Company Reports

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.

As technologies and consumer preferences change rapidly, it is generally difficult for consumer electronics companies to build an economic moat. The replacement cycle for digital appliances is usually four to six years, but as most products are commoditized, it is difficult for manufacturers to build an ecosystem that prevents customers from switching to other brands. As a result, Sony’s profitability on electronics had been unstable in the past, while its music, movies, and financial services businesses have generated solid results.

No-moat Albertsons, with its network of over 2,200 stores, operates as one of the largest grocery retailers in the United States. After purchasing over 600 Albertsons stores in 2006, Cerberus Capital Management expanded its footprint through its 2013 deal with Supervalu to acquire nearly 900 supermarkets, and just a year later pursued an acquisition of Safeway. Now, with stores spanning across 34 states and a more than $75 billion top line that gives the firm a strong standing with suppliers, Albertsons’ presence in US communities appears well entrenched. We also note that the grocery industry benefits from steady demand as food-at-home spending per capita typically increases at a low-single-digit pace, helping to limit mismatches in industrywide supply and demand and thus providing some stability to Albertsons’ financial outlook.

As a leading provider of premium beauty products, Estee Lauder has reinforced its competitive position with category-leading brands in skin care, cosmetics, and fragrances, in addition to retaining a preferred vendor status across brick-and-mortar and digital channels. These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns for more than 20 years. As such, we award Estee a wide moat rating.

Sempra Energy's investment opportunities at its regulated utilities in California and Texas will remain its primary growth driver.

Keyera's integrated business model is now finally benefiting from the Key Access Pipeline System. The pipeline will connect the firm’s northern plants to its Fort Saskatchewan liquids hubs and will consist of pipelines for condensate and natural gas liquids mix. By increasing its proportion of long-term contracts and maximizing utilization rates across facilities, Keyera is positioned to take advantage of more stable cash flows in the future while capitalizing on Canadian oil sands, natural gas, and NGL growth.

E.On transformed itself in 2016 by spinning off Uniper, its commodities and power generation business, and ultimately selling its stake in Uniper to Fortum in January 2018 for EUR 3.7 billion. This deal refocused E.On on networks, retail, and renewables.

The top healthcare real estate stands to disproportionately benefit from the Affordable Care Act. There is an increased focus on higher-quality care in lower-cost settings. The best owners and operators in the industry, which can provide better outcomes while driving greater efficiencies, should see demand funneled to them from the best healthcare systems. Additionally, the baby boomer generation is starting to enter its senior years, and the 80-and-older population, which spends more than 4 times on healthcare per capita than the national average, should almost double over the next 10 years. Long term, the best healthcare companies are well positioned to take advantage of these industry tailwinds.

Lithium Argentina is a pure-play lithium producer with two assets in Argentina. The company was created as a result of the former Lithium Americas separation, which separated the firm's Argentina and North America businesses.

Even with the intended benefits enhanced focus should unlock, we fail to see an enduring competitive advantage in WK Kellogg as a stand-alone business. For one, we surmise its leading market share position in the North American cereal aisle is diluted as its entire portfolio sits in a shrinking category. In our view, this dents its relationships with retailers that strive to stock shelves with key traffic drivers. Further, without ties to the faster-growing snacks arm (which now sits inside narrow-moat Kellanova), WK Kellogg is left with subpar scale (generating less than $3 billion in sales annually), which likely weakens its bargaining power when sourcing key ingredients, negotiating slotting fees, and securing advertising placements.