Company Reports

The Revolve Group has carved out an interesting competitive niche in the attainable luxury category, leaning heavily into the strengths of the e-commerce channel—breadth of selection, scalability, and ubiquity of access—to reach a mobile-first, millennial and Gen Z audience. With the firm cycling through 300,000 styles on its Revolve and FWRD (luxury) marketplaces during 2023, and with roughly 1,500 new styles launching weekly, the firm has positioned itself as an "online source for discovery and inspiration," capturing more than $400 in after-return spending among its base of 2.5 million active buyers at year-end 2023.

In 2022, AtkinsRealis (formerly SNC-Lavalin) reorganized its business into the following segments: engineering services, Linxon, nuclear, O&M, infrastructure LSTK projects, and capital. The first four are grouped together as SNCL Services.

We have a positive outlook on Dynatrace’s prospects in the observability space. The firm’s products benefit from secular tailwinds driving an accelerating increase in data for enterprises to monitor and analyze. In our opinion, the firm’s sticky product portfolio, broad swath of products that cover the entire IT stack, and increased penetration in its target market have enabled Dynatrace to form a narrow economic moat around its business.

Spirax-Sarco Engineering has managed to embed its products and highly qualified engineers, who act as its salesforce, into customers’ industrial and commercial processes. Approximately 50% of the group’s sales are from recurring maintenance, with an average invoice value of GBP 1,200, and a further 35% from small improvement projects with short payback periods. The recurring nature of Spirax-Sarco's sales has allowed the group to enjoy greater resilience through the economic cycle compared with the more cyclical swings in customers’ capital-expenditure budgets, which are dependent on uncontrollable macroeconomic factors.

Along with Equifax and TransUnion, Experian is one of the Big Three credit bureaus. Experian's US core credit bureau business is relatively mature and, as a result, the company has been expanding through adjacent products and in emerging markets.

Monday is a leading provider of work management software. The emerging niche within software as a service, or SaaS, aims to improve the efficiency and productivity of project and process management by displacing widely deployed but suboptimal incumbent tools of email and spreadsheets. Monday’s solution allows customers to digitize business processes and to plan, capture, manage, automate, templatize, and report on custom workflows around a single source of truth. We believe work management tools offer superior functionality relative to incumbent solutions including centralized dashboards providing real time visibility, accountability, and consistency across complex, cross-functional projects, automating workflows, and dynamically assigning tasks.

While CI Financial's aggressive pursuit of wealth management operations in both the US and Canada the past few years has provided the company with a way to offset the shifting balance of power in the Canadian fund market, the company funded most of this acquisition-driven growth with debt. This was the brainchild of CEO Kurt MacAlpine, who was hired in 2019 to take CI Financial in a new direction after years of pressure on its core fund manufacturing business from the growth of lower-cost investment products. Although revenue and adjusted earnings per share have risen the past several years, the high degree of leverage on the balance sheet has weighed on the company's share price (and even led a ratings agency to declare their debt junk in early May 2023).

Prestige Consumer Healthcare is one of the largest pure-play over-the-counter healthcare providers in the US. We expect the firm to grow through product innovations, increasing household penetration, and expanding its e-commerce presence. One way Prestige has tackled product innovations is through broadening its brands’ end markets; for example, Dramamine for a long time only played in the motion sickness space, but Prestige has spent the last number of years expanding its indication to the nausea market. While these outbreaks of categories can certainly expose Prestige to new competition, we believe it also affords the firm a new set of customers that it can win over. And given Prestige’s focus in small and niche categories, we don’t expect the company to try and compete with blockbuster brands from consumer packaged goods, or CPG, giants. Rather, we believe it will seek out adjacent categories that might be underpenetrated or composed of minor brands to displace with its recognizable brands.

Research and development in probiotics has laid the foundation for Yakult’s business, primarily comprising beverage products and pharmaceuticals. The flagship products are probiotics drinks marketed under the namesake brand in 40 countries across four continents, making up an estimated 80% of group sales and 90% of profits. Expanding the international footprint and enhancing domestic profitability through premiumization are the two pillars of Yakult’s growth strategy. Domestic growth lifted by the premium Yakult 1000/ Y1000 success has taken up the baton from overseas volume expansion, becoming a key profit driver.

While many of its peers are diverting investment to renewables to achieve long-term carbon-intensity reduction targets, ExxonMobil remains committed to oil and gas. It has responded to calls to bring in more outside voices to its board and announced emission-reduction targets. It's also investing in low-carbon technologies, but these efforts are measured and keep oil and gas production at the core. While this strategy is unlikely to win praise from environmentally oriented investors, we think it's more likely to be more successful and probably holds less risk.

Rakuten, the earliest and largest business-to-business-to-customer e-commerce platform, has benefited from the structural shift from offline to online shopping in Japan.

Alibaba is losing market share to PDD Holdings, or PDD, and Douyin in the China e-commerce business, and we don't see a quick fix in the near term. Alibaba's number of annual active consumers in the China retail marketplace was surpassed by PDD in the fiscal year ended March 2021. Meanwhile, Douyin has gained share from Alibaba especially in the beauty and apparel categories in recent years, and entered the traditional search-based e-commerce space, competing directly with Alibaba. The number of annual active consumers at Alibaba is close to the ceiling in China. Alibaba's gross merchandise volume to China's online retail sales of goods ratio was 62% in the year ended March 2023 at Alibaba, down from 72% in the year-ago period. We believe Alibaba's marketplace monetization rates will decline in the long run, due to mix-shift toward Taobao which has lower take rate compared with Tmall, and more competition.

Margin expansion through growth in value-added health foods and an enlarged overseas sales scale will continue to serve as a key driving force behind Meiji’s midterm growth. Meiji’s efforts to raise profitability through growth in premium functional foods, rationalization of its product portfolio, and cost-cutting initiatives have borne fruit, with margins expanding since bottoming in fiscal 2011. Yet the pace of margin expansion has been slowing.

We expect the Shopee e-commerce platform to be Sea’s main growth driver for the long term; the company’s valuation will be predicated on this business. We estimate Shopee has 30% share of its main market, Indonesia, and we estimate about 30%-35% share in the rest of Southeast Asia. It has built leading market share quickly using subsidies, free shipping, and incentives that attracted consumers to its platform, but in the process it incurred heavy cash burn and has not yet seen positive EBITDA. While positive macro signs exist and Shopee enjoys a market-leading position currently, we believe that it is too early to tell who the ultimate long-term winners will be. E-commerce is still in the early stages in Southeast Asia, and outside of a slight lead in market share, we do not see obvious distinct advantages for Shopee. As user growth has been highly contingent on subsidies that heavily increased sales and marketing expenses, we are concerned that growth could decelerate sharply once these incentives stop and when Sea becomes more focused on profitability.

Snam has three regulated segments: transportation, storage, and regasification/liquefied natural gas. The transportation segment, largely natural gas pipelines, contributes 80% of group EBIT. Storage contributes 20%, and regasification is only a marginal contributor. While these regulated assets benefit from efficient scale, we assign a no moat rating to Snam as regulation limits pretax allowed returns to keep prices low for customers.

Harmonic Drive Systems has been able to capitalize on demand growth with industrial robots and semiconductor production equipment, by having its compact strain wave reduction gears (also known as speed reducers) serve as critical components of both. The company seeks to continue refining its product quality toward existing applications as well as to find new applications that can serve as new long-term growth drivers. We think small industrial robots and semiconductor equipment will continue to serve as key target markets.

Ownership of infrastructure assets and economies of scale underpin StarHub's narrow economic moat rating. Cost advantage allows StarHub to price its products competitively with bundling of multiple services, helping retain share in the consumer market. Strong free cash flow supports its dividend payout.

Kyushu Railway, or JR Kyushu, is focused on driving a recovery of its businesses following the covid-19 pandemic. But there are structural headwinds, including a declining and aging population. In addition, train travel in Kyushu is less popular than other more densely populated and congested areas in Japan. Cars are a viable alternative, with around 60% of the island’s occupants owning a private vehicle. We expect greater earnings growth in the nonrailway segments, which have surpassed transportation earnings since fiscal 2021, driven by the pandemic hit on rail passenger numbers as well as investments in non-rail segments. We forecast the nonrailway segments to contribute about three-fourths of group earnings by fiscal 2028 from about 40% prepandemic.

Galaxy Entertainment, one of six casino licenseholders in Macao, benefits from insatiable Chinese demand for gaming, underpinned by rising per-capita disposable income in China. Macao has a penetration rate of less than 2%, compared with Las Vegas’ 13%. Excluding the neighboring Guangdong province, where only 8% of China’s 1.4 billion population resides, the penetration rate is merely 1%. The new hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces and drive the top line for integrated resort operators like Galaxy Entertainment. With the gradual ramp-up of traffic allowed on the Hong Kong-Zhuhai-Macao bridge, the new Hengqin border, and the Gongbei to Hengqin extension rail, Macao's carrying capacity for tourists would increase. In addition, neighboring Hengqin Island, 3 times the size of Macao, is under rapid development to complement Macao's growth.

Apple, which has established itself as a consumer electronics behemoth over the past decade, has propelled Hon Hai into the world’s largest contract manufacturer. Despite its entrenched position in Apple, which accounts for around 55% of the group’s revenue, Hon Hai is faced with increasing competition in the traditional assembly business at a time when smartphone demand has matured. As a result, its returns on invested capital have fallen to 12% in 2022 from 23% in 2016.