TheChek News Flow

*ALIBABA'S MA SAYS NEXT 5-15 MONTHS WILL BE CHALLLENGING TIMES

*JACK MA SAYS NEXT 5-15 YEARS WILL BE GOOD TIMES THOUGH

*CHINA ECONOMY MAY HAVE BIG PROBLEMS IN NEXT 5 TO 10 MONTHS: MA

*CHINA WILL HAVE 500M MIDDLE-CLASS PEOPLE IN 15 YEARS: MA

*SMALL INTERNET STARTUPS ARE THE FUTURE HOPE OF CHINA: MA

*MANY INTERNET COMPANIES WILL FAIL: ALIBABA'S JACK MA

Defence sources have said Abu Dhabi is looking to purchase 60 fighter jets and is closely studying the Dassault-built AVMD.PA Rafale after an earlier evaluation of the four-nation Eurofighter.

“I think we are in the final stage of negotiations,” Major General Ibrahim Nasser Al Alawi, commander of the UAE Air Force and Air Defence, said when asked how close the UAE was to a deal to buy the Rafale.

He also stressed that no final decision had been taken.

Dassault Aviation was not immediately for comment.

Canal in France – which were the drivers of our March downgrade report, “Winter is coming”.

Weak Q3 trends

EBITA at the group and divisional levels were substantially below (already cautious) consensus

expectations; sales missed by 2%. But for StudioCanal (5% of group revenue) virtually every single

business line grew less in Q3 than in H1. Net income was somewhat protected by very low taxes.

Canal – French issues worsening in Q3

The fall in French pay TV accelerated from -1% in Q1 to -1.5% in Q2 and -3.5% in Q3. Core pay

TV subs’ decline accelerated too, only partly offset by Canalplay subs at c.EUR7 ARPU vs EUR44

for the core, while EM growth was softer (2%). All this and cost inflation led EBITA to fall c.10%.

More pain ahead at Canal – doing the right thing, but it will hurt

Vivendi announced 2 years (‘16-17) of new investments in content to counter the tough competitive

environment in France. This is alongside a planned c.EUR150m rise in costs (mostly on sports)

and the impact that core subs loss will have on revenues – we are comforted in our bearish call on

Canal. We think management is making the right move in reinvesting and restructuring Canal:

there is simply no other way out in a Netflix-era. But this will hurt, much more than many expected.

Music – no Apple gain yet, and visibility remains very low

Download and Physical’s decline worsened while streaming did not benefit as yet from Apple. Org.

growth turned negative again; margins fell. VIV admitted it had no visibility on short-term trends.

Deep cuts, downside to fair value: VIV is only for patient investors – remain Underperform

We cut our EBITA, EPS and target price by over 10% (see overleaf). Our new EUR20 fair value

shows downside. We believe management’s plan to rebuild value at VIV will eventually succeed

but will likely take a lot of time. Given generous multiples, we see better opportunities elsewhere.

Tough times call for drastic measures. With the continued depressed state of the

marine contract market, CGG has announced a downsizing and a rebirth as a multiclient

(MC) focussed business within the acquisition segment. Ultimately the active

vessel count of the company will fall to just five vessels, from a peak of twenty vessels,

with headcount expected to be down over 43% since the end of 2013. This is a stark

about turn for CGG. Over the past ten years the company has been the aggregator of

seismic, acquiring Veritas, Exploration Resources, Wavefield and latterly Fugro’s

assets. However, despite the apparent thirst for vessels, the company has focussed on

its technological prowess and remains, in our opinion, at the forefront of the

processing market. Coupled with the Subsurface Imaging and Reservoir (SIR)

business, the company has built up a strong knowledge-based company, but it has

often been overshadowed by the vagaries of the asset-driven contract market. With

its current move, the company therefore has held up its hands. The contract market, it

believes, has struggled to cover its capital requirements and has been commoditised.

The move, we believe, creates a business that should have more sustainable returns

and offer a differentiated proposition for investors. The problem is that CGG is

capitalised for a perpendicular vision. Its balance sheet is encumbered by goodwill,

albeit now somewhat lower, and a debt level that looks inappropriate for the new

vision. The company is looking at strategic alternatives, either a sale of a minority or

an equity raise, the latter needing to be announced in the relatively near term in order

to satisfy cash needs in 2016F. On our numbers, we see the company needing to raise

ca US$120-480mn, depending on its needs, but with that can build a business that is

stronger on the other side of the downturn and could potentially post industryleading

returns should a recovery happen. The difficulty is knowing exactly what the

financing of the company will look like. Hence we remain Underweight with an

unchanged EUR6.2/share price target.

US margins have been the success story of this cycle; the gap with Europe is now 300bp, higher

than at most points in the last 20 years. However, US margins have been boosted by tech stocks,

whereas in Europe resources stocks have had a greater drag on profits. Indeed, if we sector-weight

the margins of Europe by US weights, we find the gap (while still present) is no bigger than on

average. We still see earnings upside for Europe, driven by GDP growth and a weak euro; we

expect high single-digit growth in 2016/17. But catch-up with the US is likely to prove elusive.

Since the financial crisis, US earnings have recovered to over 30% above

their previous highs. Meanwhile, European earnings – after initial recovery

in 2010/11 – have flatlined and remain below the 2007 peak.

Sales performance has lagged in Europe, but the chief difference is

margins. US net income margins are close to peaks and c.300bp above

Europe. This gap is high versus history; it has only been exceeded during

the sovereign crisis in 2012/13 and in the post tech bubble collapse in

2003/04, which hit Europe more.

We think there is potential for a small narrowing of the gap between the

US and Europe, but we are doubtful that margin improvement will be a big

driver of profits in Europe over the next two years. The gap with the US is

somewhat an illusion, in our view; once we adjust for differing sector

weights and, in particular, take out tech, the difference is reduced and the

gap between the US and Europe is no longer different to the long-term

average margin differential.

We are not that sceptical; we see good reasons to expect at least high

single-digit earnings growth in 2016 and 2017, forecasting 8% and 10%,

respectively. This type of growth, combined with continued easy monetary

policy and reasonable income (DY of 3.4% in Europe), should continue to

be an attractive combination for investors. Ex-commodity sectors, we

expect earnings growth in 2015 to be (a healthy) 8-10%. In 2016, our

economists forecast reasonable growth in Europe, stabilisation in most

EMs and a weaker euro; these should all support earnings. And, by 2017,

resources stocks could also be seeing improvement.

Dow+0.16% S&P+0.16% Nasdaq-0.24% Russell+0.28% VIX 15.29 (-7.45%)

Nikkei +0.10% Hang Seng -0.01% Shanghai -0.14%

Eur$ 1.0745 JPY 122.98 CNY 6.3634 GBP 1.5159 RUB$64.3950 WTI $ 43.72 (-1.11%)

S&P +0.01% EuroStoxx +0.32% Dax +0.18% SMI+0.28%

Macro :

- China Oct. Auto Sales Rise 13.3% Y/y

- $1 Billion of Shares Frozen as China Money Manager Xu Probed (1)

Keep an eye on :

- ABG/P SM : Abengoa Plans U.S. Road Show for Asset Sales: El Confidencial

- ABI BB : Ab InBev, SAB Pact Said to Create Almost $1.5b in Synergies: FT

- AB1 GY : Air Berlin Realises Total Rev. of EU1.301B in 3Q of ’15

- AH NA : Ahold 3Q Underlying Oper. Income, Netherlands ID Sales Beat Ests

- AMUN FP : Amundi IPO Orders Not at EU45/Shr Risk Missing: Terms

- BALN VX : Baloise Sees Need for Separate Swiss Insurance Regulator

- BP IM : Banco Popolare 3Q Net Profit EU56.7m; Analyst Est. EU54m

- BMW GY : BMW CEO Says Diesel Cars ’Fundamental’ for Reaching CO2 Targets

- BC IM : Cucinelli 3Q Rev. Beats Ests., Ebitda In Line

- CARLB DC : Carlsberg 3Q Ebit Ex-Items Beats Ests.

- DAI GY : Daimler Says Not in Talks With Authorities Over Takata Air Bags

- DLG GY : Dialog Responds to Elliot, Continues to Strongly Support Deal

- ELE SM : Endesa 9-Month Net, Ebitda in Line With Estimates

- EOAN GY : EON 9-Mo. Underlying Net Misses; Had Impairments of EU8.3b in 3Q

- GAM SM : Gamesa 9M Net Doubles to EU126 Million

- HEN3 GY : Henkel 3Q Organic Sales Growth Beats Ests., Specifies 2015 Goals

- JEN GY : Jenoptik 3Q Sales Rise 25%, Net Up 34.5%; Narrows 2015 Forecast

- SDF GY : K+S 3Q Ebit I Misses Ests.; Trims Top End of 2015 Outlook Range

- MS IM : Mediaset 3Q Net Loss EU60.1M; Est Loss EU51.1M

- NDX1 GY : Nordex Raises 2015 Sales, Orders Target; Confirms Margin Outlook

- PLT IM : Parmalat Confirms 2015 Guidance

- RHM GY : Rheinmetall Selling Up to 3.96m Shrs in Bookbuilding

- SREN VX : Swiss Re Buyback of Up to CHF1b Shares to Start Nov. 12

- TEF SM : Telefonica to Challenge Fine From Mexican Regulator: Reforma

- VIV FP : Vivendi 3Q Adj. Net EU172m Vs Est. EU186m

- VIV FP : Vivendi Says No Interaction With Xavier Niel on Telecom Italia

- VOE AV : Voestalpine 2Q Rev., Ebit Beats Ests.; Cuts FY Outlook

- WDF IM : *WDF ORDINARY SHARES SUSPENDED, TO BE DELISTED: BORSA ITALIANA

Elliott is urging other shareholders to vote against the takeover at a shareholder meet on November 19.

Elliott's concerns are based around the deal multiple and the integration of the US company. "The move is a big fish to swallow from a deal multiple, financial and integration point of view," Reuters reported the hedge fund as saying earlier this week.

On Wednesday, the board of Dialog published a response to Elliott's concerns, claiming that the activist's motivations "appear to be based on a short-term risk arbitrage trade rather than long-term shareholder value creation".

The company said it is "encouraged" by the level of support it appears to have from other shareholders for the deal. The takeover, it argues, is a "strategically important transaction".

From Dialog's response:

The transaction diversifies Dialog's existing customer concentration, increases Dialog's addressable market size, positions Dialog to capitalise on the large and growing Internet of Things (IoT) opportunity, creates significant cost and revenue synergy potential and results in a company that will be a leader in markets that are profitable and growing rapidly over the next several years.