Company Reports

We expect Xero’s near- and medium-term strategic focus to revolve around rationalizing its areas of investment, especially against a backdrop of normalizing demand for business software.

We expect GDS Holdings to continue to purchase and build data centers in and around its focus Tier 1 Chinese cities of Shanghai, Beijing, Shenzhen, Guangzhou, Hong Kong, Chengdu, and Chongqing. As its network of interconnected data centers grows it can more easily cater to the demand from its key cloud service provider customers allowing them to expand in a flexible way in their key markets. This also enables key enterprise customers to deploy their hybrid clouds in close proximity to the networked nodes of leading public clouds. The company is also excited about its international expansion into Southeast Asia. The company has announced an equity funding deal for its international business, raising USD 672 million for 47.3% of the business from private equity investors. Management has not ruled out further private equity capital raises for the international business and an IPO of this business is also a possibility down the track.

PDD Holdings is a social e-commerce platform that encourages users to enjoy lower prices by teaming up to make purchases. Easier sharing of PDD deals with social contacts through Tencent’s social network leads to lower traffic acquisition costs versus peers. The firm focused on low-tier cities and white-label merchants, followed by the CNY 10 billion program launched in 2019 to subsidize consumers for higher-priced products such as Moutai, Apple iPhones, and agricultural products. PDD aims to offer good value across a wide range of categories and price points. To increase average revenue per user, PDD uses subsidies to induce consumers to make purchases in categories they haven't purchased in before. PDD's active buyers in the year ended March 2022 were 882 million, likely higher than that of Alibaba, though we estimate its spending per active user was 37% of Alibaba. CEO Chen Lei expressed his goal in 2021 to continue subsidies so as to replace Alibaba as the shopping platform of choice for the 1 billion consumers in China.

BHP is the world’s largest miner by market capitalization. Its main operations span iron ore and copper, with smaller contributions from metallurgical coal, thermal coal, and nickel. The company is also developing its Jansen potash project in Canada. BHP merged its oil and gas assets with Woodside Energy in June 2022, vesting the Woodside shares it received to BHP shareholders, and exiting the sector. It purchased copper miner Oz Minerals in fiscal 2023.

As China rebalances away from infrastructure and construction-led growth, Anglo American is likely better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.

We expect Kuaishou Technology to expand its daily active users to 400 million by the end of 2024 and its user growth to be the main barometer of success in the near- to medium term. There is a possibility for users to increase beyond this in the long term, but we do not expect the number to be as high as larger China social media platforms such as WeChat or Douyin, since Kuaishou appeals to and targets mostly rural users in lower-tier cities. Users will dictate advertising revenue growth—which will be the long-term direct revenue driver, and should be at a faster pace than China’s forecast gross domestic product growth of 4%-6% in the near term as we expect digital advertising in China to grow more than 8% per year to 2026.

Nvidia has a wide economic moat, thanks to its market leadership in graphics processing units, or GPUs, hardware and software tools needed to enable the exponentially growing market around artificial intelligence. In the long run, we expect tech titans to strive to find second-sources or in-house solutions to diversify away from Nvidia in AI, but most likely, these efforts will chip away at, but not supplant, Nvidia’s AI dominance.

In an environment where active fund managers are under assault for poor relative performance and high fees, we believe wide-moat T. Rowe Price is one of the best positioned US-based active asset managers we cover. The biggest differentiators for the firm are the size and scale of its operations, the strength of its brands, its consistent record of active fund outperformance, and reasonable fees. T. Rowe Price also has a stickier set of clients than its peers, with two thirds of its assets under management derived from retirement-based accounts.

We think CEO Sue Nabi has whipped Coty into better shape since taking office in 2020, as the beauty industry veteran sharpens the firm’s focus on innovation and reinvigorates its brand marketing while upholding cost discipline. Top-line growth and margins both rebounded from pandemic troughs as a result. That said, we are not yet convinced that Coty has carved out an economic moat, given its lack of brand strength and tight retailer relationships, in addition to a small revenue base relative to moaty global peers L’Oreal and Estee Lauder.

PayPal’s development of a network of both merchants and consumers early in the evolution of e-commerce allowed the company to build and maintain an enviable competitive position. Historically, PayPal’s growth had been driven by the ongoing shift toward electronic payments and the rise of e-commerce, which the coronavirus pandemic temporarily accelerated. However, the company is now seeing some headwinds in the near term as the positives from the pandemic reverse and new competition arises. Management has attempted to combat the pressure on top-line growth with a greater focus on cost control and product innovation. We see this evolution as the right move, but it will likely take some time to see results.

We believe no-moat Macy’s is struggling to stay relevant as consumers have many choices. The firm recently announced the closure of about 150 of its lower-performing stores over the next three years as part of its “A Bold New Chapter” plan. We think this move is long overdue as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for at least 15 years. Other parts of the new strategy include investments in continuing stores, new smaller-format stores, cost reductions, supply chain investments, and luxury expansion. Even so, due to store closures and a lack of consistent organic growth, we forecast yearly sales and operating margins will stay well below historical highs for the foreseeable future. Specifically, we estimate long-term operating margins at 5%-6% on annual revenue growth below 1%.

A combination of rising interest rates, equity and credit market headwinds, and increased competition from private real estate investment vehicles offered by alternative asset managers and other traditional asset managers has had (and is likely to continue to have) an adverse effect on Cohen & Steers' level of managed assets. The firm closed out March 2024 with $81.2 billion in managed assets, up 1.7% year over year, but still down 22.0% from a peak of $106.6 billion at the end of December 2021.

Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry. Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices (among public peers).

Analog Devices is one of the world's largest analog chipmakers, with an especially strong position in analog signal processing chips. We think it is well-positioned to profit from more advanced and higher-priced semiconductor content in automobiles, communications equipment, and industrial applications like medical devices and factory automation and testing equipment in the years ahead.

We forecast that Eagers Automotive to continue to capture market share in the highly fragmented auto retailing segment. We estimate Eagers now boasts a market share of about 11%. As the largest dealer in the market, Eagers can centralize back-office operations and fractionalize these fixed costs over a significantly larger volume and revenue base, affording a durable cost advantage over smaller peers. Accordingly, we estimate the company earns gross and net profit margins ahead of smaller competitors. We believe Eagers' extensive size and scale should allow it to deliver midcycle profit before tax margins of about 3%-4%.

Webjet’s largest operating unit is its B2B booking platform, WebBeds. The business contracts supply from independent hotels, chains and third-party providers, aggregates and supplies the inventory to travel retailers. The business allows smaller hotels to increase distribution channels. For travel intermediaries, WebBeds increases the available inventory for end customers.

AUB Group operates the second-largest general insurance broker network in Australia and New Zealand. AUB Group brokers derive revenue from commissions paid by insurers, based on gross written premiums. AUB Group owns or has equity stakes in each broking business within the network. Around half of group profit is delivered by the Australian and New Zealand broker network, around 30% from Tysers in the United Kingdom, and the remainder from underwriting agencies.

XPeng is a leading electric vehicle manufacturer in China, targeting the midrange to high-end segment and tech-savvy consumers. It is mass producing six pure electric models: the G3/G3i compact sport utility vehicle, or SUV; P7 midsize sedan; P5 compact sedan; G9 midsize SUV; G6 compact SUV, and X9 multipurpose vehicle. Retail prices of the current model portfolio range from CNY 150,000 to CNY 420,000 for popular trims, which offer a driving range of roughly 460-700 km. For its new model pipeline, XPeng plans to launch at least 10 new cars in the next three years.

Capcom is a Japanese game developer, and its most notable flagship series, Resident Evil and Monster Hunter, account for the majority of its sales and profits. In the 2010s, Capcom changed its strategy from relying on new releases, to focusing on selling remakes and expanding global sales of old titles through digital distribution. This paved the way for Capcom’s stable sales growth and high profits in the past 10 years.

ALS is a global provider of analytical testing and inspection services; it also has a small Australian-focused distribution business. While dominating the fragmented Australian market, and being a large global player in commodity and environmental testing, it is trumped by the majors, Bureau Veritas, SGS, and Intertek in nondestructive testing and inspection.