Company Reports

Mizuho Financial Group is one of Japan’s three largest banking groups, with a 6.7% share of domestic loans and 8.5% share of deposits as of March 2023. Mizuho lacks the large consumer finance, credit card, and leasing operations of its two rivals, leaving it dependent on banking, securities and asset management for future returns. Its securities business has been performing well, in our view, including overseas. However, the dependence on banking means the need for expense reductions is even more important for Mizuho’s future profitability than it is for its two megabank rivals.

James Hardie's growth strategy includes marketing directly to homeowners, market share growth, and category expansion. We view this as rational and achievable, given past success. We estimate Hardie has about 90% market share in the fiber cement category in its main geography of North America, which contributes about 80% of group operating income. About two-thirds of North American EBIT is from repair and renovation, or R&R, and the remainder is from new house construction. We view the R&R market as less cyclical, with homes needing to be resided approximately every 40 years. According to the US Census Bureau, about half of all houses are 40 years or older. As such, we expect a steady pipeline of homes requiring siding replacement or repairs through the next decade.

With the divestment of peripheral operations and geographies, Aviva has tilted its portfolio to a regional focus and more balance across product lines. International growth took the company increasingly away from general insurance. This is back to levels of contribution seen historically. Aviva is still a life and savings business predominantly, generating close to three quarters of its earnings from protection and health, equity release, annuities, and long-term savings. Health insurance is increasingly important, serving 4.5 million retail customers and around 3.3 million customers who get health insurance through their employment. With elevated national health service waitlists, there is increasing demand for health insurance. In protection, the company’s products are split equally between individual and group insurance. Using individual protection as a benchmark, 10% of sales are direct, 10% are sold without advice but intermediated, and protection sales are heavily intermediated. Aviva is looking to make individual protection increasingly automated. Health and protection make up around 10% of operating profit from UK and Ireland life and savings.

Medibank is Australia's largest private health insurer, operating under the Medibank and Ahm brands. The dual-brand strategy has allowed the group to offer differentiated pricing and messaging to increase members and profits.

Narrow-moat Trip.com competes in China’s crowded online travel agent, or OTA, industry by leveraging the largest selection of both domestic and international hotels in China on its platform and relying on user stickiness as a one-stop shop for travel ticketing, accommodations, and packaged tours. The platform is now also generating revenue from advertisement in which it hopes to take 3%-5% of the ad market, but nearly all its revenue streams are travel-related, and coronavirus lockdowns in China has cratered demand due to the inability to travel or unwillingness to quarantine.

Sonic Healthcare’s “medical leadership” model recognizes the importance of the referring doctor as the company seeks to differentiate itself on service levels. Success in the model is evidenced by organic growth consistently tracking ahead of the market, suggesting market share gains. In an industry where absolute volume is an important component in achieving greater cost advantage, organic growth supplemented by appropriate acquisitions continues to add value for shareholders.

We expect Technology One’s strategic focus to revolve around increasing the number of products used by its local government and education customers in Australia and New Zealand. To a lesser extent, we expect Technology One to focus on vertical expansion and geographic expansion into the UK education market.

Mitsubishi UFJ Financial Group, known as MUFG, is Japan’s largest banking group, with 8.1% share of domestic loans and 11.7% of deposits as of March 2023. It was also the most global among Japanese banks in terms of the contribution of overseas operations to profits and balance sheet, but following its sale of Union Bank of California in 2022, its overseas contribution is similar to Sumitomo Mitsui Financial Group's and slightly higher than Mizuho's, excluding the profit contribution of equity-method affiliate Morgan Stanley. After including Morgan Stanley, which has contributed more than 25% of MUFG's total earnings in each of the past five years, MUFG is still the Japanese bank with the largest exposure to operations outside Japan. In Southeast Asia, Krungsri (the third-largest bank in Thailand, 77% owned by MUFG) contributes around 10% of total profit, while MUFG also owns Indonesia’s Bank Danamon and roughly 20% stakes in banks in the Philippines and Vietnam.

We view Palo Alto Networks as a leader in multiple cybersecurity end markets, including network security, cloud security, and security operations. We believe the firm stands to materially benefit from secular tailwinds across its three key verticals as cloud migrations, shift to zero-trust security, and increased automation in cybersecurity increases Palo Alto’s value proposition to its clients. In our view, the firm’s sticky platforms, combined with a broad range of cybersecurity applications have helped Palo Alto build a wide economic moat around its business.

Zoom Video Communications’ mission is "to make video communications frictionless," which it accomplishes with a unified, video-first communications platform that incorporates video, voice, chat, and content sharing. More recently, Zoom introduced a phone system and a contact center solution. The company offers a differentiated peer-to-peer technology, complete with proprietary routing technology. Zoom is a recognized market leader in meeting software and is disrupting and expanding the $100 billion market for collaboration software with its ease of use and superior user experience. We think the pandemic lockdowns demonstrated the strength of the solutions, which combined with an expanding portfolio help establish a narrow moat.

Li Auto is a leading new energy vehicle, or NEV, manufacturer in China, producing plug-in hybrid electric sport utility vehicles, or SUVs, for family car use. Li Auto put a lot of effort into its range-extension powertrain, which has become a key selling point for its value-for-money vehicles. As it uses less battery, plug-in hybrid electric vehicles, or PHEVs, offer significant price advantages compared with battery electric vehicles, or BEVs.

The Cooper Companies is one of the largest eye care companies in the U.S. It operates in two segments: CooperVision and CooperSurgical.

Fidelity National Information Services' acquisition of Worldpay in 2019 was one of three similar transformational deals that took place in short order. But FIS has more recently decided to undo the Worldpay deal as it struggled with operational issues within the Worldpay business.

Generac is in the midst of a transition to an energy technology solutions company.

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.