TheChek News Flow

Going into Friday, much was hanging on the outcome of the NFP number. Enter 271k new jobs in October and the outcome doesn’t seem to be hanging anymore. The very strong report, nearly 100k above consensus and the best payroll gain of 2015, has now pushed the market implied probability for a December hike to nearly 75%, up dramatically from being slightly over 50% prior to the report. Absent any major negative surprise in the US, the Fed “should” raise rates in December as any turn back to the dovish September message would tilt the Fed’s communication from confusing to erratic at this stage. Looking at equities on Friday, the initial sell-off was reminiscent of a market signaling uneasiness with the end of US QE, fortunately, that quickly reversed as the markets rallied into the weekend. Perhaps Fridays action finally means that markets have warmed to idea that we are reaching the end of a nearly decade long accommodative monetary policy experiment. An asset market rally as we move toward a hike will ultimately give the Fed a bit more faith in the domestic economy, even if exports remain subdued. Should the Fed raise rates in December, which was initially our US Chief Economist Ellen Zentner’s out of consensus view, communication will be crucial in order to avoid markets believing a raise is intended to slow an overheating economy instead of simply moving off the lower bound. As one door closes, another one opens and as the focus turns from when to how rates will rise; it is worth familiarizing yourself with our Market Implied Pace of Rate Hikes Indicator (MSP0KE Index) which is currently suggesting we will see +2.5 hikes in 2016.

Until we officially hear it from the Fed there is no way to guarantee a hike. This also means there are still ways to position ahead a lift-off event. One note worth recalling is our Alpha Team’s Rising Rates & Reflation which highlights the best way to play a rate hike (please ask for the report), including being positive on banks and insurance while negative telecoms, REITS, and utilities. Financials appears to be a consensus long for many investors on the sector basis, but at the single names level is continues to feel like many are struggling to identify the investible opportunity set. Large Cap Banks have ample single names as almost all of the banks in US Large Banks analyst Betsy Graseck’s coverage are asset sensitive and are positioning for rising rates. Some of the better poised banks are Bank of America (BAC), PNC (PNC), J.P. Morgan (JPM), and Capital One (COF). Moving to insurance, life insurers appear to be strong beneficiaries as the tail risk of a lower for longer environment and the related possible large balance sheet impairments off the table would likely be highly favorable for the multiples on the stock. Top picks include MetLife (MET) and Prudential (PRU) and Ameriprise (AMP). Finally, on a sector basis, cyclicals tend to relatively outperform amidst higher rates and inflation expectations so we going Long the US High Beta Cyclicals Basket (MSXXHBC) or a pair trade against the Defensives Basket (MSMSDEFS).

Although the signal from the Fed suggests the US economy may be picking up, our Global Economics team continues to look for the global economy to pass through an inflection point in terms of sequential activity growth. The team expects the pick-up to be more pronounced in Developed Markets than in Emerging Markets and further point out that weak EM growth is unlikely to derail the DM momentum, as DM domestic demand remains solid. This out-of-phase global macro environment leads us to seek out companies with growth trajectories largely unrelated to overall macro cycles — i.e., those that are the result of a sustainable competitive advantage, product cycles, market share gains, pricing power, or a combination of these factors. On the back of this analyst and in conjunction with research analysts across the globe, the team has published a report which identifies over 100 stocks including at least one company with favorable secular drivers in every sector (ex the highly cyclical Energy space).  Technology is the top sector allocation with names such as Apple (AAPL) Palo Alto (PANW), Saleforce (CRM), Ctrip (CTRP), ARM (ARM LN), ASML (ASML NA). A few other key names in the report across the globe include Bharti Infratel (BHIN IN), Tencent (700 HK), Zalando (ZAL GR), Kose (4922 JP), and Cielo (CIEL3 BZ). Please ask to see the report.

Another hotly contested debate has been around earnings season and whether we would actually see positive earnings growth and the magnitude in which it would come given the lowered expectations. Surprisingly for many, the 3Q earnings season has come in much better than anticipated.  As this week closed, 90% of the S&P market cap has reported so far and aggregate earnings are tracking 4.8% ahead of consensus, while revenues are coming in in-line with consensus. Further to the point, if you exclude financials, net margins are expanding for 57% and 58% of companies on a YoY and QoQ basis, respectively. In the face of these numbers, some remain staunch and insist on cautioning for an earnings recession in US stocks, with some even calling this earnings season the worst since 2009. To believe that means that one have to ignore that 57% of the companies that have reported have shown y-o-y earnings growth and that excluding Energy aggregate earnings are 5.7% higher than last year. In fact, earnings have come in a little over $5.6bn below what they were last year, but Energy alone is down $17.3bn.  It’s a bit of a stretch to call this the worst earning season since 2009 when one sector is responsible for the entire decline, especially when almost 60% of S&P 500 companies that have reported so far are reporting y-o-y earnings growth. While much has been positive, there have certainly been disappointments. Avis* (CAR) reported another quarter of lower than expected pricing and volumes in the Americas further tempering our outlook on Avis and the industry overall. Our Autos & Shared Mobility Analyst Adam Jonas notes these issues are not unique to CAR or the rental car industry for that matter. The issue instead resides in a fundamental conflict between the prevailing oligopoly pricing thesis and the pace of disruption into mobility-on-demand leaving traditional car rental firms like Avis (CAR), Hertz (HTZ) along with traditional OEMs caught in the crossfire. Avis is a great example of a secularly challenged business. There remain a large opportunity of other similar names as well which are all highlighted in our most recent ‘Secularly Challenged’ note from our Alpha Team that includes ADT (ADT), Navistar (NAV), Seagate (STX), Royal Mail Group (RMG LN), and DSW (DSW). DSW is a name which has been on the wrong side of a very bifurcated earnings season for the consumer sector. DSW lowered its FY15 EPS guidance mid-point by 22% this week citing slower retail traffic, weak category sales trends, and unseasonably warm weather despite comps Caleres (CAL) and Steve Madden (SHOO) actually raised outlooks last week. DSW, a classic big box brick-and-mortar retailer is clearly on the wrong side of this fashion trend,

One sector to highlight this week which bucked the trend of a generally positive earnings season was Media, which despite being a week late to Halloween, had investors stumped as to whether the recent moves were a trick or treat. Ultimately, Media investors appear to have been yet again caught on the wrong foot. Last week, the +1.3% move in MSXXMDIA (vs the SPX +20bps) and ~15% move in the month of October were almost entirely driven by short covering, as investors elevated their hopes about advertising numbers and less damaging pay-TV trends. It was clear that the rally was in fact a trick. Following Disney (DIS) in August, Time Warner (TWX) sounded the alarm this quarter by cutting their long-term guidance calling out ratings and sub declines on top of FX which sent the stock tumbling down 10%. Twenty-First Century Fox (FOXA) followed shortly after with light revenues, having investors second guessing the achievability of their guidance and reminding everyone that cord cutting/shaving are secular concerns. While Disney (DIS) outperformed post print, they continue to face uncertainty around transitioning its media businesses from primarily a big bundle, linear-first TV consumption model to something else – likely distributed over the Internet, likely less bundled, and potentially app-based, which begs for the question: ‘Will the magic continue to exist online?’. As a reminder, on the overall space, we continue to prefer Cable over Media with Comcast (CMCSA) the top pick overall. Within content we like SMID Caps Dreamworks (DWA) & AMC Networks (AMCX) and Broadcasters over Cable Networks.

Next week, the focus on Media will be in Europe as our Flagship Barcelona TMT Conference kicks off. Clearly there is plenty of focus on the sector as we have nearly 850 investors due to attend and around 160 Corporates. As with previous years, the Telecom players have received the most demand with Altice (ATC NA), Vodafone (VOD LN), Telecom Italia (TIT IM) leading the pack while Tech companies Amadeus (AMS SM), Infineon (IFX GR), ASML (ASML NA), Media names Vivendi (VIV FP), Sky (SKY LN), and Publicis (PUB LB) and Internet stocks Zalando (ZAL GR) and Just Eat (JE/ LN) follow closely thereon after. Overall, much the of the conference is likely to be focused on M&A. Liberty (LBTYA) and Vodafone (VOD LN) are both attending so the market will be watching closely for any hint of talks restarting M&A between these two. Furthermore, European media companies have been heavy spenders as of late with Axel Springer (SPR GR), ProSieben (PSM GR) and Stroeer (SAX GR) having all been on an online acquisition spree. Outside M&A, fundamentals in the Telco sector look attractive, sequential improvement in MSRs and a potential theme of operating leverage to that recovery will be a key theme addressed by management as the sector swings towards positive revenue growth. Finally, a few other themes worth keeping an eye on are in Media, where print is declining at an accelerating pace for most of the publishers amid online news assets changing hands at hefty multiples, and in Tech as the sector demand is split down the middle with Outsourcing & Ops prone to price pressure. With no real break from the 3Q reporting season investors and companies will no doubt look upon the conference as a chance to set the tone into 2016. Please ask for more on the conference as our Telco, Media, Internet and Tech teams have all put together very comprehensive preview notes.

Earnings season in Europe, has been less robust than in the US. In fact, results have been downright disappointing as earnings have missed expectations for the first time in two year. This is despite seeing consensus estimates for Europe's 3Q EPS fall by 4% in the two months ahead of time. 32% of companies have beaten EPS estimates by 5% or more, while 37% of companies have missed expectations. This gives a net 5% of companies missing estimates, which would be the weakest quarter on this measure since 1Q13. Revenues have been disappointing too, top-line results have come in modestly below expectations, and the pace of revenue beats is much slower than the last 4Q. 29% of companies have beaten revenue expectations by 1% or more, while 32% have missed, giving a neat miss of 3%. Not only are the data a little below expectations, but this is well below the average net beat of 16% seen in the last four quarters. Perhaps all of this bad is may actually be good (sound familiar?), as a further deteriorating in the regions underlying fundamentals could force Mario Draghi to act sooner than later. Official timing is uncertain, but it now appears nearly consensus that the ECB will expand and increase its asset purchase program in December and buy more bonds and beyond September 2016 until at least the second half of 2017. The one effect which this will drive will be a weaker Euro, which is best positioned for by our Weaker EUR Beneficiaries Basket (MSSTWKEU) which despite seeing its performance accelerate in the last 6 weeks likely still will have plenty to go.

Over in Asia, the Shanghai Composite (SHCOMP) is now up 20% since the year’s lows, and for those keeping track, China has now seen a Bull, Bear and a second Bull market in 2015, with two months still to go. This week’s rally (HSI +1.00%) was driven by news over the possibility of a Shenzhen / Hong Kong stock connect before year-end as well as the announcement of the first meeting between the Chinese and Taiwanese Presidents in over 65 years. Macro data was supportive (Caixin Services PMI at 52.0 vs 50.5 prior) and retail drove mainland volumes past the $200bn mark for the first time since August. Notably, India, our top country pick within EM Asia, has underperformed (MSCI India was up 1.4% but underperformed MSCI EM by 5.6% in October) on account of a weak earnings season and concerns over PM Modi’s NDA alliance losing the Bihar state elections (results out on Sunday). We double upgraded China Property and expect 1H16 to see rising ASPs and falling inventories with Tier 2 cities seeing a sweet spot. We recommend the China Property Basket (MSNJCNRE) whereas single stock ideas include China Overseas Grand Oceans Group (0081 HK) and China Vanke (000002 SZ). Year-to-September, our Best Ideas across Pan-Asia delivered an absolute / relative return of 2.3% / 1.8%. Our current Best Ideas include Tata Communications (TCOM IN), Kakao Corp (035720 KS), Aluminum Corp (2600 HK), and Tencent Holdings (700 HK).

Japan also rallied on the week but all eyes were on the IPO markets which helped to buoy markets overall. PM Abe’s tone at the “What We Should Do Next?” speech overnight indicated a possible change in the goal of social policy to be geared towards economic sustainability. The market would likely react positively should he run on an agenda of pushing out the consumption tax once again. Our Japan Economist Yamaguchi-san and Strategist Pankaj Mataney were marketing in the US this week and safe to say that the market will likely trade range bound into the Jul-Sept GDP print announcement on Nov 15th. Despite consensus opinion of a negative print, Yamaguchi-san expects a slightly positive print (0.05%) with fiscal stimulus announcement to come. Though it might not feel like it, Japan is still on track to beat earnings by a hair. Earnings breadth also positive with 38% of TOPIX companies having beaten earnings estimates, compared to 26% missing. I still like our Japan Buyback basket (MSJNBBP5 Index) and the five stocks I would particularly highlight within in are Kao (4452 JP), Kaken Pharmaceutical (4521 JP), Fuji Heavy Industries (7270 JP), Astella Pharma (4503 JP), and NEXON (3659 JP).

Lastly, our bi-weekly “Global Sales Idea” meeting this week included Avago Technologies LTD (AVGO US), AVIVA Plc (AV/ LN), and Royal Caribbean Cruises (RCL US) pitched as longs and Woolworth’s LTD (WOW AU) as a short.  First on AVGO, Craig Hettenbach sees a runway for both multiple expansion and EPS growth as this leader in the semi space continues to be a consolidator.  With multiple catalysts on the horizon, the stock is attractively valued with a top notch management team to boot.  On AV/LN, there are clear catalysts over the next year and a half including Solvency 2 capital position/ policy to be disclosed in March, leading analyst Jon Hocking to believe the stock should return to a simple EPS and DPS momentum story. RCL was the third long pick as the cruise industry is on the cusp of benefiting from a new wave in passenger demand, Jamie Rollo believes RCL is poised to out sail the group.  At a valuation roughly in-line with lower quality peers, Jamie believes the company’s strategy of marketing higher margin gambling and shopping on top amenity ships, particularly in China, will set the stock up for outperformance. On the short side, Australian supermarket Woolworth’s (WOW AU) was pitched as lower priced peers entering their markets are beginning to dent margins.  After years of expansion, WOW is now the most at risk as they have the highest market share and have enjoyed the highest supermarket margins globally.   At ~6% today, Analyst Tom Kierath believes these margins still have a ways to go to reach the global peer average of ~3%. In addition, Woolworths price investment has not yielded results and topline growth is not significant enough to offset operating deleveraging. Tom sees~45% downside to the stock in his bear scenario. Please ask to see the pitches and for a video with for more information, please Click Here

Have a great weekend,

Nick

 

 

*Included in my 2015 Global Ideas Deck. Please ask for the presentation.

 

TRENDS & INFLECTION POINTS

 

Positive

 

ìCanada – Energy  – The SPTSX Composite index moved sideways this week with two notable diverging sectors: Energy stocks were higher while the gold etf (XGD) trailed off almost 10%. Canadian Natural Resources (CNQ) was a standout performer in energy rallying 10% on CFPS beat of $1.40 vs MSe of $1.19 driven partially by an industry wide trend this quarter of reporting costs below estimates.  CNQ also benefited early in the week from reports that the company is in talks with pension funds regarding the sale of its royalty assets. Canadian Oil Sands (COS) remained one of the most active names on our desk as the target of an unsolicited takeover bid by Suncor (SU). SU remains committed to its 0.25 ratio bid while the COS board has called it ‘substantially undervalued’.  The Alberta Securities Commission will hear arguments regarding the target’s recently adopted shareholder rights plan on November 27th, ahead of SU’s Dec 4th offer deadline. COS has traded through the SU bid price since the announcement, indicating market expectation that a SU sweetener or a rival bid is a likely scenario.

 

ì Europe – Hearing Aids – our European Medical Devices analyst Michael Jungling and team expect sales growth to be at the upper end of their +4-5% market growth forecast, but not quite match 2015 growth (MSe: +5-6%). For 2016 they expect the product cycle to be weaker and only pick up towards the end of the year, which should help fuel growth for 2017. Furthermore, the US is likely to face tough comparisons, offset by a more robust Germany. While they have not yet formed their view for 2017, they believe the year could be a strong beneficiary from multiple high-end product cycles pushing wireless connectivity, including a formal Bluetooth standard, which should drive demand for non iPhone based operating systems, such as Android based Samsung phones. With the hearing aid market fundamentals robust over the next 12 months, they see it as realistic that the 1-year forward P/E valuations will continue to hover around the long-term average of ~21-22x, with the fastergrowing hearing aid stocks trading at a premium. Post EUHA they remain optimistic on CY16 market growth of +4-5% and see the beginning of a new & powerful wireless product cycle. But they also see challenges ahead for the industry. They take William Demant up to OW, move Sonova down to EW and stay EW on GN.

 

ìUS – Clean Tech  – Our US Utilities and Clean Tech Analyst Stephen Byrd is outlining his bullish view on SCTY and RUN in five compelling charts. He remains Overweight both stocks and estimates that both are pricing in excessively bearish growth prospects at current levels. He also views financing concerns as overblown and believes greater ABS financing will fill any funding gap as the ITC is lowered to 10%.

 

ì China – Video Surveillance – Yunchen Tsai, Greater China Technology Hardware Analyst, initiated on two video surveillance companies – Hikvision (002415 CH) with OW PT Rmb46, implying 33% upside, and Dahua (002236 CH) with EW PT Rmb32, implying 8% downside. She believes Hikvision is well placed to benefit from growing demand for customized solutions and industry consolidation, while the market is overly optimistic about the pace of Dahua's transition. The video surveillance market is equivalent to merely 8% of the handset total addressable market (TAM) in 2015 and the segment is growing at a stable rate (14-17 CAGR of 11%). Thanks to upgrades to IP from analog (enabling data analysis), offering customized solutions rather than pure hardware has become a trend and software R&D and the ability to provide video data analysis have become key. The transition to offering customized solutions could expand the current video surveillance TAM by 2-3x. Hikvision leads in providing solutions in vertical markets while still maintaining a scale advantage in the pure hardware oriented distributor channel. Dahua typically lags Hikvision by 1-2 years in product development and is yet to benefit materially from customized solutions.

 

ì LatAm – Argentina – Argentine stocks have rallied 30% after the results of the 1st round of the Presidential election. Cesar Medina’s (our Argentine Strategist) long-standing thesis of political/macro change is playing out. However, the risk-return in the short term has turned more symmetric. For now Cesar remains long and continues to monitor the situation. The 2nd round of the Presidential election scheduled for November 22nd creates a binomial outcome for local stocks over the next month. A market friendly outcome could lead the equity market to approach, or even overshoot, Cesar’s base case price target (+20% USD upside), while a less market friendly outcome could easily lead to a double digit correction. However, more importantly, Cesar’s visit to Buenos Aires last week reinforced his belief that both Presidential candidates show strong tendencies towards pragmatism, especially on the debt litigation front.

 

ì Europe – UK REITS – Property stocks are bucking the trend this earnings season. While our European Property analyst Bart Gysens and team do not consider EPS growth and PE multiples as key valuation metrics for European property stocks (they focus on total return, i.e. expected NAV growth and dividends in relation to current NAV valuation) but they appreciate that for many generalist investors these nevertheless remain important metrics. They note that UK property stocks' 12 month forward EPS growth is re-accelerating while the opposite is happening for the market. Meanwhile, on average PE multiples show this is yet to be priced in; the average PE multiple for UK REITs relative to the PE multiple average for the UK equity market, is only at long term averages. Several UK REITs with March year-ends are set to publish 1H results with an updated NAV next month, including Land Securities (10 November), Great Portland (11 November) and British Land (17 November). They think these results could be a catalyst. Some market participants will yet again worry that this will be the last set of good numbers, as recent market volatility saps confidence. But even though they also assume NAV growth is slowing, they think it will nevertheless remain pretty good medium term, with risks to the upside relative to their numbers and even more so relative to consensus. Therefore they believe next month's UK results should at the very least provide support to the shares and will more than likely be a catalyst for further share price performance.

 

ì EEMEA – Turkey Elections – The AKP party won the Turkish presidential elections with 49.4% support rating that no opinion poll company or even AKP itself predicted. The market rallied >5% on the unexpected outcome and faded into week end. This political certainty was welcomed by the market and makes our Turkish economics team less cautious on domestic exposure across our industrials and consumer coverage in Turkey. Consumer confidence is at very low levels, and they would expect this to tick up some from here. Yet they’d like to see the composition of the new economy management team, positive developments on Turkey’s foreign policy and last but not least progress on the Kurdish peace process to be constructive in the medium-to-long term. Global banks exposure to Turkey’s banking system is US$207bn – 81% of that is from European countries. Top picks: Halkbank, BIM, Coca-Cola Icecek.

 

ì US – Chemicals – Our US Chemicals Analyst Vincent Andrews is looking at the potential for consolidation in the ag space over the next 12 – 18 months and notes that while some consolidation seems likely, it is very difficult to predict how it will happen - there are simply too many workable combinations. Recent management statements give the impression that management teams are considering combinations but that firm details are elusive.  Vincent examines several consolidation scenarios based on transactions that 1) could fill strategic "white space", 2) are unlikely due to high levels of market share overlap (e.g., 40%+), 3) have the most permissible overlap (~20-30%), and as a result, presumably the most duplicative COGS, SG&A, and R&D, 4) could involve seeds/traits assets being sold to buyer A and crop chemistry assets being sold to buyer B, and 5) would be the most tax efficient.

 

ì Japan – Medical Technology – Ryotaro Hayashi-san, Japan Medical Technology Analyst, resumes coverage with an in-line industry view. While Japan medtech companies’ average P/Es are higher than the average for Japanese stocks, he believes the shares price in expectations of stable and higher EPS growth vs. the overall market, which justifies the high P/E. The China medical device market outlook poses downside risk, but he feels that the stocks have discounted the risk of the slowing China market with the correction in 2H Aug. Meanwhile, he focuses on the upside potential of the US market. He forecasts share price upside of 11% for the 3 Japan medtech companies (weighted avg.), which is broadly in line with the projected upside for TOPIX (12%). Japan medtech P/Es do not seem as overvalued vs. Japan pharmas (covered by Shinichiro Muraoka). He believes medtech names are relatively appealing given the comparatively limited negative impact from domestic drug price cuts in F3/17 and beyond (reimbursement price cuts for devices), and emerging concerns over the outlook on US drug prices.

 

ìIndonesia – Policy Measures Impact –  îHozefa Topiwalla, ASEAN Equity Strategist and team, continue to believe Indonesian corporate earnings have not troughed yet and equity markets are likely continue to be vulnerable to external headwinds. Recent policy measures, although in the right direction, do not materially alter their relatively weak near-term outlook. The policy packages recently announced centre around the five policy objectives of: (a) improving investment; (b) improving financing; (c) managing input costs and inflation; (d) providing supporting to low-income families; and (e) managing currency volatility. Due to Indonesia’s fiscal deficit ceiling, the policy packages are invariably going to matter more in terms of its qualitative aspects rather than the quantitative aspects (i.e., the size of the stimulus). They think the measures to spur investment are the more important ones as Indonesia needs to improve competitiveness in non-commodity segments to offset the commodity reversal. However, implementation is key to reaping results and will take time. They do not expect the policy packages to drive a quick and vigorous recovery, but they see a mild growth recovery in 2016/2017. They believe that the stimulus measures announced so far are unlikely to materially alter Indonesia's near-term earnings growth trajectory and hence they believe earnings growth is likely to remain lower for longer.

 

ì LatAm – Brazil Mobile Telecom – With its new plans, TIM takes a big first step toward a more data-centric pricing model. The new plans are noteworthy because TIM is (1) eliminating the distinction between on-net and off-net voice pricing, and (2) data allowances are larger than competitors', and (3) SMS is always unlimited. For much of the past half-decade, TIM had made unlimited on-net calling the centerpiece of its marketing strategy, forcing the entire industry to eventually follow its lead. Now TIM is essentially turning the page by launching disruptive plans that reflect the growing importance of data.

 

ì Global – Consumers & Climate Change – The residential sector is often overlooked in climate change discussions despite contributing 17% of global CO2 emissions. In this report, our Sustainable and Responsible Investing analyst Eva Zlotnica and team examine four primary levers for reducing consumer energy use at home, with corresponding investment implications. I. Use less energy: do more with less by reducing energy use through more efficient appliances and LED lighting. II. Conserve energy: through improving insulation and fenestration, reduce needs for heating, cooling, and lighting. III. Monitor & automate: rely on demand response or connected "smart" home appliances, gadgets and systems to optimize energy use. IV. Use renewable energy: install solar panels at home, or simply make a choice to buy electricity from sources with higher renewable integration. They believe that consumer actions addressing energy use (and thus climate change) have strong investment implications. Sectors involving household electronics, renewables, and building materials may be materially impacted. They identify nearly 50 stocks in total that are positively exposed to each of the four energy-reducing "levers". They highlight 3 Overweight-rated stocks in particular: Honeywell, SolarCity, and Zumtobel.

 

ìUS – Large Cap Banks  –The Fed's October 2015 Senior Loan Officer Survey showed that consumer demand for card ratcheted up sharply, and much stronger than prior years' October surveys. This supports our US Large Cap Banks Analyst Betsy Graseck’s attractive view on cards and expectation for accelerating loan growth. The consumer looks strong, is confident and expecting a YoY raise, which should support loan growth.

 

Negative

 

î  Europe – EU Earnings – So far 3Q15 results have been disappointing across European equity markets. Morgan Stanley's strategy team highlights how the European results season has been disappointing so far despite lowered estimates ahead of earnings season. The team calculated that so far 5% more companies have missed estimates than beaten, which marks the weakest quarter since 1Q13 and the first net miss in over two years. Total earnings have missed by 10%, so far, while revenues have been similarly weak. In addition, earnings estimates continue to fall sharply as European earnings revisions continue to deteriorate

 

î EEMEA – Greek Banks – Sam Goodacre, our EEMEA banks analyst, reviews the finding from the AQR & Stress tests this weekend. The ECB's comprehensive assessment of the four systemic Greek banks has identified a €14.4bn capital need to solve for a 9.5% CET-1 ratio in the baseline scenario of the stress tests and 8% ratio in the adverse scenario. The exercise includes an initial adjustment to the starting point June-15 CET-1 ratio (phased-in) under the asset quality review (AQR). Greek economy is likely to shrink sharply for some time. He is more cautious on the probability that the third bailout is implemented relative to market expectations. The upside of the programme is that credible execution may make Greece eligible for ECB QE. 

î     US – Specialty Retail – Store traffic trends remained quite weak in the back half of October following a lackluster first half of the month according to Kimberly Greenberger, our US Softline and Department Store Analyst. The East coast received temporary reprieve from the unseasonably warm weather on the third weekend of retail October, potentially providing some brief but much-needed help to outerwear sales. However, this is unlikely to compensate for the difficulty retailers are facing in moving seasonal apparel as temperatures generally remain elevated across the country. Kimberly remains cautious on retailers and is seeing greater discounting.

 

î China – Financials – Richard Xu, China Financial Analyst, adjusted his target prices for Chinese banks by -4% for H share and -1% for A share on average, based on recent RMB/HKD changes and 3Q15 earnings performance. His new target P/B for China Banks range from 0.75x to 1.60x for 2016. Most banks under his coverage reported in-line net income while NIM  and credit costs remain pressured. Divergent operating and PPOP trend between large banks and mid-sized banks continued but net income growth gap not as big. State-owned banks maintained more prudent operating trends with conservative on and off balance sheet growth and remained focus on low risk loans, while Mid to small sized banks under coverage continued to post higher asset growth albeit with some moderation in 3Q15. Average leverage for banks under his coverage declined modestly following a rebound in 2Q15. This is largely due to decline in interbank lending, which was also partly aided by seasonally higher capital accumulation. CRCB, SPDB and Industrial Bank maintained more aggressive asset growth in 3Q15 while ICBC and CCB were more conservative. Some moderation in NPL formation largely due to seasonality, and some pick up in 4Q15 likely as banks tend to conduct more detailed credit reviews before year end. Overall, CRCB, CMB, and Everbright reported better than peers 3Q15 results while BOC and BoCom lagged.

 

î  Europe – Wholesale Banks & Capital Markets – European banks restructuring are unlikely to get a quick boost to their long-term restructurings from the view of our European Banks analyst Huw Van Steenis and team. Despite the equity rally, US inv-banks are likely to be the biggest beneficiaries: they forecast Q4 up ~8% for US firms vs ~(8)% for EU, but value should emerge as they restructure. Overall, Q4 has started a mixed quarter - good in Equities, ECM & FX, but still challenging in Credit: Given FICC was so weak Q4 14, they hope revenues could be up YoY (after being down ~23% YoY in Q3). In Equities they think US firms will be up double digit YoY, continuing Q3 trends, whilst ECM is likely to be up materially (Oct was ~30% up on Q3 run rate). But they forecast US firms will benefit far more from these constructive Equity/ECM trends - & European firms down -6% on Q4 14. Overall they expect total industry revenues pools to be flattish in 2015, underscoring the need for share gains and restructuring. Overall, FICC remains the challenge, which they think will be down 6-7% again. Meanwhile Q3 was so weak that if you annualised, it would be running at ~20% below 2014 levels, prompting more adaption into 2016. In contrast, annualising Equities in Q3 would still be flat on 2014. Little wonder why US firms are so intrigued to see how vulnerable Europeans will be to share loss during their lengthy restructurings

 

î   US – Machinery – Nicole DeBlase, our US Machinery Analyst, is recapping 3Q15 earnings for the machinery group. There were 5 beats, 5 misses, and 1 in-line quarter and most companies elected to reduce their full year outlooks again this quarter driven by deterioration in September (CAT, CMI, MTW, PH, TEX, WBC). While guidance was taken down, the group still does not look cheap and fundamentals remain decidedly negative. As such, she remains tactically bearish on the group - although would not be surprised if the current rally continues into year-end.

 

î Europe – EU Referendum & Brexit – Our UK Economist Jacob Nell and team expect a close contest, leading growth to slow and market volatility to rise, followed by a rebound after a 3Q-16 vote to stay. If the UK votes to leave, they see a hit to economic activity and asset performance. In their  base case ("Close Call", 50% probability), there is a close contest, leading to substantial uncertainty and higher asset price volatility, and contributing to a mid-year growth slowdown, before a vote to remain triggers a growth pick-up and a relief rally from late 2016. In their  bull case ("Clear Victory", 15% probability), there is minimal uncertainty about the outcome, with higher growth and lower asset price volatility. In their  bear case ("UK Votes to Exit", 35% probability), the close contest ends with a vote to leave. This triggers a "referendum shock", followed by protracted uncertainty over the relationship with Europe, and enhanced domestic political risks, notably over Scotland and the Conservative Party leadership. In this bear case, they would expect a fall in investment and weaker consumption to slow 2017 growth to 1%, and trigger an easier policy response, with rates on hold for a year. Heightened uncertainty in the run-up to the referendum is likely to act as a drag on the relative valuations of UK equities. Brexit fears should favour international large-cap stocks at the expense of smaller UK and European exposed names. They recommend investors OW FTSE100 and UW Mid250.

 

î  US – Freight – Alex Vecchio, our US Freight Transportation Analyst, is reviewing 3Q earnings and giving positioning recommendations. He thinks investors need to be prepared for near-term volatility in the Rails given commentary about disappointing volumes and continues to like UNP and CP. If the macro backdrop worsens, he would be a buyer of the defensive transports, such as CHRW and EXPD, or those with attractive valuation, KNX and SWFT. Finally, he would be cautious on JBHT ahead of it guidance announcement next week.

 

CHARTS

 

National Residential Property Sales Vs. Investment and Floor Space Sold vs. Starts

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John Lam, China Property and Greater China Cement Analyst, double upgraded China Property to OW. With a series of property policy easing and monetary easing (e.g., interest rate / RRR cuts), national residential floor space sold increased by 8% YoY in 9M15, vs, a 9% decline YoY in 2014, as per NBS data. However, residential floor space starts fell 14% YoY in 9M15 following a 14% YoY drop in 2014. The national floor space starts-to-sales ratio has improved to 102%, the lowest level seen in the past 10 years (See Exhibits 11, 13). A similar trend is also being seen in the residential property sales vs. investment ratio (See Exhibit 12-13). In addition, China 300 cities residential land sales have plummeted by half from 2014, as per CREIS data.  Download the Complete Report

 

Medical Device Market Trends

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Ryotaro Hayashi-san, Japan Medical Technology Analyst, resumes coverage with an in-line industry view. Strong growth seems unlikely in Japan and Europe, and while he looks for long-term growth in China, the outlook has become somewhat unclear. That said, the US market is relatively attractive supported by an upward trend in hospital inpatient/outpatient volume growth, rising revenue per patient, and hospitals' improving capex expectations. He estimate aggregate sales growth of the 3 Japan medtech companies on a constant-currency basis at +7% in F3/16 and +6% in F3/17, roughly maintaining the same level of momentum as +6% in F3/14 and +7% in F3/15. Download the Complete Report

 

China – Offshore versus Onshore Positioning by Stock Exchange Listing

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Majority of the recent China performance has been generated by ADRs / US listed China Internet stocks. Net exposures to these names has ticked up sharply since the beginning of September. Driven by a sharp rebound in share prices (US China internet stocks up about 35% from early Sept lows) plus some buying. What is clear is that any ‘China’ activity has remained in US listed product versus actual onshore Asia.

 

The fall in EM debt spreads would suggest a further reversal in momentum strategies

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Momentum trades have started to roll over again. Between May and September, European momentum long-short trades outperformed by almost 25%. This reversed sharply in early October given a combination of extreme positioning, a more dovish Fed and some signs in stabilisation in EM as the weakest performing European stocks over the prior year outperformed the prior winners by 12% between Sep-28 and Oct-9. While momentum strategies regained around half of their losses in recent weeks, there have been signs of renewed underperformance of European momentum stocks.

 

We are Overweight Financials and Discretionary

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Adam Parker reviewed 3Q earnings this week and what he has been noticing from management teams. With 77% of the S&P 500 market capitalization having now reported, companies have beaten consensus estimates by 5.1%. The market also appears to be differentiating on margins as stocks with margin expansion have been rewarded and those with margin contraction are being punished. He has seen management focus on potential economic weakness in China, headwinds from the dollar and give muted capital spending guidance. As for earnings guidance, it has been less negative than the average in recent years. The negative-to-positive guidance ratio is 2.22 for the fourth quarter of the year, meaning companies are issuing more than two instances of negative guidance versus consensus expectations for every one instance of positive guidance.  We are recommending that investors overweight financials and consumer discretionary and underweight materials, industrials, and staples (the relative performance of our portfolio to the S&P 500 since inception is 9.2%).  =

 

ARGENTINA TRADING AT A P/B DISCOUNT TO LATAM

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Book value is an accounting metric that is less cyclical than net income. However, in Argentina, the net worth of local firms is understated by the absence of inflation accounting despite an accumulated inflation of 800% since 2003. Our LatAm Strategy team estimate Argentinean ADR's trade at 0.6x P/BV or significantly less than the 1.4x average for Latam after they adjust for this distortion. Download the Complete Report

 

FB Accelerated Constant Currency Advertising Revenue for the Second Straight Quarter

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Brian is reiterating his Overweight rating on Facebook and is raising his price target from $110 to $120. Third quarter results showed that FB continues to grow its reach and engagement while the ad innovation to improve user monetization continues as well. The results highlight the platform’s monetization momentum as constant currency ad revenue growth accelerated to 57% YoY (from 55% in 2Q:15) with advertising revenue coming in 1.9% better than MS estimates. Strong advertiser demand -- driven by rising adoption and spend from new ad products like carousel ads, Instagram and video ads -- user growth, growth in time spent per user, and a higher advertising load were balanced contributors to the strong ad growth. FB also lowered its non-GAAP opex guidance for 50% YoY growth (vs 50%-55% growth previously), which combined with rising topline, raises MS EBITDA by 6.6% in 2015 and 7.4% in 2016, contributing to the increased price target.

 

DEDICATED EM FUNDS REPORT OUTFLOWS OF US$1.19BN THIS WEEK

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Dedicated EM equity funds (GEMs + EM Asia + EMEA and Latam regional funds) reported outflows of US$1.19bn for the week ended November 4, 2015. Excluding China A share equity fund flows, this week's outflows from EM funds amounted to US$0.74bn. Within dedicated EM equity funds, EM Asia regional funds reported the largest outflows of US$0.89bn. GEMs regional funds, EMEA regional funds and LatAm regional funds also reported outflows of US$0.19bn, US$0.07bn and US$0.04bn, respectively. Download the Complete Report

 

KORS 2Q -3.4% Constant Currency Comp Saw First Qrtr of Sequential Acceleration Since 3Q13

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Kimberly Greenberger believes earnings from Michael Kors was the first step in convincing the market that financial forecasts are achievable and she sees value in the shares. Global comps decelerated each quarter between 4Q13 and 1Q15, but 2Q's -3.4% comp showed sequential acceleration (1Q -5%) for the first time since 3Q13, demonstrating much needed stabilization. Management expects this stabilization to persist and guided comps to remain in the negative LSD range (MSe -2.7%). Kimberly expects future comp acceleration to be driven by: 1) the inclusion of eCommerce in comps; 2) diminished FX and tourism headwinds; 3) easier y/y comparisons (especially in 4Q); 4) the rollout of Kors concierge (ability to fulfill online orders in-store); and 5) a new national advertising campaign and holiday and spring 2016 product launches. However, trading at 10x, she thinks the stock can work in the absence of a comp acceleration should margin pressures ease and buybacks continue. She remains Overweight with a $63 price target.

 

Online Video Creating a More Competitive Environment

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Agencies/marketers are facing an increasingly complex video ad landscape – in the context of our Cautious Media industry view, Ben Swinburne remains EW TWX. Our concern over the group starts with the question - are media companies over-earning? In some respect, the lowered TWX outlook answers that question - as it takes some short-term pain to try and build a better long-term position. 

 

RESEARCH

 

Positive

 

ì   US – DexCom Inc – Our US Medical Technology Analysts David Lewis and James Francescone are initiating on DexCom Inc. with an Overweight rating and $106 price target. Continuous glucose monitoring (CGM) is a secular growth story with ample room to run, and James believes multiple product catalysts and reimbursement events should support growth for longer than consensus expects. Near-term, he believes estimates look conservative, competitive threats are manageable, and DexCom's technological / commercial critical mass should preserve leadership in CGM. His price target of $106 is driven by a both a DCF analysis and comparable multiples on out-year numbers (translating to 34x P/E and 6.5x EV/sales on 2020 numbers, discounted back at 10%). Download the Complete Report

 

ì China – Bloomage Biotechnology – Isabella Zhao, China Healthcare Analyst, initiated Bloomage with OW rating and PT HK$20 (51% upside) on accelerated growth through its expanding range of products and services. Bloomage is China’s largest fully integrated cosmetology provider and it aims to become the first and only aesthetic ecosystem solution provider with differentiated products and services to cover the full value chain. Frost & Sullivan estimates China's aesthetic market will double in terms of sales in 2014-18 because of increasing discretionary spending, a large aging population and wider application of new medical technologies. It expects sales of HA dermal fillers in particular to grow by 30% to Rmb4.8bn by 2018. Bloomage is the world’s largest HA raw material manufacturer and has a dominant position in China's HA raw material market. According to the company, Bloomage has a 65% share in China's HA raw material market, 90% share in China's medical grade HA raw material market, and more than 50% share of China's HA export market, in terms of sales in 2014. Bloomage has built clear competitive edges in product technology, production capacity, and customer base, which create strong entry barriers. Bloomage's sales and net profit CAGR in 2012-14 were a healthy 32% and 35%, respectively. Isabella estimates 24% and 25% top-line and bottom-line CAGRs, respectively, in 2014-17. The stock has been under pressure amid market concerns about intensifying competition from newly approved HA products in China, but Isabella believes the market has over-reacted and undervalued Bloomage’s full value chain and aesthetic ecosystem solution provider. She expects its new products and services to generate long-term earnings growth. The stock is attractively trading at 15x 2016 P/E, on her estimates, versus cosmetic/biotech peers at 25x.  Download the Complete Report

 

ì LatAm – Credicorp – In their 3Q results, recurring net income was P$746 million, up 16% y/y and 1% q/q, and 2% above MSe. Bloomberg consensus was P$731 million. Recurring ROE was 21.2%, down from 21.5% in 2Q15 and up from 20.6% in 3Q14. MSe was 20.2%. Net results were positively impacted by a non-recurring gain (P$58 million) from the sale of a fund at the ASB subsidiary. Reported net income was R$807 million, yielding an ROE of 23.1%. Download the Complete Report

 

ì Europe – Danone – Ahead of Danone's Investor Seminar (Nov 16-18), our European Food Producers analyst Eileen Khoo and team identify 3 key debates likely to arise at Danone's Investor Seminar, which could prove to be a positive catalyst. Following a strong run (+23%) since the summer, Danone shares have now outperformed Staples and MSCI EU YTD. But the stock's discount vs. peers implies still cautious sentiment – Danone's upcoming event (the first with its new management team) could assuage this. They see further rerating potential, driven by: 1. Top-line acceleration in 2016. They expect EU Dairy to stabilize in 2016 after 3 years' decline, driven by easier comps, large margin tailwinds, and reinvestment into A&P to drive top line and improved innovation. 2. More evidence of positive management cultural change. They expect the upcoming investor event to provide clarity on the new 5-year strategy ('Danone 2020') and long-term guidance. 3. Balance sheet optionality – not necessarily a negative risk, as widely perceived by investors. Acquisitions look likely to remain part of Danone's growth strategy medium term. Relative valuation is compelling. Despite material rerating since the summer, at 20x 16e P/E, Danone still looks good value vs. EU/US Food stocks. If their forecast of best-in-class EPS growth (14-17e) and LFL (16-17e) is right, they see material scope for rerating – Danone now trades at a discount to EU Food (vs. a historical 10% premium). Their new PT reflects this, as well as sector-rerating. Download the Complete Report 

 

ì EEMEA – Safaricom – Safaricom reported strong KPIs for 1H-FY16, beating our analyst, Ed Hill-Wood’s net income estimates by ~10% and EBITDA by 4.5%. Revenue growth momentum has remained strong in key segments with acceleration seen in M-PESA and Voice revenue growth. Ed believes these results will bring market focus back to operational performance and execution despite regulatory concerns. Valuation has come off from peak levels to Safaricom has also raised the FY guidance to KSH35.5bn-36.5bn Net Income (vs KSH32-34bn earlier, MSe KSH34.4bn, Cons KSH35.1bn ) and KSH27.5bn to 28.5bn FCF (vs KSH25-26bn earlier, MSe 27.8bn) and will be liked by the market, we believe. Download the Complete Report

 

ì China – Sinopham – Sean Wu, China Healthcare Analyst, assumes coverage of the stock and reiterates OW rating. He raised price target to HK$40 from HK$34 and increased EPS estimates by 3% in 2015, 6% in 2016, and 10% in 2017 after reducing finance cost estimates and fine-tuned expense ratio forecasts. The continuous easing of interest rates throughout the last 12 months has enabled Sinopharm to cut its finance cost ratio, resulting in overall net margin improvements - 1.43% in 2014 to 1.58% in 3Q15. Sean expects Sinopharm to continue to benefit from the low interest rate environment in the near future, though sales growth may slow down due to industry weakness. New PT of HK$40 implies that the stock would trade at 20.3x MS 2016 EPS estimate, implying 26% upside from the current price. Potential catalyst includes further interest or RRR cuts may lead to an even lower finance cost ratio and higher net margins, or Market gains due to price cuts driving out small competitors. Download the Complete Report

 

ì Korea – Hankook Tire – Candice Kim, S. Korea Autos & Auto Parts Analyst,  reports Hankook's top line improved for the first time in six quarters and upgrade the stock from UW to EW. The temporary measure in China and better mix in North America should support earnings growth for the next 12 months, but she awaits clearer improvement in industry dynamics before she gains conviction in earnings growth thereafter. She does expect earnings recovery for the next 12 months. The Chinese government's temporary tax cut on vehicles with engine sizes ≤1.6L should trigger OE sales recovery (a discount factor since 4Q14). In addition, increase in North American sales should drive overall mix improvement as U.S. tariff on Chinese imports takes effect, coupled with rising demand for SUVs. Download the Complete Report

 

ì LatAm – Mercadolibre – Meli plows through macro headwinds to deliver 3q beat… Michel Morin, our LatAm TMT analyst, is raising his 2016-17E EBITDA by 3% and EPS by 8% (details inside). Non-GAAP EPS of $0.75 in 3Q15 beat MSe of $0.61 by 22% and consensus by 17%. Once again, MELI delivered solid growth despite intensifying macro headwinds in its largest market of Brazil. Michel continues to find the risk-reward unattractive. Remain UW. Download the Complete Report

 

ì Emaar Properties –EEMEA –  Solid 3Q15 earnings growth, slow Dubai pre sales as expected 3Q15 earnings below consensus (wide range) but beat MSe: Net income of AED843mn (+31% YoY, -28% QoQ) was 16% higher than our estimate, but 16% below consensus (AED1bn). Muneeba Kayani, our EEMEA industrials analyst, notes that consensus had a wide variance and 3Q is a seasonally slow quarter. The net income beat on our estimate was driven by higher revenues, partially offset by higher minority interest. Revenue of AED3.33bn (+56% YoY, -5% QoQ) is ahead of consensus (AED3.23bn) and MSe. The beat on MSe is driven by higher than expected development and hospitality revenues. Emaar's stock is down 10% in the last two weeks and given the continued earnings momentum, Muneeba thinks valuation is compelling at 11.4x 2016e P/E and a 54% discount to 2014 NAV. Remain OW. Download the Complete Report

 

ì Europe – Nestle – Although the 'Nestle model' has increasingly come into focus with investors following a third consecutive year of sub-5% LFL growth, our European Food Producers analyst Eileen Khoo and team’s detailed analysis suggests improving execution and innovation in Zone AOA could drive a +ve inflection point by 2016. Zone AOA has on average made up ~20% of group sales (~30% including Nestle's Globally Managed Businesses , ie. Waters, Nutrition and Other). Between 2005-13, the Zone contributed on average ~24% to Nestle group LFL. The Zone's margins have also consistently been much higher than the group's (19.2%, vs group 15.4%, in 2014). Valuation at 21x 16e P/E for low-teens, low-beta TSR looks compelling vs. global Staples peers. They think the consistent track record of superior growth and margin performance deserves a valuation premium - they raise their PT to SFr85, reflecting the sector rerating. They expect: (i) improving operational momentum and (ii) balance sheet/portfolio optionality to drive stock upside. They forecast net cash on the B/S by 2018, absent M&A/further cash returns. Download the Complete Report

ì US – Abbvie – Our US Pharmaceuticals Analyst David Risinger is upgrading Abbvie from Equal-Weight to Overweight and is raising his price target from $62 to $73. After Friday’s webcast of management’s long-term plan, the stock traded 10% higher. Dave thinks the stock has more room to go and was encouraged by the robust defense of the broad Humira patent estate. When combined with a patent consultant's views, he has conviction to raise his projections. While his old forecasts assumed US biosimilar entry in 2018, he now assumes 2020 or later. He is also raising his 5-year free cash flow from $46B to $55B, which will help it pursue acquisitions to help offset eventual biosimilar erosion. Download the Complete Report

 

ì Canada – Goldcorp – Our North American Gold Analyst Brad Humphrey is reiterating his Goldcorp OW as he believes the shares were overly punished for its slight Q3 miss which overshadowed strong production growth, growing free cash flow and expanding margins. Coming out of a busy week of earnings, Goldcorp and Canadian Natural Resources remain among our focus picks in the beleaguered Canadian resources space. Download the Complete Report

 

ì Japan – Terumo –  Ryotaro Hayashi-san, Japan Medical Technology Analyst,  resumes coverage of Terumo with an OW rating and a ¥4,300 PT. He highlights the improving US device market in the US, and favors Terumo as the Japan medtech name likely to benefit most. Market concerns regarding Terumo centered on the risks of falling blood management system prices and negative official reimbursement price revisions in F3/17, which pointed to slower earnings growth in F3/17. However, he believes that the improving US device market will support solid overseas Cardiac & Vascular business, leading to F3/17 earnings above consensus. He sets his price target at 23x his F3/17 adjusted EPS forecast. He derives his target multiple based on estimated CAGR of 16% for adjusted EPS during F3/16-F3/17, multiplied by PEG of 1.4x (for details regarding PEG ratios for Terumo and peers. Download the Complete Report

 

ì Europe – Weir Group – Our European Capital Goods analyst Rob Davies and team downgraded Weir to UW on March 17th, based on a lack of focus on O&G equipment pricing, which was deteriorating rapidly. Although their concerns over the impact of a more prolonged commodity downcycle on Weir’s margin profile have not reduced, they were surprised at how quickly consensus expectations have adjusted around 3Q results. Full details on consensus are not yet available, but their 2016 EPS forecast of 76p is not sufficiently below market estimates to merit an UW. In O&G, they expect margins of 11.0% in 2016, down from 22.7% in 2014. For Minerals, the margin decreases to 17.0% in 2016e from 20.1% in 2014. For the group, they forecast a 42% reduction in operating profit to £259mn over the same time frame. Although they do not know that 2016 will definitively be a ‘trough’, they expect the market to work on that basis in the near term and Weir to trade accordingly. On their new estimates, Weir trades on a 15.0x 2016 PE, 12.6x EV/EBIT and FCF yield of 8.7% – i.e. it is no longer expensive. In terms of 2016e EPS, they have a bear-bull range from 55p to 108p, which affords valuations from 550p to 1,900p. They acknowledge a significant management response in terms of cost savings initiative and headcount reductions. Their natural inclination remains that for commodity suppliers in general, there are risks to the downside – however, based on the current risk reward they feel the shares merit an EW. Download the Complete Report

 

ì US – Qualcomm – Our US Communications Systems and Applications Analyst James Faucette is reiterating his Overweight rating and $75 price target on Qualcomm. James is addressing the recent decline in the stock price due to concerns on royalty collections and believes that as AAPL and Huawei continue to gain share of smartphones in China, the share gains will come at the expense of the smaller players where QCOM has seen royalty collection issues. AAPL’s push into the used market in particular will further erode the market position of these smaller players who target mid-to-low end phones and help create an incremental sale of new iPhones that will ultimately improve QCOM’s market share and royalty revenue. Based on MS survey work, underlying handset demand in Chinas is good, providing further tailwinds. Download the Complete Report

 

ì LatAm – YPF – Global oil prices halved Y/Y in 3Q15 and YPF managed to deliver a modest 10% EBITDA contraction in USD. Comps were also difficult as last year YPF was in the process of catching up on fuel price hikes. Bruno Montanari, our LatAm Oil & Gas analyst, thinks results quality were good and valuation remains attractive, supporting his OW rating. Download the Complete Report

 

Negative

 

î US – Texas Roadhouse – John Glass, our US Restaurants Analyst, is moving from Equal-Weight to Underweight on Texas Roadhouse and is lowering his price target from $37 to $32. They key to this call is predicated on the relationship between beef prices and TXRH’s SSS. John looked at TXRH sales vs retail beef price data going back well over a decade and his work suggests that there is a high correlation between retail beef prices and TXRH's SSS. Thus, TXRH benefits when eating a steak away from home is a better relative value. So ironically, as beef prices fall--as he expects over the next few quarters--this may actually hurt shares as sales increases moderate. While falling beef costs is good for margins, the multiple compression caused by lower comps will likely more than offset any earnings benefits from lower beef prices. In addition to possible headwinds to SSS, TXRH will have increasingly difficult comps in the back half of 2015 and 1H16, faces challenging casual dining dynamics and industry wide comps slow, and the prospect of wage inflation that could offset lower beef prices. Despite these headwinds, shares still trade at ~22x NTM EPS estimates, above its historical and peer averages, leaving shares vulnerable. Download the Complete Report

 

î India – Just Dial – Parag Gupta, India Discretionary and India Technology Analyst, reports that revenue growth and margins in the core Search business were weak and point to a challenging near-term outlook. Growth may take a few more quarters to pick up, and SP is unlikely to fire in a hurry. With limited positive triggers, he once again moves to UW. Just Dial reported one of the slowest revenue growth rates (adjusted growth of 20% yoy) ever in F2Q16 and adjusted EBITDA margins dipped to 27.4% (-366bp yoy). New campaign additions were negligible qoq ( 2,900 increase qoq). PAT was ahead of estimates at Rs463mn (+39.6% qoq, +8.8% yoy), but that was due to higher-than-expected other income. Download the Complete Report

 

î Europe – AMEC Foster Wheeler – The announced dividend cut reduces the DY to 3.8%, despite today's 23% stock fall. It also suggests gearing concern with 2015 NDEBITDA likely to reach 2.7x and therefore a prioritisation of balance sheet strength over shareholder distributions. Move to Equal-weight. Our European Oil Services analyst Rob Pulleyn and team downgrade from Overweight to Equal-weight to reflect the deterioration in investment case following the dividend cut. Guidance for a 2016 dividend "half" the 43p DPS in 2014 and FY15 dividend of 29p was a negative surprise to the street, which had forecast 44p DPS for both years. They considered yesterday's dividend yield of 5.8% was adequate to own the stock, whereas a yield moving towards 3.8% is not attractive enough. The magnitude of the shock, with the stock down 23%, may dilute AMFW's reputation as a relatively low risk stock where dramatic stock moves are highly unlikely and this could lead to a valuation discount vs the past. Download the Complete Report

 

î EEMEA – Alrosa – Neri Tollardo, our EEMEA M&M analyst, downgrades Alrosa to EW (PT reduced to RUB56 from RUB64). The cyclical downturn is deeper than expected, and the diamond pricing outlook worse than expected. For Alrosa, low sales volumes, working capital accumulation, and small pricing upside mean that leverage will increase and dividend payments will disappoint until 2017.ALROSA's inventory accumulation causes leverage to increase from 1.2x at 2Q15 to 3.1x at 1Q16. It is also hurt by the Mineral Extraction Tax, which is paid on production and not sales. Neri expects this, combined with a 43% YoY decline in revenues over the next 12 months, will lead to two years of disappointing dividends (2.1% in 2015 and 4.7% in 2016). He expects downgrades as we are 35-37% below consensus on 2015-16e EPS. Download the Complete Report

 

î US – Avis – Adam Jonas, our US Autos & Shared Mobility Analyst, is reiterating his UW on Avis Budget Group and edging his price target lower from $26 to $25. He notes three central points to his call 1) volume growth slowing to +2%/y by 2017 due to macro factors and increased secular risk from competing mobility models, 2) an anemic pricing environment that we have seen over the last three quarters likely continuing (and not something investors should pay a high multiple for), and 3) peak-ish levels in the US auto cycle present significant downside risk to estimates on used car sales prices that may ultimately not be offset by better pricing/volumes. Download the Complete Report

 

î China – MediaTek – Bill Lu, Greater China Technology Semiconductors Analyst, upgraded the stock on June 14, 2015 and has since been wrong. EM smartphone demand remains lackluster, the competitive pressure could increase in 2016, and new drivers seem several quarters away. Bill is lowering his 2016 estimates significantly: His 2016e revenue is now NT$231.8 billion, up 10% Y/Y. This assumes 10% unit growth and flat ASP. He believes prices for 3G products will continue to decline, offset by mix shift to more 4G. His 2016 GM assumption is 40.9%, down from 43.6% in 2015 as pricing pressure continues and 4G products still carry lower GM than 3G products.  Looking at his new estimates, he sees less variation in the unit assumptions and more risks (both upside and downside) in the ASP assumptions. He downgrades to EW and lower his TP significantly to NT$260.00. Download the Complete Report

 

î LatAm – TIM Participacoes – Weak 3Q as macro continues to impact… Normalized EBITDA of R$1.30bn (-3% y/y) missed MSe of R$1.36bn by 4%, but came in line with consensus compiled by the company.  Adj. Net Income of R$172mn missed MSe and consensus by 28%. Mobile Business Generated contracted 1.6% y/y in 3Q15. Handset volumes shrank 78% y/y to 697k in 3Q15. Fixed line revenue rose 6% q/q and 12% y/y. TIM unveiled a new portfolio of plans (see note). Remain EW. Download the Complete Report

 

î EEMEA – Kcell AO – Polina Ugryumova, our EEMEA TMT analyst, downgrades Kcell to EW as continuing competitive pressures brings down her 2016/17 EPS estimates by ~50%, which in turn lowers her PT by ~55%. Kcell shares have lost >50% YTD, reflecting negative operational trends in the Kazakh mobile market. Moreover, with visibility on 2016/17 earnings limited, risk-reward is not especially appealing (13% base case upside is offset by 62% downside in her bear case compared to 73% upside in her bull case). For investors seeking yield, MTS (11%), MegaFon (8%) and STC (8%) are more appealing options, in her view, offering much fewer risks to earnings/dividends. Download the Complete Report

 

î Europe – Standard Chartered Bank – While bold action is being taken, targets indicate the hard task ahead to beat cost of capital by 2020. Our UK Banks analyst Chris Manners and team continue to see revenue as the key challenge. At 0.7x (TERP basis) 2015e TNAV and trading at ~11x their updated 2018e EPS, they remain Underweight. While the plan is a strategic necessity to improve returns, there remains uncertainty about how much revenue will be lost as a result of the exiting of RWAs and how long the challenging current trading environment will persist (3Q15 revenue print was -18% y/y). Accounting for the gross costs saves of $2.3bn 2016-18e, modest inflation and $0.7bn of increased investment spend, StanChart now target a group cost base of less than $10bn by 2018e (i.e. below management estimate of $10.1bn for 2015). This is broadly in line with their pre announcement estimates, and hence they see this element of the plan as manageable. On their estimates the CET1 ratio rises to 15.8% by 2018e, well above the 12-13% target indicating plenty of scope in management targets to absorb regulatory headwinds (e.g. RWA inflation, fines, IFRS 9). They see that solving for 13.1% CET1 pro-forma 1H15 (+1.6%) post the rights issue should allay market concerns on capital ratios for StanChart for the moment. And in terms of valuation, STAN trades on 0.7x 2015e TNAV pro-forma for the capital raise vs. management guidance for 8% RoE in 2018e and their estimate of 6% (on lower revenues). They reduce their earnings and price target materially due to drag from reshaping and rebasing post a weak Q3 and adjust for the capital raise. Download the Complete Report

 

î US – DSW – Jay Sole, our Branded Apparel & Footwear Analyst, is reiterating his Underweight on DSW following last night’s earnings results. DSW reduced FY15 EPS guidance to $1.40-1.50 from $1.85-1.95, pointing to slowing retail traffic, weak category sales trends, and unseasonably warm weather. However, Jay notes that competitors either raised or maintained FY15 outlooks last week, and that DSW likely underperformed due to structural issues that are not easy to resolve. DSW also announced a new CEO, previously the EVP and Chief Innovation Officer, which is a positive and signals an intent to accelerate DSW’s transition into an omni-channel retailer, but Jay believes the transition will take more time and money than the market is pricing in. Jay’s $17 bear case may become increasingly likely as the market decides on a fair multiple to pay for a retailer with little store growth, slow comps, tough competitors, falling gross margin, and rising SG&A investment costs. Download the Complete Report

 

î China – Strategy – Jack Lu, China Energy & Chemicals Analyst, downgrades Kangde from OW to EW. The stock has risen by ~35% since mid-Sept (vs. 8.5% for SHSZ300). Tactically, he downgrades KDX to EW on fair valuation. He thinks a higher price target depends on market penetration of its new products. He awaits stronger catalysts before reviewing his model. There was no surprise in 3Q results. KDX reported 3Q earnings of Rmb367.8mn, roughly in-line with his expectations, and his full-year estimate implies 4Q earnings of Rmb364.5mn. There were no stronger-than-expected catalysts to make him change his earnings forecasts. Download the Complete Report

 

î LatAm – Cemex – Nikolaj Lippmann, our LatAm cement analyst, is downgrading Cemex to EW. Three reasons: 1) Legacy problems – particularly high leverage and FX mismatch – are increasingly getting in the way of operations, which continue to disappoint. Nikolaj’s new, lower 2015e EBITDA is just 1% above 2009 levels, at the cycle trough; further, he is now 8-9% below consensus' 2016-17 EBITDA. 2) Nikolaj thinks bold steps are required to achieve investment grade status, which he now views as unlikely before 2019. 3) Valuation looks inexpensive on a SOTP basis but not, he thinks, on a multiples basis. Download the Complete Report