form, but views the proposed increase as manageable. The IQOS decision is a setback, but she sees greater EPS flexibility from lower IQOS investment spend and ultimately expect the companies to come to a resolution. She also thinks MO may provide an update on its plans for its $10.9 bn ABI (Covered by MS Research Analyst Pinar Ergun, ABI BB EW, €53 PT) stake as its lock-up expires this month, which can be a positive catalyst for the stock. Internationally, Pam notes that PM (OW, $110 PT) faces solid underlying HNB/combustible fundamentals, but semiconductor shortages are weighing on IQOS supply and new user adoption rates. She sees NT EPS upside as constrained by this dynamic. Download the Complete Report

 

îGreater China – Technology – Charlie Chan, Daniel Yen and Ray Wu downgrade the Greater China Semi industry view to Cautious and make 4 downgrades in this note – King Yuan, ASE Tech and ASM Pacific to EW and Jiangsu Changjiang to UW. The team have been calling for a logic semi downturn for some time now but recent datapoints caused them to take an even more cautious stance on the outlook – softening PC/TV demand; backend foundry order cuts; weak Chinese smartphone shipment + de-spec trend; and earlier end to auto chip shortages with Malaysia chip production ramping up fast – signaling an impending “logic semi deflation”. This implies rising risk of a logic semi inventory correction in 1Q22 and diminishing pricing power for IC design companies in particular on gross margin squeeze. Our analysts expect multiple compression to continue as we transition into the “logic semi deflation cycle” and remain selective. They see the raw wafer industry as better protected with 20-30% annual price hikes over next two years and stay with a contrarian EW on TSMC and Will Semi. Top-5 UW ideas include: Vanguard, Silergy, Novatek, Powerchip, Maxscend. Top-5 OW ideas are GlobalWafers (raw wafer up-cycle), MediaTek (low expectations, high yield), Alchip (China's CPU localization), ACMR (China's capex), Aspeed (severe pent-up demand). In his separate report, Daniel Yen lowers PTs of Realtek and Bestechnic reflecting logic semi downcylce +  margin erosion, but stay long-term positive on both. Download the Complete Report | Download the Complete Report

 

îìLatAm – Quantitative – MS LatAm Chief Strategist Gui Paiva says investors turned cautious as they favoured defensives, high quality and undervalued stocks in 3Q. LatAm equities are trading at an all time high fwd P/E discount to EM over the last 25 years. Gui likes junk over high quality, defensives over cyclicals, and value over growth. Download the Complete Report

 

MS SINGLE NAMES CONTENT

 

Positive

 

ìîUS – Equity Strategy – The US Equity Strategy team thinks the inability of companies to pass on pricing, supply chain risks, margin risk related to higher wages, and the reversion to trend in goods consumption pose a serious risk to companies' earnings prospects. Companies will likely struggle to beat EPS estimates at the same rate that they have the past 5 quarters. All sectors have seen beats that are at least 5% higher than normal. Earnings revisions breadth has reached a definitive peak in their view and they expect it to decelerate further as the mid cycle transition completes. Against that backdrop, the team highlights 16 names for which Morgan Stanley Research analysts expect the news to drive the stock meaningfully — 12 where they expect material upside (EVR (OW, $168 PT), HUM (OW, $513 PT), IRDM (OW, $50 PT), LAMR (OW, $135 PT), MSFT (OW, $331 PT), PG (OW, $161 PT), QCOM (OW, $180 PT), O (OW, $81 PT), SIVB (EW, $625 PT), SYF (OW, $65 PT), GWW (EW, $492 PT); and 4 that they believe will move lower (CAT (UW, $165 PT), LUMN (UW, $11 PT), PNR (UW, $64 PT), TPIC (OW, $56 PT)). Download the Complete Report

 

ìUS – On Holding AG – Best-In Class, High Growth, High Return Business; Initiate at Overweight

Source: Company Data, Morgan Stanley Research

MS Research Analyst Kimberly Greenberger is initiating coverage of On Holding at OW with a $38 price target. She sees ONON delivering strong double-digit  revenue and EBITDA growth over the next decade (and beyond). She thinks the -13% stock price pullback since the close of its first trading day presents an opportunity to buy as supply chain and Vietnam factory closure worries appear largely discounted in the shares at the current price levels. Kimberly sees room for further multiple expansion, particularly as supply chain headwinds abate, supported by her DCF analysis (current multiple 44x 2023e EV/EBITDA vs. 58x for her PT). In Kimberly’s view, ONON is one of the most attractive assets in her coverage universe. She models ONON grows revenue and EBITDA at a 33% and 42% '21-25e CAGR, and continues to grow +DD% y/y for the next ~15 years. She also thinks ONON's fundamentals compare favorably to a peer set of high-quality, high-growth retailers that trade at ~45x 2023e EBITDA multiples. Download the Complete Report

 

ìUS – Sportradar Group AG – Market Leading B2B Sports Betting Player; Initiate at Overweight

Source: Company filings, Morgan Stanley Research

MS Research Analyst Thomas Allen initiates coverage of SRAD with an Overweight rating and $27 price target, implying 15% upside. He sees four key positives: SRAD 1) has significant exposure to the high-growth global sports betting market, which he sees growing 12% per year from '20-23e; 2) is the scaled leader (~40% market share) in the concentrated B2B sports data distribution sector (the only true comps are StatsPerform, Genius Sports, IMG Arena, BetConstruct); 3) has diversified, recurring revenue streams (78% subscription-based) that provide predictability to cash flow generation; and 4) has a proven scalable high-margin (~50% 2020) business internationally that should translate to higher consolidated margins over time as its more nascent (including US) businesses mature. Thomas thinks a multiple comparable to peer Genius Sports (Not Covered), as well as similar growth SaaS stocks is justified. While Sportradar's existing scale (>3x GENI's 2020 revenue) means it will likely grow slower (consensus forecasting GENI 42% '20-23e rev CAGR vs. his 25% SRAD forecast), Thomas believes that SRAD deserves a quality premium. Download the Complete Report

 

ì LatAm – Enel Chile – The company offers the largest renewable portfolio of both operating assets and projects in Chile, a country that has been prioritizing decarbonization. Potential changes in legislation, hydrology, and power prices are headwinds, but MS LatAm Research Analyst Miguel Rodrigues thinks historical-low valuation is unwarranted.He initiates coverage at Overweight with a 50% upside to his YE-22 Ch$52/share price target. Download the Complete Report

 

ìUS – SoFi Technologies, Inc – Fastest Growth Story in Consumer Finance; Initiate at Overweight

Source: Company data, Morgan Stanley Research estimates

MS Research Analyst Betsy Graseck initiates on SOFI at OW. She highlights that it is a challenger consumer finance company that is leading with lending; specifically refinancing a high yield student loan into a lower rate. She expects SoFi's customer base can double in the next 2 years, from 2.6 to 5.3 million, after more than doubling over the past year from 1.2 million. Betsy is looking for ~150% CAGR over the next 2 years as SOFI doubles its customer set and expands its product offerings. Near-term, she sees two catalysts driving faster revenue growth and positive revisions to management guidance: First, expiration of the government's student loan deferment program should drive a surge in student loan volumes. Betsy expects a 70% increase in student loan originations in 2022 as student loan refis return to pre-COVID levels. Second, approval of SoFi's bank charter. This alone could boost total revenues by ~10% in its first full year given benefits to NIM; this is only in her bull case and would be incremental to both her base case as well as consensus. Betsy’s PT of $25 implies 54% upside and the market today is only assuming ~20% annual revenue growth vs. her 47%. Download the Complete Report

 

ìChina – Macquarie Group Limited –Andrei Stadnik Forecasts Green Revenues To Grow At ~20-25% P.A. From Fy21 To Fy25e, Helping To Lift Mqg Group's Revenue Growth By ~2%Pt, Helping Mqg To Grow Earnings >10% In Fy22e To Fy24e

Source: Morgan Stanley Research estimates

Macquarie has become a vertically integrated private markets asset manager and developer, with potentially the world's best green capabilities among financials. Andrei Stadnik reiterates his Overweight, despite the recent strength, Andrei see the market under-estimated MQG’s green capabilities and growth potential. MQG’s green capabilities are ~ 9% of revenues growing towards 15% of revenues by F24 in addition Andrei estimates MQG could have uncrystallised gains of between A$5.0bn and A$7.3bn on its net equity investments (currently ~A$5.6bn). Andrei’s report illuminates the new green growth angle will bring faster earnings growth vs. peers and MQG should command a green premium multiple like global peers. New target price of A$240, implies a ~23.5x FY23E P/E, which we think is justified by the green growth options vs the US/EU green peers >30x or Blackstone trading at 29-30x. We forecast ~13.5% earnings growth in FY22E and then >10% in FY23E & FY24E, where we are ~15% ahead of consensus. Our A$388 bull case offers >100% upside. MQG becomes our top pick among Australian financials, a key OW within our model Aus portfolio. Download the Complete Report | Download the Complete Report

 

ìChina –Yonyou Network Technology Co Ltd –China's Cloud Software TAM Could Reach US$18bn In 2023

Source: IDC, Morgan Stanley Research. e = IDC estimates.

Shih sees now a good entry point for Yonyou post recent correction and upgrades to OW with a new PT of Rmb 45. Software localization has been an ongoing trend in China - IDC estimates China's cloud software revenue to achieve a 37% CAGR in 2018-23 and reach US$18bn in 2023, vs. the 23% global average. Within the industry, Sharon sees enterprise cloud migration, SASAC cloud policy (US$750bn software revenue potential amid the SOE's SASAC cloud adoption wave) and industrial IoT offerings (China to make up 13% of the global manufacturing cloud market vs. 2% in 2016)as tailwinds. Sharon forecasts a 33% overall revenue CAGR in 2021-23 as substantial cloud service project wins (54% revenue CAGR) help offset the decline in Yonyou's traditional software business and outgrow SAP (6%) and Oracle (4%) during the same period, implying potential for sizable share gains. Sharon sees valuation favorable now – the stock now trades at 8x 2022 P/S, vs. average of 9x in the past three years and Kingdee at 14x 2022 P/S (based on consensus estimates). Our new price target of Rmb45 is derived from 37x 2025 FCF discounted to 2021, which implies 75x 2022 P/E and 11x 2022 P/S. Download the Complete Report

 

ìChina – JD.com – We Expect 3Q21 Revenue To Grow 23% YOY

Source: Company data, Morgan Stanley Research (E) estimates

Eddy Wang forecasts 23% YoY revenue growth in 3Q21 despite a weak consumption trend starting from August owing to macro headwinds. He expects JD's revenue growth to remain resilient in 4Q21 despite the continuing weak consumption trend. JD's more focused CGB strategy should have incurred lower-than-expected investment in 3Q21. However, we expect JD's commitment to investment in CGB to continue in 4Q21 and 2022, which could potentially erode its margins. He trims his non-GAAP NP estimates 2.6%/4.8%/4.6% for 2021/22/23 to reflect lower revenue growth forecasts in view of weaker-than-expected consumption in 3Q21 and onward. Maintain OW with TP unchanged at US$98. Download the Complete Report

 

ìîChina – Meituan – On October 8, the State Administration for Market Regulation (SAMR) announced the decision to impose a US$530mn (Rmb3.4bn) fine on Meituan as a result of its five-month anti-monopoly probe launched in April. The amount is equivalent to 3% of its 2020 domestic revenue (Rmb114.8bn). This compares to 4% of domestic rev for Alibaba ($2.8bn) and lower than what WSJ reported at $1bn 5-6 weeks ago. The penalty decision, in Gary Yu’s view, should lift a major overhang on the stock, which derated from 10x to 6-7x 2022 P/S currently. Meituan has been perceived as the company with highest antitrust risk after Alibaba, and merchant exclusivity has been one of the key battlefields for Meituan and Ele.me. Outstanding regulatory matters include social security benefit guidance, which Meituan has been guiding for Rmb0.5 / order, which would be one of key things to watch out. On earnings, Gary notes that heavy losses around community group buying should peak out in 3Q. Download the Complete Report

 

ìUS – Netflix Inc – MS Research Analyst Ben Swinburne reiterates his Overweight rating in NFLX and sees 2022 as a year of healthy and accelerating net additions as the rebuilt content pipeline hits the service, starting in 4Q. He sees recent M&A as potentially accelerating key strategic initiatives into franchise development and gaming. Download the Complete Report

 

ìUS – TuSimple Holdings Inc – MS Research Analyst Ravi Shanker expects imminent news from TSP (OW, $75 PT) on two catalysts: 1) The Driver Out test. He has identified this as a key milestone for TSP on the path to demonstrating the commercial viability of autonomous driving not just for the company, but perhaps the entire industry. This test will involve running a Class 8 truck on public highways with regular traffic for an extended period, without a human inside the truck; and 2) The CFIUS process. On March 1, TuSimple received a CFIUS inquiry regarding the 2017 SINA investment into TuSimple as part of its Series B raise. The CFIUS review will be looking into whether TSP is a Chinese-controlled entity. Ravi expects a final resolution for both these catalysts within the next 3 months, potentially as soon as in the next few days/weeks. Ravi sees 3 potential outcomes: 1) Positive Scenario, his base case (50% probability, 25-45% upside, $48 to $55 share price): The ultimate positive outcome would be full positive resolution of both catalysts; 2) Neutral Scenario (15% probability, +10 to -10% stock move, $34 to $42 share price): The neutral scenario would be positive or neutral updates (but not full resolution) of both catalysts; and 3) Negative Scenario (30% probability, -45% to -25% stock move, $21 to $28 share price): The ultimate negative outcome would be full negative resolution of both catalysts. Download the Complete Report

 

Negative

 

îLatAm – Pagseguro – LatAm Research Analyst Jorge Kuri was able to catch up with PagSeguro to confirm that interchange from PagBank prepaid cards is indeed booked as a cost (see discussion on page 7 of this report:PagSeguro Digital: Investor Feedback on Our Earnings Downgrade). This means that there is a natural offset to the lower interchange revenues that PagBank will likely see if the central bank proposal goes through. Not only will PagSeguro benefit from lower interchange from PagBank issued prepaid cards, but also from other prepaid cards issued in Brazil, mostly from fintech companies, MercadoPago, PicPay, iti, and the likes. Keep in mind that prepaid cards were implemented to be a tool of financial inclusion to serve unbanked population; many of these cards are in the hands of low income individuals that are unlikely using them at high-end shopping centers, but rather at the informal/long-tail merchant segment. PagSeguro, of course, has largest network of acceptance for micromerchants, so they capture an outsized amount of prepaid card transactions from all issuers.  Lastly, remember that PAGS has not passed any improvement in interchange cost (after the regulatory cap 2 years ago) to the consumer in the form of lower prices, so they have kept all of the windfall. Jorge thinks this may be the case again. Bottom line, Jorge thinks his estimates of low single digit impact on EPS from this are correct. We’ve heard that other sell-siders are coming out with numbers in the 10-15% range. He thinks they have missed to incorporate the benefits on the processing side of the business.

 

îLatAm – Pagseguro Digital – MS LatAm Research Analyst Jorge Kuri sensed investors disappointed yet understanding with the large EPS cuts he did on PAGS. The bullish camp thinks price hikes, better credit/debit mix, and funding improvements could offer more offset than he expects. Some see the upcoming investor day as positive catalyst. Download the Complete Report

 

îUS – Avis Budget Group Inc – MS Research Analyst Billy Kovanis downgrades CAR to UW with a $110 PT for 3 reasons: 1) The market is fading peak cyclical earnings and his normalized 2023 earnings forecast of $1.2bn is lower than what the market appears to be implying at $1.5bn; 2) Billy sees the risk reward as tilted to the downside. From the current share price of ~$150, he has 27% downside to his PT, 47% upside to his $220 Bull Case valuation and 60% downside to his $60 Bear Case valuation; and 3) He sees LT industry opportunities (and risks) with shared mobility but accounts for this in his Bull Case (not the Base Case). Ultimately, when solving for what’s in the price, Billy just doesn’t buy that investors suddenly view car rental as a high ROIC business in the long-run and that pricing will be permanently higher. Pricing may very well be higher for a year or two, but he doesn’t see this as a 3 to 5 year phenomenon. Therefore, at the risk of reading too much into inexplicable stock price moves, Billy asks whether the market may be pricing in a rising strategic premium for the fleet management capability of today’s car rental model.Download the Complete Report

 

 

 

Nick Savone, Managing Director
Morgan Stanley | Institutional Equity Division
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Nick.Savone@morganstanley.com

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