Company Reports

Morgan Stanley has built a more stable business model, and its shift to wealth management from investment banking will continue to be a main part of the company’s story over the long term. Investment banking is capital intensive, and many banks, especially the European investment banks, have had trouble earning adequate returns in that business and have purposely shrunk that business line. Morgan Stanley has remained dedicated to investment banking and has gained market share. The company had a strong return on equity in its institutional securities business of about 16% in 2020 and 20% in 2021 but has only averaged about 11% over the previous decade.

Home Depot is the world's largest home improvement retailer, delivering $153 billion in revenue in 2023. The firm's wide economic moat rating is based on its economies of scale and brand equity. While Home Depot has realized strong historical returns as a result of its scale, operational excellence and concise merchandising, all of which remain key tenets underlying our modest margin expansion forecast. Its flexible distribution network should help elevate the firm's brand intangible asset, with faster time to delivery improving the do-it-yourself (DIY) experience and market delivery centers catering to the pro business. The success of ongoing initiatives should allow for modest operating margin expansion above prepandemic levels in the longer term, despite near-term inflationary pressures and economic turbulence.

We see Hyatt’s brand intangible asset—the source of its narrow moat—strengthening over the long term. Hyatt's growing brand advantage is evident in its managed and franchised unit growth that has averaged more than 10% annually over the past 10 years (2014-23), well above the long-term US industry supply increase of 2%, according to STR data. We expect Hyatt to expand room and revenue share in the hotel industry over the next decade, buoyed by newer brands like House, Place, Apple Leisure Group, and Studios, supporting its intangible brand advantage. We see the company’s room growth averaging 4%-5% annually over the next decade, above the 1%-2% supply increase we estimate for the US industry during this time. We are favorable on Hyatt's long-term competitive advantages and think the firm's high luxury, upper upscale, and upscale exposures across the globe position it to outperform industry demand in 2024, as improving overseas and group travel augments resilient leisure trips.

Manawa is New Zealand's fifth-largest generator behind Contact Energy, Mercury NZ, Meridian, and Genesis. Like Meridian and Mercury, Manawa generates close to 100% of electricity from renewable resources. It owns 26 relatively small hydroelectric schemes in New Zealand, producing about 1,940 gigawatt hours of electricity in an average rainfall year. The firm's wind farms and retail business were divested.

Uni-President China is the second-largest producer of instant noodles and ready-to-drink, or RTD, tea in China. The company underwent a period of fast revenue growth in the early 2010s and has transitioned to a more stable state in recent years. According to Euromonitor, its market share in instant noodles and RTD tea rank second after Tingyi, at around low-teens and midteens, respectively. However, new entrants emerging in ready meals and RTD drinks could gain share in the company's traditional categories.

Sumitomo Mitsui Financial Group, with a 7.1% share of domestic loans and 8.9% of deposits as of March 2023, is one of Japan’s Big Three banking groups. Compared with its two megabank rivals, SMFG has a greater focus on retail customers and small and medium-size enterprises rather than large corporate clients. This has given it a higher average asset yield in Japan but we don't think it has necessarily meant higher credit costs in the core banking business. SMFG has strengths in consumer finance, where it owns 100% of the Promise business, and in credit cards. Like the other two Japanese megabanks, SMFG has expanded its overseas business significantly since 2010, with overseas loans constituting 40% of total loans as of March 2023, compared with 15% in March 2011. SMFG also owns Indonesian bank BTPN, Fullerton India Credit, around 20% of Hong Kong-based Bank of East Asia, 20% of Rizal Commercial Banking in the Philippines, 18% of Cambodian lender Acleda, and 49% of Vietnamese nonbank lender VPBank SMBC Finance.

Daikin is one of the world’s largest heating, ventilation, and air conditioning companies. The air conditioning segment constantly contributes to over 90% of the company's revenue, and the division’s revenue mix is well-diversified geographically, with the Americas—mostly the United States, China, Japan, and Europe each contributing to over 10% of revenue. Over the years, Daikin has seen decent earnings growth mainly thanks to sales channel expansion in the US and Southeast Asia, robust global demand for high-end products, and the Japanese yen’s depreciation. Meanwhile, the company maintained healthy operating margins thanks to cost rationalization and efficiency improvements.

Fletcher Building operates across six segments: building products; distribution; concrete; Australia; residential and development and construction. Fletcher's earnings are tied to construction activity in Australia and New Zealand. In fiscal 2023, EBIT was approximately split: 25% building products; 17% residential and development; 16% distribution; 18% concrete; 21% Australia; and 3% construction.

As the largest beauty product maker globally, L’Oreal has built an impressive collection of top-selling beauty brands balanced across core categories (skin care, makeup, hair care, and fragrance) that straddle the premium and mass segments. We believe its strong brand differentiation based on innovation, marketing, and consumer experience, coupled with scale-based cost advantages, should support a durable competitive edge, enabling the firm to deliver excess returns for more than 20 years. As such, we award L’Oreal a wide economic moat rating.

Avangrid is majority-owned by European utility Iberdrola. Avangrid investors must be comfortable with regulated operations across the Northeast and the outlook for the U.S. onshore and offshore renewable energy growth.

Take-Two is one of the larger video game publishers and owns one of the most well-known video game franchises in Grand Theft Auto. With the acquisition of Zynga, the company is also one of the largest mobile game publishers, with mobile games currently accounting for about half of sales. Like several of its peers, Take-Two is trimming the number of games in development to focus resources where financial returns are likely to be strongest, which we think will play to the firm's competitive advantages. While all eyes are now on the release of GTA 6, currently planned for the fall of 2025, we believe patience is warranted, given this title will likely serve as a sales platform far into the future.

Corteva is an agriculture pure play that was formed in 2019 when it was spun out of DowDuPont. The company is a global leader in seeds and crop protection products. Seeds generated around 60% of profits in 2023, with the remaining 40% coming from crop protection. Corteva develops its pipeline through the investment of around 8% of sales in research and development, which should allow sales and profits to grow from new products even as patents expire and generic products come to market.

DuPont de Nemours is a world-renowned specialty chemicals company with a history spanning over 200 years and an ever-evolving portfolio. In the current iteration, DuPont is the specialty chemicals company created in 2019 from the DowDuPont merger and subsequent separations.

We believe Dada Nexus should see steady growth in the medium term on the back of its relationships with Walmart and JD.com, which should eventually provide it a pipeline of steady orders and allow the firm to maintain stability in a competitive industry. Dada competes in a very saturated industry that doesn’t have much differentiation among competitors, which means that consumers are likely to base their preferences on cost. Currently, it still incurs operating losses, but we believe that its relationships with Walmart and JD.com should provide Dada with steady growth and a positive operating margin, given the larger merchants’ reach across China. Sales and marketing expenses and incentives remain about 40% of sales, which highlights Dada’s high operating leverage and underscores how the firm should eventually expand its operating margin as it scales. Dada Nexus is optimistic that it can reach its long-term forecast target of 10%-15% operating margin as orders grow. However, the main concern is that growth could be an issue, given the abundance of other options if not for its partners. It trails its larger competitors in volume and revenue terms, which suggests that Dada’s laggard position within the industry is unlikely to change in the short term for its delivery business. This is unless it incurs heavy spending on incentives to get consumers to use its delivery business.

Resona’s lack of large overseas operations is a double-edged sword—unlike the megabanks, it cannot greatly expand lending abroad to compensate for the poor returns available in Japanese commercial banking; but on the other hand, with its domestic focus, Resona effectively escapes increasingly stringent Basel III rules on risk weightings, allowing it to act as a potential consolidator of regional banks even if doing so expands its balance sheet and lowers its capital ratios. Resona’s acquisition of Kansai Urban Banking and Kobe-based Minato Bank in 2017 expanded its assets and revenue by about 20%, and we expect efficiency gains will continue to be achieved as these two units are further integrated with Resona’s Kinki Osaka Bank under the Kansai Mirai Financial Group holding company.

We are encouraged that Iqiyi has been successful at turning around its business to generate high-single-digit operating margins, which are a significant improvement from a 30% operating loss margin since its IPO in 2018. We expect Iqiyi to maintain profitability in the near term because of expectations of lower content costs that are 50%-60% of sales, rather than the 70%-80% level prior to 2022. However, we forecast that subscription prices and memberships will grow at only low-single-digit levels, given our view that Iqiyi will have challenges in retaining customers on a consistent basis and is vulnerable to switching costs and churn.

Since its 1982 inception, Copart has grown into the largest online salvage vehicle auction operator in the United States, connecting buyers and sellers around the world. The company has grown its top line nearly five-fold since 2009 due to a combination of significant land expansion and robust service quality to drive higher salvage vehicle volume. Copart receives the majority of its vehicle volume through contracts with large auto insurers and sells them on consignment for high margins. The company prioritizes maintaining amicable insurance relationships which are fostered by having adequate storage capacity (even after storms) and providing flexible service. All auctions have been online since 2003.

Applied Materials is the largest supplier in the world of wafer fabrication equipment for semiconductors. It holds the broadest portfolio, in our view, which we think should enable it to maintain its leading market share. In our view, Applied Materials' breadth in chip manufacturing gives it stickier inroads to customers by selling integrated solutions across technologies. We expect Applied Materials to grow at a mid-single-digit pace over the course of market cycles as it benefits from trends toward more-complex chips into the long term, including gate all-around transistors, advanced packaging, and artificial intelligence.

Wide-moat Walmart’s unrivaled scale relative to its brick-and-mortar retail peers provides the firm with the rare ability to formidably adapt to a dynamic retail landscape. Walmart benefits from an expansive physical footprint and entrenched position in the communities it serves, putting the retailer in close proximity to the vast majority of US consumers. The firm’s unique promise of a wide assortment of goods at low prices has allowed Walmart to retain its status as the nation’s preeminent retailer for over 30 years.

Cromwell Property Group is an Australian property company that currently generates most of its income from rent on properties it owns, and a lesser amount from property funds management. The latter includes property management services, investment management, and property acquisitions and development, in collaboration with customers. The group tends to own co-investment stakes in funds or properties that it manages for clients, particularly in its wholesale business. This provides a degree of alignment with clients, as well as providing another indirect source of rental income. Cromwell is growing its funds management business, and is exploring options to dispose of property assets, and instead act as fund manager of those assets, and build new funds management ventures. Directly held property investments account for more than half of group revenue, nearly all of this being offices. The office portfolio has significant exposure to less supply constrained areas such as fringe central business districts, or CBDs, or suburban sites in Sydney, or less built-up capital cities such as Canberra. Relative to its largest rivals, this makes Cromwell more exposed to economic and property market conditions. Increasing CBD supply and cautious businesses could particularly hurt tenant demand in suburban and fringe locations. Reassuringly, Cromwell has solid tenants in many sites, with government accounting for circa half of Australian rent, and a decade-long lease to Qantas another big chunk. A minority of earnings is from funds management activities, but this segment is likely to grow as Cromwell sells property assets and increases its focus on funds management. This segment generates a high return on equity because while it relinquishes rental income, it frees up capital for use elsewhere, while still generating management fees. A portion of revenue comes from indirect property holdings, mostly Cromwell’s stake in the Cromwell European REIT, listed in Singapore.