Embed Size (px)
Citation preview
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
29 September 2014
Global
Equity Research
Global Equity Themes Connections Series
Investing for growth
Source: Credit Suisse research
Looking for growth: The aim of this report is to identify stocks that have
structural growth characteristics in their immediate investment case. We have
used a thematic framework of four factors capturing 10 specific micro themes
that we view as key to the prevailing investment landscape.
Why now? Looking into 2015, we expect the cycle in the US to mature further.
Moreover, an enduring low nominal growth world where profit margins for many
companies are close to historical highs puts the emphasis on top line drivers.
Stock picking? Over time, investors (and analysts) have tended to be better at
identifying growth than knowing what to pay for it. Growth as a style has not
always rewarded. Leveraging our CS HOLT® framework and combining factors
of quality and momentum has helped us pick stocks from our 10 themes.
Ticking all the boxes: Within our analysts' top picks, the HOLT overlay
identifies these stocks among the key plays on the theme: Tencent, Baidu,
Priceline, ITV, SIIC Environment, Sun Pharmaceuticals, Continental, Halliburton,
Pioneer Natural Resources, China Singyes Solar, SAP and Coloplast. To view
the accompanying key stocks presentation, click here.
The Credit Suisse Connections Series
leverages our exceptional breadth of
macro and micro research to deliver
incisive cross-sector and cross-border
thematic insights for our clients.
Research Analysts
Richard Kersley
44 20 7888 0313
Andrew Garthwaite
44 20 7883 6477
Ashlee Ramanathan
44 20 7883 9934
Eugene Klerk
44 20 7883 4678
HOLT Specialist Contact®: Michel Lerner
44 20 7883 3649
For the accompanying key stocks report, please click here.
29 September 2014
Global Equity Themes 2
Table of contents and contributors Key themes and stock selections 3 Theme #1 – A connected consumer 10
I The untapped potential of the internet 11 II Content – Still King in Global Media 23
Theme #2 – Demographic demands 31 III China environment – real efforts and real moves 32 IV Growth in healthcare 42 V Ageing in emerging markets 49
Theme #3 – Resource Scarcity 59 VI Resource Efficiency 60 VII Shale – Vive la Revolution 70 VIII A Solar “inflection point” 81
Theme #4 – Technology's new wave 89 IX The Big Bang of Data 90 X Automation – the second wave 101
Appendix 110
Thematic Research Telephone Email
Richard Kersley +44 20 7888 0313 [email protected] Eugène Klerk +44 20 7883 4678 [email protected] Ashlee Ramanathan +44 20 7883 9934 [email protected]
Equity Strategy
Andrew Garthwaite +44 20 7883 6477 [email protected] Robert Griffiths +44 20 7883 8885 [email protected]
Nicolas Wylenzek +44 20 7883 6480 [email protected] The untapped potential of the Internet
Andrew Garthwaite +44 20 7883 6477 [email protected] Richard Kersley +44 20 7888 0313 [email protected] Nicolas Wylenzek +44 20 7883 6480 [email protected] Content – still king in Global Media
Nick Bertolotti +44 20 7888 4954 [email protected]
Omar Sheikh +44 20 7883 8507 [email protected]
China Environment – real efforts and real moves
Trina Chen +852 2101 7031 [email protected] Joy Zhang +852 2101 7083 [email protected] Growth in Healthcare
Jo Walton +44 20 7888 0304 [email protected] Matthew Weston +44 20 7888 3690 [email protected] Ageing in Emerging Markets
Andrew Garthwaite +44 20 7883 6477 [email protected]
Robert Griffiths +44 20 7883 8885 [email protected] Resource Efficiency
Eugenè Klerk +44 20 7883 4678 [email protected] Ashlee Ramanathan +44 207 883 9934 [email protected] Shale – Vive la Revolution
Ed Westlake +1 212 325 6751 [email protected] David Hewitt +65 6212 3064 [email protected] A Solar "inflection point"
Patrick Jobin +1 212 325 0843 [email protected]
Maheep Mandloi +1 212 325 2345 [email protected] The Big Bang of Data
John Pitzer +1 212 538 4610 [email protected] Philip Winslow +1 212 325 6157 [email protected] Automation – the second wave
Julian Mitchell +1 212 325 6668 [email protected]
Product Marketing
Katie Iorio +1 212 538 6386 [email protected] Mujtaba Rana +852 2101 6305 [email protected] Arbin Sherchan +1 212 325 8967 [email protected]
Daisuke Takato +81 3 4550 9671 [email protected] Brandon Vair +44 20 7888 6381 [email protected]
29 September 2014
Global Equity Themes 3
Key themes and stock selections Figure 1: Key stocks exposed to our themes
Theme Drivers Disruptive Impact Key Stocks
The Untapped Potential of the Internet
− Rising global smartphone penetration, with internet enabled phones currently at 27% globally the penetration rate is expected to reach 52% in 2017
− Infrastructure roll out in Emerging Markets supporting demand for an "enabling" tool of choice. Huge potential for E-commerce in EM.
− Security a growing related theme.
− Price
transparency
− Need for scale
presence
Tencent, Baidu,
Palo Alto Networks, Priceline,
Naspers
Content – Still King in Global Media
− The proliferation of online business models with options for monetising video, audio
and written content
− Rising power of new customers for content and growing viability of direct-to-
consumer models
− Structural growth in the value of the owners of content IP
− Development of aggregator business models has achieved critical mass
− The value add shifts away from
the aggregators with rising cost pressures
Sony, ITV
China Environment - Real Efforts and Real Moves
− Rapidly deteriorating air and water quality, as well as rising public demand calling
for action. Policy announcements and targets now being established.
− China’s “water stress” likely to intensify given demand projections.
− A robust waste treatment and EPC demand growth rate as collection/treatment
share rises as a share of FAI.
− Emerging large players, especially waste treatment operators, driven by M&A
activities and higher scale and standards requirements
− Potential costs
and regulation on basic material
industries
SIIC
Environment, Bejing
Enterprises
Water
Healthcare - Immuno-oncology – an Emerging $25bn Market
− Oncology (cancer) accounts for c $95bn of sales, 9% of the 2013 global market and new medicines have the potential to significantly drive oncology drug sales
growth
− With baby-boomers aging and rates of diagnosis increasing, if new cancer
therapies emerge, a blue sky scenario could see oncology demand growth of between 20% and 100%.
− Risk for existing
therapeutic treatments
Bristol Myers, Roche, Ono
Ageing in Emerging Markets
− The growth rate of the older share of the population will be almost double in
Emerging Markets than Developed Markets. China, Brazil & Korea stand out.
− Incidence of illness tends inevitably to increase with age requiring healthcare spend
− A more affluent population has sufficient income to afford a general shift away
from physical infrastructure toward more healthcare and social infrastructure.
− A long term mix shift in
consumer spending
Sun Pharma, AIA,
Prudential, L'oreal,
Coloplast
Resource Efficiency: Demand Management
− Three powerful long term macro drivers: population growth, urbanisation and the expansion of the emerging middle class.
− Tightening environmental legislation increases impact. Buildings (34%), transport (30%) and industry (32%) are the key energy consumers.
− Technology and equipment suppliers tied to this trend of downward demand management represent key opportunities.
− Rising potential
costs on incumbents and
displacement of energy demand
Continental, Infineon, United
Technologies Corp
Shale – Vive la Revolution
− A global hydrocarbon growth story for the next decade and beyond. North America shale having un-and under-explored geological opportunities. Shale prospectivity is
high in multiple countries including Argentina, China and Russia
− The accelerated development of technology to support production efficiencies with
the introduction of down-spacing and stacked pay drilling drive further production.
− Energy transportation, E&C distribution and logistics have been and will be heavily
influenced by the Shale Revolution.
− High return drilling locations
allowing lower breakevens
− Shift in cost curve creates winners/losers
Halliburton, Pioneer,
Wood Group
A Solar “Inflection Point”
− The inflection point in solar adoption is here, given relative cost competitiveness of solar power due to its ~50% decline in costs over the past six years
− Tremendous growth opportunity as solar only representing 0.003% of total power generation capacity globally, a mere 1% global penetration rate equates to $86
billion opportunity
− We expect demand to grow at a 16% CAGR over the decade
− Long term
market share risks for
traditional energy
China Singyes,
SolarCity
The Big Bang of Data
− The most important unifying product across technology as more business processing becoming digitized. Connected devices to grow from 15 billion to
potentially 50 billion by 2020
− Exponential growth in volume and complexity of data with demand for rapid cross-
correlation between different types.
− Need for real time processing of data into usable business analytics. Multiple end
user markets.
− A data divide
between those who “get” data
analytics and those that don’t
SAP, Splunk, Micron, SanDisk
Automation – The Second Wave
− Automation/robotics demand in China/EM due to rising labour costs.
− Rising IT software penetration in manufacturing automation given increasing complexity of production and the ability to reduce time-to-market. This can drive a second wave of automation in the developed world.
− Increasing connectivity throughout the industrial world onto the factory floor with Enterprise Resource Planning (ERP), Product Lifecycle Mgmt (PLM), Mfg
Execution System (MES), Metrology and Spatial Info Mgmt
− Need to retain a
productivity edge. China to
move up value chain?
Keyence, Emerson,
Siemens
Source: Credit Suisse research
29 September 2014
Global Equity Themes 4
Themes: investing for growth In this report, we have sought to identify structural growth stocks. With the stage of the
macro cycle, particularly in the US, moving to a more mature phase, profit margins high
and the world still one of low nominal growth, we think investors should focus on top line
growth, rather than simply how a recovery can deliver widespread restructuring
opportunities. The question is how to select such stocks. While this has to be a bottom up
exercise in many respects, we have also chosen to do this within a thematic framework.
However, this does pose three questions: Why themes? Which themes? How to invest in
these themes?
Why themes?
In terms of the first question, Figure 2 provides a simple context. Over the last 10 (if not
30) years, the diversification - and indeed excess return - to be reaped driven by purely
regional investment allocations and, more recently, by sector allocation has steadily
eroded. The standard deviation of country and sector returns is at historic lows, with the
latter, if anything, taking another recent leg down. Only periods of market and economic
dislocation such as 2008 have seen significant changes that have broken this trend.
This should not be a tremendous surprise amidst a world of increasing globalisation.
However, in our view, the implication is that we need to look for investment ideas that cut
across regions and/or across sectors to generate premium returns. The key is "what
themes drive such an investment process?", the second of our three questions.
Figure 2: Standard deviation in country and sector returns
0%
2%
4%
6%
8%
10%
12%
May-73 Jul-78 Sep-83 Nov-88 Jan-94 Mar-99 May-04 Jul-09 Sep-14Stan
dar
d d
evia
tio
n o
f m
on
thly
ret
urn
s
Countries Sectors
A wider spread in country Selecting the right setors becomes at least as important as selecting the right countries
New low for sector returns
Source: Thomson Reuters, Credit Suisse research
Which themes?
There is no scientific rule book for identifying themes but the following factors lie behind
the areas on which we have focused in this report and the thematic work we have
previously published (please see the Appendix for reports we have published).
■ Multi-year and structural. Such themes have typically seen a consistent under-
estimation of growth potential.
■ Cross-sector and cross-region characteristics as can be seen in Figure 2.
■ Potential disruptive implications for an industry/positive implications for growth.
The drivers that lie behind these ideas may be typified by:
■ Structural supply/demand imbalances, with the investment opportunity often reflected
in the adjustment process to this imbalance.
Thematic Research & Global
Equity Strategy
Richard Kersley
+44 207 888 0313
Andrew Garthwaite
+44 20 7883 6477
andrew.garthwaite@credit-
suisse.com
Ashlee Ramanathan
+44 207 883 9934
Ashlee.ramanathan@credit-
suisse.com
Eugene Klerk
+44 207 883 4678
29 September 2014
Global Equity Themes 5
■ Technological change, potentially establishing winners and losers by virtue of the
disruption at work.
■ Demographic drivers (and pressures) including their regional contrasts.
■ Regulation which may be a response to all of the above.
Four building blocks; 10 specific themes
Shaped by this thinking, we have isolated 10 specific investable topics that we believe
offer premium top line potential. While we would not claim that these ideas are mutually
exclusive, they reflect aspects of four building blocks we see as central to the immediate
investment landscape and exhibit characteristics that resonate with the broad thought
process above while capturing previous thematic research we have published: A
Connected Consumer, Demographic Demands, Resource Scarcity and Technology’s
New Wave. We have devoted a chapter to summarise each theme, including key drivers,
growth potential, with relevant stocks concerned. Links to related research are detailed at
the end of each chapter. Figure 5 provides a snapshot and the key recommendations we
would highlight now. The investment case for each stock is detailed in our separate report,
click here, also published today.
Figure 3: Credit Suisse's 10 structural growth themes
Source: Credit Suisse research
If only it were that easy… As fine as this all sounds—and to a degree it is rather idealistic—there are clearly
challenges:
■ Stock selection and portfolio construction—how do you apply this at a stock level?
What stocks provide genuine leverage to a given theme? Where in the value chain is
the profit potential captured?
■ Valuation and timing—when is any given theme played out?
This is the third of the three questions: how to invest in these themes? We seek to address
this in the next section, by seeking to rank these themes and provide a framework to
select relevant stocks to complement the bottom up work of our analysts. The detail of the
report provides the ultimate drill-down, theme by theme.
29 September 2014
Global Equity Themes 6
Growth stocks and theme strategies
Is growth investing bad for your wealth?
The underperformance of growth as a style recorded in many people’s investment history
books serves as a reminder that, whether they pick the right themes or not, investors can
be better at forecasting growth than judging the right price to pay for it (see Credit Suisse
Global Investment Returns Yearbook and Sourcebook 2014, Dimson, Marsh & Staunton).
Our analysts' stock picks are designed to look for growth at a reasonable price. However,
below we have also used Credit Suisse’s HOLT® framework to provide a more quantitative
framework to select growth stocks at a given point in time.
The Credit Suisse HOLT Investment Strategy team addressed the issue of the statistical
underperformance of growth as a style over time and looked to isolate quantitative factors
that would identify growth stocks that have delivered consistent outperformance – see
Redefining the Style Box and improving performance in the growth cohort. We would
direct you to the report for the detail of the analysis but essentially, they found within their
growth universe overlaying factors of quality (the level of CFROI®, value creation and the
change in value creation) and momentum (CFROI revisions, price momentum, liquidity)
drawn from the HOLT scorecard enhanced performance, particularly outside the US.
Figure 4 illustrates this striking impact with an incremental 500bp being added to returns.
Figure 4: Quality and Momentum characteristics generate superior forward-looking
growth and outperformance
High % Growth + High Quality &
Strong Momentum
High % Growth
Universe
High % Growth +
High Quality
High % Growth +
Strong Momentum
Low % Growth
-2%
-1%
0%
1%
2%
3%
4%
5% 7% 9% 11% 13% 15% 17% 19%Annu
aliz
ed
Exc
ess
Retu
rn
5-year forward EPS CAGR
Universe: Global ex. US and financials, $2bn+ market cap scaled back in time (2004-2014)
Source: Credit Suisse HOLT
Picking stocks from our themes
Following this methodology, we can apply a screen of quality and momentum across the
core exposed and Credit Suisse covered stocks, highlighted theme by theme by our
analysts. Figure 5 highlights the names that emerge from this twin-factor screening. (Top
stock picks from our analysts are also flagged within these selections.) All but one of our
themes generate stocks that meet the criteria. Our healthcare/“immuno-oncology” plays
fall short on this approach, mainly due to the score on historical operations rather than
long-term potential.
29 September 2014
Global Equity Themes 7
Figure 5: Stocks rated Outperform by Credit Suisse analysts and which have 'High
quality' and 'Strong momentum' in the HOLT framework
Facebook Inc. FB.OQ North America
P Tencent Holdings 0700.HK Asia
Arista Networks ANET.N North America
Vipshop Holdings Limited VIPS.N Asia
P Baidu Inc BIDU.OQ Asia
P Priceline.com PCLN.OQ North America
Check Point Software Technologies Ltd. CHKP.OQ North America
Content is King P ITV ITV.L Europe
Sound Global Co. Ltd 0967.HK Asia
Guangdong Investment Limited 0270.HK Asia
P SIIC Environment Holdings SIIC.SI Asia
China Everbright International Ltd 0257.HK Asia
P Sun Pharmaceuticals SUN.BO Asia
P Coloplast B COLOb.CO Europe
Daikin Industries 6367.T Japan
Halma HLMA.L Europe
P Continental CONG.DE Europe
DELPHI Automotive PLC DLPH.N North America
Hyundai Wia Corp. 011210.KS Asia
Merida Industry Co Ltd 9914.TW Asia
Shimano 7309.T Japan
Japan Airlines 9201.T Japan
INPEX Corporation 1605.T Japan
Baker Hughes Inc. BHI.N North America
Cameron International Corp. CAM.N North America
P Halliburton HAL.N North America
LyondellBasell Industries LYB.N North America
Marathon Oil Corp MRO.N North America
P Pioneer Natural Resources PXD North America
Schlumberger SLB.N North America
EOG Resources EOG North America
Solar P China Singyes Solar Tech. 0750.HK Asia
Avago Technologies Ltd. AVGO.OQ North America
P SAP SAPG.F North America
Salesforce.com Inc. CRM.N North America
Tableau Software, Inc. DATA.N North America
NXP Semiconductors N.V. NXPI.OQ North America
Teradyne Inc. TER.N North America
Verint Systems Inc. VRNT.OQ North America
Dassault Systemes DAST.PA Europe
Hollysys Automation Technologies Ltd. HOLI.OQ Asia
Teco 1504.TW Asia
Shale Revolution
Big, Fast Data
Automation
Untapped potential of the
internet
Theme Company
Ageing in Emerging Markets
Resource efficiency
Ticker RegionKey pick
China Environmental Sector
Source: Credit Suisse research
Ranking the themes
Just as we can look at the attraction of a given stock, we can look at the relative attraction
of the Themes against themselves by aggregating the universe of names we have built
behind each topic. The analysis below again leverages the HOLT framework outlined
above. It is important to stress that this is looking at the relative merits of the themes
rather than their absolute merit which we see as compelling in each case.
29 September 2014
Global Equity Themes 8
The bar chart in Figure 6 ranks the themes when scored in keeping with the factors
highlighted above of quality and momentum – using a 50/50 weighting for each factor.
The relative attractiveness declines moving from right to left. The colour coding, as
reflected in the key, illustrates the quintile ranking across each theme by analysing the
characteristics of each stock that is included in the theme from our universe of names. The
themes which stand out as 'best' are centred around technology – Big Data and the
Internet plays (direct and indirect), while Solar and Resource Efficiency rank at the
low end. We are not surprised that Solar scores poorly in aggregate given the poor
historical returns but, as the title of the chapter suggests, we are nearing an inflection point
in profitability which should change the returns profile that looks back in the data below.
Figure 6: HOLT rankings based on 50% quality and 50% momentum weightings
0
1
2
3
4
5
Un
tap
ped
po
ten
tial
of
the
Inte
rnet
Big
, Fas
t d
ata
Age
ing
in E
M
Au
tom
atio
n
Co
nte
nt
is k
ing
Hea
lth
care
Ch
ina
Envi
ron
men
t
Re
sou
rce
Eff
icie
ncy
Sola
r
Shal
eHO
LT S
core
card
Qu
inti
les
Most attractive Least attractive
Source: Credit Suisse HOLT
While we have focused on quality and momentum above both in our stock picks and
theme rankings, valuation is a factor in the broader HOLT scorecard framework. Although
we haven’t used it in the screens above, Figure 7 provides a valuation-based rank of each
theme. Valuation from a HOLT perspective is based on % upside/downside, Economic PE,
Dividend Yield and HOLT Price to Book. Interestingly our Big Data theme still ranks well
on valuation as well as quality and momentum. Internet is more challenged. The movers
up the rankings are Shale and Resource Efficiency.
Figure 7: HOLT rankings based on purely Valuation
0
1
2
3
4
5
Shal
e
Big,
Fas
t dat
a
Cont
ent i
s ki
ng
Reso
urce
Eff
icie
ncy
Auto
mat
ion
Hea
lthca
re
The
unta
pped
pot
entia
lof
the
Inte
rnet
Chin
a En
viro
nmen
t
Agei
ng in
EM
Sola
rHO
LT S
core
card
Qui
ntile
s
Most attractive Least attractive
Source: Credit Suisse HOLT
Best Quintile
2nd best
Middle
2nd Worst
Worst Quintile
29 September 2014
Global Equity Themes 9
Figure 8: HOLT scorecard rankings based on a balanced scorecard
0
1
2
3
4
5
Unt
appe
d po
tent
ial o
fth
e In
tern
et
Big,
Fas
t D
ata
Cont
ent
is k
ing
Aut
omat
ion
Hea
lthc
are
Age
ing
in E
M
Reso
urce
Eff
icie
ncy
Shal
e
Chin
a En
viro
nmen
t
Sola
rHO
LT S
core
card
Qui
ntile
s
Most attractive Least attractive
Source: Credit Suisse HOLT
We would stress that there are of course natural health warnings in aggregating stocks
that themselves conceal a range of sub-groups, particularly where the theme touches a
wide range of different sectors and sub-sectors as is the case for topics such as Resource
Efficiency and Shale. If we were to rank/score the extensive sub-groups within these
themes, we would see differing value propositions across their respective supply chains.
Hence, the importance of stock selection is key as we have highlighted above and, of
course, the focus of the detail throughout the report.
Postscript…momentum and sentiment
We continue to monitor the fundamental drivers of each growth theme whether
fundamentally (eg Are big data software companies seeing price pressure? Are emissions
targets tightening?) as well as the more quantitative positioning above. If being on top of
the news flow is an important analytical discipline to shape these views, we would flag the
charts below. They arguably proxy (or lead) the momentum factor by monitoring the weight
of news flow. If there is a price for everything, there is also a time for everything. That
seems the case for Big Data. As Figure 10 shows, events can change.
Figure 9: Big Data – press mentions Figure 10: 3D Printing – press mentions
90
95
100
105
110
115
120
125
130
0
100
200
300
400
500
600
700
800
900
1,000
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Press mentions of Big Data and related terms - monthly
Big data custom basket relative to MSCI AC World index, rhs
50
150
250
350
450
550
650
0
5
10
15
20
25
30
35
40
Mar-08 Apr-09 May-10 Jun-11 Jul-12 Aug-13 Sep-14
Press mentions of 3D Printing and related terms, 3mma
3D Printing custom basket rel. to MSCI USA, rhs
Source: Thomson Reuters, WSJ, FT, Bloomberg Source: Thomson Reuters, WSJ, FT, Bloomberg
A balanced HOLT scorecard
assigns equal weighting to
Operations, Momentum and
Valuation
29 September 2014
Global Equity Themes 10
Theme #1 – A connected consumer
Source: Credit Suisse Research
I Untapped potential of the internet
The internet, whilst not a new theme, is undergoing a structural shift in both creation and
usage of online content. We believe this is primarily being driven by a rise in the use of
smartphones, connecting users to online content more frequently and for longer than ever
before. Global smartphone penetration is set to rise to 52% in 2017 by CS technology
analysts from just 27% today. This, coupled with the fact that internet penetration still
remains very low makes this a compelling growth industry over the next decade. Specific
trends we would highlight include the substantial potential upside for marketing spend on
the internet, the potential for e-commerce and
The often under-appreciated security industry; as more content goes online, ring-fencing
this becomes more of a concern for users.
II Content is King
Ownership of media content has never been so valuable. The options for monetising
video, audio and written content continue to expand as online business models proliferate.
The rising power of new customers for content (eg. Netflix, Amazon, Spotify), and the
growing viability of direct-to-consumer models, will drive structural growth in the value of
the owners of content IP, in our view, in a diverse range of industries from movies and TV
production to music, publishing, education and sports.
29 September 2014
Global Equity Themes 11
I The untapped potential of the internet Theme Dynamics and Drivers
At first sight, writing about the internet as a growth theme seems nearly 20 years too late;
however, given the following reasons, we still believe the internet, and industries with
exposure to the internet, will continue be one of the key growth stories over the next
decade.
The rise of the smartphone
In our opinion, the introduction and rise of the smartphone is currently one of the most
important drivers. Internet-enabled smartphones already make up 27% of the installed
mobile phone base globally, with Credit Suisse technology analysts expecting the
penetration rate to reach 52% in 2017. In fact, some developed markets such as the US
already have penetration rates of 58%. The success story of the smartphone in
combination with an ever-faster mobile infrastructure (4G) enables mobile users to have
both the functionality and speed to exploit high-speed mobile broadband.
Figure 11: Global smartphone penetration
0%
10%
20%
30%
40%
50%
60%
2006
2007
2008
2009
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
2017
E
Global smartphone penetration (as % oftotal mobile subs)
Source: Gartner, Credit Suisse research
Internet penetration is low in major emerging markets
A major driver of smartphone penetration will be emerging markets. Internet penetration is
still low in a number of the major emerging economies (eg. India). As infrastructure rolls
out as we expect, with a leapfrogging of the West’s technology experience, smartphone
take-up should follow naturally. While the implications of greater internet penetration
stretch beyond smartphones (eg. laptops and tablets), we would note from the Credit
Suisse Emerging Consumer Survey 2014 that the electronics product EM consumers
were most likely to purchase was a smartphone. It is the “enabling” tool of choice.
In terms of the build-out of the necessary infrastructure to support such demand, by way of
example we note that in China, total capex by the three largest telecom providers is growing
by 10% per annum. This has been driven by a 20% per annum increase in wireless capex.
Global Equity Strategy &
Thematic Research
Andrew Garthwaite
+44 20 7883 6477
andrew.garthwaite@credit-
suisse.com
Richard Kersley
+44 207 888 0313
richard.kersley@credit-
suisse.com
Nicolas Wylenzek
+44 20 7883 6480
nicolas.wylenzek@credit-
suisse.com
Ashlee Ramanathan
+44 20 7883 9934
ashlee.ramanathan@credit-
suisse.com
29 September 2014
Global Equity Themes 12
Figure 12: Internet penetration is below 50% in the three
largest EMs by population (CN, IN, ID)
Figure 13: Smartphone is the most popular consumer
device respondents planning to upgrade to smartphone
0%
10%
20%
30%
40%
50%
60%
70%
Population weighted average penetration
46%52%
29%
49% 50%
31%
64%
39%
29%
0%
10%
20%
30%
40%
50%
60%
70%
Source: www.internetworldstats.com Source: Credit Suisse Emerging Consumer Survey
Why now?
The public internet has been around for the past two decades; so why are we revisiting the
story now?
i) The internet is currently hitting another level of critical mass owing largely to the rise in
broadband and smartphone penetration.
ii) The sector is back to its average 12m forward P/E relative to the market. Earnings
momentum is positive.
Figure 14: Global internet software and services trade
only 62% above global markets on 12m forward P/E…
(20th
Sep)
Figure 15: … and relative earnings momentum is clearly
positive (24th
Sep)
20%
120%
220%
320%
420%
520%
620%
2004 2006 2008 2010 2012 2014
Global Internet software and services rel mkt: 12m fwd P/E
Average (+/- 1SD)
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2004 2006 2008 2010 2012 2014
Global Internet software and services
Rel mkt
3m breadth of revisions
Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research
Potential Advertising spend
We believe there is substantial potential upside for marketing spend on the internet.
According to Nielsen, individuals in developed countries spend on average 22% of their
time on the internet, a trend that is likely to increase. Corporates, however, are only
spending 20% of their marketing budget on the internet, suggesting there is significant
upside potential for online marketing spend.
29 September 2014
Global Equity Themes 13
Figure 16: We still see potential upside for ad spending on the internet and mobile
phones
39.8%
24.8%
13.2%11.7%
3.1%2.3%
38.9%
20.9%
9.3%
1.6%
11.5%
9.2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
TV* Online Radio Mobile (non voice) Newspapers** Magazine**
Time spent share Ad spending share
* TV time spent includes live, DVR and other prerecorded video such as video dowloaded from the internet but saved locally; TV ad spending inlcludes broadcast TV(network, syndication and spot ) and cable TV** offline reading only
Source: Credit Suisse Media team, ZenithOptimedia, eMarketer Sep/Oct 2012
The potential of e-commerce
In our opinion, the combination of improved web services, faster internet speeds, a better
online shopping experience and more integrated solutions should ensure high and
sustainable growth rates within the e-commerce space over the coming years.
E-commerce still makes up only 5% of the retail sales in the US, although the CAGR is
now running at 10%. In the UK, where the population is generally more comfortable
shopping over the internet, online retail sales account for more than 11% with the CAGR
of 17% (e.g. in the UK 17% of clothing and shoes are sold online). Within the online retail
space, we would note that areas such as homeware, furniture and groceries in particular
remain underdeveloped. In our view, as distribution networks improve and consumers
become accustomed to shopping online, e-commerce trends should accelerate further.
Amazon already has c3x the product offerings of Walmart, but only a third of the sales.
Figure 17: Internet retail sales account for a steadily
growing share of total retail sales
Figure 18: Music, books and electricals stand out in terms
of internet penetration; the other categories lag notably
behind
0
2
4
6
8
10
12
2000 2002 2004 2006 2008 2010 2012 2014
US internet retail sales, % total
UK internet retail sales, % total,12 month moving average
0% 20% 40% 60% 80%
Furniture & floorcoverings
DIY & gardening
Homewares
Food & grocery
Health & beauty
Electricals
Music & video
Books
Clothing & footwear
Share of internet shoppers
Source: Thomson Reuters Source: Credit Suisse General Retail team
29 September 2014
Global Equity Themes 14
From the perspective of the consumer, the shift from offline to online purchasing has
greatly improved the price visibility across the market; companies such as
Moneysupermarket have eliminated the need for consumers to travel between stores to
compare prices of goods. This is most visible in the financial products market where,
according to Moneysupermarket, 80% of all new car insurance is purchased online. This
shift to cashless online transfers has implications for payment system providers such as
Visa and MasterCard.
Figure 19: Many financial products are bought online
Policies/Products
New/switch as % of
existing
New/switch done
onlineAvg. customer savings
Motor Ins 44% 81% £398
Home Ins 26% 55% £104
Travel Ins 78% 43% £34
Savings 15% 30% £25
Cards 13% 56% £279
Loans 20% 50% £84
Energy 16% 32% £103 Source: Moneysupermarket
As much as the West, emerging markets, particularly in APAC, offer significant potential.
China is already the single largest e-commerce market despite lacking comprehensive
infrastructure – broadband, smartphones, payment systems and logistics. Combining
development in these areas with the fact that per capita spend is low at US$1,000, and
should increase with improving incomes, the potential for growth is clear. Our APAC
internet research team projects the e-commerce market size—at US$500bn in 2013—to
almost double by 2016, with APAC e-commerce growth accounting for the majority of
global growth. While in China we acknowledge that it is hard to get precise data, we note
that according to McKinsey, China's internet economy – all internet-related expenditure from
retail to infrastructure to broadband bills – as a percentage of GDP was 4.4%. This
proportion has risen one-quarter over three years (FT, 27 August 14).
Figure 20: APAC to drive more than 50% of global e-commerce sales growth
$311
$434$522
$650
$788
$936
40%
42%
44%
46%
48%
50%
52%
54%
56%
58%
60%
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2011 2012 2013 2014E 2015E 2016E
APAC E-commerce sales (US$ bn) APAC Share of Global E-commerce Growth
Historical APAC CAGR = 18%Forward APAC CAGR = 20%RoW Forward CAGR = 11%
Source: Thomson Reuters, Credit Suisse estimates
Security
As mentioned in the "Limitations" section below, security is key for internet companies and
will be one of the most important trends over the coming years. We believe the biggest
beneficiaries of this trend would be vendors that are able to offer state-of-the-art enterprise
and network security, as the security-related reputation and business risk will require
online companies to make substantial investments to ensure a safe shopping environment
for their customers
29 September 2014
Global Equity Themes 15
Health Monitoring
With an ageing and more health-concerned population in most developed
countries, health monitoring is an increasing trend for several tech companies. The
iPhone’s new operating system has several apps helping users to keep track of health and
fitness data, the Apple Watch is able to measure heart rate and calories burned and
Google's new contact lenses are able to monitor glucose levels (on the back of which
Google formed a JV with Novartis).
Smart home
Google’s purchase of Nest shows the potential for the internet to help control home
heating, home lighting, and home security, therefore opening up new areas of revenue.
Potential valuation upside
Below, we present our Global Equity Strategy team's blue-sky scenario.
The Reuters Datastream World Internet Index currently has a market cap of around
$875bn. If we add Amazon and non-listed companies, the value would be higher. The
question is: what are the potential revenue streams (and their value) – and can they justify
such a market cap?
We believe the internet sector has two key revenue streams:
■ Advertising revenues: We believe it is possible that in 10 years' time, 40% of
advertising revenues will be spent on internet advertising. If we assume global
advertising spend is roughly 2% of GDP, a 15% net margin on the advertising
business (currently Google's net margin is roughly 25%) and an ex-growth multiple of
12x (below the market multiple of 15x), the capitalised ad-related earnings should be
valued at roughly US$1.5trn in future dollar terms (this assumes 5% nominal GDP
growth over the next 10 years).
■ Retail sales: If we assume 20% of retail sales globally will be carried out via the
internet in five years' time at a net margin of just 1% (additionally assuming that retail
sales are 70% of a consumer share of GDP of two-thirds), the resulting earnings can
also be valued at roughly US$981bn in future dollar terms (assuming 5% nominal
GDP growth over the next five years and a conservative P/E multiple of 12x). This
does not even include any potential food and grocery sales yet, a market which is
increasingly targeted by internet companies owing to their improved distribution
networks and the ability to offer short-term delivery.
Even on cautious assumptions, retail and advertising earnings already sum up to
capitalised earnings of nearly US$2.4trn in future dollar terms. Assuming a conservative
discount rate of 10% and discounting advertising retail earnings over a 10- and a five-year
period, respectively, these earnings would still have a present value of US$1.2trn.
Figure 21: Even on conservative assumptions, retail and advertising earnings are worth
close to US$1.2trn
in bn USDAdvertising earnings (in
10 years)
Retail earnings (in 5
years)Total
Capitalized earnings (FV) 1,500 980 2,480
Present value (PV - 10%
discount rate) 578 609 1,187
Source: Credit Suisse estimates
In addition, there is the potential for additional B2B sales through the internet as well as
taking a fee for other consumer services such as Google's efforts to organise home
security, and heating.
29 September 2014
Global Equity Themes 16
Content is king
We have devoted a specific section of the report to this topic (Content – still king in global
media), though we would flag that the platform provided by the internet provides a new
source of demand for content in its various forms – entertainment (eg. music and video
streaming, gaming and education). The proliferation of new channels requires content to
fill them. It is also increasingly the conduit for the rapidly growing demand for education in
the emerging world.
Barriers to Entry
A history of new and rapidly growing entrants in the internet space creates the impression
of very low barriers to entry. However, we believe the major players in the sector have built
up sizeable protection from new competition, leveraging powerful network effects to do so:
(1) R&D and capital spend – To keep up with the latest technological developments, internet companies are required to spend significant amounts on IT infrastructure and the development of new technologies and services. Furthermore, to be able to compete with Amazon on speed and efficiency, a competitor would need to copy Amazon's extremely advanced and expensive distribution network (which enables Amazon to offer 23% of the US population same-day delivery). We proxy the capital intensity of the internet sector by looking at capital spending to sales and capitalised R&D relative to sales. We can see that it is one of the highest of any sector with a capitalised R&D to sales of nearly 35%, ensuring a CFROI of 15%; in fact, Google's capitalised R&D as a percentage of sales is nearly 50%.
Figure 22: Internet services offer high barriers to entry
and high profitability
Figure 23: Google's capitalised R&D is nearly 50% of
sales
Autos
Cap Gds
Cons Dur
Cons SVs
Materials
Media
Retailing Comm. Eqpt
Elec. Eqpt
Int. S/w
IT Svs
Semis
Software
Tech H/W
0%
5%
10%
15%
20%
25%
0% 10% 20% 30% 40% 50% 60% 70%
Capitalized R&D as % of sales
2014
e C
FR
OI
Global
Company
Capitalized R&D as
% of salesCapex to Sales
Amazon 19% 5%
Facebook 23% 18%
Google 48% 14%
Source: Credit Suisse estimates Source: Thomson Reuters, Credit Suisse research
(2) Networking – Most internet companies depend heavily on the number of users they have, as there is little use being in a social network if there are only a few other users. This creates a strong first-mover advantage for companies such as LinkedIn and Facebook and makes it exceptionally difficult even for other dominant internet players to enter this market (e.g. Google+ struggles to compete with Facebook). In addition, having a large number of users helps online companies to attract unique content, a diversity of applications and varied products (e.g. eBay's liquidity and market depth are strongly correlated with its number of users).
(3) Access to data – Established internet companies have access to large databases on customer behaviour, owing mainly to their large client base. We have highlighted in Theme IX Big Fast Data the vulnerability for companies that lack sophisticated business data analytics. Amazon's database of historical sales data, for example, enables the firm to provide clients with customised recommendations on products that are compatible with their recent purchases and preferences. According to Stephen Ju,
29 September 2014
Global Equity Themes 17
our US internet analyst, a quarter of Amazon's sales are a result of these targeted recommendations. This gives especially "data rich" companies such as Google, Facebook, Tencent and Baidu a strong advantage over their competitors.
(4) Service integration – The critical mass that has been built has stimulated powerful network effects that have generated new and diversified revenue streams. The likes of Google and Amazon are heavily investing in their infrastructure to provide the client with more integrated solutions/eco-systems. Examples of recent efforts include new integrated hardware solutions such as the Amazon phone and Google Glass and other “wearables”, as well as services such as Amazon Prime, which tries to lock in customers by offering them faster delivery, access to a video-streaming service and free e-books against an annual fee. Google’s acquisition of Nest potentially establishes a platform for connectivity throughout the home leveraging further and locking in their existing customer base. Online travel agents (OTAs) are increasingly offering integrated packages, with flights, hotels, transfers, for example, booked together.
(5) Market leaders have the wallet to buy competitors – In contrast to the tech names
in the previous tech boom, the major players now are highly cash generative, which enables them to react quickly to rising competition, by acquiring any potential threat, and invest heavily in new areas of innovation. At a deal value of US$119bn in 1H14, global technology M&A is 70% higher than in 1H13, and looks to be on course to annualise the highest level since the peak of the dotcom bubble.
Figure 24: Directional view of select 2Q14 deal-driving
trends
Figure 25: Cash reserves of the top 25 technology
companies have been growing steadily
300
400
500
600
700
800
2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Source: EY Global Technology M&A update Source: EY Global Technology M&A update
We believe that as long as tax regulations prevent tech companies from bringing their cash "home" to pay dividends and shareholders continue to be rewarded through rising stock prices, big players with deep pockets are likely to continue to be consolidators, creating a powerful barrier to entry.
Figure 26: Selected M&A deals announced in 2Q14
Acquirer AcquireeDisclosed
value ($m)Announced
Premium
offeredDetails
Oracle MICROS Systems 5,300 23-Jun 69% MICROS builds technology for the hospoitality and retail industries
Zebra Tech Enterprise business of Motorola solutions 3,450 15-Apr N/A Mobile-computing services for businesses that need to track employees and products
Priceline Group OpenTable 2,600 13-Jun N/A Positioning for further growth
Alibaba Group AutoNavi Holdings 1,580 11-Apr 32% Purchased the remaining 72% of the online mapping service which it didn't already own
EPISTAR Formosa Epitaxy 693 30-Jun 24% Semiconductor M&A with a view to seeking scale through consolidation Source: EY Global Technology M&A update
29 September 2014
Global Equity Themes 18
Limitations
However, we also see seven areas of concern:
1. Conventional valuations
One of the key concerns is valuation, with Amazon and Facebook trading on 230x and 40x
consensus earnings, respectively, compared with the market trading on roughly 22x 12-
month forward earnings.
However, we would highlight that on Credit Suisse HOLT®, the economic P/E is
significantly less demanding than the actual P/E. For Amazon the economic P/E is only
86% higher than the market and in line with its long-run average. This is mainly due to
Amazon's solid CFROI® of around 14%.
Figure 27: HOLT vs conventional valuation
Absolut rel. market Absolute upside Upside rel. to market Absolut rel. market
Amazon 36.6 175% 7% 4% 157.75 989%
Google 22.87 110% 57% -46% 19.977 125%
Facebook 49.18 236% -10% 21% 41.422 260%
Economic P/E HOLT - Price to Best 12m fwd P/E
Source: Credit Suisse HOLT, Credit Suisse estimates
Furthermore, we note that the sector's P/E relative on 12-month forward consensus
earnings is merely at neutral levels as shown in Figure 27 and our "blue sky" arithmetic
above.
2. Regulation over privacy of data
Many companies in the internet space use customer data to provide more targeted and
therefore more expensive advertisements. Regulations on data privacy would clearly be a
threat. In addition, in some emerging markets there is the risk of state censorship limiting
the ability of companies such as Facebook, Google and Twitter to do business in these
countries. The other side of this coin, though, is the opportunity for local players and
networks.
3. Security
This topic touches a wide range of issues and with it regulation and privacy. The key
concern for e-commerce remains the security of personal and payment details due to the
increased reputational and business risk. Online companies can only succeed in this
environment as long as customers have trust in the protection of their personal information.
This is especially a problem for young unknown companies, as a customer is more likely
to purchase the same product from a known provider such as Amazon (further increasing
the barriers to entry), where there is a bigger perception of security. We believe that to
some extent these concerns should slowly diminish, with customers becoming more
comfortable with shopping over the internet and internet companies increasingly focusing
on internet security.
4. Being "hot/fashionable"
Dick Wei, our head of Asian internet research, highlights that the key risk for many online
services and technologies is to fall out of favour when better and "hotter" products are
introduced. Well-known examples of this phenomenon are ICQ and Friendster, two very
fashionable and widely used online services just a few years ago, which have now been
replaced by Skype and Facebook. This underlines the importance of considering those
companies that have established meaningful first-mover advantage and barriers to entry.
29 September 2014
Global Equity Themes 19
5. Reliance on 'unique' relationships
Several online business models such as Vipshop, China's leading online discounter, are
based on unique relationships with the supplier to be able to sell goods at a discount.
According to Dick Wei, this relationship is very hard to replicate, although it still makes
these companies highly reliant on their supplier.
6. Infrastructure investment
To tap the e-commerce opportunities and broader service offerings requires infrastructure
investment. The "enabling" of 3G/4G capex is part of this, but logistics are a key factor in
EM where it is more than a "final mile" consideration.
7. Net neutrality
If there were moves to remove net neutrality, then telecom companies could charge heavy
users of data different prices and perhaps thus charge more for the delivery of content.
This has been the subject of legal disputes in the US (with the Court of Appeal in
Washington DC striking down the FCC net neutrality rules in January).
Selected companies exposed to this theme
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names across our coverage. These are not mutually exclusive.
Tencent (Analyst: Dick Wei) – Tencent is the leading social network website in China and
is exposed to nearly all aspects of the internet (social networking, e-commerce, web-
based gaming and web-based financial services—Tencent is likely to get a banking
licence). We expect further monetisation from platforms such as QQ, WeChat and Qzone.
Tencent's WeChat already has more than a 500m installation base globally and the key
advantage to Facebook in that it is able to access the Chinese market.
Baidu (Analyst: Dick Wei) – Baidu mobile search accounted for 30% of all search revenue
during 2Q14, with mobile traffic above PC traffic during holidays. We are encouraged to
see mobile search monthly active users (MAU) of 500m, implying significant penetration
among internet users. We believe that the newly launched city-level bidding could help
customers to target their ad campaigns more precisely, and provide better user experience
as well as better ROI. We also note that Baidu is active in exploring new internet finance
opportunities, and could potentially attract more traffic to position itself for future internet
finance innovation and mobile payment. After acquiring Nuomi, we believe that Baidu has
successfully equipped itself with large offline exposure. By leveraging Baidu Map and its
LBS platform, we expect Nuomi to unlock Baidu's significant potential in the O2O business.
Vipshop (Analyst: Evan Zhou) – Vipshop is the leading online discount retailer in China.
The company's first-mover advantage on relationships with suppliers ensures its access to
discounted inventory. Vipshop's large-scale execution capability and distribution network is
difficult to replicate for competitors and gives it some influence over its suppliers. It is
expanding beyond apparels into cosmetics, home goods and electronics.
Priceline (Analyst: Stephen Ju) – Our Outperform rating, and thesis, is predicated on the
expectation that Priceline (PCLN) will remain an open-ended growth story. We expect
share gain momentum to continue as (1) scale, coupled with the fragmented EU hotel
landscape, provides a structural moat around the core Booking franchise; and (2) PCLN
successfully exports its playbook globally. Our conviction is reinforced by new work that
suggests significant runway as PCLN’s share of fillable rooms is only c7%.
Palo Alto Networks (Analyst: Philip Winslow) – Multiple data points from end users and
partners reinforced our belief that Outperform-rated Palo Alto Networks' unique next-
generation firewall platform is well positioned to consolidate features onto a single system
and, therefore, continue to gain share in network security. Palo Alto also announced a
partnership with VMware to provide integrated network security for VMware NSX, which
we view as a positive given our expectation for increased adoption of VMware NSX over
the next few years
29 September 2014
Global Equity Themes 20
Check Point (Analyst: Philip Winslow) – Outperform-rated Check Point continues to
enhance its Software Blade Architecture (e.g., Anti-Bot, and Threat Emulation), which we
believe positions the company to gain share from Juniper and Cisco Systems, both of
which continue to struggle in the network security market (from which Palo Alto Networks
continues to also benefit).
Proofpoint (Analyst: Philip Winslow) – Outperform-rated Proofpoint announced a new
"malvertising" (malicious advertising) protection solution that tracks the flow of
malvertisements and warns about problematic ad networks. We remain encouraged by
Proofpoint's potential to capitalise on the opportunities for (1) increased adoption of
Targeted Attack Protection and (2) competitive displacements in messaging security and
archiving.
29 September 2014
Global Equity Themes 21
Figure 28: Selected stocks exposed to the Internet theme
Company Ticker CS rating Region Exposure to
the theme
Explanation
Tencent 0700.HK O/P China High China's leading social network is exposed to social networking,
e-commerce, web-based gaming and online-based financial
services. Key advantage over Western companies such as FB
is that the WeChat app allows access to the potentially
profitable Chinese market.
Baidu BIDU.OQ O/P China High Strong revenue growth is driven by mobile monetisation. New
products and initiatives such as exploring of internet finance
opportunities are supportive of future growth.
Vipshop VIPS.N O/P China High Leading online discount retailer in China with a first-mover
advantage. Able to influence suppliers through large-scale
execution capability.
Naspers NPNJn.J O/P Africa High Naspers is building the largest portfolio of (Craigslist-like) online
classifieds websites in emerging markets, spanning more than
100 countries. It also has strong ecommerce marketplaces in
Central Europe
Facebook FB.OQ O/P USA High World's largest social network. Looking to capitalise on the
expanding of the budgets of the online brand advertisers. Other
products such as Whatsapp still indicate potential upside.
Amazon AMZN.OQ O/P USA High Online retailer with dominant market position and exposure to
key segments of ecommerce (e.g. online retail, video on
demand)
Google GOOG.OQ O/P USA High Leading search engine with exposure to smartphones and
online advertising, underpinned by rapid adoption of mobile
devices.
Priceline PCLN.OQ O/P USA High Exposure to online retail/booking. Strong growth story coming
off a low base, CS work suggests that PCLN currently only has
c7% share of fillable rooms.
Yandex YNDX.OQ O/P Russia High Key player in the fast-growing Russian online market which CS
estimates can reach a c20% market share. This is based on a
strong technical platform similar to Google.
Palo Alto PANW.N O/P USA High Unique next-generation firewall platform is well positioned to
consolidate features onto a single system, continuing to gain
market share.
Check Point CHKP.OQ O/P Israel High Providing network and data security, taking market share from
companies such as Cisco which have struggled in the network
security market.
Proofpoint PFPT.OQ O/P USA High Levered into fast-growing market for email security, outbound
data loss prevention, privacy protection and email encryption.
GLP GLPL.SI N APAC Medium Rapid e-commerce growth triggers strong demand for logistics
services in China. One of the world's leading logistics providers
with market leadership in china, Japan and Brazil.
TAL Education XRS.N O/P China Medium Chinese online education play. TAL has favourable exposure
to the K-12 market, enabling the fastest earnings growth
amongst its peers.
New Oriental EDU.N O/P China Medium Chinese online education play. Largest English tutoring
company in China with a superior brand recognition
Dangdang DANG.N N APAC Medium Rapid e-commerce growth triggers strong demand for logistics
services in China. Comprehensive B2C retailer.
Haier 1169.HK O/P APAC Medium Rapid e-commerce growth triggers strong demand for logistics
services in China. Provision of Integrated channel services
(ICS).
Deutsche Post
DHL
DPWGn.DE O/P Europe Medium The PEP segment is most exposed to e-commerce through
B2C deliveries in the fast growing online retailing German
market.
Visa V.N O/P USA Medium Global payments technology company that connects
consumers, enabling them to use digital currency instead of
cash and cheques.
Mastercard MA.N O/P USA Medium Global payments solutions company offering services in
support of the credit, debit and related programs of financial
institutions.
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 22
Figure 29: The untapped potential of the internet – Relevant research
Report Date Highlight
Smartphones: Theme - A Lasting Disruptive Force
11-July-13 Primer: We summarize the key stats, drivers, the competitive situation, and ultimately the lasting disruption that has come with the rise of today's smartphone.
China Internet Finance: Tides beneath the sea surface
27-Aug-14 We believe Internet finance is still at a very nascent stage in China, and continue to prefer large-cap names on this theme.
Cloud fears continue to ebb 25-Aug-14 Broad cloud adoption will take time, but these dynamics are critical to monitor as they are beginning to impact our coverage universe at the margin. We would note a bifurcation across the IT Hardware space.
Russian Internet/Media: Sector Review - Reduce adspend estimates further
4-Sep-14 Yandex continues to be our preferred fundamental story even with our more conservative growth assumptions, a lower profitability outlook and more demanding valuations.
Updating Our Thoughts on Google Play – Data Points Suggest Upward Bias to Estimates
4-Sep-14
We update our thoughts on Google Play, which we first published on 14 July 2014 (Google Play – The Next and More Important Multibillion Dollar Opportunity), as we collect global gross booking data from mobile game as well as mobile messenger companies.
Google Play - The Next and More Important Multibillion Dollar Opportunity
14-July-14 We layer in explicit contribution from Google Play into our updated model, which we have rebuilt to take into account more granular product-by-product estimates.
IT Hardware & Global Comm. Equipment: Amazon continues to innovate and disrupt
5-Jun-14 Amazon's new technology will now enable workloads to be transported from on-premise to public cloud datacentres. We fear that the technology poses a risk to on-premise capacity and may curtail demand for traditional enterprise gear over time.
Internet: Facebook - Ideas Engine - Time to Rebuild Your Facebook Models
21-Apr-14 We upgrade FB shares to Outperform (from Neutral) as we increase our mid-to-longer-term user ARPU growth trajectory expectation, following extensive analysis, to layer in monetization from the company's upcoming product releases.
IT Hardware & Global Communications Technology: 2014 Outlook: Spending muted, with a Cloud shift to boot
6-Jan-14
The macro backdrop to IT spending points to muted cyclical recovery; Real cloud drivers exist, disruption to incumbents ahead; Amazon: the CIA contract is no one off; Storage: A shift to DIY is under way but traditional storage continues to grow; SDN is real and will have an impact over 2-5 years.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 23
II Content – Still King in Global Media Theme Dynamics and Drivers
Ownership of media content has never been so valuable. The options for monetising
video, audio and written content continue to expand as online business models proliferate.
The rising power of new customers for content (eg. Netflix, Amazon and Spotify), and the
growing viability of direct-to-consumer models, will drive structural growth in the value of
the owners of content IP, in our view, in a diverse range of industries from movies and TV
production to music, publishing (including education) and sports.
The structure of the content value chain
As we show in Figure 30, the content value chain can be split into multiple tiers. The
'macro'-tiers are (i) content ownership, where the right to exploit the IP resides; (ii)
aggregation, where content is bundled into packages; and (iii) distribution, where content
bundles are priced and sold to consumers. 'Micro'-tiers split content ownership into (i)
content originators, i.e. the individuals who create the content; (ii) the type of content, i.e.
audio, written or visual; and (iii) the content units, i.e. the smallest consumable unit of the
content. Aggregators are split into (i) primary aggregators, which create the consumable
units of content; and (ii) secondary aggregators, which perform the role of buying content
from others and creating bigger bundles. Finally, in the distribution tier, we distinguish
between (i) the charging and (ii) transmission mechanisms.
Figure 30: Music, TV, movies, written content and sport are the key structural growth areas in the media value chain
Music TVWritten Content Movies Sport
Albums Newspaper, Journal TV channels
DISTRIBUTION Physical purchase SubscriptionDigital purchase
TRANSMISSION Satellite Cable DTTRetail
Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer Consumer
IP Networks Mobile Networks
AGGREGATORS
Labels/Publishers Publishers LeaguesStudios
PlayersActorsAuthorsArtists
CONTENT
CONTENT ORIGINATORS
Tracks Tracks Articles Books Shows Shows Movies Movies Matches MatchesCONTENT UNITS
CONTENT BUNDLES
Free TV /Pay TV channel networksAGGREGATORS
Social Media
Advertising-funded
Source: Credit Suisse research
Media Research
Omar Sheikh
+44 20 7883 8507
Nick Bertolotti
+44 20 7888 4954
29 September 2014
Global Equity Themes 24
Historically, control over media distribution platforms was an insurmountable barrier for
new entrants, and incumbents' control over the route to the consumer was a key driver of
the market capitalisation of traditional media companies. For example, TV broadcasters
(pay and free) had, until the late-1990s, unchallenged control over the distribution of TV
content into homes, thanks to either set-top box infrastructure or broadcasting licences.
Over the last 20 years, rising broadband penetration coupled with ever-increasing
bandwidth into homes have slowly made it possible to deliver video content over IP
networks instead of via traditional satellite and over-the-air broadcast networks. Thus, for
example, challengers to the incumbents in the aggregation and distribution tiers of the TV
value chain no longer have to invest heavily to replicate the route to the consumer – they
can effectively build new business models thanks to the network infrastructure investment
made by others.
While the proliferation of IP networks, whether fixed or mobile, creates opportunities for
new online media business models—like Netflix in TV; Amazon in books, TV and music; or
Apple in music—to disrupt traditional media companies, content creation is 'undisruptable',
in our view. The function of creating audio, written and visual content is unaffected by
changes in aggregation and distribution—the way in which a successful movie or TV show
is made, or how a successful song is recorded, is constant.
Why is it relevant now?
We argue that demand for content grows with the number of aggregators seeking to sign
licensing deals with content owners. The number of aggregators ultimately is driven by
infrastructure—penetration of IP networks and, increasingly, penetration of smartphones.
As we show in Figure 31 and Figure 32, with penetration of the former now well above
80% in most developed countries, and penetration of the latter above 70%, the
infrastructure which drives the development of aggregator business models has achieved
critical mass.
We therefore believe that demand for content from online distributors is entering a period
of potentially accelerated growth in developed markets. As new distributors seek to
acquire differentiated content to drive consumers to their services/platforms, the economic
returns generated by content owners will expand steadily, in our view. We would
particularly highlight the impact of this structural trend in video content and music content,
which has positive implications for movie and TV producers and for music labels.
Figure 31: Smartphone penetration (2013) Figure 32: Internet penetration, developed markets
83%
74% 72%
60%
41%
33%35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
South Korea North America Western Europe Japan China Brazil Global
Smartphone effective penetration % 2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Sweden Neths. Australia USA UK Germany SouthKorea
Japan France Italy Brazil Global
Internet penetration as a % of total population
Source: Gartner, Credit Suisse estimates Source: www.internetworldstats.com
Potential and Limitations
What is the magnitude of the growth potential?
We would calibrate the size of the global content market with reference to the consumer
value of content in each of the four most important content sub-sectors—movies, TV,
music and sport. By this measure, the content growth opportunity is largest in TV, followed
by music and sports.
29 September 2014
Global Equity Themes 25
For movies, total industry revenue globally was just over $90bn in 2013 (see Figure 33
and Figure 34 below), with just under 40% generated in the US. 45% of global revenues
were generated "out of home", ie. at the box office; and 55% "in home", ie. either via
physical DVDs or via subscription pay TV or electronic sell-through/streaming. Growth will
be driven by "in home" exploitation, particularly rising demand for electronic sell-
through/streaming licences. This will partly be driven by higher unit prices, but also by
rising volumes of consumption, in particular driven by emerging mobile platforms.
Figure 33: Global filmed entertainment revenues 2007-
2016E ($m)
Figure 34: Global filmed entertainment revenues 2007-
2016E ($m) by source
0
20,000
40,000
60,000
80,000
100,000
120,000
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
Global filmed entertainment revenues ($m)
0
20,000
40,000
60,000
80,000
100,000
120,000
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
Out-of-home Physical home video Electronic home video
Source: PwC Source: PwC
For TV, industry revenues consist primarily of subscriptions and advertising spend, and
totalled in excess of $450bn in 2013. Within that figure, $240bn was paid by consumers to
distributors (cable and satellite pay TV operators) and $210bn was paid by advertisers to
free TV channel operators. We would highlight that most of the consumer value generated
by pay TV distributors is derived from sports and movie content—but even if we were to
strip out $130bn for that, to avoid double-counting, "pure" TV content (drama,
entertainment, game shows, etc) still generates annual revenues of some $320bn. This
makes the consumer value of TV programming significantly higher than for any other
content, reflecting the huge volume of consumption—for example, on average individuals
in the US and Europe consume over four hours of TV content per day. Growth will be
driven by inflation in pricing, in turn driven by growing demand from online aggregators.
Figure 35: Over $200bn is spent annually by advertisers
to exploit the consumer value of TV content
Figure 36: Current split of TV adspend by territory 2013
-
50,000
100,000
150,000
200,000
250,000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Global TV advertising spending ($m, current prices)
North America33%
Western Europe15%
Central & Eastern Europe
7%
Asia Pacific29%
Latin America14%
Middle East & North Africa1% Rest of World
1%
Source: ZenithOptimedia Source: ZenithOptimedia
29 September 2014
Global Equity Themes 26
Figure 37: Global TV subscription/licence fee revenue by
type 2007-2016E ($m)
Figure 38: Global TV subscription/licence fee revenue by
region 2007-2016E ($m)
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
Subscriptions Public TV license fees Mobile TV
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
North America EMEA Asia Pacific Latin America
Source: PwC Source: PwC
For music, the consumer value is also high, albeit lower than for movies or TV. The
recorded music industry generated $15bn of revenue in 2013 (according to IFPI data);
which rises to $16.5bn if music publishing is included. But if the mix of spending on music
expenditure currently observed in the UK is being replicated globally, the total amount
spent on music content including live performances at concerts is probably well over
double that figure, perhaps reaching $40-45bn. We believe the value of music content will
grow strongly over the next 10 years, driven by increased consumption of music via paid
streaming platforms, including Spotify, Deezer and Beats Music. As we show in Figure 39,
we assume the proportion of adults in developed markets who subscribe to these services
will grow from 5% to 20% by 2025. This will drive 4% per annum growth in revenues for
the industry, but 15-20% per annum growth in EBITDA for the big-label groups, as we
calculate paid streaming revenues generate 40% EBITDA margins vs 34% for digital
downloads and vs 10% for physical.
Figure 39: We assume paid music streaming/subscription
services will increase penetration from 5% in 2014 to 20%
in 2025 in the top 10 global music markets
Figure 40: We expect global paid music
streaming/subscription customers to grow from 14m in
2013 to 148m by 2025 2014 2025
0
20
40
60
80
100
120
140
160
180
2009
2010
2011
2012
2013
2014
E
2015
E
2016
E
2017
E
2018
E
2019
E
2020
E
2021
E
2022
E
2023
E
2024
E
2025
E
Spotify (m) Deezer (m) Other platforms (m)
Source: Credit Suisse research Source: Spotify, Deezer, Credit Suisse assumptions
29 September 2014
Global Equity Themes 27
Figure 41: We estimate paid music streaming subscribers generate 2.4x the annual revenue of "average" physical and
digital download customers; and 3.7x-10.3x the EBITDA contribution
Annual spend
$50.00
Retailer revenue
35%* $14.58
Sales tax
20% $8.33
G&A
18% $4.13
Label revenue
100% $22.92
A&R
33% $7.56
Manufacturing
23% $5.27
Sales & marketing
15% $3.44
Distribution
1% $0.23
Label EBITDA
10% $2.29
Publisher revenue
100% $4.17
Writer royalty
70% $2.92
Publisher G&A
2% $0.08
Publisher EBITDA
28% $1.17
Annual spend
$50.00
Platform revenue
30%** $12.50
Sales tax
20% $8.33
Label revenue
100% $25.00
A&R costs
33% $8.25
Sales & marketing
15% $3.75
G&A
18% $4.50
Label EBITDA
34% $8.50
Publisher revenue
100% $4.17
Writer royalty
70% $2.92
Publisher G&A
2% $0.08
Publisher EBITDA
28% $1.17
Annual spend
$120.00
Platform revenue
30%** $30.00
Sales tax
20% $20.00
Label revenue
100% $60.00
A&R costs
30% $18.00
Sales & marketing
12% $7.20
G&A
18% $10.80
Label EBITDA
40% $24.00
Publisher revenue
100% $10.00
Writer royalty
70% $7.00
Publisher G&A
2% $0.20
Publisher EBITDA
28% $2.80
3.7x
10.5x
PHYSICAL DIGITAL DOWNLOADS PAID STREAMING
* Retailer gross margin; ** Platform share of after-tax spend
Source: Credit Suisse estimates
The majority of the consumer value of sports content can be measured by the amount
raised from selling broadcast rights, the total value of which is in excess of $38bn (see
Figure 42). If the value in direct payments (gate receipts) is added to this, sports content
remains an important part of the media value chain. Revenues generated by owners of
sports content (clubs and leagues) will grow over time as, once again, online aggregators
push up unit pricing, and opportunities to leverage direct-to-consumer grow.
29 September 2014
Global Equity Themes 28
Figure 42: Total annual spend on the top 30 sports leagues is €38bn (2013)
165
166
171
197
201
214
218
276
276
279
283
298
362
385
397
452
508
551
896
919
980
1,300
1,700
1,760
1,900
2,000
2,900
3,667
5,867
6,601
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
Superleague Greece
Tippeligaen
Swiss Super League
Scottish Permier League
Segunda Division
Ligue 2
Chinese Super League
Serie B
Belgian Pro League
Australian Football League
Ukrainian Premier League
Primeira Liga
Major League Soccer
Bundesliga Div. 2
J. League Division 1
Eredivisie
Football League Championship
Süper Lig
Russian Premier League
Campeonato Brasileiro Série A
Nippon Professional Baseball
Ligue 1
Serie A
National Hockey League
La Liga
Bundesliga Div. 1
Premier League
National Basketball Association
Major League Baseball
National Football League
Revenue (€m)
Source: League websites, Forbes, Deloitte, PwC, ESPN
Finally, the value of consumer publishing content remains at very high levels – the total
amount spent globally on consumer magazines, newspapers and consumer/educational
books (cover price and advertising revenues from print and digital product) was $360bn in
2013. However, we are less convinced by the structural growth characteristics of the
industry for two reasons. First, as we show in Figure 43, 93% of global publishing
revenues are generated from print product, which is likely to decline steadily over time as
consumption shifts to digital platforms. The publishing industry therefore has many years
of migration from physical to digital ahead of it, in our view, putting it decades behind other
industries in Global Media; Second, there is less need for consumers to pay for an
aggregation service for magazines, newspapers or books—they simply choose to buy a
particular newspaper, book or magazine, in contrast to TV, movies, music or sports. This
means that the industry is less likely to see competitive bidding for its content from digital
aggregators in future—in other words, one of the key structural growth drivers evident for
other forms of content is likely to be absent for publishing, in our view.
Figure 43: While digital revenues are growing at >20% pa,
print was 93% of global publishing revenues in 2013
Figure 44: Print newspapers are the largest component of
global revenues from the publishing industry
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
Print Digital
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
Magazines - print Magazines - digital Newspapers - print Newspapers - digital Books - print Books - digital
Source: PwC Source: PwC
29 September 2014
Global Equity Themes 29
Companies exposed to the theme
Potential beneficiaries: Owners of movie, TV, music and sports content, eg. movie/TV
studios, recorded music labels; sports leagues, sports clubs.
Potentially adversely affected: Traditional (offline) aggregators of content, eg. DTH satellite
broadcasters; analogue radio stations.
We outline the key players' positioning below, with a summary in Figure 45.
Disney (NR) – Disney owns key movie and TV studio content (Walt Disney Studios, Pixar,
and Marvel Studios), as well as the ESPN cable network and ABC broadcast network. The
company therefore controls some of the most strategically valuable global content assets.
These assets contributed just under 70% of group EBIT in 2013.
Time Warner (NR) – Time Warner's key assets are the Warner Bros. movie and TV
studios and the Turner and HBO cable networks. Networks and Filmed Entertainment
contributed just under 95% of group EBIT in 2013. Post the spin-off of its publishing assets,
the group is a "pure play" content company, with 100% of EBIT coming from its content
assets. On 16 July 2014, Time Warner confirmed that it had rejected a proposal from 21st
Century Fox to acquire all the outstanding shares for 1.531 FOXA shares plus $32.42 in
cash, which valued TWX's equity at approximately $73bn (as at 28 July 2014). On
5 August, Fox announced that it had withdrawn its proposal, citing Time Warner
management's refusal to engage and the negative reaction in the Fox stock price, while
highlighting the "significant strategic merit" of the proposed deal.
Viacom (NR) – Viacom owns the Paramount movie studio and various cable networks,
including MTV and Nickelodeon, which are distributed by pay-TV platforms globally.
Viacom's content assets contributed close to 100% of group EBIT in 2013.
21st
Century Fox (NR) – Fox owns the Twentieth Century Fox studio, the Fox broadcast
network, various cable networks and a 39% stake in UK pay TV platform BSkyB. On 25
July 2014, Fox confirmed that it will transfer its 100% ownership in Sky Italia and its 57%
interest in Sky Deutschland to BSkyB for a total of $9.3bn before tax, which effectively
reduces Fox's exposure to distribution and increases its exposure to content. On 16 July
2014, Fox confirmed that it had approached Time Warner about combining the two
companies, which would have moved the group further towards being a "pure play"
content company. On 5 August, Fox withdrew its proposal.
Sony (OP, TP ¥2,600) – Sony owns Sony Music, the world's second largest recorded
music group. While the EBITDA contribution of Sony Music to the group is low currently
(<20% of EBITDA), we believe its value could rise from around ¥500−600/share to ¥700-
900/share, equating to 35-45% of the group's market value. We expect the stock market to
remain concerned about downside from smartphone and TV operations over the near term,
but the share price has already reached levels that we believe price in asset-impairment
writedowns for goodwill and intangible fixed assets.
ITV (OP, TP 250p) – ITV owns the largest commercial TV studio in Europe, ITV Studios,
which represents 25% of group EBITDA. We value ITVS at £3bn, which leaves the
broadcasting and online assets trading at just 10.1x 2015 EV/EBITDA, on our forecasts
(as at 2 September 2014). ITVS specialises in Drama and Entertainment programming—
after a period of investment under new management, the content pipeline has been
replenished and demand for this type of content is robust, driven by traditional
broadcasting customers globally and online aggregators.
Vivendi (RESTRICTED) – Owner of Universal Music, largest recorded music group.
29 September 2014
Global Equity Themes 30
Figure 45: Stocks exposed to the Content theme
Positive
Company Ticker Rating Region Exposure to the
theme
Explanation
Disney DIS.N NR US High Owner of Disney and Pixar studios, ABC, ESPN networks
Vivendi VIV.PA RES Europe High Owner of Universal Music, largest recorded music group
Time Warner TWX.N NR US High Owner of Warner Bros studio, and HBO cable network
Viacom VIAB.N NR US Medium Owner of Paramount Pictures and various cable networks
21st Century Fox FOX.N NR US Medium Owner of Twentieth Century Fox studio, Fox network
ITV ITV.L O/P Europe Medium Owner of ITV Studios, largest European TV studio
Sony 6758.T O/P Asia Pacific Medium Owner of Sony Music, second largest music label
Negative
Company Ticker Rating Region Exposure to the
theme
Explanation
BSkyB BSY.L U/P Europe High Aggregator of TV content, faces challenges from online
aggregators
Source: Company data, Credit Suisse estimates for rated companies
Figure 46: Content – Still King in Global Media – Relevant research
Report Date Highlight
Agencies - The Digital Transition 18-Sep-14
The consensus on programmatic buying : Agencies should be net beneficiaries; digital should be a positive for the Agencies; Technology is increasingly important but message/creativity/content, core competences of Agencies, still dominate – even more so in the viral digital age.
Global Media - Fox/Time Warner - building scale in content
17-Jul-14
We outline our initial assessment of the proposed acquisition of Time Warner by 21st Century Fox. While no negotiations are ongoing between the two companies, and it remains possible that no deal will take place, we believe the proposal itself illustrates the growing strategic value of content assets. This has positive implications for all owners of TV networks, TV studios and movie studios, in our view.
Global Music - Dancing to a New Tune 25-June-14 We analyse how the rapid shift in music consumption towards paid streaming will drive a period of structural growth in the industry and refocus investors on the value of owning music content.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 31
Theme #2 – Demographic demands
Source: Credit Suisse research
III China environment
Environmental issues have become a top priority in China since 2013, triggered by the
rapidly deteriorating air and water quality, as well as rising public demand. Through 2014,
a series of policy announcements, disclosures and corporate actions have underlined our
conviction that we are seeing real change in China and a growth opportunity for investors
through the remainder of the decade. Even though the China economy may be running at
a slower growth rate, we see robust waste treatment and EPC demand growth in China,
as both collection and treatment rates catch up and its share of FAI increases.
IV Themes in Healthcare
The single largest pharma category today is oncology (cancer) accounting for c $95bn of
sales (9% of the 2013 global pharma market). Current treatment options are limited for
many cancers with drug regimes often offering only limited longevity for common cancers
such as lung and colorectal. The incidence of many cancers is age and lifestyle related.
With baby boomers ageing and rates of diagnosis increasing, new medicines which could
transform cancer treatment outcomes have the potential to significantly drive oncology
drug sales growth over the next few years.
V Ageing in emerging markets
Projections from the UN suggest that the population of emerging markets (EM) is set to
age much more rapidly over the next 20 years than that of developed markets (DM). The
share of the population aged over 65 will remain much higher in developed markets.
Specific industry plays on this theme include life insurers, asset managers and cosmetic
companies.
29 September 2014
Global Equity Themes 32
III China environment – real efforts and real moves Theme Dynamics and Drivers
Environmental issues have become a top priority in China since 2013, triggered by the
rapidly deteriorating air and water quality, as well as rising public demand. Since our first
study on the sector China Environment Sector: The start of “green” cycle, December 2013,
further policy announcements, disclosures and corporate actions have only served to
underline our conviction in this theme. Over the coming 5-7 years, despite the China
economy likely running at a slower growth rate, we see robust waste treatment and EPC
demand growth in China, as both collection and treatment rates catch up and as its share
of FAI is rising. Moreover, while the industry is fragmented, we see emerging large players,
especially waste treatment operators, driven by demand growth, M&A activities, and
higher scale and standards requirements. We see strong earnings potential for the
companies in this space.
Figure 47: Growth and contribution to growth – China fixed asset investment by sector
-5%
0%
5%
10%
15%
20%
25%
30%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14-QTDInfra-transport Infra-others Property Manufacture Environment Others
Contribution to FAI growth (%)
5%
10%
15%
20%
25%
30%
35%
2004
A
2005
A
2006
A
2007
A
2008
A
2009
A
2010
A
2011
A
2012
A
2013
A
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
Jul 1
4
FAI ENV
Growth YoY (%) FAI and investment in environment growth yoy (%)
Source: CEIC, Credit Suisse estimates
China’s air pollution levels remain high and have been deteriorating rapidly. 95% of key
cities in China reported PM2.5 beyond the Chinese limit of 35µg/m³ in 1H13. Water and
soil pollution are even worse due to industrial discharges, heavy use of fertilizers and
lagged waste collection and treatment. Soil data used to be limited before but recently the
Chinese government published the first soil pollution report, which stated that 16.1% of the
country’s soil is polluted. The key now is that the government is taking serious steps to
address these issues. Figure 48 details the targets consistent with China’s most recent
five-year plan.
The government is making an effort to control air pollution and executing more stringent
emission standards on major emission resources such as power, steel, cement, industrial
boilers, fuel and “yellow labelled” vehicles which may be small in volume, yet big in
emissions while also prioritising clean energy substitution such as coal by gas in key
regions where “environment carrying capacity” is limited. Importantly, more effort is going
into enforcement, a historical weakness. More effective monitoring systems are being
implemented, and regulatory and legal changes are increasing the liability of managers
and corporates. We believe that air emission reduction could potentially reach 40-55%
from the 2011 level in major pollutants in an optimistic case.
China Environment
Research
Trina Chen
852 2101 7031
Joy Zhang
+852 2101 7083
29 September 2014
Global Equity Themes 33
For waste water and solid waste, we believe demand for treatment will continue to grow as
a result of rising waste generation from urbanization, consumption upgrades, and catch-up
in waste collection and treatment rate. We would note that as impressive as the growth
rates in Figure 47 are, where waste is concerned, this isn’t the end of the story with 63% of
the potential waste water treatment market and 74% of the municipal solid waste
treatment market still untouched, on our estimates.
As far as the big picture is concerned, we would stress that much has taken place in
recent months, including major revisions on legislation such as China Environment Law
(first time in 25 years), changes in "key performance measures" for local government
officials with quantifiable points relating to environment effort, and upgrades of emission
standards in many key industries for both waste generators and waste treatment operators.
We believe the trend will continue in the coming years in terms of further refining of
regulations, and the financial framework for the industry to manage more and sustainable
waste management.
Figure 48: China’s 12th
-five-year plan target on environment
2010A 2015E Chgs
Total COD emission m tonnes 25.5 23.5 -8%
Total ammonia nitrogen emission m tonnes 2.6 2.4 -8%
Total SO2 emission m tonnes 22.7 20.9 -8%
Total NOx emission m tonnes 22.7 20.5 -10%
% of surface water with grade V quality (poor) % 18% <15% -3%
% of 7 surface water systems with grade III quality of better % 55% >60% 5%
% of cities with air quality better than grade 2 % 72% ≥80% 8%
12th five year planned investment - planned Rmb bn 1,375 3,400 147%
12th five year planned investment - spent Rmb bn 2,160 5,000 131%
Central government funding Rmb bn 150 510 240%
Water – 1st draft Rmb bn 635 1,100 73%
Water – revised Rmb bn n.a. 2,000 n.a.
Air emission (2013-2017E) Rmb bn n.a. 1,747 n.a.
Hazardous solid waste Rmb bn 7 26 270%
Wastewater-capacity m t/day 125 208 66%
Wastewater-collected bn m3 45.1 66.2 47%
Wastewater-treated bn m3 35.5 55.9 57%
Wastewater-utilization % 78% 82% 4%
Wastewater pipeline k km 166 325 96%
Wastewater-collection rate % 63% 84% 19%
Wastewater-treatment rate % 79% 84% 6%
Sludge-wet m t 20.4 32.1 57%
Sludge-treated m t 5.1 22.5 339%
Urban domestic waste-collection m t 158.0 324.9 106%
Urban domestic waste-incineration m t 23.2 111.3 380%
Hazardous solid waste m t 15.9 65.0 310%
Source: Environment 12th FYP, Credit Suisse estimates
29 September 2014
Global Equity Themes 34
Figure 49: Domestic solid waste – strong growth driven by collection and treatment
2.01.8
1.61.3
1.6 1.5 1.5 1.5
1.00.7 0.7
1.1
2.0
1.2
0.0
0.5
1.0
1.5
2.0
2.5U
S-2
010
US
-198
0
US
-197
0
US
-196
0
Ger
man
y
OE
CD
aver
age
UK
Fra
nce
Japa
n
Bra
zil
CN
-urb
an(2
010)
CN
-urb
an(2
015E
)
Cn-
urba
n(2
020E
)
CN
-avg
(202
0E)
Domestic solid waste generation/collection per capita (kg/day)
Incineration
Landfill
Other treated
Untreated collection
0
100
200
300
400
500
600
700
800
900
1000
2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Annual municipal solid waste collection/treated (mn t)
Uncollected-uaban
Uncollected-rural
Source: Company data, Credit Suisse estimates
Figure 50: Population with access to water – China Figure 51: Domestic water consumption – China
322381
425 450482
91118
141156
229
117
131
187
281
386
0
200
400
600
800
1,000
1,200
2006 2010 2015E 2020E 2030E
Cities Counties Towns
Population with water supply- China (mn)
0
10
20
30
40
50
60
70
80
2006 2010 2015E 2020E 2030E
Cities Counties Towns
Annual domestic (household only) water consumption - China (bn m3)
Source: MOHURD, Credit Suisse estimates Source: MOHURD, Credit Suisse estimates
Figure 52: The long-term story about China’s waste treatment market
Urban treated-
201231%
2012-15E added
treatment6%
Rural LT potential
49%
China waste water treatment market - LT view
Urban untreated as of 2015E14%
2012-15E added
treatment14%
Urban-untreated as 2015E
1%
Rural LT potential
49%
China municipal waste treatment market - LT view
Urban collected/treated-201211%
Urban consumptionupgrade25%
Source: Environment 12
th FYP, Credit Suisse estimates
29 September 2014
Global Equity Themes 35
Water stress-scarcity cost
We take the water sector as an example of changes on the ground. See our August 2014
report, China Environment Sector – Water: Scarcity costs.
China's water stress is about the fundamental mismatch between resources (7% of global
total) and withdrawals (16% of global total), on both aggregate and regional bases.
China's withdrawal-to-resource ratio averages 22% but mostly is over 50% in the north,
versus the conventional 20% stress threshold. In fact half of China's population lives under
"very high water stress" with 15% of resources, serving 50% of demand, and generating
60% of China's GDP. And the stress is building up: we estimate the average withdrawal
will rise further by 12% in the north by 2030E. Pollution-led deterioration in water quality
exerts further pressure - the sub-class III ground water increased from 61% in 2006A to
76% in 2012A, effectively reducing resources by nearly 3%, on our estimates.
Regardless of stressed resources, water demand will continue to grow in China, and we
expect it to increase from 618bnm3 in 2013 to 649bnm3 in 2020E and 700bnm3 in 2030E,
driven by rising demand from domestic and industrial sectors, while agriculture has to give
way. We believe China's water efficiency is already in good shape, as reflected in its water
consumption for industrial output (38t/US$1000) as well as high irrigation efficiency
(0.52x), suggesting that further improvement would be moderate.
The rising marginal cost of alternative water supplies for China, along with the sub-peer
investment return in water supply/treatment, requires fundamental changes in the
country's water sector. We estimate that sustainable water management measures in
China will take the average municipal water tariffs from the current level of Rmb2.8/t (all in
water supply and waste water treatment tariffs) to Rmb7.0/t. The price hikes will need to:
(1) cover higher costs for incremental yet more expensive water supplies such as recycled
and desalination water (with a higher cost of Rmb0.5-4.1/t), (2) finance the massive south-
north water diversion (with raw water at Rmb1.4-3.3/t higher than the current level), (3) fix
the pipeline leakage and expand network infrastructure, (4) cover the higher operating cost
of water plant upgrades, and (5) provide better return incentives to water operators to
invest capital in continuous expansions and upgrades.
We see higher tariffs and improving returns for water operators in the coming years. We
estimate that a 2-4% EBITDA/capex improvement, combined with a Grade I-A upgrade,
will boost unit EBITDA by Rmb0.2-0.3/t, or 70-110. Tap water suppliers should see more
improvement. While privatisation of pipeline assets may look remote and challenging, the
potential impact could double the addressable market/asset and profit for water operators,
in our view.
29 September 2014
Global Equity Themes 36
Figure 53: Annual freshwater resources – China vs peers Figure 54: Annual freshwater withdrawals – China vs
peers
ROW51.0%
Brazil 12.8%
Russia 10.2%
Canada 6.7%
US 6.7%
China 6.6% N. Africa
0.5%India 3.4%
Japan 1.0%
France 0.5%
UK 0.3%
Germany 0.3%
Israel 0.0%
World annual freshwater resources (2012A)
ROW35.8%
India 19.5%
China 15.7%
US 12.3%
N. Africa 7.9%
Japan 2.3% Russia
1.7%Brazil 1.5%
Canada 1.2%
Germany 0.8%
France 0.8%
UK 0.3%
Israel 0.1%
World annual freshwater withdrawals (2011A)
Source: World Bank, Credit Suisse estimates Source: World Bank, Credit Suisse estimates
Figure 55: Deteriorating water quality – China Figure 56: Nearly half of the municipal water is leaked out
42%
50%
61%
33%
56%
76%
0%
20%
40%
60%
80%
100%
River Lakes Ground
2006A 2012A
Water quality - sub-Grade III (%)
Leaked supply11%
Consumed-not collected
26%
Consumed-collected-not
treated13%
Consumed-treated45%
Consumed-treated-recycled
5%
Municipal water supply, consumption and treatment-China (2010A)
Source: MOEP, Credit Suisse estimates Source: Company data, Credit Suisse research
Figure 57: Average domestic water tariff versus PDI – China versus peers
7.8
4.3 4.2
3.9
3.8
2.8 2.72.2 2.2
1.8 1.8 1.7 1.5
0.7 0.7 0.60.4 0.2
1.1%0.8%
2.2%
1.2%
0.7%
2.7%
1.6%1.5%
1.0%
1.3%1.4%
1.9%
1.2% 1.1%
0.5%0.4%
0.7%
-1.0%
0.0%
1.0%
2.0%
3.0%
-
2.0
4.0
6.0
8.0
Den
mar
k
Ger
man
y
Aus
tral
ia
Fra
nce
UK
Can
ada
US
Pol
and
Japa
n
Spa
in
Por
tuga
l
Tur
key
Italy
Rus
sia
S K
orea
Mex
ico
Chi
na
Indi
a
Water supply tariff Wastewater tariff % 2013 PDI
Average domestic tariffs (US$/m3) As% of PDI 2013A (%)
Source: OECD Global Water Tariff Survey 2010, Credit Suisse estimates
29 September 2014
Global Equity Themes 37
Figure 58: Industrial water tariffs versus industrial value added – China versus peers
1.7 1.7 1.6 1.6 1.5
1.31.1 1.1 1.1 1.1
1.0
0.6 0.60.5
1.5%
3.8%
0.7%
4.1%
0.5%
5.5%
2.1%
4.4% 4.4%
2.5%
2.0%
4.0%
0%
2%
4%
6%
8%
-
1.0
2.0
3.0
4.0
UK
Tur
key
Aus
tral
ia
Can
ada
Hun
gary
Por
tuga
l
Gre
ece
Net
herla
nds
Spa
in
Aus
tria
Fra
nce
CN
-201
1A
CN
-202
0E US
Industrial&comm Water tariff in % of 2011 industry value added (%)
Average Industrial water tariffs (US$/m3) Industrial water tariff versus industry value added (2011A)(%)
Source: OECD Global Water Tariff Survey 2010, World Bank, Credit Suisse estimates
Figure 59: Upgrade of municipal waste water treatment capacity – China
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
40
80
120
160
200
240
280
320
2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Grade I-A Lower grades Grade I-A in total
Municipal waste water treatment capacity by grade - China (mn t/day) Grade I-A in total (%)
Source: MOHURD, Credit Suisse estimates
Figure 60: Water tariffs in China – now and the future
WS-current
WWT-current
Higher return-WS
Higher return/upgrade
-WWT Sludge
Pipelines
Secondarywater supply-cost based
Secondary water supply-return based
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Water tariff (Rmb/t)
Current tariff level
Sustainable water management measures
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 38
Potential and Limitations
Potential
Within the China environment sector, our preference for segments is based on market size
and growth outlook, but most importantly project economics/return in EBITDA/capex and
its sustainability and trend ahead. We view the water sector as the most defensive among
all environment services segments in China. Despite slower growth than others, risk on
return and margin are on the upside, with potential to beat growth expectations on the
back of potential inclusion in other water-related assets and M&A activities.
The water sector is one of the few sectors in the China environment space where China's
project EBITDA/capex is lower than global peers', suggesting upside risk, in our view. We
estimate that a 2% increase in return will boost unit EBITDA by 29%, all else being equal.
Specifically, we expect waste water unit EBITDA improvement to be driven by both margin
and plant upgrades. Tap water should see higher margin upside, due to overly depressed
returns (lowest in the water sector)—although unit EBITDA improvement should come
close to that of waste water, given no upgrade requirement.
In terms of market size, while growth of the Chinese water sector—single-digit CAGR in
the intrinsic market—may not compete with industrial hazardous waste treatment/disposal
or the MSW incineration segment, and the potential addressable asset base for water
operators could more than double, underpinned by asset upgrades, pipeline network
privatisation, and inclusion of sludge treatment assets.
Figure 61: Unit EBITDA/CAPEX versus market growth by segment – China and peers
WWT
MSW-landfill MSW-WTE (mechanical)
MSW-WTE (fluidized)
MSW-cement
MSW-ADT
MSW-applianceSludge
IW-HWT
IW-recycling
IW-WWT
WWT-global
HWT-global
WTE-global
WS
WS-global
WS-CN avg0%
5%
10%
15%
20%
25%
30%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Avg project EBITDA/CAPEX (%)
Sector potential demand growth CAGR 2012-2020E (%)
IW-HWT-cement (>100%)
Source: Company data, Credit Suisse estimates
The waste water industry is fragmented and is generating returns at the low end in China,
but we see emerging large players driven by accelerated M&A activities. Figure 64 shows
the major waste water operators’ recent acquisitions. While there can be risk of overpaying
as M&A heats up, acquisition prices (EV/capacity) so far are similar to the replacement.
With the support of strong financial ability and government relationships, large SOEs have
tended to expand more quickly and gain market share in recent years through M&A, such
as BEW, SIIC Env and Beijing Capital.
Limitations
Environment investment and requirement can have an adverse impact on cost and growth.
The risk to China's environment sector may come with any disruption in the country's
economy, in which case policy may have to take a pause. Local government financial
health will also impact the treatment charge payment for municipal waste.
29 September 2014
Global Equity Themes 39
Figure 62: Capacity and earnings growth outlook—major
China water peers
Figure 63: Improving return outlook – Average ROE and
EBITDA/capex for China waste water industry
0%
10%
20%
30%
40%
50%
60%
-
5.0
10.0
15.0
20.0
25.0
30.0
BEW SIIC Env Sound Global GD Inv BJ Capital TJ Capital
2013A capacity 2017E Capacity NP CAGR EPS CAGR
Year end capacity (mnt/day) Earning growth CAGR (2013-2017E) (%)
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2020E
EBITDA/ASSET ROEWW industry average ROE and EBITDA/Asset (%)
Source: Company data, Credit Suisse estimates Source: CEIC, Credit Suisse estimates
Figure 64: Selected M&A activities in waste water treatment
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2006
Apr
-07
Mar
-08
Aug
-08
Sep
-08
Sep
-08
Oct
-08
2009
Sep
-11
Jun-
12
Feb
-13
May
-13
Jun-
13
Sep
-13
Sep
-13
Feb
-14
Mar
-14
Jun-
14
Jun-
14
Implied EV/capacity-day (Rmb/m3)
Source: Company data, Credit Suisse estimates
Global names in China
We believe growth in the Chinese environmental sector also provides opportunities for
global companies, with most benefit likely for equipment/EPC companies. Given the
localised nature of waste treatment, global operators' presence in China would be limited,
in our observation, mostly in the form of local JVs. Global EPC companies have a unique
position in China.
On equipment and EPC, we note meaningful presence at Chinese water plants:
■ Asahi-Kasei (membrane)
■ ITT Corp (pumps for waste plant)
■ Siemens Turbo (air blower)
■ Andritz (dehydration equipment)
■ ABB and Schneider Electric (frequency conversion equipment)
■ HACH, a major subsidiary of Danaher (online monitoring system)
Global established environment operators such as Veolia China and Suez China also
have operations in China. We estimate Veolia operates 2.7mt/day water assets and Suez
6mt/day, accounting for 6% of China's market shares. Veolia Environment entered the
Chinese market as early as the 1990s and has two main sub-branches, namely Veolia
Water and Veolia Environmental Services. Veolia Environment operates nearly 30 projects
29 September 2014
Global Equity Themes 40
including landfills, methane to power, hazardous waste treatment centres, WTE plants and
municipal waste cleaning services, while Veolia Water operates in half of the 34 provinces
and provides both municipal water/sewage treatment and industrial water/sewage
treatment services.
Suez China operates its China business through three subsidiaries—Degremont, SITA
Waste Services Ltd. and a JV between Sino-French Holdings and NWS Holdings Ltd.
Degremont provides water treatment solutions and services to municipalities and various
industrial customers. Degremont entered China as early as the 1970s and has signed
more than 200 projects including municipal water supply, wastewater, industrial water
supply and sewage treatment. SITA Waste Services specialises in waste management. It
designs, builds and operates a 60,000tpa HW incineration plant for Shanghai Chemical
Industry Park, which is a pioneer for China in terms of size and technology. Sino French
Water is a JV between Suez Environment and NWS Holdings Ltd of Hong Kong. Since its
establishment in 1992, Sino French has been active in China's water industry and
operated around 30 projects including water production, industrial water treatment,
sewage treatment and sludge treatment. As the CEO of Sino French said at a recent
conference: "We never gave up in bad times, and will never get carried away or be too
aggressive in good times."
Figure 65: Revenue exposure to China/ Asia
Source: Company data, Credit Suisse research
Companies exposed to this theme
Our stock preference is for waste treatment operators, with exposure to solid waste
segments, and/or strong consolidators in the waste water segment. The flip side of the
environmental effort is the higher costs of waste generators, with losers tending to be the
ones with poor S/D where it is difficult to pass on the higher environment costs.
BEW (0371.HK) – Fundamentals of the company remain intact with most M&A on track in
1H14. BEW has signed over 0.9mt/day new capacity YTD and believes 2mt/day new
addition target can be achieved. With much of 2013 acquired assets consolidating in
1H14E, we estimate that the existing project pipeline can support 50% treatment volume
growth in 2014. Besides, existing pipeline projects should be able to boost capacity by
80% from 2013A to 2015E. We believe the company will continue to benefit from a solid
uptrend from the industry.
SIIC Env (SIIC.SI) – We expect the company to expand water capacity from 3.9mt/day in
2013A to 10.2mt/day in 2017E. Potential parent asset injections could add a further 4.3mt,
implying a 27-39% CAGR. With gearing currently at 22% on our estimates, SIIC is better
prepared for stronger growth than peers, in our view. On an ex-construction income basis,
the stock is on a par with BEW on 2014E (30x), yet becomes more attractive as operations
ramp up (2016-17E P/E is 10-16x, or a 25-40% discount to BEW).
Dongjiang (0895.HK) – Dongjiang should also benefit from strong growth in hazardous
waste treatment. Earnings growth is expected to reach 15% for 2014E and 75% for 2015E.
29 September 2014
Global Equity Themes 41
Based on organic expansion projects on hand, we expect industrial waste treatment
volume tripling from 402kt in 2013A to 1,349kt in 2016E. Although the tightened regulatory
focus led to higher treatment costs in 2H13 due to the higher discharge standard, we
believe margins bottomed in 2H13 as Dongjiang will gradually pass through the cost hike
to downstream industrial customers.
CEI (0257.HK) – Following industry consolidation trends, CEI recently announced the
proposed acquisition of Hankore and aims to inject CEI’s own wastewater assets in
exchange for 79% of shares in the enlarged company. Besides, China recently revised
waste incineration emission standards and this will lead to higher capex and operating
costs (a potential Rmb50-60/t cost increase for low-end incineration operators). On a
relative basis, big operators should benefit, in our view.
Figure 66: Selected stocks exposed to the China Environment theme
Beneficiaries
Company Ticker CS Rating Region Exposure to the theme Explanation
Beijing enterprise
water
0371. HK O/P China High Strong consolidator in the waste water
segment, solid management team also with
operational focus
SIIC Environment SIIC.SI O/P China High Right ingredients to capture the sector’s
growth, potentially the strongest growth profit
among peers in China’s water sector
China Everbright
International
0257.HK O/P China High Highest exposure to WTE segment. Further
upside from incineration equipment and
HWT.
Dongjiang 0895.HK O/P China High Established player in hazardous waste
treatment segment, strong growth set to
come to meet demand in 2015-2016E
Sound Global 0967.HK O/P China Medium Established water EPC player and emerging
waste water BOT operator, should benefit
from China's waste water market expansion.
Uniquely positioned for higher growth in small
town/waste water market.
BJ Capital 600008.SS O/P China Medium Diversified player in the Chinese municipal
waste water market, with exposures in waste
water, tap water supply and solid waste
treatment.
Adversely impacted
Company Ticker CS Rating Region Exposure to the theme Explanation
Chinacoal 1898.HK U/P China high High-cost producer as the coal market moves
to severe oversupply, partly due to China
coastal regions' efforts in cutting coal
demand
Source: Company data, Credit Suisse estimates
Figure 67: China environment – real efforts and real moves – Relevant research
Report Date Highlight
China Environment Sector: Ideas Engine - Water: Scarcity Costs
18-Aug-14
The rising marginal cost of incremental water supplies in China, in the context of heightened water stress, along with the depressed investment return in water supply/treatment, requires fundamental changes in China's water sector. Beyond the volume growth story, we expect higher tariffs and improving returns for water operators in the coming years.
China Environment Sector: Refining policy, higher demand and standards
26-May-14 We highlight feedback from our recent China Environment Conference and trip, from companies and industry contacts in waste water, municipal solid waste, industrial waste, EPC and equipment, as well as government policy and regulators.
China Environment Sector: Time to look at soil pollution: Industrial waste treatment to benefit
21-Apr-14
We believe the Chinese government's publication, “National Soil Pollution Survey Report”, represents escalated determination of the government in environment clean-up, broadening efforts from just air emission control to water, and now the toughest of all—soil.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 42
IV Growth in healthcare Theme Dynamics and Drivers
Immuno-oncology – an emerging $25bn market
The topic of healthcare is relevant to a wide range of investment themes, not least the
emerging world as discussed elsewhere in this report. However, here we have chosen to
focus on a therapeutic rather than a regional /demographic driver of growth: immuno-
oncology.
The single largest pharma category today is oncology (cancer) accounting for c $95bn of
sales (9% of the 2013 global pharma market). Current treatment options are limited for
many cancers with drug regimes often offering only limited longevity for common cancers
such as lung and colorectal. The incidence of many cancers is age and life-style related.
With baby-boomers ageing and rates of diagnosis increasing, new medicines which could
transform cancer treatment outcomes have the potential to significantly drive oncology
drug sales growth over the next few years.
If new cancer therapies emerge, a blue sky scenario could see oncology demand growth
of between 20% and 100%. This has the potential to drive significant earnings growth for
companies with oncology exposure. The key question is whether any such emerging
therapies with transformative patient outcomes exist. We believe that the emerging field of
immuno-oncology has this potential.
Cancer is a disease in which normal cells become 'abnormal' through the accumulation of
genetic alterations and loss of orderly regulatory controls. When this happens, cells do not
die when they should and new cells form when they are not needed. Cancer cells can
divide without control and are able to invade other tissues of the body. It should be the
responsibility of the immune system to recognise and eliminate cancer cells. However,
cancer cells that may be destroyed in the early stages of cancer by the immune system
('elimination' in Figure 68) may manage to evade the body's immune system over time,
allowing them to multiply in an uncontrolled manner (move from 'equilibrium' to 'escape' in
Figure 68).
Figure 68: The body's immune system and cancer in balance
Elimination Equilibrium Escape
Normal cellsCancer
transformation
CancerImmune system
Cancerwins
Immune system wins
CD8+
T cellCD8+
T cellCD8+
T cell
CD4+
T cell
CD4+
T cell CD4+
T cell
CD4+
T cell
CD8+
T cell
NK
cell
NK
cell
NK
cell
Dendritic
cell
Dendritic
cell
Dendritic
cell
Normal cell
Immunogenic
tumour cell
Immunoevasive
tumour cell
LEGEND
Immune-system cells
Source: Adapted from Schreiber, Science 2011 & Tenget al 2013
Pharmaceuticals
Research
European Pharma Team
+44 20 7888 0304
creditsuisse.pharmateam@credit-
suisse.com
29 September 2014
Global Equity Themes 43
Recent advances have been made in the scientific understanding of the molecular
mechanisms by which tumours evade the immune system. This has allowed the
development of drugs which aim to reactivate the immune response and effectively lead
the body's own immune system to fight the cancer. These drugs fall into two categories:
■ Removing the brakes on the immune system. Cancers have been shown to 'hijack'
the body's own inhibitory pathways that ensure the immune system does not attack its
own 'self' tissue.
■ Accelerating the immune system.
Stimulatory and inhibitory factors are involved at multiple stages of the cancer immunity
cycle (see Figure 69). With multiple pathways of communication between cells any one
approach may not be enough and the current expectation is that combination treatment
either with more than one immuno therapy agent, or a combination with more traditional
treatments that can arrest the growth of tumour cells will be the most successful .
Figure 69: Cancer Immunity Cycle involves stimulatory and inhibitory factors at each
step
Source: Adapted from Chen & Mellham, Immunity 2013
29 September 2014
Global Equity Themes 44
Potential and Limitations
How big could immuno-oncology be?
In 2013, the worldwide market for oncology drugs generated sales of $91bn. This
represents 9% of the global $965bn annual pharmaceutical market. We estimate that
immuno-oncology could generate incremental revenue of $25bn per annum. This
assumption is based on the treatment of 0.5 million patients each for six months, at a cost
of $8K per month. This price point is in line with modern targeted therapies for cancer,
already approved and reimbursed in the US and RoW (see Figure 70).
We would highlight that this base case could significantly underestimate the market
potential of I-O. Early clinical evidence from immuno-oncology agents has demonstrated a
high durability of responses, with patients living longer than expected. Recent evidence at
ASCO 2014 also highlighted the efficacy of immuno-oncology agents in a broader range of
tumour types than expected. While it is very early to draw conclusions, these two
observations have the potential to increase the market size materially. The treatment of
one million patients for 12 months at a cost of $8K per month would support a market size
of c.$100bn (see Figure 70).
Figure 70: The potential of Immuno-oncology to double cancer sales to $180bn annually
0
20
40
60
80
100
120
140
160
180
200
2013 Base Case 'Blue Sky'
An
nu
al r
eve
nu
e, $
bn
Immuno-oncology
Supportive care
Hormonal
Cytotoxic
Targeted
Source: Company data, Credit Suisse estimates
What are the limitations/risks to the story?
Immuno-oncology is relatively early in development. One agent, Bristol Myers' Yervoy, is
well-established on the market and two further agents—BMY/Ono's nivolumab and MRK's
pembrolizumab—have recently been approved in Japan and the US, respectively. Multiple
agents are in Phase 3 and Phase 2 development. However, the development of all agents
in immuno-oncology has been highly accelerated due to the early signs of their significant
potential. For this reason, the body of evidence on long-term safety and efficacy is less
than we would normally expect for drugs in P3 and on the market. At the current time it is
not known how long a patient might need to be treated for best results, or the most
appropriate combinations.
Secondly, increased demand from new life-extending drugs could add significant price
pressure to the overall industry as government-funded services in many countries could
not absorb this level of growth in demand for one type of treatment without effectively
increasing rationing for others. A blue sky scenario would require either a greater
proportion of overall GDP devoted to healthcare, or more likely a redistribution of current
spending towards more unique portfolios of drugs that offer meaningful extension of life.
29 September 2014
Global Equity Themes 45
Companies exposed to this theme
Potential beneficiaries
Figure 72 sets out current Credit Suisse forecasts for immuno-oncology drugs by
company. Key players at the forefront of this technology are Bristol Myers (O/P, TP $59),
Roche (O/P, TP SFR 300), Ono (N, TP ¥8600), Merck & Co (N, TP $59) and AstraZeneca
(N, TP $48). A detailed review of the impact of immuno-oncology is set out in Figure 73.
Bristol-Myers is the most leveraged major pharma to the immuno-oncology (I-O) pipeline,
with potential 16% upside to NPV from full success. We continue to see a very attractive
risk/reward on the stock, driven by long-term pipeline potential.
Roche is the current global oncology leader and although its immuno-oncology assets are
likely to lag BMY in terms of initial market entry, we expect Roche to remain a strong
player as it is most likely that these drugs will be used in combination with other drugs, and
here Roche’s existing market position and breadth of drug approaches suggest that it will
increasingly be recognized as a leader .
AstraZeneca has a number of early immuno-oncology assets, and a heritage in cancer
drug development.
Ono is an originator of PD-1 antibody nivolumab/Opdivo and co-holder of global
intellectual property right of nivolumab. Japan is the first country to approve Opdivo with
melanoma indication. Annual reimbursement price of Opdivo is listed in NHI at Y15million
= $150,000. Ono is also entitled to receive running royalty from BMY global sales of
Opdivo at rate around 10%.
Who are potentially negatively affected given any disruptive impact of I-O?
We see two potential disruptive impacts of immuno-oncology:
(1) Emerging therapies could present direct competitive threats to existing cancer drugs.
The early nature of I-O development means that it is impossible to assess this direct
risk at this time, in our view.
(2) We estimate that the immuno-oncology market could generate annual sales in the
range of $25bn to $100bn. How will governments and commercial payers afford this
incremental annual cost? One option would be for payers to accelerate the adoption of
generic biologics in other areas of oncology or in the broader healthcare market.
Historically, oncologists have been reticent about the use of therapeutic biosimilars for
the treatment of cancer. This may change over time in order to provide the funds to
accelerate the adoption of I-O agents.
29 September 2014
Global Equity Themes 46
Figure 71: Credit Suisse key oncology catalysts
Merck
AZN
Roche
BMY
pembrolizumab, melanoma
65% prob, $1bn peak
olaparib, ovarian cancer
80% prob, $500m peak
mono
RG7446, lung cancer
60% prob, $2bn peak
Pivotal trial starts
Pivotal DATA
Launch
2014 2015 2016 2017
P2 mono PDL1+
3 Oct (PDUFA)
P3 treme combo
RG7446, bladder cancer
30% prob, $500mn peak
nivolumab, lung cancer
70% prob, $4bn peak
nivolumab, melanoma
75% prob, $2.5bn peak mono & combo
FDA approved
tremelimumab, mesothelioma
60% prob, $200m peak
MEDI4736, lung cancer
40% prob, $2bn peak
P3 Yervoy combo
pembrolizumab, head&neck
30% prob, $500m peak ???
mono & combo
AZD9291, lung cancer
30% prob, $500m peak
pembrolizumab, lung
50% prob, $2bn peak
nivolumab, renal and H&N
70% prob, $1bn peak
30 Oct – 1 Nov
???
Source: Company data, Credit Suisse research
Glo
ba
l Eq
uity
Th
em
es
47
29 S
ep
tem
ber 2
01
4
Figure 72: Credit Suisse estimates for immuno-oncology drugs
Source: Company data, Credit Suisse estimates from 2014
Status
Dev 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Yervoy Bristol Myers 100% Cancer Anti-CTLA4 mAb US M 75% 2011 502 577 806 900 1,100 1,266 1,467 1,658 1,790 2,000 2,000
ipilimumab Bristol Myers 100% exUS M 75% 2011 204 383 727 867 967 1,033 1,133 1,280 1,383 1,450 1,450
CP-675206 Pfizer 20%, AstraZeneca 80% Cancer- combo Anti-CTLA4 mAb WW P1 10% 2018 100 250 375 499 1,000
tremelimumab Pfizer 20%, AstraZeneca 80% Cancer-mesothelioma Anti-CTLA4 mAb WW P2 60% 2017 0 0 0 0 0 50 125 144 180 207 300
NHS-IL12
Merck KGaA 100%
Cancer Anti-IL12 mAb
WW P1 5% 2020 0 0 100 250 1,000
NHS-IL2
Merck KGaA 100%
Cancer Anti-IL2 mAb
WW P1 5% 2020 0 0 100 250 1,000
MEDI6469
OX40 AstraZeneca 100%
Cancer - solid tumours Anti-OX40 mAb
WW P1 10% 2019 0 200 500 750 2,000
RG7446
MPDL3280A Roche 100%
Cancer - lung, bladder, other Anti-PD-L1 mAb
WW P3 40% 2016 150 400 800 1,000 1,200 1,440 3,000
MEDI4736
MEDI-4736
AstraZeneca 100%
Cancer -
lung/renal/CRC/melanoma
Anti-PD-L1 mAb
WW P1 40% 2017 0 100 300 600 798 1,061 3,000
AMP-224
AMP 224
Cancer Anti-PD1 mAb
WW DS 0% 0 0 0 0
Opdivo Ono 10%, Bristol Myers 90% Cancer - lung Anti-PD1 mAb US P3 65% 2015 231 692 1,231 1,750 2,363 2,599 2,937 3,300
nivolumab Ono 10%, Bristol Myers 90% Cancer - renal Anti-PD1 mAb US P3 65% 2015 23 69 123 175 236 260 281 300
Ono 10%, Bristol Myers 90% Cancer - other Anti-PD1 mAb US P3 65% 2015 92 277 492 700 945 1,040 1,175 1,300
Ono 10%, Bristol Myers 90% Cancer - melanoma Anti-PD1 mAb US P3 65% 2015 115 346 615 875 1,181 1,477 1,595 1,700
Ono 10%, Bristol Myers 90% Cancer - lung Anti-PD1 mAb ROW P3 65% 2015 154 538 846 1,096 1,644 1,808 2,043 2,300
Ono 10%, Bristol Myers 90% Cancer - renal Anti-PD1 mAb ROW P3 65% 2015 15 54 85 110 165 206 223 250
Ono 10%, Bristol Myers 90% Cancer - other Anti-PD1 mAb ROW P3 65% 2015 62 215 338 438 657 723 781 900
Ono 10%, Bristol Myers 90% Cancer - melanoma Anti-PD1 mAb ROW P3 65% 2015 77 269 423 548 822 1,028 1,110 1,200
Ono 90%, Bristol Myers 10% Cancer - lung/liver/renal Anti-PD1 mAb JAP M 100% 2014 45 60 70 90 104 119 131 150
MK-3475 Merck 100% Cancer - melanoma Anti-PD1 mAb US P3 70% 2015 286 929 1,714 2,143 2,679 3,081 3,389 4,000
pembrolizumab exUS F 65% 2015 154 500 1,000 1,385 1,870 2,337 2,571 3,300
MEDI 0680
MEDI-0680 AstraZeneca 80%
Cancer - solid tumours Anti-PD1 mAb
WW P1 10% 2019 0 50 150 375 1,000
MSB0010718C Merck KGaA 100% Cancer - lung Anti-PD1 mAb WW P1 10% 2020 0 0 100 250 1,000
PF-05082566
Pfizer 100%
Cancer CD137 mAb
WW P1 10% 2019 0 1,000 1,000 1,000 1,000
urelumab
BMS-66513 Bristol Myers 100%
Cancer - Melanoma CD137 mAb
WW P2 20% 2019 0 0 0 0 0 0 0 60 150 225 600
IL-21
denenicokin Bristol Myers 100%
Cancer - melanoma IL-21
WW P2 20% 2019 0 0 0 0 0 0 0 15 90 122 200
BMS 986015
lirilumab Bristol Myers 85%
Cancer - AML KIR
WW P2 20% 2019 0 30 90 122 200
BMS 986016
Bristol Myers 85%
Cancer LAG-3
WW P1 10% 2025 0 0 0 0 250
IPH2201
Anti-NKG2A Novo Nordisk 10%, Innate Pharma 90%
Cancer anti-NKG2A mAb
WW P1 5% 2019 0 100 200 300 500
CoStim platform
(CoStim platform) Novartis 100%
Cancer unknown
WW PC 1% 2020 0 0 100 250 1,000
US TOTAL
(PROBABILITY
ADJUSTED)
377 433 605 1,175 2,405 3,864 5,138 6,641 7,596 8,537
EX US TOTAL
(PROBABILITY
ADJUSTED)
153 287 545 995 1,839 2,710 3,527 4,867 5,726 6,365
TOTAL (PROBABILITY
ADJUSTED) 530 720 1,150 2,170 4,244 6,574 8,665 11,508 13,322 14,903
Generic
Entry
End User Sales
Peak
Sales
($m)% Economic
Brand Name
(generic) Indication Mechanism of Action Region Prob
Launch
Date
29 September 2014
Global Equity Themes 48
Figure 73: Stocks exposed to the Healthcare theme
Company Ticker CS Rating Region Exposure to the
theme
Explanation
Bristol Myers BMY O/P US High BMY has the most advanced portfolio in I-O with Yervoy
on the market for melanoma. Nivolumab is also in
development in combination trials with multiple other
agents. BMY also has a broad pipeline of other immuno-
oncology agents in mid- and early development. Credit
Suisse PharmaValues estimates assume $14.5bn peak
sales in immuno-oncology for BMY
Ono 4528.T O/P Japan High In Japan, Ono's lead I-O candidate is Opdivo
(nivolumab), recently approved for the treatment of
melanoma. Ono has a direct interest in Japan and a
royalty on ex Japanese sales by BMY of Opdivo. We
estimate that 40% of Ono's NPV comes from immuno
oncology.
Roche ROG.VX O/P Europe Medium Roche/Genentech is the market leader in cancer today
and a leader in immuno-oncology research. Roche's lead
programme, PD-L1, is in P3 development in lung and
bladder cancer and in P2 combination trials with multiple
other agents. Roche's in-market product, Avastin, may
also have potential in enhancing the efficacy of other I-O
drugs. Data to test this hypothesis should be available
during 2014. Roche also has a broad pipeline of other
immuno-oncology agents in early development. Credit
Suisse PharmaValues estimates assume $3bn peak
sales for PD-L1. Positive combination data with Avastin
could accelerate growth in this $8bn franchise.
AstraZeneca AZN.L N Europe High AZN is a 'fast follower' in immuno-oncology with a broad
portfolio slightly behind the leaders in terms of timing.
AZN is in a good position to develop in-house
combination therapies that may avoid having to negotiate
shared economics. An oncology heritage suggests that
AZN will be able to access the correct opinion leaders
and design smart studies to get to the market as fast as
possible
Merck MRK N US Medium MRK's lead I-O candidate pembrolizumab was approved
in the US in September 2014 for the treatment of
melanoma. Credit Suisse PharmaValues estimates
assume $7.3bn peak sales for pembrolizumab WW.
Source: Company data, Credit Suisse estimates
Figure 74: Growth in healthcare – Relevant research
Report Date Highlight
The Appeal of Consumer Health 18-Jul-14
For our universe, we see historical underlying sales CAGR of only 2.2% rising to 4.8% (2014E-18E) with a recovery from manufacturing issues, product launches and synergies from M&A more than compensating for increasing own brand pressures, particularly in the US.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 49
V Ageing in emerging markets Theme Dynamics and Drivers
Projections from the UN suggest that the population of emerging markets (EM) is set to
age much more rapidly over the next 20 years than that of developed markets (DM). The
share of the population aged over 65 will remain much higher in developed markets than
in emerging markets (24% in DM by 2035, against 11% in EM), but in EM the growth rate
of the older share of the population will be almost double that of DM, with a CAGR of 2.8%
forecast over the next 20 years, against 1.5% in developed markets. The UN estimates
that by 2035, 73% of the world's over 65 year-olds will live in less developed regions, up
from 64% currently.
Looking at the dynamics by country, China, Brazil and Korea are forecast to see
particularly rapid growth of the older share of the population(at around 3.5% CAGR over
the next 20 years, more than double that of DM). In Asia, our Asian healthcare team
highlights Singapore, Thailand and Indonesia as countries that are likely to experience the
most rapid ageing (see ASEAN Healthcare Sector: Close to escape velocity, 29 April
2014).
Figure 75: Developing markets 65+ age group looks set to
grow at twice the rate of developed markets
Figure 76: Brazil, China and Korea will experience
particularly rapid growth in the older portion of their
population
0
5
10
15
20
25
2015 2025 2035
More developed regions Less developed regions
1.5% CAGR
2.8% CAGR
% of population aged 65+
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0
5
10
15
20
25
30
SS
A
DM
Russia
S A
frica
India
Brazil
China
Korea
2015 2035 CAGR (rhs)
% of population aged 65+
Source: United Nations Source: United Nations
We think that there are two major ways to play this theme through the equity market:
healthcare and annuities.
How to play this theme: Healthcare
We believe there will be three principal drivers of rising healthcare spending within
emerging markets. First, the ageing of the population; second, the share of income spent
on healthcare tends to rise as a nation becomes more affluent; and, third, the need for the
governments of emerging economies to enhance their legitimacy by offering a more
comprehensive system of social insurance (particularly in China).
(1) An ageing population
Incidence of illness tends to increase with age, and thus older people spend more on
healthcare. In the case of the US, for example, those aged over 65 spend three times on
healthcare as their 45-64-year-old counterparts Naturally, therefore, given the forecast
Global Equity Strategy
Andrew Garthwaite
+44 20 7883 6477
andrew.garthwaite@credit-
suisse.com
Robert Griffiths
+44 20 7883 8885
Robert.griffiths@credit-
suisse.com
29 September 2014
Global Equity Themes 50
growth in the old age population within emerging markets described above, healthcare
spending within GEMs will accelerate. Currently, expenditure on healthcare within
emerging markets remains half of that in advanced economies, at around 5% of GDP.
Figure 77: Spending on healthcare rises sharply once
people start to age
Figure 78: Healthcare spending as a % of GDP is low in
GEMs
0
2
4
6
8
10
12
14
16
45–54 55–64 65 and over 65–74 75 and over
Percentage of US Total Household Expenditures Spent on Healthcare by Age - 2008
0
1
2
3
4
5
6
7
8
9
10
MENA DevelopingAsia
Sub-SaharanAfrica
Latin America EasternEurope
Advancedeconomies
Public Private
Health expenditure, % GDP
Source: US BEA, Credit Suisse research Source: World Bank, Credit Suisse research
To some degree, one would expect healthcare spending within GEMs to be lower given
that only 6% of the population is aged over 65, compared with around 18% in developed
markets. However, even adjusting for the low proportion of the population over 65,
healthcare expenditure appears low.
Figure 79: Countries with older populations tend to spend a greater portion of their GDP
on healthcare
AustraliaBrazil
Canada
ChinaEgypt
FranceGermany
India
Indonesia
Italy Japan
Mexico
MalaysiaKenya
Nigeria Russia
S Africa
South KoreaTurkey
UK
USA
Switzerland
Spain
0
2
4
6
8
10
12
14
16
18
0 5 10 15 20 25 30
Hea
lthca
re s
pedi
ng, %
GD
P
% of population aged over 65
Source: World Bank, Credit Suisse research
(2) A more affluent population
A necessary condition of increased spending on healthcare is inevitably for the population
of emerging markets to have sufficient income to afford it. In its ASEAN Healthcare Sector
– Close to escape velocity report, our Asian healthcare team cited a World Bank study
which categorises the growth outlook for different consumer product categories by
different income level, suggesting that health care becomes a 'high growth' category when
a country moves to an income level above $10,000 per capita.
29 September 2014
Global Equity Themes 51
Many emerging markets are moving, or indeed have already moved, into the buckets
under which healthcare becomes a higher-growth segment. On a PPP basis, China, Brazil
and Mexico are in the $10,000+ bracket, while India and the Philippines are on the verge
of moving to the $5,000+ bracket, where expenditure on healthcare becomes a medium-
growth category.
Figure 80: Growth potential of consumer product categories at various levels of GDP per
capita
High Medium Low
Below $2,000 Cereals
Two wheelers
Apparel
Meat
Beverages
Health Care
Education
Consumer Credit
Cars
PCs/Laptops
Beauty Products
Tourism
$2,000-$5,000 Meat
Apparel
Beverages
Cars
Cereals
PCs
Education
Health Care
Consumer Credit
Tourism
$5,000-$10,000 Beverages
Cars
PCs
Beauty Products
Education
Meat
Apparel
Health Care
Consumer Credit
Tourism
Cereals
Two Wheelers
$10,000-$20,000 Education
Health Care
Consumer Credit
Beauty Products
Tourism
Cars
PCs
Beverages
Cereals
Two wheelers
Meat
Apparel
Source: World Bank, Credit Suisse ASEAN health care research team, Credit Suisse research
(3) A move towards greater investment in social infrastructure
We believe that within emerging markets there is likely to be a more general shift away
from physical infrastructure towards social infrastructure (China, for example, already has
a road density per capita above that of the US, and an investment share of GDP at 48%).
Such a move would be imperative if the population of emerging markets, especially China,
is to continue to believe that they are participating in the proceeds of growth, upon which
the legitimacy of the government rests.
In keeping with this shift, the Chinese Premier Li Keqiang has this year stated that China
will work to establish a universal and affordable medical insurance system, and will relax
requirements for the private sector to build hospitals. In Indonesia, public health insurance
will be made mandatory, with 60% of the population now covered by public/private health
insurance.
Potential beneficiaries: specific subsectors
■ Generics
IMS healthcare forecasts 4-5% per annum growth in generic drug sales, driven by a
combination of patent expiries, emerging market growth (with 80% of incremental sales in
GEM expected to come from generic drugs) and higher generic penetration rates in Japan
and Europe, where penetration rates are particularly low currently (at around 30%,
compared with 70% in the US).
We believe that the growth rate in emerging markets will be even higher because of the
low price of generic relative to branded drugs. Our Indian Pharmaceuticals analyst,
Anubhav Aggarwal, highlights that generic drugs typically cost 95% less than the branded
29 September 2014
Global Equity Themes 52
alternative in emerging markets, and in India, can be just 1% of the price of the branded
drugs. Among the major listed beneficiaries are Hikma (50% of sales from emerging
markets), Aspen (66%), Mylan (12%), Sun Pharma (40%), Sihuan Pharma (100%) and
Teva (19%). Of the majors, Novartis would also be a beneficiary, but generics represent
only around 17% of their sales.
Our favoured play on this theme is Sun Pharma for three key reasons: first, around a
quarter of its drugs focus on lifestyle diseases; second, it has a portfolio of difficult-to-
formulate generics (where pricing tends to be stronger); and third, they are market leaders
in high-growth areas such as dermatology.
Our head of China healthcare, Iris Wang, highlights Sihuan Pharma (0460.HK), about
70%-80% of whose products are generic. Once on the list of approved generic drugs in
China, drug producers enjoy a level of protection as the list of drugs for which the Chinese
state provides central reimbursement is updated only every 4-5 years, and public hospital
tenders every three years. Those companies which are approved can receive c.80% of
their revenues from the government.
Figure 81: Generic penetration remains low across a
number of markets
Figure 82: Sanofi and Novartis have the highest
proportion of sales from emerging markets
0%
10%
20%
30%
40%
50%
60%
70%
80%
Pol
and
US
Ger
man
y
UK
Tur
key
Net
herla
nds
Sw
eden
Hun
gary
Aus
tral
ia
Fra
nce
Japa
n
Spa
in
Bra
zil
Bel
gium Ita
ly
Por
tuga
l
Irel
and
New
Zea
land
Generic utilisation by volume
28%
24%23% 23%
22%
20% 20%19%
17%
12%
5%
10%
15%
20%
25%
30%
San
ofi
Nov
artis
GS
K
Mer
ck
Pfiz
er
Abb
ott
Roc
he
AZ
N
J&J
Lilly
% of sales from emerging mkts
Source: WHO Source: Company data, Credit Suisse estimates
■ Developed-market drug companies
Developed market-listed pharma companies have reasonably high exposure to GEMs.
The problem is that the margins on GEM sales have been low, primarily as the majority of
the products sold tend to be lower-margin generics. The exception to this tends to be in
diabetes, where our pharma team highlights that Novo, Eli Lilly and Sanofi are particular
beneficiaries. Diabetes is an age- and lifestyle-related disease, and thus one of the
fastest-growing healthcare problems in emerging markets, as Western eating and living
standards are increasingly adopted across GEMs.
Diabetes is also one of the key causal factors behind end-stage renal disease (ESRD),
with our analyst Christoph Gretler highlighting that about 50% of ESRD patients are
diabetics. ESRD is growing rapidly in GEM, with Fresenius Medical Care a likely
beneficiary (with around 18% of sales from GEMs). The major drawback, currently, is the
cost of a dialysis course, which costs around US$180 per week, or over $9,000 a year, so
price points would need to fall.
■ Hearing aids
In our view, hearing aids have the potential to be a structural growth story. According to
our analyst, Christoph Gretler, roughly 10% of people are estimated to have a hearing
problem, and of these, only a fifth have a hearing aid. Moreover, the incidence of hearing
problems is closely correlated with age, with the first-time buyer of a hearing aid typically
aged 69.
29 September 2014
Global Equity Themes 53
As the population of emerging markets ages, hearing aids could become a growth area.
Currently, this is an underdeveloped industry within emerging markets, where only around
5% of hearing devices are sold, and the necessary retail distribution network (which our
analyst suggests accounts for around two-thirds of the hearing aid value chain) is small.
Our analysts' preferred play on this theme is Sonova. Only 7% of Sonova's profits
currently come from GEMs, but even so our analysts believe they can grow sustainably at
around 10% annually.
■ Hospitals in emerging markets
Hospital facilities within emerging markets are extremely low. Across a number of major
emerging markets, including India, Indonesia and Pakistan, there are less than 10 hospital
beds per 10,000 people, compared with 30-140 in developed markets (with the US at the
lower end of that range). The provision of hospital facilities appears, therefore, to have
significant upside potential.
Our Asian healthcare team highlighted in their report ASEAN Healthcare Sector – Close to
escape velocity, 29 April 2014, that the hospitals under their coverage should have a
revenue CAGR of 10-34 by 2018 %. The stocks under their coverage can be divided into
the medical tourism plays (IHH Healthcare and Bumrungrad Hospitals) and hospitals that
serve local patients (Apollo Hospitals, Fortis Healthcare, Siloam, Raffles Medical, KPJ).
Figure 83: Most GEMs have significantly fewer hospital beds per capita than in
developed markets
0
20
40
60
80
100
120
140
Indonesia
Pakistan
India
Mexico
Brazil
Turkey
United S
tates
UK
China
France
Germ
any
South K
orea
Japan
Hospital beds per 10,000 population
Source: World Bank
The one negative for the Asian hospital stocks is their valuation. The aggregate index of
ASEAN hospital stocks trades on 44x 2014E earnings vs 20x for the Global sector
excluding NJA. That said, our analysts point out that on 2018 numbers, multiples are a
more reasonable 15-18x (with the exceptionally high 2014E multiples a function of the
investment programmes being pursued by the major operators, depressing near-term
earnings).
Mediclinic, Life Healthcare and Netcare (not covered) are South African hospital
companies that should benefit from increases in the proportion of the population over 60
years old, which rose by 18% between 2007 and 2013 (from 3.8 million to 4.5 million
people), and represented 8.4% of the total population in 2013. The proportion of the over-
60s is estimated by the World Bank to increase by a further 20% by 2025 to 5.3 million. In
addition, there has been a 54% increase in the size of the middle class (defined as those
earning R16-50K per month) over the past decade.
29 September 2014
Global Equity Themes 54
■ Ostomy and Continence Care
The average age that patients require ostomy care is 68 years and, though incontinence
can affect women from the age of 20 (10% of 18-24-year-old women have incontinence
symptoms), it becomes more common and acute with age: 34% of people aged 65 have
issues with incontinence and 84% of those needing acute care are over 65.
Within this, our analysts highlight Coloplast, which develops products and services mainly
for Ostomy care (42% of sales), and Continence care (35% of sales) and the company's
ambition is for emerging market exposure to rise to 25% of sales from the 13% current
levels. Coloplast already has a market share of 35-45% in Ostomy care and 15-25% in
Continence care in emerging markets, with China, Brazil, Argentina, Greece, Poland and
Russia as its core growth markets. Organic growth in its emerging market region was 24%
in the nine months to August 2014. Our analysts have an Outperform rating on Coloplast,
which has a long-term revenue growth target of 7-10%.
We also expect adult diaper producers to benefit from this theme. According to our
analysts, the disposable adult diaper market takes off when per capita GDP exceeds
$10,000. Worldwide growth in the diaper market is estimated at 3% per annum by our
analysts, but is expected to be higher where populations are older and economies look set
to grow.
Credit Suisse research analysts rate the Japanese company Kao as a particular
beneficiary of this trend as it has 10% of the market share of adult-use disposable diapers
in Japan. It has been aggressively expanding its market share in China (from 3% FY12
to12 7% FY13) and in developing Asia (10% of sales). Our analysts forecast a profit
CAGR of 11% over the next three years for Kao, and have a target price of ¥5,000,
implying around 12% potential upside.
■ Health and Beauty
According to our consumer staples team, older people spend around four times as much
as younger people on face cream. Based on this theme L'Oreal is our top pick for health
and beauty and is rated Outperform by our analysts. It has high exposure to GEMs as its
"New Markets" it wishes to target, which includes Brazil, China and Russia, was their
largest contributor to revenues last year (39.8% of total sales). Though we would note that
organic growth has slowed in emerging markets recently in this sector, L'Oreal looks well
positioned to take advantage of ageing populations in emerging markets. L'Oreal is
undervalued against other staples on an on P/E as has historically tended to be the case,
trading on 21x 2015E PE, the bottom of its 25-year range.
Potential and Limitations
We would highlight the ability of the population and of governments within emerging
markets to afford the cost of healthcare services as the main limitation of this theme.
Private sector cost is high…
In contrast to most developed markets (with the notable exception of the US), the private
sector tends to be the major consumer of healthcare services in emerging markets. As
discussed above, treatments can be expensive: a dialysis treatment costs around $9,000
per year, beyond the reach of most GEM consumers (Chinese per capita income in US
dollar terms is $7,300, for example).
Although greater affluence would boost demand for these services, the low-income base
from which GEM incomes are growing means that a number of treatments would remain
out of reach unless price points, and therefore margins, fall. Further underlining the
relevance of this point, the Credit Suisse Emerging Consumer Survey 2014 pointed to a
mismatch between the existence of the means to pay and the typical healthcare
consumers in the emerging world and particularly China. Young people are the higher-
income earners rather than the elderly who require more public provision.
29 September 2014
Global Equity Themes 55
Figure 84: Chinese distribution of income by age Figure 85: US distribution of income by age
6,000
7,000
8,000
9,000
10,000
18-29 30-45 46-55 56-65
Mo
nth
ly in
com
e (
RM
B)
Age (years)
1,000
2,000
3,000
4,000
5,000
6,000
15 - 24 25- 34 35 - 44 45 - 54 55 - 64
Mo
nth
ly in
com
e (
USD
)
Age (years)
Source: Credit Suisse Emerging Consumer Survey 2014 Source: US Census Data, 2012
…and public sector revenues are under pressure
As always, the government sector accounts for a high proportion of healthcare spending
(as shown below) and the government clearly wants value for money. This is more a threat
in those GEM nations where public expenditure on healthcare is high, such as China and
Thailand (which since 2002 has had a universal healthcare system). In China, our analyst
Iris Wang points out that local governments fund around 60-70% of hospital beds.
With local government revenues coming under pressure as the Chinese property market
(a key source of revenues for the local government – see our report China and China
plays, 30 June 2014) slows, spending on healthcare could come under pressure.
Moreover, in China around 60% of the healthcare budget is spent on drugs, compared
with just c.15% in the US, suggesting that the Chinese government could seek to
negotiate drug prices down.
Figure 86: The public share of healthcare spending tends to be lower in emerging
markets than in developed markets, with the exceptions of China and Thailand
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
EUUK
US
Japan
Thailand
China
Indonesia
Malaysia
Philippines
India
SingaporePublic as a % of total healthcare expenditure
Source: OECD
29 September 2014
Global Equity Themes 56
How to play this theme 2: Savings products
Life insurance
An older, more affluent population not only spends more on healthcare, but also on life
insurance products. Life insurance premiums as a percentage of GDP (a crude proxy for
savings products) are particularly low in emerging markets (and, if anything, the data
understate the scale of the GEM shortfall as US 401Ks and UK ISA/PEPs are not
accounted for).
Figure 87: Life insurance product penetration is low in emerging markets
Australia
Brazil
Canada
China
France
Germany
IndiaIndonesia
Japan
Mexico
Nigeria
Poland
South Korea
Spain
Turkey
UK
US
0
10,000
20,000
30,000
40,000
50,000
60,000
0 1 2 3 4 5 6 7 8 9 10
2014
GD
P pe
r cap
ita ($
PPP)
Life insurance premiums, % GDP
Source: Swiss Re, IMF, Credit Suisse research
As the population of emerging markets ages, we think that governments will encourage
greater private provisioning for old age via tax incentives. In China, for example, the
government is planning to introduce deferred tax pension products similar to 401Ks in the
US. And, once inheritance tax is introduced in China, investors will be more likely to buy
insurance products as they will be tax exempt.
Swiss Re forecasts that growth in life premiums within emerging markets will be almost
three times that in developed markets over the coming years (forecasting 3.2% growth in
DM against 9.2% premium growth in GEMs in 2015), while according to our life insurance
analyst, Chris Esson, the Asian life insurance industry has experienced a CAGR of above
15% over the past decade.
In our view, the potential beneficiaries of this trend will continue to be AIA, with 100% of its
revenues coming from Asia, and Prudential, which has a 40% market share in Asia, with
a third of its business coming from emerging markets. Crucially, both have established
significant sales forces (and the barrier to entry tends to be the distribution system via
agents and bank channels), and this, in turn, allows them to generate structurally higher
margins than in developed markets.
Chinese life insurance companies that should also benefit from this trend and are rated
Outperform by our Asian insurance analysts are China Pacific, which has new business
growth in high-margin agency channels, and Ping An which has strong growth momentum
in life insurance in China.
Asset management
The other play on this theme is wealth and asset management. The leader in this space is
OCBC which is largely an ASEAN savings play (where 25-30% of OCBC's profits are from
wealth management). To some extent China Everbright is also a potential beneficiary (a
diversified financial services group that trades at a discount to the sector on both P/E and
P/B, according to our analysts) and Value Partners (60% of its assets are from the HK
compulsory savings scheme, the Mandatory Provident Fund).
29 September 2014
Global Equity Themes 57
Potential and Limitations
The main threats to the growth of life products in Asia are as follows, in our view
1) If governments make non-life-related products more tax efficient at the point of entry or
exit (e.g. as in the US or UK allowing ISA, PEPs or 401k);
2) If regulations force payments into a state pension scheme (such as the
Superannuation Fund in Australia) or a state social security safety net operated at a
higher level, which would serve to lessen the need for individual savings;
3) Margins are higher because of the degree of vertical integration: regulations could
threaten this;
4) Most importantly, there is a strong cyclical risk. As we have discussed elsewhere, we
remain concerned about the outlook for Chinese economic growth. Were our concerns
to crystallise, consumers could be reluctant to invest in a 10-year product if they fear
that they will not have a job.
29 September 2014
Global Equity Themes 58
Selected stocks exposed to this theme
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names which are not mutually exclusive.
Beneficiaries
Company Ticker CS
rating
Region Exposure to
the theme
Explanation
Sun Pharma SUN.BO O/P India High First, around a quarter of its drugs focus on lifestyle diseases; second, it has a portfolio of difficult to formulate generics (where pricing tends to be stronger); and third, it is market leader in high-growth areas such as dermatology.
Sihuan Pharma 0460.HK O/P China High About 70-80% of its products are generic, and it is on the list of approved Chinese drug suppliers, which affords it a degree of revenue as this list is refreshed only once every 4-5 years.
Fresenius Medical Care
FMEG.DE O/P Europe Medium Provides dialysis treatment, and therefore benefits from the growth in diabetes, a key cause of end-stage renal disease.
AIA 1299.HK O/P Asia High 100% exposed to the Asian insurance market, where premium growth looks set to be three times that in developed markets. Large established sales force a significant barrier to entry.
Prudential PRU.L O/P Europe High 40% market share in Asia, with a third of its business coming from GEM.
Bumrungrad Hospital
BH.BK N Asia Medium Dominates the high-end hospital market in Thailand, and is a beneficiary of rising health tourism in the region. Its market dominance also allows it to enjoy greater bargaining power with suppliers and economies of scale, driving an RoE of 26% in 2014 on our analysts' estimates.
Siloam SILO.JK O/P Asia High A hospital operator with a dominant position in what our analysts believe to be one of the most attractive markets, Indonesia. Hospital bed penetration in Indonesia is low even by GEM standards, and it is one of the most attractive markets in NJA in terms of prospective healthcare expenditure growth.
Essilor ESSI.PA N/R Europe Medium Market leader in eye care products, especially vision correction lenses. The company estimates that there are about 300m uncorrected elderly persons. Further, the company projects the number of presbyopic persons to grow at a CAGR 2013-20 of 2-2.5% or 2-3x world population growth on ageing effects as after 50 years, almost everybody has presbyopia. This should also help the penetration with progressive lenses, which is only about 15% globally.
Straumann/
Nobel Biocare
STMN.S
NOBN.S
O/P
R
Europe Medium Market leader in dental implants. Demand for complex dental work, maintenance and peri-implantitis checks increase with age. In the US; the number of decayed, missing or filled teeth stands at about 15-20 for patients over 65 years old vs. about 7-12 for persons 20-50 years old.
Smith & Nephew SN.L N Europe Medium The company has substantial market positions in hip and knee replacement, an indication that occurs increasingly with elderly patients as joints degenerate over time. The company also holds positions in sports medicine and trauma, which are more accident related, but are also more frequent as age progresses, e.g. osteoporotic bone, etc.
Coloplast COLOb.CO O/P Europe Medium Market leader in ostomy and continence care in emerging markets. Growth is largely driven by ageing populations. The company has core growth markets in China, Brazil, Argentina, Greece, Poland and Russia. Organic growth in emerging markets was 24% in the 9 months to August 2014 and emerging market sales are 13% of the total currently but expected to increase to c25%.
L'Oreal OREP.PA O/P Europe High The company has high exposure to GEMs as its "New Markets" category, which includes Brazil, China and Russia, was its number one contributor to revenues over FY 2013 (39.8% of total sales). In emerging markets it has sustained a 10% growth rate, ahead of 7-8% growth in the cosmetics market.
Natura NATU3.SA N Brazil Medium Brazil's leading manufacturer and marketer of beauty products, skin care, cosmetics etc.
Unicharm 8113.T U/P Japan Medium Downstream toiletry manufacturing play in Japan.
Kao 4452.T O/P Japan Medium The consumer product section of Kao focuses on disposable diapers as well as beauty care etc.
Netcare NTCJ.J N/R South
Africa
Medium South African hospitals which are potential beneficiaries of the demographic shift of the population; increasing the proportion of over 60 year olds.
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 59
Theme #3 – Resource Scarcity
Source: Credit Suisse research
VI Resource Efficiency: Demand Management
We see the need for greater resource and specifically energy efficiency as amongst the
greatest challenges facing the global economy during the next few decades. The reason
for this relates to the impact of three powerful long-term macro drivers - population growth,
urbanisation and the rapidly emerging economy middle class. There are two mechanisms
to address the underlying imbalance – exploiting new sources of supply or managing down
demand. We focus on the latter and the investment opportunities that exist in building and
transport.
VII Shale: Vive la Revolution
In our reports on The Shale Revolution I and The Shale Revolution II, we set out the
transformational influence unconventional energy would have across not just the energy
sector but across the whole related supply chain. Much has happened but it is by no
means played out. In our view shale is set to underpin the global (not just US)
hydrocarbon growth story for the next decade and beyond, supporting faster than average
growth from the Oil Field Service companies specialising in shale and the upstream
companies with productive shale acreage. In turn it provides growth end markets for a
wide range of connected companies and industries.
VIII Solar: An inflection point
Alternative and unconventional sources of energy are new supply drivers bringing
disruptive impacts with them. On the alternative side, we believe the inflection point in
solar adoption is here given relative cost-competitiveness. Not only are environmental
policies supporting the adoption of renewable power sources, but the cost of solar energy
has declined ~50% over the past six years, making it a cost-competitive resource in many
markets. The growth opportunity is tremendous, with solar representing only 0.003% of
total power generation capacity globally today. A mere 1% global penetration rate equates
to an $86bn opportunity for solar companies.
29 September 2014
Global Equity Themes 60
VI Resource Efficiency What are the key drivers of the theme?
The availability of the world's key resources—energy, water and land—is being challenged.
We see the need for improved resource efficiency as one of the greatest challenges facing
the global economy during the next few decades. The reason for this relates to the impact
of three powerful long term macro drivers: population growth, urbanisation and the
expansion of the emerging middle class.
Figure 88: The demand for resources
Resource Demand
WaterEnergy
Industry Buildings Transport
Land
Source: Credit Suisse research
■ World's population may increase by up to 3bn by 2050
The expansion of the world's population from less than 3 billion people in 1950 to 6-7bn
today has already put significant pressure on the available level of key resources such as
fresh water, land and energy. For example during the past 40 years total primary energy
consumption has more than doubled.
Figure 89: Primary energy consumption has more than doubled since 1970 (Mtoe)
Figure 90: Increasing share of transport more recently has been driven by emerging markets growth
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1970 1980 1990 2000 2010
Th
ou
sand
s Other Transport Industry Buildings
10%
15%
20%
25%
30%
35%
40%
1971 1981 1991 2001 2011
OECD Non-OECD World
Source: IEA, OECD, Credit Suisse research Source: Company data, Credit Suisse estimates
However, without greater resource efficiency we believe that supply-demand frictions for
these resources are likely to increase significantly, given that the world's population may
expand by an additional 3bn or almost 50% between now and 2050.
Resource Efficiency
Eugene Klerk
+44 207 883 4678
Ashlee Ramanathan
+44 207 883 9934
Ashlee.ramanathan@credit-
suisse.com
29 September 2014
Global Equity Themes 61
■ Urbanisation adds to resource consumption patterns
Global population growth is not the only factor driving demand for resources. Urbanisation
also increases demand as is shown by academic studies. Jones (1991, "How urbanization
affects energy use in developing countries, Energy Policy 19, 621-630) for example shows
that every 1% increase in the urbanisation rate increases resource consumption by an
additional 0.47%. Urbanisation globally has increased from 30% in 1950 to 54% today. We
expect a further increase, owing primarily to emerging countries. We refer to work from our
emerging markets strategy team, Opportunities in an urbanizing world.
Figure 91: World population projections to 2050: Strong growth expected to continue
Figure 92: Urbanisation in emerging market regions (urban population, % of total)
500
2,500
4,500
6,500
8,500
10,500
1950 1970 1990 2010 2030 2050
World
World upper estimate
World lower estimate
LEDC
MEDC
0
10
20
30
40
50
60
70
80
90
100
1950 1970 1990 2010 2030 2050
Latin America Eastern Europe
MENA Non-Japan Asia
Sub-Saharan Africa
Source: United Nations, Credit Suisse research Source: Population Division of the Department of Economic and
Social Affairs of the UN Secretariat, Credit Suisse research
Further urbanisation is also likely to increase emission and environmental challenges in a
no-change scenario. For example traffic congestion is already a major issue across the
globe which leads to inefficient fuel consumption and unduly high emission levels. Without
changes in traffic patterns total urban-related miles driven could increase c160% by 2050
from 2010 levels. Currently c70% of the largest 1500 cities in the world already have
pollution levels above WHO guidelines. The potential increase in car-related urban traffic
would increase these pollution levels further.
Figure 93: Yearly hours of delay in larger US areas Figure 94: Congestion set to worsen in London
0
10
20
30
40
50
60
70
80
Was
hin
gto
n
San
Fra
nci
sco
Los
An
gele
s
New
Yo
rk
Bo
sto
n
Ho
ust
on
Ch
icag
o
Atl
anta
Seat
tle
Ph
ilad
elp
hia
Mia
mi
Dal
las
Det
roit
San
Die
go
Ph
oen
ix
2011 1982
Source: Texas Transportation Institute Source: Greater London Authority
29 September 2014
Global Equity Themes 62
■ Growing middle class
Demand for resources not only increases because more people consume energy, use
water or need more land to grow food. Over and above this we believe that consumption
per capita will also increase as average wealth levels rise. The potential impact of this is
significant. Convergence of energy consumption per capita across the emerging world with
European levels for example would increase global energy demand by c3x the current
total for Europe and the US combined.
Figure 95: Energy consumption per capita vs GDP/capita (MBtu/capita/year)
100.0
150.0
200.0
250.0
300.0
350.0
0
50
100
150
200
250
0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000
EU Russia Japan China Brazil India World US (rhs)
Source: EIA, World Bank
■ Supply risk
Finally we see growing supply risk as another reason for increased resource efficiency.
We note that in the case of energy most regions are already net importers of oil and gas.
Their reliance on foreign suppliers would in the absence of efficiency gains increase,
which in turn could lead to volatility in resource prices and undermine economic stability.
Figure 96: Total energy demand for key emerging countries could increase c2.3 times the EU/US total
Figure 97: Changing import reliance for oil and natural gas (2010-2020)
0
100
200
300
400
500
600
2010 2020 2030 2040 2050
China India Asean Brazil Mexico
Incremental usage: 395 QBtuEU + US combined: 170 QBtu
Source: World Bank, IEA, Credit Suisse research Source: US Energy Information Administration, 2013 International
Energy Outlook (IEO) and 2014 Annual Energy Outlook (AEO) Early Release for US projections, Credit Suisse estimates
29 September 2014
Global Equity Themes 63
Why is it relevant now?
A number of arguments support a positive view on companies exposed to the theme of
resource efficiency. These include the following.
Support from legislative agenda
Tightening legislation relating to resource efficiency plays a key role in driving the
corporate agenda towards the theme.
Achievements reached to date have already been significant in our view. For example in
the car industry average fuel efficiency levels increased c35% in Europe and 42% in
Japan between 2000 and 2013. Average fuel efficiency of airplanes improved 70% during
the past 40 years.
The political agenda globally remains focussed on driving efficiency standards further.
Examples of this include recent global discussions on stricter emission standards, the
current review by the European Council on energy efficiency targets for 2020 (with
potentially new targets with a 2030 deadline) and the range of emission targets set for
transport sectors.
Figure 98: Fuel efficiency (km/l) Figure 99: Fuel efficiency of commercial airlines
US
Canada
EU
Australia
Japan
China
S. Korea
India
Mexico
Brazil
6
8
10
12
14
16
18
20
22
24
26
2000 2005 2010 2015 2020 2025
Historical Enacted In study
Source: International Council on Clean Transportation Source: IATA Technology roadmap 2013
Surveys among corporates continue to suggest that legislation in combination with
financial stimulus packages are key drivers for investments in improved resource
efficiency (see for example the annual surveys by the Global Energy Efficiency Institute
run by Johnson Controls). As the global economy continues its recovery following the
financial crisis we believe that governments will be in a better position to expand support
programmes.
Corporate interest reaching critical levels
One of the key issues for investors when reviewing the opportunity set in resource
efficiency is finding credible support that the theme is actually investible. Indicators that
this is happening in our view relate to corporate investment in products and services
aimed at increasing resource efficiency. There is evidence across the spectrum of
resource efficiency in support of this.
For example we note that c70% of corporates now view energy efficiency as a key part of
their corporate strategy and invest in various products and services related to it. Green
building construction is also rapidly expanding while within the area of transport efficiency
we note that investments in electrical vehicles and even driverless cars are accelerating.
29 September 2014
Global Equity Themes 64
In the airline industry we find that fleet renewal is showing strong growth as new aircraft
are typically up to 20% more fuel efficient than the ones they replace.
Finally, we notice a strong increase in the development of technological solutions that will
play an increasingly important role in energy efficiency. Examples include smart building
products, the development of driverless cars and dynamic traffic and routing optimisation.
Developments like these continue to raise the profile of resource efficiency, which in turn
lifts the credibility of the theme in our view.
Figure 100: % of companies with an energy efficiency goal
Figure 101: Level of green building activity set to rise
0%
10%
20%
30%
40%
50%
60%
70%
80%
2011 2012 2013
Goal No goal
0%
10%
20%
30%
40%
50%
60%
No Green 1%-15% 16%-30% 31%-60% More than 60%
2009 2012 2015
Source: Institute for Building Efficiency Source: McGraw-Hill Construction, 2013
Potential and Limitations
What is the magnitude of the growth potential on offer in terms of subgroups?
The potential size of the market for products and services relating to improving resource
efficiency is very significant and covers a wide range of end markets. For the purpose of
this note we limit ourselves to opportunities related to energy efficiency.
■ Building energy efficiency opportunities
In the case of energy efficiency relating to buildings, we estimate that refurbishing existing
homes across the developed world already accounts for a US$2trn investment opportunity.
Improving the efficiency of non-residential buildings represents total investment
requirements of at least US$500bn in our view. End markets that are exposed to this
include the product manufacturers relating to heating and cooling equipment, insulation
products and energy management technologies. In addition we believe that service
companies involved in design and consultancy or installation services also stand to benefit.
29 September 2014
Global Equity Themes 65
Figure 102: The residential opportunity: energy savings of up to 95% can be achieved (Kwh/m2)
Figure 103: Total residential refurbishment opportunity (for buildings built before 1980, (€bn)
0
50
100
150
200
250
300
350
before1977
Today'savg.
1977 1982 1994 2001 PassivHaus
Average energyconsumption
can fall 95%
0
50
100
150
200
250
300
350
400
US
Ge
rm
an
y
Ita
ly
UK
Fra
nce
Sp
ain
Po
lan
d
Ro
ma
nia
Ne
th
erla
nd
s
Be
lgiu
m
Sw
ed
en
Cze
ch
Re
p.
Au
stria
Hu
ng
ary
Gre
ece
De
nm
ark
Po
rtu
ga
l
Bu
lga
ria
Fin
lan
d
Slo
va
kia
Lit
hu
an
ia
US: €600bn
Source: PassivHaus Source: Eurostat, Enerdata, Credit Suisse research
■ Transport efficiency opportunities
Energy consumption from cars, airplanes, boats and trains account for 30% of final energy
demand but has been growing more rapidly than either industry or buildings during the
past 40 years. The need to further improve efficiency levels for these transport modes is
high given that demand for transport services globally is showing sustained strong growth.
Some of the more high-profile investment opportunities exposed to transport include:
Road: Energy consumption from cars accounts for 77% of total transport usage.
Companies that should see structural growth from further efficiency improvements in this
area include those that produce batteries related to electric vehicles, develop testing
facilities to be used as part of the design phase, car component manufacturers, software
developers related to traffic optimisation, and tyre manufacturers. The ability to improve
fuel efficiency beyond current targets would provide an annual savings opportunity of
c$700bn by 2035 on our estimates.
Air: Fuel efficiency for aircraft has been improving steadily during the past 40 years.
Further gains are likely through the development of new technologies and materials.
Design changes and new industrial processes (3D printing for example) add to this. In
combination with bio-fuel deployment, savings could reach up to 80% from current levels.
Shipping: International shipping accounts for c10% of global transport energy
consumption, however, it carries c90% of world trade. Fuel efficiency and emission
savings opportunities are driven by stricter sulphur emission targets, the energy efficiency
design index (EEDI) and the Ship Efficiency Management Plan (SEMP). These should
allow emissions to fall by c23% by 2030. Total annual fuel cost savings could reach $50bn
by 2020 and $200bn by 2030 if IMO standards are met.
■ Significant potential to improve "quality of life"
Global warming is a significant side effect of the continued increase in energy
consumption. Targeting of so-called "short-lived climate pollutants", which account for
c40% of the current warming, is the quickest way to address these problems. Short-lived
climate pollutants include black carbon and methane which are also air pollutants that
harm human health. Research from the World Bank shows that a reduction of these
pollutants could prevent the deaths of 2.4m people and boost crop production by 32m tons.
The annual benefits of these policies could add $1.8-$2.6trn to GDP growth, avoid
production of 8.5bn metric tons of carbon dioxide equivalent and save 16bn kilowatt-hours
of energy which is equivalent to taking 2bn cars off the road. Currently there are only
about 1.1bn cars on the road, so this is equivalent to removing the emissions of almost
twice the entire end-market automotive industry.
29 September 2014
Global Equity Themes 66
What are the limitations/risks to the story?
General acceptance for the need to further increase resource efficiency is high in our view,
but there are limitations, including:
■ Weak macro environment: Resource efficiency measures have tended to work best
in a strong GDP growth environment where companies and governments are more
willing or able to invest towards these initiatives. A lack of economic growth might
therefore impact the investment case in the short term.
■ Lack of regulatory pressures: While acceptance for the need to improve efficiency
appears high, we find that government incentive schemes and regulation more broadly
are critical. A loosening in legislation would not be positive in our view.
■ Rebound effect: Research into consumer behaviour has shown that consumption
may increase owing to the belief that savings are made as a result of efficiency
improvements. This so-called "rebound effect" therefore limits the full savings potential
that can be achieved.
Stocks exposed to the theme
■ Potential winners
Using the input from our research analysts across Credit Suisse we have put together a
list of c200 companies exposed to building energy efficiency and a list of c350 companies
exposed to transport energy efficiency.
The companies exposed to building energy efficiency can be grouped into a few key sub-
sectors: consulting engineers, construction firms/home builders, technical service
companies, original equipment manufacturers (OEMs) and property owners. Reviewing
these sub-sectors within a Credit Suisse HOLT® framework indicates that value creation
through time has been better than for the wider equity market. In addition we note that
risk-return characteristics have been superior to the overall equity market (Figure 104).
At this point, from Figure 105, we believe that the most undervalued subsectors are
Lighting, Tech. Services and Cooling. Heating and Insulation/Energy management on the
other hand appear to carry consensus forecasts that look stretched when compared to the
past 5 and 10 year median.
Figure 104: Cooling is the stand-out subsector on a risk-returns basis
Figure 105: Lighting looks the best valued sector. The building universe as a whole is also slightly undervalued
Universe
Consultancy
Construction
Technical
Services
OEM
Cooling
Lightingenergy
Insulation
Appliances
heating
Property
Owners
MSCI
World
MSCI
Industrials
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
15% 20% 25% 30%
CA
GR
sin
ce 2
003
Annualised monthly volatility since 2003
0
2
4
6
8
10
12
14
16
18
10yr Last fiscal year Forecast Market implied CFROI
Undervalued Overvalued
Global Credit Suisse HOLT Source: Credit Suisse HOLT, Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 67
Figure 106: Performance by activity and transport subsector: water/shipping has been weak more recently, while rail and infra appear strong
Figure 107: CFROI® improvements for most sectors
except water and infrastructure. Road is most undervalued from a HOLT perspective
Universe
Road
Air
Water
Rail
Multi
Transport Infrastructure
5%
10%
15%
20%
25%
30%
5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
1yr
shar
e p
rice
ret
urn
10yr average share price return
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Road Universe Multi Rail Air Water Infrastructure
10yr Last FY Forecast Market implied
Undervalued Overvalued
Source: Thomson Reuters, Credit Suisse Research Source: Credit Suisse HOLT, Credit Suisse Research
As for transport energy efficiency we believe that the key subsectors affected include the
transport modes: Road (autos, trucks, buses and bicycles), Rail, Air, Shipping and
construction and design companies exposed to transport infrastructure. The performance
of these subsectors during the past 10 years and most recent 12 months suggests that
rail-related companies performed best (Figure 106). Shipping (water) companies on the
other hand, whilst having a strong performance longer term, were the weakest across the
transport universe more recently. This in our view may be the result of upcoming
tightening legislation.
From a valuation perspective, we find that water and infrastructure companies look
overvalued whereas consensus estimates for road-related transport companies appear to
be undemanding (Figure 107).
■ Potential losers
A strong improvement in resource efficiency, especially if it were to reduce total usage
would in our view have a negative impact on the companies that supply conventional
energy and are unable or unwilling to broaden their product offering. Therefore utility
companies and oil and gas companies are most likely to be negatively affected if
technological improvements and government programmes manage to improve resource
efficiency.
Selected stocks exposed to this theme
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names across our coverage. These are not mutually exclusive.
United Technologies Corp: Leading global player in commercial and military aircraft
engines (Pratt & Whitney), and in commercial and residential HVAC equipment & controls
as well as transport refrigeration (Carrier, Transicold); collectively these account for 40%
of sales. The company has leading positions in global markets, offering relatively high
aftermarket content and strong returns.
Solarcity: SCTY leases solar systems to homeowners, allowing no upfront capital
investment for consumers while also delivering immediate savings relative to the
incumbent utility rates. Distributed rooftop solar has grown at a ~40% CAGR for the last 4
years yet still represents less than 0.6% of rooftops. Reaching a 10% penetration level
implies a CAGR of >13% through the next decade (or >50% CAGR if reached in 5 years).
29 September 2014
Global Equity Themes 68
First-mover states have already indicated these penetration levels may be obtainable:
13.4% of residential rooftops in Hawaii have solar, while California is approaching 2.2%
penetration.
Infineon: Infineon appears well positioned to benefit from a secular trend around rising
semiconductor chip content in Automotive driven by the adoption of a broad range of semi
chips (e.g., power controls, microcontrollers, sensors, voltage regulators and radio
frequency applications) used in cars. Infineon's key markets – Automotive and Industrial
Power, which we estimate will account for ~45%/40% and ~20%/25% of group
revenues/profits in FY14E – suggests that the company is likely to see continued share
gains in both these markets, driven by its strong presence in the IGBT category
(transistors which operate in a high-voltage environment with applications in areas such as
hybrid cars, industrial automation, renewable energy and train/transit systems).
Arcadis: Arcadis has strong exposure to building energy efficiency as 30% of revenues
are from building-related consultancy work while 27% are derived from infrastructure, 15%
from water and 26% from environmental consultancy work. Through the acquisitions of EC
Harris and Langdon and Seah a few years ago, Arcadis has become one of the world's
largest building consultancy firms. The company provides a full life cycle offering from
planning and environmental impact studies to project management during the construction
phase, asset management consultancy during the operating phase of a building and
refurbishment with possible environmental remediation work during the redevelopment
phase.
Continental: Increasing powertrain content—2020 emissions targets for OEMs are even
more difficult to achieve vs. the last period given the tougher starting point; thus we expect
the increase of powertrain content in a vehicle to provide structural tailwinds.
Shimano: The global leader in sports bicycle parts with a market share of about 70%. Its
share is even higher, over 80%, in critical parts such as shifters that directly impact
performance. Bicycles, being human-powered, are the ultimate eco-friendly transport
vehicles. Governments around the world are taking active measures to promote the
spread of bicycle use, based on aims such as ecology, public health, easing traffic
congestion, and reducing air pollution.
J.B. Hunt: The largest division functions as an asset-based truckload intermodal company,
boasting the largest fleet of company-owned 53 ft. containers in the world with ~50k rail
containers in operation. The company derives ~75% of EBIT from its intermodal division
and partners with railroads BNSF and Norfolk Southern to deliver rail intermodal service to
customers. The intermodal rail service is expected to continue to take freight share away
from truckload movements in the US as truckload capacity is constrained by multiple
factors including highway congestion and driver recruitment challenges.
Boeing: An aircraft OEM, and frankly any company exposed to the aerospace original
equipment cycle, is exposed to the transport efficiency theme as airlines strive to improve
their operating costs. The bellwether of this in our coverage is Boeing, which is in the
midst of a product line upgrade that offers new aircraft with greater operating efficiencies.
Rockwell Collins: A leading supplier of communications and aviation electronics
equipment, and thus benefits directly from the heightened investment in new, more fuel
efficient aircraft. We forecast that Commercial Aerospace revenues will account for ~56%
of total group sales in FY’15, and become a larger percentage in future years as the entry
into service of new aircraft and production ramps on existing models drive commercial
growth higher than that in COL’s defense-oriented businesses.
29 September 2014
Global Equity Themes 69
Figure 108: Stocks exposed to the resource efficiency theme
Beneficiari
es
Company Ticker Rating Region Exposure to
the theme
Explanation
Infineon IFXGn.DE O/P Europe High German semiconductor company with market leading position in
Automotive (outside Japan) and Industrial Power.
Arcadis ARDS.AS O/P Europe High One third of revenues originate from resource efficiency. 30% of revenues
from buildings, 28% from environmental consultancy, 15% from water
advisory and 27% from infrastructure work.
United
Tech Corp
UTX O/P US High UTX is a leading global player in commercial and military aircraft engines
(Pratt & Whitney), and in commercial and residential HVAC equipment &
controls as well as transport refrigeration (Carrier, Transicold); collectively
these account for 40% of sales.
Alfa Laval ALFA.ST O/P Europe Medium Three key product groups which are Heat Transfer, Separation and Flow
Technology. Their exposure is primarily in the Marine segment. In Marine
they offer products from each of the above three groups which can enhance
the operating efficiency of ships.
Tesla TSLA.OQ O/P US High Tesla designs, develops, manufactures and sells electric vehicles and
electric powertrains. The company distributes its vehicles in North America,
Europe, and China through its own network of sales and service centers.
Continental CONG.DE O/P Europe Medium Earnings growth to be driven by advances in powertrain efficiency in the
mid term e.g. fuel injection, turbochargers and dual clutch transmission.
BYD 1211.HK O/P China High One of the leading local brand car makers in China. BYD is China's most
competitive electric vehicle (EV) manufacturer, in our view, given its
technology leadership with an integrated EV solution., strong EV product
pipeline and the longest EV commercial operation experience.
Denso 6902.T O/P Japan High Largest exposure to the electronics field among auto parts sector. Denso
handles products ranging from HEV ECUs to inverters, DC/DC converters,
battery monitoring units, current sensors, high-voltage batteries, and motor
generators.
Shimano 7309.T O/P Japan High Global leader in sports bicycle parts with a market share of c70%.
Honeywell HON O/P US High Exposure to energy efficiency in both Aerospace and ACS segment
Cummins CMI.N O/P US High Leading global manufacturer of diesel and natural gas engines
Rockwood ROC.N O/P US High Low cost producer in Lithium supply chain
J.B. Hunt JBHT.OQ O/P US High Largest division of company functions as an asset-based truckload
intermodal company.
Boeing BA.N O/P US High Product line upgrade offers new aircraft with greater operating efficiencies
Source: Company data, Credit Suisse research
Figure 109: Resource Efficiency: Demand Management – Relevant Research
Report Date Highlight
Themes in Energy Efficiency 3-Apr-14 Primer: As part of our global energy efficiency research, this report reviews building energy efficiency challenges and investment opportunities.
US Autos & Auto Parts Coverage Initiation
13-Aug-14
We favor the suppliers over the automakers: Strong earnings growth for the suppliers should accelerate, driven by global secular growth trends, modestly recovering volumes (and strong incremental margins) in Europe, and content growth / margin expansion in China. Continued strong returns, strong balance sheets, and potential for increased M&A activity could drive a further re-rating of these stocks.
Auto, Auto Parts, Electronic Components Sector - Vol.1 Electrification
16-July-14 We present the findings of a cross-sector survey we conducted to explore current developments within major trends currently dominate automotive technology: electrification, automation, and informatization.
Battery Technology - Electrifying Future
1-July-14
While there are many new battery technologies emerging that claim to be 10 times better than lithium-ion in some of the above criteria, right now, lithium-ion batteries are the only proven technology that scores well on all of those, and possibly the only technology in the next 10 years that can be used in commercial applications.
Lithium – Ideas Engine: A Powerful Story for Investors
27-May-14 Based on our detailed analysis of the global lithium supply/demand balance, we believe the industry is poised for significant volume growth, with a reasonable amount of risk to the upside around pricing as well.
Battery / Battery Materials 28-Feb-14 Supply chain implications of Tesla's Gigafactory: We present our thoughts on its implications for the battery and the battery materials industry.
Clean Tech in 2013 17-Jan-14 We see reasons to be optimistic for the sector . Lower oil & natural gas prices and a sluggish economy have not derailed the prospects for the sector.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 70
VII Shale – Vive la Revolution In our prior reports, The Shale Revolution I and The Shale Revolution II, we set out the
transformational influence shale would have across not just the energy sector but the
whole related supply chain. As significant as it has proved, it is by no means played out.
Thus far, the US has moved through the first few phases of the theme (initially
commercialising shale gas, then shale or tight oil as gas prices fell sharply). However, in
our view, shale is set to underpin the global hydrocarbon growth story for the next decade
and beyond, and support faster-than-average growth from the Oil Field Service
companies specialising in shale and the upstream companies with productive shale
acreage. In turn, it provides growth end markets for a wide range of connected companies
and industries.
Theme Dynamics and Drivers
Although overall energy demand is in its mature growth phase (+2% growth per annum),
shale remains a fast-growing new supply side technology that will become an increasingly
important component of global oil and gas supply (notably gas) over the next 10-15 years.
Despite shale success thus far in North America, the industry describes North America
shale as being in the third or fourth innings (baseball). There is still a significant as yet
unexplored and under-explored geological opportunity in North America; for example, in
Appalachia alone, a recent US Geological Survey estimated 88 Trillion Cubic Feet of shale
gas to be discovered, along with 3.4 billion barrels of shale liquids. The accelerated
development of technology to support production is also likely far from over. In the last few
years alone, the introduction of down-spacing (drilling more wells per section) and stacked
pay drilling (where multiple pay zones are drilled per well) drove further production gains.
The innovative and competitive nature of the US shale industry is likely to spawn further
technological advances, helping to drive North America toward its '9th inning'. In the rest of
the world, shale developments are much further behind North America—but shale
prospectivity is high in multiple countries like Argentina, China and Russia to name just a
few. The degree to which other countries can emulate the early stages of the US shale
revolution will also continue to drive the shale theme.
Figure 110: Global technical recoverable shale gas resources – China vs. world
-
200
400
600
800
1,000
1,200
China Argentina Algeria US Canada Mexico Australia SouthAfrica
Russia Brazil
(Tcf)
Source: EIA, Credit Suisse Equity Research
Global Oil & Gas Research
Ed Westlake
+1 212 325 6751
Edward.westlake@credit-
suisse.com
David Hewitt
+65 6212 3064
Richard Kersley
+44 207 888 0313
Richard.kersley@credit-
suisse.com
29 September 2014
Global Equity Themes 71
When thinking about the shale revolution, it is important to note that shale has the most
impact on natural gas and natural gas liquids markets (e.g. ethane, propane, butane).
Light molecules flow more easily from tight rocks. The abundance of lower cost gas has
ramifications across various manufacturing sectors as well providing growth opportunities
for the oil and gas industry, as we show below.
Figure 111: Global Oil Supply : Tight Oil or 'Shale' Oil is
Growing from a Low Base. We suspect there is upside to
the Tight Oil forecast shown by XOM in its most recent
presentation
Figure 112: Global Gas Supply : Non-Conventional or
'Shale' Gas Taking a Rapidly Increasing Share
Source: XOM 2014 Energy Outlook Source: XOM 2014 Energy Outlook
Persistent low US gas prices: Credit Suisse maintains a forecast of an extended period
of low gas prices in the US, a key factor for those connected industries. Our long term, (ie,
2020), Henry Hub forecast is US$4.50/mmcf. Underpinning that central case is a fairly
aggressive and optimistic demand side forecasts – of roughly 20 Bcf/d cumulative growth
between 2013 and 2020. That involves the creation of some 10Bcf/d of domestic market
growth (including ~3 Bcf/d of incremental industrial demand; similar growth for
transportation, but only 2-3 Bcf/d for power-generation). We also project that 8-10 Bcf/d of
LNG export capacity will be on stream by 2020 and that net imports from Canada will
continue to shrink while exports to Mexico will step up at least 2 Bcf/d as well:
The US upstream, however, should easily be able to meet these very large market
expansions. While the growth path may not always be smooth, and large infrastructure
expansion still need to be committed to in the next year or two, there is little or no question
left that the resource basins in the north-eastern US landmass especially can support
growth of this magnitude and more – and that the industry can deliver at BEP / cost bases
that are still declining, e.g. latest completion practices have reduced 'half-cycle' BEPs in
the dry-gas window of the core Marcellus to near $2/mmBtu.
Shorter term, we worry that our fairly pedestrian and conservative looking forecast of last
spring for a $4.10/mmBtu 2015 average HHub price level could prove too optimistic.
Supply growth keeps surprising to the upside and this summer weather has been quite
mild. So the fast shrinking storage deficit in the US looks like to disappear entirely as early
as end-November. Should a merely normal-to-modestly-colder-than-normal winter follow,
then 2015 markets may have to get comfortable with prices in a high $3/mmBtu range.
29 September 2014
Global Equity Themes 72
Growth opportunities
■ Shale exposed onshore oil field service and drilling companies and capital equipment
suppliers will benefit from a 10+ year period of rising demand. Considering US rig
counts Figure 113as a proxy for both activity and capex, the horizontal rig count has
more than tripled since 2009 (400 to nearly 1,400 rigs).
Figure 113: US rig count: 2006 - current
0
200
400
600
800
1,000
1,200
1,400
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Horizontal Vertical Directional
Source: Baker Hughes
■ Well positioned E&P companies now have an inventory of high return drilling locations
which breakeven at a lower oil price than the spot and futures curve for oil, a lower
price than OPEC budget breakevens and a lower price than marginal sources of
supply growth (e.g. oil sands, some deepwater).
■ Infrastructure companies (MLPs) and engineering companies are in the midst of a US
construction boom. In the MLP space, the majority of capex is driven by the shale
revolution, which we forecast to peak to nearly US$45bn in 2014, but to remain
elevated through 2015 and 2016.
■ Engineering & construction companies have reaped and should continue to reap from
the capex boom associated with US shales. Over the last 18 months, US$50bn of
projects have been announced with the majority in US LNG and petrochemicals
(reference report The Blueprint – designing Value for the E&C investor – Jamie Cook).
■ Energy transportation, distribution and logistics have been heavily influenced by the
Shale Revolution, the railroads represent a key investable theme for the expected
manufacturing revival in North America over the next 3-5 years. Examples include
hauling frac sand to the wellhead for horizontal drilling and logistically constrained
NGLs from the Utica/Marcellus to the Gulf Coast (reference report: If you believe in
Shale, you gotta love rail).
29 September 2014
Global Equity Themes 73
Figure 114: US MLP capex history and Credit Suisse forecast
Source: Credit Suisse estimates
■ As the US becomes a major exporter of LPG’s, shipping markets will expand.
■ A stimulus to new technologies that leverage the low cost of gas – eg, NGVs and
related infrastructure; DRI furnaces in the steel industry.
Free Cash Generation Opportunities
■ Chemical companies that can access low cost ethane should generate excess
returns/free cash flow given their position on the global cost curve. Similarly North
American fertiliser companies can access low cost gas relative to competitors
overseas. These companies should also be able to generate some growth.
■ US refiners can access cheaper crude and enjoy lower energy costs than their peers
around the world.
■ A major competitive advantage has been afforded to a range of energy intensive
industries in the US. There has been a cost curve shift.
Emerging Negatives
■ On the negative side, as the industry shifts capex onshore, then the offshore drillers
could suffer given new drillship deliveries.
■ Shale gas could reduce LNG demand growth.
■ Higher cost parts of the chemical/refining industry have become surplus to
requirements, mainly outside the US.
29 September 2014
Global Equity Themes 74
Figure 115: Contribution to Future Liquids Production Growth and Breakeven Range (Brent)
Source: CVX Analyst Day
Potential and Limitations
US Shale Oil Potential: We believe the US could increase oil production to over 12mbd
by the end of the decade (from 8.5mbd today) given the resource potential (notably in the
Permian). PXD, a Midland basin focused E&P shale player, suggests there could be as
much as 75bn boe in the Midland basin alone (just shy of Russia’s proven oil reserves
according to the BP Statistical Review).
US Shale Gas Potential: With over 100 years of gas, US gas demand could rise by
20+bcfd (from around 70bcfd today). Drivers of gas demand include LNG exports,
transport, power and industry. The Marcellus and Utica are some of the largest and lowest
cost gas basins in the world.
Figure 116: US Oil Production Potential (kbd) Figure 117: US Gas Demand Growth Potential (bcfd)
6,487 944
1,092
1,106
1,167 795
537 394
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Oil production set to increase by 5.1 MMBbls/d by 2020
Source: EIA, Credit Suisse estimates Source: EIA, Credit Suisse estimates
29 September 2014
Global Equity Themes 75
Figure 118: US Oil Production Potential By Basin (Growth from 2013 to 2019). The Permian has substantial upside from here.
-400
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
kbd
Source: EIA, Credit Suisse estimates
Shale outside the US: If the US is in its third of fourth innings (baseball), the rest of the
world is still choosing where to build a stadium. Shale prospectivity is high in certain
countries, but both technical challenges and above ground issues leave countries like
Argentina, China and the UK still at the very start of the shale (baseball) game.
Canada: We are optimistic for shale production growth in Canada (gas for LNG exports,
liquids from plays such as the Duvernay). The US energy Information Administration (EIA)
estimated in 2013 that there were 573 tcf of technically recoverable natural gas in Canada.
Argentina – prospective, investment stability key: We see strong geological potential
in the Vaca Muerta play at a time when the government would like (or needs) to reduce
high and rising energy subsidy bills, hence potential commercial/political alignment. The
challenges will be providing the political and fiscal stability required for foreign developers
(and supporting service plays) to introduce material capital to develop the opportunity.
YPF, Chevron, Schlumberger and Baker Hughes are the main protagonists at this point.
China – not giving up on shale: China is driven by energy security, and shale resources
(along with tight gas and CBM) offer the country the promise of increasing natural gas's
share in its primary energy mix without having to depend purely on high cost imports.
Recently the signposts have been somewhat confusing: Sinopec appears to be ready to
commercialise a field (Fuling), targeting 5Bcm of production in 2015 and 10Bcm by 2017;
but at the same time national planners recently announced a reduction from 60Bcm to
30Bcm of the 2020 production. We believe the original 60Bcm target was predicated on
China replicating the US shale industries growth profile from 2006 (the inflection year for
production) from 2015, now clearly too ambitious. We do not, however, conclude that
China is not as focused on developing its indigenous shale resources, with rising
exploratory wells being in 2014 and beyond. We expect 100 wells to be drilled in 2014 and
300 in 2015 (versus a total drilled of 100 – 160 by end 2013) Sinopec appears to be
leading the upstream development, with PetroChina also working in the upstream but also
positioned in the pipeline segment.
29 September 2014
Global Equity Themes 76
Europe: Torn between environmental concerns and energy security
UK: The current UK government clearly sees a need to try and stimulate the exploratory
phase for shale in the UK, offering significant incentives to local councils to support drilling
in two primary opportunity areas. Public opposition has been vocal, however. Centrica,
Total, Cuadrilla and IGAS are involved in the UK shale play.
Rest of Europe: Political hand-wringing has led to an anaemic approach in many
European countries, despite geological prospectivity and presumably geo-political supply
risk (dominant Russian supply dependence). WoodMackenzie forecasts 23 shale wells will
be drilled in 2014, 12 in Poland, 5 in Turkey, 3 in the UK and 1 in the Ukraine, Romania
and Demark. Despite prospectivity in the Paris basin France retains its frac ban. The major
players are Total, Chevron, San Leon Energy and 3 Legs Resources.
Australia: limited activity thus far; will gas prices stimulate shale? Australia's initial
foray into unconventional gas via Coal Bed Methane to LNG has been less than
successful – but those very plants using gas as feedstock are creating a major imperative
for further gas exploration and production as East Coast gas prices move toward LNG
netback parity. Geological prospectivity appears high in the Cooper and Canning Basins –
but both are relatively remote and drilling costs are high. Major operators in Australia
include Beach Energy, Chevron, Santos, Senex, Drillsearch, Buru and New Standard.
Figure 119: Substantial Shale Source Rock Around the World
Source: EIA
Limitations and risks
Oil Market Supply Demand Balance is Helped But Not Derailed By Shale: Shale oil
helps to meet the rising demand growth from EM countries for transport fuels. However,
production excluding North America has been flat for a decade and the world still relies on
the Middle East for around a third of production. Ultimately, regulators still need to focus
on energy efficiency programmes and natural gas substitution to alleviate oil market price
stress and as a stepping stone towards a lower carbon future.
Regulation: Given the resource potential of shale gas, its lower carbon content, and its
lower cost of supply for consumers, we like the opportunities it offers. That said, shale
does involve more wells to be drilled per barrel of production and lots of equipment moving
29 September 2014
Global Equity Themes 77
in onshore locations nearby population centers. Appropriate regulation to ensure well
integrity and investment in the affected communities would go a long way towards making
the division of this public benefit more equitable.
Supportive Regulatory Regime Required For Supernormal Growth: The North
American shale experience has been successful due to well-defined property rights that
were aligned between stakeholders, substantial infrastructure, tax incentives, and a
thriving domestic service industry. In much of the rest of the world, only some of these are
present, and much of the world’s shale potential may fail to come to market as a result.
More generally there are still many questions to be answered: Will the shale
revolution become global, and if so how quickly? Is there a risk that the US revolution
fizzles out (if production decline rates are higher than forecast) before the rest of the world
ramps up? How far will related industry economics be transformed (eg, petrochemicals,
power generation)? Will shale oil and gas reserves transform the global geo-political map?
Selected Stock Impact
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names across our coverage. These are not mutually exclusive.
As flagged above, the sensitivities to this theme lie both within and outside the oil sector.
In our report, The Shale Revolution II, we highlight over 300 companies in the shale supply
chain, too many to list here. In energy, there are many winners in the North American Oil
Field Services and E&P shale space.. Indeed, North America is still the most obvious
place to find shale equity exposure, directly or indirectly. Over time, as other basins
around the world are de-risked, more equity opportunities will become available. Outside
the US, the most promising shales appears thus far to be the Vaca Muerta, the Duvernay
in Canada. Sinopec is claiming success in its first commercial shale development in Fuling
(China). The Australia Cooper Basin should continue to attract interest as gas prices rise.
The UK’s shale looks geologically promising if above ground issues can be solved. We
have also included a list of equities exposed to non-US shale basins below.
Pure play LNG companies are likely to also benefit as LNG prices may fall over the longer
term if shale gas resources are commercialised.
Halliburton (Outperform): HAL is the largest provider of hydraulic fracturing services
worldwide and is a likely beneficiary of the Shale Revolution. The high service-intensity
horizontal rig count is up 350% in the last five years and has surprised with its strength
YTD; up over 200 rigs. Oilfield service activity in certain basins, such as the Permian,
Eagle Ford, Niobrara, and Bakken are absorbing excess capacity and straining supply
chains to the point where service companies like HAL are able to push pricing levels.
Wood Group (Outperform): Wood Group is distinctive in European oil services in having
significant exposure to US shale following a number of strategic acquisitions during the
last two years, and with a stated intent to grow through deals. As a consequence, it has
over 5,000 staff working in US shale, providing a variety of services to oil and gas
producers across all major basins. WG's main peers Amec and Petrofac have little direct
exposure to US shale.
Pioneer (Outperform): Pioneer has assembled the industry’s most prospective acreage
position in the Midland Basin. PXD began 2013 with a stated goal of significantly
increasing its NAV by confirming 3 BBoe of resource potential across 6 stacked intervals
(Wolfcamp A, B, and D; Middle Spraberry; Jo Mill; and Lower Spraberry) in the Northern
Midland Basin. PXD’s thesis that multiple zones could be highly prospective throughout its
800,000+ acre position is gaining significant traction. With a rig ramp from 5 to 16 in 1H14,
PXD seems to be an ideal growth play for 2015 with production expected to ramp up in
2H14.
29 September 2014
Global Equity Themes 78
Figure 120: Shale supply chain mind map
Equipment & Support Services Cost Beneficiaries
Regulation
Subsidies
Anadarko Petroleum
Apache
ARC Resources
Athlon Energy
Baytex
Beach Energy
Carrizo Oil & Gas
Chevron Oil & Gas Refining & Marketing
Cimarex Energy
CNOOC
Concho Resources
Construction & Infrastructure ConocoPhillips
Continental Resources
Devon Energy
Diamondback Energy
Drillsearch
Encana
EOG
Exxon Mobil
Gulfport Energy
Marathon Oil
Molopo Energy
Noble Energy
PDC Energy
Penn Virginia
Petrochina Company
Pioneer Natural Resources
Range Resources
Rosetta Resources
Santos
Senex energy
Sinopec china
TAG Oil
Trilogy Exploration
Revenue Risk
Oil & Gas Equipment Services Government Chemicals & Agriculture
Anton Oilfield Services, Baker
Hughes, Cameron, Dresser-Rand,
Enbridge, Halliburton,Hilong,
Honghua, Kinder, Schlumberger,
SPT Energy, Superior Energy
Services, Transcananda
Weatherford and Yantai Jerah,
Tenaris, Vallourec
Agrium Inc
CF Industries
Exploration & Production Dow Chemical
Formosa Plastics
Flowserve, Vallourec, Pentair,
Rotork, Weir, CIMC Enric, Energy
Recovery, Mitsubishi Heavy, KBR,
Luxfer, JGC
Clean Energy Fuels
Phillips 66
Eastman Chemical
Westlake Chemical
Lyondellbasell Industries
Bioamber
Tesoro Corp
Western Refining
Access Midstream, Caterpillar,
Crosstex, Fluor, Markwest Energy,
Plains, Targa Resources Utilities
Industrial Machinery
Environ & Facilities Services Dominion Resources
Nuverra, Republic Services, Waste
Mgmt and Waste Connections
Korea Gas
Perusahaan Gas Negara Persero
Railroads Steel
Union Pacific, Canadian Pacific and
Kansas City Southern. Yamato Kogyo
Osaka Gas
Electrical Equipment Tokyo Gas
Dongfang Electric, Harbin Electric
and Emerson.
Chubu Electric Power
NextEra Energy
Nucor
Other Voestalpine
Siemens, General Electric,
Honeywell, Inpex, Canadian Natural
Resources, Rolls Royce, Denso,
Keihin and Itron
Auto's & Tech
Maruti, Westport Innovation,
Cummins
ABM Investama, Adaro Energy,
Alpha Natural Resources, Arch Coal,
Cloud Peak Energy, Harum Energy,
Indika Energy, Peabody Energy and
Tambang Batubara.
Tenaska Uralkali, PhosAgro
Transalta Yara Intl,
Qinghai Salt Lake Potash
Coal & Consumable Fuels Independent Power Producers Chemicals & Fertilizers
Source: Credit Suisse research
29 September 2014
Global Equity Themes 79
Figure 121: Selected stocks exposed to the Shale theme
Beneficiaries
Company CS
Rating
Ticker Region Exposure to
the theme
Explanation
Halliburton O/P HAL US High Dominant shale Oil Field Service provider
Pioneer O/P PXD US High Largest resource holder in the Northern Midland basin
EOG O/P EOG US High Diversified shale portfolio and industry leader
Phillips
Petroleum
N PSX US High PSX benefits in its chemical business from cheap ethane, refining
business from cheaper crude, lower energy costs and
infrastructure opportunities in the MLP
Enterprise
Products
Partners, LP
O/P EPD US High EPD has significant growth potential in infrastructure
YPF N YPF Latin America High YPF has the largest acreage position in Argentina shale.
New Standard N/R NSE.AU US/Australia High Eagle Ford prod., Canning JV's with Conoco and Petrochina
Energy Transfer
Equity
O/P ETE US High ETE has significant growth potential in infrastructure
Sinopec O/P 0386.HK China High Successful commercial development of Fuling shale gas field –
China's pilot shale gas development
PetroChina N 0857.HK China Medium Largest shale resources owner in China, lukewarm on shale
development in the initial phase but impact could be material
towards the end of the decade
LyondellBasell O/P LYB US Medium LYB benefits from low cost ethane
Beach Energy N BPT.AX Australia Medium Phase 1 JV with Chevron, phase 2 would be material
Senex O/P SXY.AX Australia Medium Phase 1 JV with Origin, phase 2 would be material
Drill Search N/R DLS.AX Australia Medium Cooper JV with QGC, exploration upside later this year
Buru N/R BRU.AX Australia Medium Canning JV's with Mitsubishi and Apache, exploration upside
Chevron O/P CVX Global Low CVX is the key partner of YPF to develop shale thus far.
Schlumberger O/P SLB Global Low Service provider. Possible beneficiary to Argentina shale capex
cycle
Baker Hughes O/P BHI Global Low Service provider. Possible beneficiary to Argentina shale capex
cycle
Dow Chemical O/P DOW US High Cost beneficiary of shale gas until at least 2015E.
BioAmber O/P BIOA.N US High A beneficiary of the shale boom since it supports high prices for
BioAmber's products.
Caterpillar O/P CAT US Medium Intentions to launch LNG powered locomotives.
Union Pacific O/P UNP US High Crude by rail, inbound drilling materials
Fluor O/P FLR US High Leading player in construction of LNG facilities
Canadian Natural
Resources
O/P CNQ.TO North America High Current sellers of shale/tight gas resource
Agrium O/P AGU US High Could benefit from low cost shale, at least to 2016
Weir Group O/P WEIR.L Europe High Could benefit from increased demand in pressure pumps, fluid
ends and related services
KBR Inc O/P KBR US High Well positioned based on verticals in place
Negatively
impacted
Company Rating Ticker Region Exposure to
the theme
Explanation
Transocean N RIG US Medium Offshore drillers. With the industry growth shifting to the onshore
and an oversupply of offshore rigs, RIG's 2015-2016 earnings
power is being negatively impacted.
Diamond
Offshore Drilling
N DO US Medium Offshore drillers. With the industry capex shifting to the onshore
and an oversupply of offshore rigs, 2015-2016 earnings power is
being negatively impacted.
Shell O/P RDSa.L UK Low Arrow gas holds a major un-developed CSG acreage which is likely to be high cost. Shale could impact project margins.
PetroChina N 0857.HK China Low
BHP U/P BHP.AX Australia Low Major conventional gas producers in the Gippsland, direct beneficiaries of higher gas prices. Small in terms of scale of companies.
Esso N XOM US Low
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 80
Figure 122: Shale – Vive la Revolution – Relevant Research
Report Date Highlight
The Shale Revolution 13-Dec-12 Primer I: This report leverages the expertise of over 40 research strategists and analysts and paints a clear geographic and sector picture of the shale phenomenon, uncovering significant investment opportunities globally.
The Shale Revolution II 1-Oct-13 Primer II: We draw on the insights of over 50 global equity analysts, economists and strategists to revisit the key investment theme of the shale revolution and chart new developments.
Marcellus Shale: Inside the Numbers 11-Sep-14 Analysis of Unconventional Marcellus Shale production data in Pennsylvania suggests that the ‘rate of change’ continues to improve, with a step change in gas well productivity noted during 1H14.
Bakken Deep Dive: A "Client Flex" Basin Model
28-Jul-14 We introduce a client excel flex model for the key players where clients can model common assumptions for downspacing by county, by operator, across core acreage and the fringe acreage.
Exploration & Production: U.S. Upstream Deep Dive
28-Jul-14 We provide an update to our "US Upstream Deep Dive" which tracks select North American basin activity and expected operational catalysts as we head into the 2Q14 earnings season.
The Unbearable Lightness of Condensate - Impact On Chemicals, Refining, E&P and MLPs
12-Jun-14 The strong expected growth in condensate rich shale plays could have a significant impact on global naphtha markets over time, given the high naphtha (and pentanes) yield of condensate (up to 50+%).
Shale Day Takeaways 14-May-14 US tight oil production boom continues to have running room across the key plays; the Northern Midland and Wattenberg remain king on a per acre value basis; rising oil production will continue to keep the US refiners and Gulf Coast crude prices in focus.
Managed Shale - How to Get Paid for Know-How
10-Apr-14 This shift in business model means larger revenue opportunities, higher margins, and longer-term, stickier contracts for large, diversified, oilfield service companies that can offer a full suite of products.
If You Believe in Shale, You Gotta Love Rail
26-Mar-14 We turn our attention to the Natural Gas Value Chain, and the broader, long term impact of sustainably low natural gas prices.
Exploration and Production - Marcellus Shale: Inside the Numbers
12-Mar-14 Analysis of Unconventional Marcellus Shale production data in Pennsylvania suggests that the ‘rate of change’ continues to improve albeit at a slower pace than in recent history.
CS Conference Call: The Shale Revolution - Why it Still Matters
25-Feb-14
In N.A., efficiencies driving costs lower, recoveries are still improving. focus remains on the core of the key shale plays; shale is most impactful to GAS and NGL markets; shale oil won’t derail global oil markets for some time; global shale will take longer to be meaningful.
Energy in 2014 – Resilience 18-Dec-13 Shale efficiency and recovery are still improving for E&Ps with low-cost rocks in the right zip code. We continue to believe the low-cost shale E&Ps have upside.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 81
VIII A Solar “inflection point”
Theme Dynamics and Drivers
The inflection point in solar adoption is here given the relative cost-competitiveness of
solar power. Not only are environmental policies supporting the adoption of renewable
power sources, but the cost of solar energy has declined ~50% over the past six years,
making it a cost-competitive resource in many markets.
The growth opportunity is very significant, with solar representing only 0.003% of total
power generation capacity globally today. A mere 1% global penetration rate equates to a
$86bn opportunity for solar companies, on our analysis.
We expect solar demand to record a 16% CAGR throughout the decade, with the potential
for demand to surprise on the upside fuelled by continued technology improvements and
access to lower-cost forms of capital.
We expect 20% revenue and 59% bottom-line growth in 2014 for companies in our
coverage, with those poised to benefit the most having exposure to downstream project
development, including SolarCity (SCTY, Outperform), SunEdison (SUNE, Outperform),
SunPower (SPWR, Neutral) and First Solar (FSLR, Neutral).
Solar Demand: Increasing 21% in 2014
We expect solar demand to see a CAGR of 16% through this decade primarily driven by
demand from China, the US, and India among other countries. We forecast demand
growth of 21% in 2014 and 24% in 2015.
Figure 123: Global solar demand forecast to increase 21% in 2014 Solar Demand (MW) 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E
China 530 2,900 4,200 12,920 11,500 16,000 18,400 21,160 24,334 27,984 32,182% growth 155% 447% 45% 208% -11% 39% 15% 15% 15% 15% 15%
% of total demand 3% 11% 14% 34% 25% 28% 29% 30% 30% 30% 30%
% of electricity from Solar 0.03% 0.12% 0.30% 0.65% 0.92% 1.28% 1.65% 2.04% 2.44% 2.87% 3.32%
Japan 960 1,200 1,864 6,026 7,834 8,617 4,000 4,400 4,840 5,324 5,856% growth 101% 25% 55% 223% 30% 10% -54% 10% 10% 10% 10%
% of total demand 5% 4% 6% 16% 17% 15% 6% 6% 6% 6% 5%
% of electricity from Solar 0.34% 0.45% 0.63% 1.20% 1.94% 2.75% 3.13% 3.54% 4.00% 4.50% 5.05%
US 949 1,750 3,313 4,751 5,701 7,127 11,402 11,402 13,911 16,971 20,705% growth 96% 84% 89% 43% 20% 25% 60% 0% 22% 22% 22%
% of total demand 4% 7% 11% 12% 12% 12% 18% 16% 17% 18% 19%
% of electricity from Solar 0.09% 0.15% 0.27% 0.43% 0.63% 0.87% 1.25% 1.63% 2.10% 2.66% 3.34%
Germany 7,400 7,500 7,634 3,304 3,500 3,500 3,500 3,500 3,500 3,500 3,500% growth 96% 1% 2% -57% 6% 0% 0% 0% 0% 0% 0%
% of total demand 35% 28% 26% 9% 8% 6% 6% 5% 4% 4% 3%
% of electricity from Solar 2.99% 4.46% 5.07% 5.67% 6.26% 6.85% 7.44% 8.01% 8.59% 9.15% 9.71%
India 22 300 1,174 1,100 2,400 3,360 4,704 6,586 9,220 11,986 15,582% growth 1264% 291% -6% 118% 40% 40% 40% 40% 30% 30%
% of total demand 0% 1% 4% 3% 5% 6% 8% 9% 11% 13% 14%
% of electricity from Solar 0.00% 0.08% 0.27% 0.58% 0.92% 1.36% 1.94% 2.69% 3.69% 4.90% 6.36%
UK 77 850 960 1,450 1,943 2,040 2,142 2,249 2,361 2,479 2,603% growth 1007% 13% 51% 34% 5% 5% 5% 5% 5% 5%
% of total demand 3% 3% 4% 4% 4% 3% 3% 3% 3% 2%
% of electricity from Solar
Italy 6,000 5,800 3,583 1,117 1,173 1,232 1,293 1,358 1,426 1,497 1,572% growth 868% -3% -38% -69% 5% 5% 5% 5% 5% 5% 5%
% of total demand 28% 22% 12% 3% 3% 2% 2% 2% 2% 2% 1%
% of electricity from Solar 2.97% 5.41% 7.07% 8.00% 8.64% 9.37% 10.18% 10.99% 11.79% 12.59% 13.39%
Australia 385 700 700 610 847 932 1,025 1,127 1,240 1,364 1,501% growth 305% 82% 0% -13% 39% 10% 10% 10% 10% 10% 10%
% of total demand 2% 3% 2% 2% 2% 2% 2% 2% 2% 1% 1%
% of electricity from Solar 0.34% 0.75% 0.99% 0.86% 0.94% 1.04% 1.14% 1.25% 1.38% 1.52% 1.67%
Saudi Arabia 25 25 25 1,100 1,300 1,690 2,197 2,856 3,713 4,827% growth 0% 0% 4300% 18% 30% 30% 30% 30% 30%
% of total demand 0% 0% 2% 2% 3% 3% 4% 4% 4%
% of electricity from Solar
France 720 1,500 1,080 743 844 1,015 1,186 1,358 1,530 1,703 1,706% growth 314% 108% -28% -31% 14% 20% 17% 14% 13% 11% 0%
% of total demand 3% 6% 4% 2% 2% 2% 2% 2% 2% 2% 2%
% of electricity from Solar 0.21% 0.49% 0.63% 0.72% 0.87% 1.06% 1.28% 1.53% 1.81% 2.12% 2.43%
Global demand 21,107 26,900 29,291 38,037 46,164 57,085 62,478 69,711 80,873 93,503 108,355% growth in demand 167% 27% 9% 30% 21% 24% 9% 12% 16% 16% 16% Source: Government data, Company data, Credit Suisse estimates
Clean Tech Research
Patrick Jobin
212 325 0843
Maheep Mandloi
212 325 2345
maheep.mandloi@credit-
suisse.com
Baiding Rong
852 2101 6703
29 September 2014
Global Equity Themes 82
Theme Drivers
Driver #1: Regulatory support
Solar demand has traditionally been supported by subsidies. Demand growth in the 2000s
was mainly supported by a feed-in-tariff (FiT) structure in Europe. This decade, we believe
regulatory growth will be supported to an extent by FiT in China and Japan, Investment
Tax Credits (ITC) and Renewable Portfolio Standards (RPS) in the US, reverse auction–
based subsidies in India, and similar programmes in other countries. Cost
competitiveness, discussed below, should help to reduce reliance on these incentives and
provide reasonable returns to solar project developers.
■ US: Demand in the US is mainly supported by a 30% ITC on the installation price of
the solar system. The tax credit will decline to 10% starting in 2017. In addition, most of
the states require utilities to source a portion of their electricity from renewables. The
US installed 4.75GW of solar in 2013 and has a cumulative installed base of 11.8GW.
Based on the various state RPS mandates, we calculate incremental solar demand of
~34GW if solar meets 20% of the renewable mix (remainder mainly wind) and 85GW if
the solar/wind mix is 50%.
■ China: Starting in July 2013, the central government issued policies specifying
subsidies, on-grid tariffs, provincial quotas, and execution details, which removed
uncertainties, clarified returns and simplified solar project initiations. In March 2014, the
NDRC set the 2017 installed solar capacity target at 70GW, suggesting additions of
12.7GW per year in 2014-17. The government also set an Rmb0.9-1.0/kWh feed-in
tariff for utility-scale solar farms and an Rmb0.42/kWh subsidy on top of the normal
tariff for DG solar projects in 2014. We expect the government to review and potentially
reduce FiT on an annual basis as installation cost declines.
■ Japan: The FiT for solar was first re-introduced in the Renewable Energy Act in July
2012 primarily to decrease the country's dependence on fuel imports. The FiT is
designed to decline every year and offers ~JPY32-37/kWh in the current financial year
(ending March). Recent widespread media reports suggest that the government may
cap renewable volumes, or reduce FiT for higher volumes, or revise FiT more than
once a year to curb strong growth in renewables. The FiT is now passed on as a
renewable surcharge to all electric customers.
Driver #2: Cost-competitiveness spurring demand
We view the demand growth as particularly healthy, not only because of the relative
geographical diversity but because of the balanced reliance on subsidies. Solar is now a
more cost-competitive resource in many markets (see Figure 124) – both utility scale and
distributed generation (ie rooftop residential). All else being equal, this should reduce
resistance to overturning renewable targets, in addition to encouraging new policy
measures to adopt solar as the cost burden for ratepayers/governments becomes less
onerous. Levelized cost of energy (LCOE) for a US-based utility project has declined from
$200/MWh in 2011 to $80/MWh today (includes 30% ITC with 5.5hrs of average daily
sunshine, see Figure 126). Meanwhile solar demand in the US has seen a CAGR of 71%
to 4,751MW in 2013 from 949MW in 2014.
29 September 2014
Global Equity Themes 83
Figure 124: Levelized Cost of Electricity (LCOE) comparison of generation technologies
Solar Thermal
Nuclear
Geothermal
Fuel cell DG
Coal
Solar PV (Thin Film)
Solar PV (Crystalline)
Wind
Nat Gas
LED
0 25 50 75 100 125 150 175 200 225 250
$/MWh
Consumer retail rates range from $70/MWh to $340/MWh
Source: Company data, Credit Suisse estimates Note: Solar PV, thin film, thermal and fuel cell includes 30% investment tax credit (US). Solar PV installation cost of $2/watt, natural gas at $4.5/MMBtu. No production tax credit assumed for new wind/geothermal projects.
Figure 125: Lower cost of solar power makes it competitive in many markets
$ (0.13)
$ (0.09)
$ (0.08)
$ (0.06)
$ (0.05)
$ (0.04)
$ (0.02)
$ (0.02)
$ 0.01
$ 0.01
$ 0.03
$ 0.04
$ 0.05
$ 0.05
$ 0.08
$ 0.09
$ 0.10
$ 0.12
$ 0.16
$ 0.16
$ 0.30
Russia
Canada
China
South Korea
Saudi Arabia
India
Turkey
US
UK
Taiwan
Japan
France
Brazil
South Africa
Iran
Mexico
Italy
Chile
Germany
Spain
Australia
DG saving over residential retail rate, $/kWh
$ (0.10)
$ (0.09)
$ (0.04)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.02)
$ (0.01)
$ (0.01)
$ 0.01
$ 0.01
$ 0.02
$ 0.02
$ 0.03
$ 0.05
$ 0.05
$ 0.05
$ 0.05
$ 0.06
$ 0.08
$ 0.08
Russia
Canada
US
UK
Mexico
Iran
Saudi Arabia
Germany
France
Turkey
Italy
Spain
Brazil
South Africa
Japan
South Korea
China
Taiwan
Australia
India
Chile
Utility Solar savings over natural gas, $/kWh
Source: Company data, Credit Suisse estimates Note: LCOE base case assumes WACC of 6%, no subsidies, Solar installation cost of $3/watt for DG and $2/watt for utility scale
■ Dramatic price declines have abated, relatively stable module prices going
forward: The principal driver for the panel ASP reduction has been the decline in the
cost of polysilicon (see Figure 126), and to a lesser extent, increased cell efficiencies
29 September 2014
Global Equity Themes 84
and compression in manufacturing margins. Polysilicon prices fell from >$300/kg in
2008 (~$2/watt) to $16-18/kg ($0.09/watt) in 2013, enabling the majority of the cost
reductions in solar module pricing. Module pricing has stabilized at $0.54-0.75/watt
today, depending on the market. Certain markets have premium pricing, such as Japan
(which has started to correct towards the global price), Europe (following a price floor
trade agreement reached of €53c/watt) and the US (following anti-dumping and
countervailing duty against Chinese panels with ASPs of ~$0.74/watt), but certain
markets, particularly China, have had low pricing (in the low ~$0.54/watt) which is
starting to normalize due to tightening supply. We expect prices to remain at these
levels in the short term, and decline further in the long term as companies lower their
non-silicon costs.
Figure 126: Panel prices have declined nearly 85% over 5 years
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Silicon $/W Non-Si cost $/W Margin $/W
LCOE ~20c/kWH
LCOE ~9c/kWH
LCOE ~8c/kWH
Source: Company data, PV Insight, PV Energy Trend, Credit Suisse NOTE: LCOE for a utility scale project includes BOS cost, 30% ITC with 5.5hrs of average daily sunshine
■ Distributed generation a bright spot for growth: The cost-competitiveness of solar
power is particularly evident in the distributed generation market where solar power
competes with higher retail prices of electricity. According to the latest EIA and
SEIA/GTM data, the US residential market grew 58% y/y in 2013. More than 360,000
homes in the US now have rooftop solar which equates to >2.3 GW of capacity.
Distributed rooftop solar has grown at a ~40% CAGR for the last 4 years yet still
represents less than 0.6% of rooftops. Reaching a 10% penetration level in the US
implies a CAGR of >13% through the next decade (or >50% CAGR if reached in 5
years). First-mover states have already demonstrated these penetration levels could
be obtainable: 13.4% of residential rooftops in Hawaii have solar, California is
approaching 2.2% penetration.
29 September 2014
Global Equity Themes 85
Figure 127: Decline in system costs should open up new markets
China
US
Japan
India
Germany
Canada
France
Brazil
South Korea
UK
Spain
Italy
Mexico
South Africa
Saudi Arabia
Iran
Taiwan
Turkey
Chile
$ -
$ 0.05
$ 0.10
$ 0.15
$ 0.20
$ 0.25
$ 0.30
$ 0.35
$ 0.40
3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0
Res
iden
tial r
etai
l tar
iff/L
CO
E $
/kW
h
Average Daily Sunshine hours
$1.5/W $2.0/W $2.5/W $3.0/W $3.5/W $4.0/W
Source: Company data, Credit Suisse estimates
Note: LCOE base case assumes WACC of 6%, no subsidies, Solar installation cost of $3/watt for DG
Driver #3: Access to lower cost of capital accelerating cost-competitiveness
Emergence of financing vehicles in 2014 will likely increase cost-competiveness of
solar further and increase value capture for developers
Solar project developers typically develop projects and sell them to private investors which
often demand returns in the 7-9% range, partially due to the tax attributes and partially due
to friction in single-project transactions.
Solar developers are looking at tapping new forms of lower-cost capital, including
launching YieldCos (C-corps paying a dividend to take advantage of the disconnect
between private project capital and the public market's yield appetite) and asset backed
securities (ABS), further increasing shareholder value capture and unlocking new markets.
Recent financial innovations in the solar sector include (i) SolarCity – initiated the first ever
solar asset backed security with a 4.8% interest rate in November 2013, followed by
4.59% in April and 4.32% in July 2014 (ii) Hannon Armstrong – launched a renewable
asset REIT, (iii) NRG Yield (NYLD) – launched a YieldCo by combining renewable assets
with conventional generation assets to take advantage of the tax benefits, (iv) Abengoa
yield (ABY) launched by combining transmission and renewable generation assets, and (v)
NextEra (NEE) launched a YieldCo – NextEra Partners (NEP) by combining wind and
solar generation assets, and (vi) SunEdison successfully launched their TerraForm
(TERP) yield vehicle that currently trades at a 3% dividend yield (and ~6% on 2016).
29 September 2014
Global Equity Themes 86
Figure 128: Low-cost financing can expand available markets (or increase value-capture for developers)
China
US
Japan
India
Germany
Canada
France
Brazil
South Korea
UK
Spain
Italy
Mexico
South Africa
Saudi Arabia
Iran
Taiwan
Turkey
Chile
$ 0.05
$ 0.10
$ 0.15
$ 0.20
$ 0.25
$ 0.30
$ 0.35
3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0
Res
iden
tial r
etai
l tar
iff/L
CO
E $
/kW
h
Average Daily Sunshine Hours
3.0% 4.0% 5.0% 6.0% 7.0% 8.0%
Source: Company data, Credit Suisse estimates Note: Installation cost of $3.0/watt, 25 year life; TAM represents total accessible market of annual energy payments for residential electric customers in $bb and TWh
If solar project developers were to lower the LCOE by roughly 2c/kWh to an average of
13c/kWh due to a 200bps improvement in WACC (at the same price per Watt), the market
opportunity for distributed generation in the US (pegged against retail rates) could
increase roughly 50% to about $90bb per year, according to US EIA data.
Figure 129: Lower Cost of Capital can Reduce Solar PPA rates and Increase Solar TAM
US utilities' retail TWh Solar PPA rate c/kWh US utilities' retail revenue Solar PPA rate c/kWh
above solar rates 13 15 17 above solar rates 13 15 17
Residential TWh 441 270 126 Residential Rev $b $62 $41 $22
Commercial TWh 199 126 61 Commercial Rev $b $27 $19 $10
Industrial TWh 19 11 6 Industrial Rev $b $3 $2 $1
Total TWh 659 407 192 Total Rev $b $92 $62 $33 Source: EIA, Company Data, Credit Suisse estimates
Risks and Concerns
■ Subsidy-driven market: Though solar has achieved grid parity in some regions,
major markets like China, Japan, the US, the UK and others depend on subsidies for
attractive returns. Any sudden decline in subsidies would result in an immediate
decline in demand in these countries, or margin compression for panel manufacturers
and project developers, or both. Countries have also started imposing self-
consumption charges on power produced from solar panels (irrespective of who uses
it) to fund deficits caused by higher feed-in-tariffs (FiT), especially in Europe.
■ Regulatory charges against rooftop solar: The growth in rooftop solar has spurred
regulatory battles on whether or not customers should receive payments at the full
retail rate of electricity or something closer to a wholesale power price. Thus far
regulations in California, the largest market, have largely favoured distributed
generation. Arizona has also contested the rate construct for rooftop solar customers
but to-date has only persuaded the utility commission to implement a somewhat
nominal surcharge of ~$4.90/month for an average system. We expect as the
distributed generation market grows the pressure for regulatory changes will intensify.
■ Trade wars and import duties/barriers: Countries like Europe and the US have
imposed anti-dumping duties on panels imported from China. Few countries like
Canada and India also give some preference to panels with higher domestic content.
29 September 2014
Global Equity Themes 87
These import duties and barriers increase panel ASPs thereby creating margin
pressure for manufacturers, lowering value creation for project developers, increasing
solar's levelized cost of energy, or negatively impacting demand.
Selected stocks exposed to this theme
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names across our coverage. These are not mutually exclusive.
Preference for Downstream Developers
We prefer downstream solar stocks SunEdison (SUNE) and SolarCity (SCTY) due to their
strong growth prospects in 2014 and access to lower cost capital from YieldCos and
asset-backed securities. JinkoSolar (JKS) is our top pick amongst upstream China solar
manufacturers as the company leads in manufacturing cost, gross margin, and is
increasing project development activities.
■ SunEdison (SUNE, Outperform, TP $34): SunEdison's solar project business is at
an inflection point of growth as the company delivers on its project pipeline and
expands into smaller-scale distributed solar generation projects. The company is well
positioned with a low-cost solar manufacturing process, a low-cost poly JV with
Samsung, and a road-map to further cost reductions. While the inflection point in
project completions will be the primary catalyst (100% growth guided in 2014), the
semiconductor business IPO has guided the market to realize a SOTP valuation in
Q2. SunEdison will also receive Incentive Distribution Rights (IDR) thereby enabling
higher value capture. Along with drop-downs to the current YieldCo (and potential for
a second YieldCo), securitization of solar assets will further increase valuation upside
and act as catalysts.
■ SolarCity (SCTY, Outperform, TP $97): SolarCity is the leader in the US rooftop
solar market with a 35% share. The company is a key beneficiary of two trends in
solar – lower solar costs making it a viable resource in more markets and the ability to
lower the cost of capital through alternative financing vehicles to increase returns.
SCTY leases solar systems to homeowners, allowing no upfront capital investment for
consumers while also delivering immediate savings relative to the incumbent utility
rates. We estimate current unlevered project returns are in the mid-teens range.
SolarCity has been the first to market with securitizations, enabling full gearing on
projects that generate mid-teens unlevered returns with <6% cost of capital, and
importantly, to fully finance all capital needs for systems. We remain constructive
given (1) robust demand – Q2 bookings (+216% y/y) suggests the company is already
at a run-rate that would exceed guidance of 88% and 81% growth in 2014 and 2015,
respectively; (2) the company is in the process of finalizing plans to expand upstream
to lower system costs by manufacturing high-efficiency solar modules, increasing
returns and preserving economic viability after the subsidy step-down in 2017; and (3)
SolarCity is likely to further demonstrate their ability to finance systems at a lower rate
through additional securitizations.
■ SunPower (SPWR, Neutral, TP $35): SunPower has the best high efficiency
technology which makes their panels ideal for rooftop markets today (or space
constrained places) and potentially having attractive economics for utility scale
projects. Large strategic owner (Total) can help lower the cost of capital as the
company expands globally. The company has said that it also plans to potentially
launch a YieldCo in 2015/2016 (or retain projects to be sold to a third-party YieldCo at
a higher multiple). SunPower remains capacity constrained until new capacity comes
online in 2015/2016 and faces margin headwinds in the near term as it completes
highly-profitable legacy projects.
■ First Solar (FSLR, Neutral, TP $70): First Solar has strong visibility on 2014 projects,
but 2015 project development and margins are at risk, in our view. Margins on new
projects are much lower than the legacy projects being built in 2013-14. That said, the
29 September 2014
Global Equity Themes 88
company deserves credit for reducing its manufacturing cost and improving efficiency
in line with its roadmap. The company looks likely to make a decision on whether or
not to launch a Yieldco in the next few months.
■ Singyes (0750-HK, Outperform, TP HK$16.4): A solar EPC company with a strong
track record in Golden Sun and BIPV, we believe Singyes is an attractive play on the
potential DG market ramp-up. Its experience and strong track record and healthy
balance sheet could differentiate it from its competitors.
Upstream Solar Panel Manufacturing
■ JinkoSolar (JKS, Outperform, TP $45). JinkoSolar is a vertically integrated, low-cost
solar panel producer. JinkoSolar has among the lowest costs and highest margins in
the industry. We have an Outperform rating on JKS based on project development and
more conviction on stable pricing through 2014.
Figure 130: Stocks exposed to the Solar theme
Beneficiaries
Company Ticker CS Rating Region Exposure to the
theme
Explanation
SunEdison SUNE O/P US/global High YieldCo in 2014 will enable higher value capture
SolarCity SCTY O/P US High Market leader in US DG. Also expanding vertically with
1GW plant coming online in 2017
SunPower SPWR N US/global High Highest efficiency panel manufacturer. Poised to take
advantage of growth in DG markets
First Solar FSLR N US/global High Efficiency improvement and cost reduction measure
should help compete with c-si panels
Jinko Solar JKS O/P Global High Low cost panel manufacturer with downstream
presence
Singyes Solar 0750-HK O/P China High Downstream project developed in China set to benefit
from potential DG ramp-up
Source: Company data, Credit Suisse estimates
Figure 131: A Solar “inflection point” – Relevant research
Report Date Highlight
Solar Snippet: Near-term Speed Bump Expected; Lowering Q3 Forecasts on Continued Weak Pricing
11-Aug-14 Continued weak pricing suggest lower margin expectations are warranted into Q3 guidance setting
Solar Snippet: Ouch - Anti-Dumping Higher than Expected; Back to Trade 1.0, Potential Margin Pressures
27-Jul-14 Worse than expected, but impact partially mitigated for Chinese manufacturers as a shift back to China manufacturing likely.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 89
Theme #4 – Technology's new wave
Big Fast Data
Automation – the second wave
China Environment
Themes in Healthcare
Ageing in EM
Resource Efficiency
Shale Revolution
Solar’s inflexion point
Unlocking the internet
Content is king
Technology’s
new waveResource
scarcity
A connected
consumerDemographic
demands
Structural Growth Themes
Source: Credit Suisse research
IX Big Fast Data
While not new, “Big Data” still stands out as arguably the most important unifying product
across the technology space. Connected devices alone are projected to grow from 15
billion today to potentially 50 billion in 2020 offering the prospect of an exponential growth
in connections and data generation spanning the private and government sectors.
Importantly, the advent of an easily deployable/practical Data Analytics scheme, as well as
In-Memory Computing (at ever lower costs) provides the foundation on which to now
monetize data. An arguably self-perpetuating cycle of (1) Data Creation, (2) Data Storage,
(3) Data Transmission, and (4) Data Analytics.is establishing itself and also serves as a
framework for investment across the technology supply chain. The software/database and
storage/memory plays are key to this theme.
X Automation
We have previously discussed the emerging market labour-inflation / productivity drivers of
automation spend, and this thesis seems to be borne out now as robot demand in markets
such as China has remained strong, even as the broader macro-economy has slowed
down. It remains a source of structural growth in the industrial arena. Aside from emerging
markets, we see now that rising IT penetration in the manufacturing sector can also drive a
second wave of automation investment in developed economies.
29 September 2014
Global Equity Themes 90
IX The Big Bang of Data Theme Dynamics and Drivers
“Big Data” is not a wholly new theme for us. However, in our view, it still stands out as the
most important unifying product across the technology space and arguably the only
demand curve in technology that is being underestimated, with more and more business
processing becoming digitised. Connected devices alone are projected to grow from 15
billion today to potentially 50 billion in 2020, offering the prospect of an exponential growth
in connections and data generation spanning the private and government sectors.
Figure 132: From creation to security, the need for and use of Big Data is all around us
Source: Credit Suisse Research
Importantly, the advent of easily deployable/practical Data Analytics scheme, as well as In-
Memory Computing (at ever lower costs) provides the foundation on which to now
monetize data. An arguably self-perpetuating cycle of (1) Data Creation, (2) Data Storage,
(3) Data Transmission, and (4) Data Analytics is establishing itself and also serves as a
framework for investment across the technology supply chain. The software/database and
storage/memory plays are key to this theme.
Exhibit 133: Overall compute units to grow at c20% CAGR (2011-15E)
Source: Company data, Credit Suisse estimates
Software
Philip Winslow, CFA
212 325 6157
Semiconductors
John Pitzer
212 538 4610
29 September 2014
Global Equity Themes 91
What Are The Key Drivers?
As first highlighted in our deep-dive reports on Fast Data (see The Need for Speed) and
Big Data (see Does Size Matter Only?), we believe there is a data revolution under way in
the business intelligence/analytics/data warehouse environment. Specifically, changing
business requirements have placed demands on data warehousing technology to do more
things faster and to extract value from more types of data that organizations collect outside
of traditional transactional systems.
Enterprise IT departments are having to deal with two contradictory forces: (1) the volume
and complexity of the types of data are continuously increasing (i.e., Big Data), while (2)
the processing of data into usable business analytics needs to be more real time to react
to fast-changing business needs (i.e., Fast Data).6
Owing to the two aforementioned contradictory pressures on IT departments, we expect
that the lines between Fast Data and Big Data will begin to blur into a new category that
we are referring to as Big Fast Data (BFD). Specifically, we expect enterprises to
supplement data warehouses to support MapReduce in order to optimize for larger and
more diverse datasets, while new data architectures will enhance real-time analytics for
complex models (i.e., rapid cross-correlation between different types of unstructured and
structured data).
Figure 134: Next Evolutions of Business Intelligence (BI), Business Analytics, and Data Warehousing
Data Management
Initial processing and standards
Data integration
Reporting
Standardized business processes
Evaluation criteria
Data Analysis
Focus less on what happened and more on why it happened
Drill-downs in an OLAP environment
Modeling & Predicting
Leverage information for predictive purposes
Utilize advanced data mining and the predictive power of algorithms
“Fast Data”
Information must be real-time
Query response times in seconds to accommodate real-time, operational decision-making
Agility to create temporary analytics in an end-user driven, scalable environment
The line between data warehousing and CEP blurs
“Big Fast Data (BFD)”
Structured and multi-structured data must be extremely up to date and query response times must be measured in seconds
More operational decisions become executed with pattern-based, event-driven triggers to initiate automated decision processes
The lines between data warehousing, CEP, and “Big Data” blur with seamless integration of historical, operational, and predictive data analytics in real-time at massive scale
Complex Event Processing
Analyze streams of data, identify significant events, and alert other systems
“Big Data”
Leverage large volumes of multi-structured data for advanced data mining and predictive purposes
Source: TDWI, HighPoint Solutions, DSSResources.com, Credit Suisse research.
■ Fast Data. Real-time, operational analytics represents the next stage of business
intelligence/data warehousing, shifting business intelligence to tactical use, geared
towards short-term horizons and utilizing information as it is made available to players
out on the field conducting day-to-day operations. This model for business intelligence
is juxtaposed against the first four stages of BI/data warehousing as detailed in
Figure 134, which focused on strategic decision support for longer-term goals and
company initiatives. Whereas strategic BI looks to the future and centres on decision-
29 September 2014
Global Equity Themes 92
making in advance or anticipation of certain outcomes, tactical and operational BI
focuses on continuous or frequent data updates and insights that affect the immediate
environment and support ongoing, tactical decision-making. As such, the adoption of
real-time, operational analytics represents a shift to active data warehousing. Real-
time, operational decision-making has essentially been unattainable because of the
time delay in getting data produced by business applications into and then out of
traditional disk-based data warehouses. However, applying in-memory and NAND
flash technology removes the growing performance barrier caused by the existing
disk-based business intelligence/data warehousing architectures.
Whereas a strategic decision support environment can use data that is loaded often
once per month or once per week, the lack of data freshness due to the performance
limitations of traditional, disk-based data warehouses is unacceptable for tactical
decision support. Furthermore, to enable real-time, operational analytics, which we
view as the next evolution of business intelligence, the response time for queries must
be measured in a small number of seconds in order to accommodate the realities of
decision-making in an operational field environment.
The core differentiating element of real-time, operational analytics is the provisioning
of up-to-date operational data for immediate use and implementation. Common
examples of this include just-in-time inventory management and delivery routing. Both
involve a series of complex decisions contingent upon several frequently shifting
variables, including sales levels and inventory-on-hand for the former and travel
delays and load balancing for the latter. In this operating environment, tactical BI can
be used to, in effect, solve optimization problems as per the specific strategic
objective. Traditional business intelligence tools, which mainly utilize historical data, do
not suffice for these tasks that require consistent, reliably up-to-date data that are
applicable to the current business environment. As such, tactical BI requires a data
warehouse capable of continuous data acquisition with high query responsiveness and
an architecture designed to prevent bottlenecking, latency and data loss.3
■ Big Data. Organizations are facing an ever-increasing amount of data that they must
handle, sift and either retain and/or dispose of every day. Yet the vast majority of data
an organization generates today are either neglected or not utilized, as the data are
often nonstandard, time-series and/or constantly changing. (See Figure 135 and
Figure 136)
Figure 135: New Digital Data vs. Enterprise Disk Storage
Capacity Shipments in petabytes
Figure 136: Enterprise Disk Storage Capacity Shipments,
Unstructured vs. Structured Data in petabytes
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2005 2007 2009 2011 2013 2015
Enterprise disk storage capacity shipments New digital data touched by enterprises
0
20,000
40,000
60,000
80,000
100,000
120,000
2005 2007 2009 2011 2013 2015
Structured data Unstructured data
Source: IDC, Credit Suisse research Source: IDC, Credit Suisse research
29 September 2014
Global Equity Themes 93
Nonetheless, this data can provide useful operational insights into user behaviour,
security risks, capacity consumption, peak usage times, fraudulent activity, customer
experience, and so on. As such, organizations are struggling with how to manage
these vast and diverse datasets that include traditional structured data, as well as
semistructured or unstructured data types including sensor data, Webpages, Web log
files, click-streams, AVI files, search indexes, text messages, email and so on. These
large, untapped datasets define a new category of information, which is increasingly
known as Big Data. These data offer significant potential for deep insights that drive
faster, clearer and more nuanced decision-making. Companies need an approach that
allows this information to be effectively understood and analyzed.
The analysis of Big Data can provide actionable insight into customers, customer
buying patterns and supply chains, leading to more timely situational awareness,
lower costs and increased agility (e.g., Amazon mining click-stream data to drive
sales, Netflix mining customer preferences, and consumer package goods
manufacturers analyzing point-of-sale data to gain insight into customer buying
patterns more effectively to manage pricing and supply chains.) In other words, Big
Data analysis must increasingly be viewed as a competitive advantage. In fact, a
recent annual survey on data warehousing by the Independent Oracle Users Group
(IOUG) found that approximately 48% of enterprises expect a significant or moderate
increase in unstructured data analysis over the next five years. (Figure 137)
Figure 137: Expected Increase in Unstructured Data Analysis over the Next Five Years
Significant increase
19%
Moderate increase
29%
Minimal increase
26%
Don't know/unsure
26%
Source: IOUG, Credit Suisse estimates
Specifically, an organization would leverage information sources, such as call centre
software, click-streams from corporate websites, news feeds and social media
websites, to identify strongly positive or negative sentiment regarding organization,
product categories, specific items, and potential failures and risks. For example, an
enterprise could combine customer demographic data from a CRM system and
purchase history across channels from an order management system found in
traditional SQL-based data warehouses with click-stream data stored in
MapReduce/Hadoop-based systems to obtain a more holistic understanding of
customers in order to better determine how they may respond to an online
promotional campaign. Furthermore, by bringing in social media conversations,
companies can better identify how customers are influencing each other's buying
decisions. In addition, a Big Data system could look for variances in behaviour,
including an increase in specific text patterns, occurrence of key words/phrases, Web
traffic trends, and point-of-sales data, to determine sentiment changes and then take
action by alerting key public relations staff, sending customers automated
updates/responses, informing the customer service organization directly to contact
individuals, or alerting a marketing automation system to send out promotions based
on historical purchase and current and past behaviour.
29 September 2014
Global Equity Themes 94
■ Big Fast Data (BFD). Regardless of the volume or complexity of data, enterprises still
want to keep the latency of the analytical queries as low as possible, with the goal of
reducing processing times from hours into minutes and minutes into seconds.
Because of the two aforementioned contradictory pressures on IT departments, we
expect the lines between Fast Data and Big Data to begin to blur into a new category
that we are referring to as Big Fast Data (BFD), as we expect existing vendors to
supplement data warehouses to support MapReduce to optimize larger and more
diverse datasets, while new data architectures will enhance in-memory analytics for
complex models (i.e., rapid cross-correlation between different types of unstructured
and structured data).
In other words, we expect Big Data batch processing platforms to be supplemented
(or even surpassed) by real-time, Big Data analytics that will be able to provide
superior performance over live streams of data (as well as accumulated historical
event data, which can be queried as the data receives these continuously-updated
feeds) given that traditional batch analytics do not deliver intelligence fast enough on
incoming data. The pattern-based output of applying complex logic to streams of
incoming data, as well as stored historical data (both structured and multi-structured)
can either be delivered to frontline decision makers via dashboards or to applications
that execute in-the-moment actions based on event triggers.
Big Fast Data (BFD) further shifts away from strategic analytics tools' reliance on
historical data towards the automation of decision-making processes based on
event-driven triggers based on real-time data. The basic concept is to continuously
discover what's happening by leveraging structured and multi-structured data, while
it's happening, correlate it with large-scale historical data, and deliver it to decision
makers or to applications via event triggers in time to take appropriate actions.
Figure 138: The Big Bang of Data - the best product cycle in Tech
Source: FactSet, SIA, Company data and Credit Suisse estimates
This stage requires data management/analytics technologies that can execute several
simultaneous queries within seconds or less across both structured and
multistructured data. An example of this technology is in the retail industry with
electronic shelf labels that do not require manual price and inventory updates. Instead,
the electronic shelf labels enact new price changes based on data related to sales,
demand, and inventory that guide the automated mark-down strategy decision.
Additionally, the shift in pricing strategy may also activate new promotional messaging
to buttress the strategy and best respond to consumers. As such, pricing decisions
can be made almost immediately on an extremely granular basis based on event
triggers and decision-support capabilities enabled by an active data warehouse.3
29 September 2014
Global Equity Themes 95
Another example of the value of real-time structured and multistructured data analysis
would be sentiment monitoring. Specifically, an organization would leverage
information sources such as call centre software, click-streams from corporate
websites, news feeds, social media websites, and so on to identify strongly positive or
negative sentiment regarding organization, product categories, specific items, as well
as potential failures and risks. A Big Fast Data (BFD) system would look for variances
in behaviour, including an increase in specific text patterns, occurrence of key
words/phrases, Web traffic trends, point-of-sales data to determine sentiment
changes, and then take action by alerting key public relations staff, sending customers
automated updates/responses, informing the customer service organization to directly
contact individuals, or alerting a marketing automation system to send out promotions
based on historical purchases and current and past behaviour.
Who Are The Winners Or Losers?
Winner: Software
If we return to the stylistic framework suggested earlier of Data Creation/Data
Storage/Data Transmission and Data Analytics, the software sector is clearly to the latter
part of the chain. Furthermore, anecdotal evidence suggests that no more than 20% of
users in most organizations use reporting, ad hoc query, and OLAP tools on a regular
basis, and an estimated 70-75% of systems referred to as enterprise data warehouses
(EDW) are actually single-business data marts. Based on these dynamics, Phil Winslow's
team expects robust adoption of business intelligence/analytics/data warehouse
technologies.
Winslow's team believes that technology vendors offering the broadest set of not only data
management systems (i.e., in-memory, columnar and traditional row-based databases, as
well as support for structured and multi-structured data) and server and storage tiers, but
also integration across multiple data processing platforms (i.e., traditional MPP data
warehouses, in-database MapReduce, Hadoop connectors) are best positioned to
monetize the adoption of the modern analytics infrastructure paradigm supporting and
continue to cultivate the sizeable market for existing (and still relevant) data architectures.
We view the following technology vendors as the most leveraged investment vehicles to
increase adoption of Fast Data and Big Data technologies that we believe will ultimately be
as transformational to businesses as client/server applications were in the 1990s:
■ Oracle. Oracle, led by the company's flagship product, Oracle Database, as well as
Exadata, Exalytics, and the Oracle Big Data Appliance, is the dominant player in the
data warehousing market with a more than 40% share. Because of Oracle's strength
in the database layer, we believe that Oracle is uniquely positioned to increase
performance and lower storage hardware costs through innovation in the software
stack that cannot be replicated by hardware vendors—i.e., Oracle is dictating "down
the stack" but server and storage hardware vendors cannot dictate "up the stack."
Because Oracle offers the "secret sauce" software features of Exadata that link
directly back to the Oracle Database only if the customer purchases the complete,
integrated Exadata system, server and storage vendors cannot match the
price/performance gains as could be achieved through Exadata for Oracle Database
workloads. (For a more extended analysis of the Oracle Exadata Database Machine,
please see Dr. Exalove, or: How I Learned to Stop Worrying (about Sun) and Love
Exadata.)
Furthermore, although much of Wall Street has been concerned about Oracle's near-
and long-term database license growth (due not only to competition from in-memory
databases but also to Hadoop, NoSQL, the cloud, and other factors), we believe the
release of the In-Memory Option for Oracle Database 12c positions to reaccelerate
Oracle's database license growth to more than 10% as compared with consensus
estimates that imply less than 5% license growth. We expect a more accelerated
29 September 2014
Global Equity Themes 96
adoption cycle for Oracle Database 12c and the In-Memory Option than past releases
(1) due to the growing need by customers to process more data faster to provide real-
time analytics and (2) because existing applications that can run on Oracle Database
12c can automatically take advantage of the In-Memory Option without any recoding.
In other words, customers increasingly require high-performance databases and
upgrading to the In-Memory Option for Oracle Database 12c is the "path of least
resistance." (See Speed Could Kill Consensus DB Estimates.)
■ SAP. SAP has been the most vocal and most aggressive vendor promoting in-memory
computing over the past several years. SAP HANA (High-Performance Analytic
Appliance), a preconfigured hardware appliance with pre-installed SAP software, is
the cornerstone of the company's in-memory strategy. SAP's management (driven by
Hasso Plattner, a cofounder and the current chairman of the supervisory board of
SAP) has positioned HANA and in-memory technology as the foundational layer of the
company's forward product roadmap—for not only business intelligence solutions but
also new and existing line-of-business applications.
For example, SAP has released and is planning to release several new applications
for the retail and consumer packaged goods (CPG) verticals, including one application
aimed at real-time trade promotion planning, which will help CPG and retail companies
make more effective decisions about when to offer promotions and special offers, and
we expect the number of HANA-optimized applications from SAP to continue to
expand in 2013. Furthermore, SAP has already begun the process of refactoring
various modules of its Business Suite applications to fully take advantage of HANA's
columnar, in-memory database architecture. For example, certain long-processing
programs, such as inventory-check and available-to-promise (ATP), are usually
performed as background programs/jobs but can benefit from HANA's in-memory
architecture and be moved online.
We view SAP HANA as the most disruptive product to database market share since
SQL Server's emergence in the 1990s. Based on our proprietary surveys and detailed
analyses of market sizing, we believe that consensus continues to underappreciate
the sell-through opportunity of HANA. (See HANA Means Business (Warehouse)! and
HANA's Bringing Sexy Back To Database.)
■ Splunk. Machine data, which is primarily a time-series semistructured/unstructured
data produced by nearly every software application and electronic device, is not only
the fastest-growing data type but also the most complex and most valuable segment
of Big Data. Splunk is the leading platform for providing Big Data analysis on
massively growing machine data. Given that Splunk enables customers to collect,
index, and query massive amounts of data (regardless of format or source) in real
time, the applicability of the Splunk platform is limited only by the creativity of end
users, developers, partners, and Splunk itself. In other words, Splunk is Big Fast
Data (BFD).
We believe that Splunk's disruptive technology, combined with the large market
opportunity and the early-stage adoption of Big Data technologies, position Splunk
Enterprise for significant, sustained revenue growth. We also believe that Splunk can
expand beyond the company's core indexing engine and establish itself as a platform
that enables developers and partners to build applications on top of Splunk's core data
engine. Furthermore, with the introductions of Hunk, Hadoop Connect, and DB
Connect (as well as Splunk Enterprise 6's new Pivot and Data Model features), we
believe that the Splunk platform is uniquely positioned to emerge as a key, next-
generation unified data platform real-time and batch data analytics—by (1) bridging
many of the gaps of the open-source components of the Hadoop ecosystem that are
at varying degrees of maturity, complexity, and stability, (2) extending Splunk
Enterprise's strengths in quasi-real-time interfaces and in schema-on-the-fly
processing of time series data to Hadoop, Cassandra, and other data stores, and (3)
enabling customers to further enrich insights by linking external structured data in
traditional RDBMSs (see SPLK: A Hunk-y, Splunk-y Platform = BFD).
29 September 2014
Global Equity Themes 97
Winner: Semiconductors
The semiconductor space is arguably one of the least appreciated ways to play the
“Big/Fast Data” theme. Leveraging the stylistic framework suggested earlier, we assess
the role of and implications for semiconductors across Data Creation, Data Storage and
Transmission, as well as Data Analytics.
Data Creation: The main impact of Data Creation is across Consumer Electronics devices
including handsets, PCs, tablets and increasingly Wearables as well as Internet of Things
(IoT)—connected devices in the Industrial/Auto/Infrastructure (I/A/I) end-markets. Between
Wearables and IoT, the two emerging applications/devices within Consumer Electronics,
we would prefer the less Consumer-centric IoT market as the way to play Data Creation.
■ Microchip. In addition to the IoT leverage, MCHP is a fundamentally solid company
that is growing faster than its peers. Overall, our favourable stance on MCHP is based
on (1) its strong position in the 8-bit microcontroller (MCU) market, (2) expectations for
continued growth in the 16-bit and 32-bit MCU and Analog markets, (3) SUPX and
ISSC acquisitions which should become more accretive to EPS than originally
expected, (4) lack of customer concentration (~90,000 total customers), and (5) a
diverse end-market exposure (industrial, consumer appliances, security, medical,
automotive, etc.), as well as long product cycles (3- to 4-year average vs. 2- to 3-year
average for its peers) among others.
■ Other data creation companies particularly leveraged to IoT include CY, FSL, INTC,
NXPI, as well as the Analog companies.
Data Storage and Transmission: Created data needs to be stored (HDD, NAND and
DRAM) as well as transmitted over a networking backbone, which should support a
healthy Wireless and Wireline capital spending environment. Top picks in Data Storage
include MU and SNDK. Top picks in Data Transmission are ALTR, AVGO, BRCM, FSL,
INTC, MRVL, MLNX, NXPI, XLNX, as well as the Analog companies.
■ Micron. Our positive view on MU is based on the company’s continued execution of
its strategy to diversify its revenue stream from primarily DRAM to DRAM, NAND and
NOR, as well as gross margin expansion opportunities driven by an improved pricing
environment from industry consolidation, slowing Moore’s Law and an improved
supply demand balance. It is our belief that MU’s structurally improving business
model will enable stronger cash flow generation relative to prior cycles and support
our target price.
■ SanDisk. We expect continued outperformance for SNDK, driven by: (1) robust
Demand Growth, driven by applications of Big Data Analytics and Cloud, (2) a slowing
supply growth and a NAND industry that needs to spend a lot more to grow supply by
a lot less, (3) specific to SanDisk a continued mix shift towards higher value-added
segments like Enterprise Storage as products from Pliant/SMART acquisitions start
rolling out for SAS and SATA products, and (4) accelerating shareholder returns, with
SNDK buying back shares worth $1.6bn in 2013 (92% of FCF in 2013). Ongoing share
repurchases targeting 70% of ongoing cash generation + dividend can potentially lead
to $700m of cash return in NTM, implying 3.9% of the current market value.
Data Analytics: We believe that the value of data is in analytics, which drives the need for
HPC, Cloud Infrastructure, as well as In-Memory Computing.
■ Intel. We continue to argue that INTC has earnings power of greater than $3.00 – with
PCCG LT earnings power of $1.50 versus $1.90 in 2014, DCG of $1.50 versus $0.95,
IoT of $0.40 versus $0.10, M&W of ($0.20) versus ($0.50) and other of ($0.20) versus
29 September 2014
Global Equity Themes 98
($0.35). It appears as though PC earnings power is stabilizing at higher-than-needed
levels to achieve our LT earnings target – in fact, units would need to decline 15-20%
from current levels to hit our $1.50 target. We would also note that our earnings
potential embeds continued loses in M&W and no contribution from foundry, but as we
argued in our note entitled DAC 2014: More Signs of Moore’s Stress (for the link to the
full note, please see Figure 141), we see increasing optionality value in INTC’s
widening manufacturing lead and would argue if INTC is truly the 'last man standing'
on Moore’s Law, our greater than $3.00 earnings potential will approach $4.00.
Negatively affect: Companies that 'don't get' data analytics
Enterprises have traditionally concentrated on implementing enterprise applications that
primarily automate back-office processes to provide specific efficiencies, but today's
economy demands better integration between transactional data processes and data
analytics to react to dynamic business trends. With the continued (and growing) pressure
to translate data into actionable information that will support business-wide decisions in
the currently challenging economic climate, we expect sustained strong growth in analytics
infrastructures. However, we believe companies that do not fully embrace the need to
leverage data analytics to proactively manage their organizations' long-term strategies and
tactical operations will be increasingly competitively disadvantaged. There will potentially
be a “data divide” across companies and arguably across regions.
Selected stocks exposed to the theme
Figure 139: From creation to security, the need for and use of Big Data is all around us
Source: Credit Suisse research
Conceptually, we can divide the big data universe into two distinct categories: "users" and
"enablers". As one would expect, we define the "enablers" as the companies involved in
the analytics of unstructured data; examples of these companies include Splunk, Tableau
and SAP. We define "users" as companies who then make use of this recently structured
data to aid in different parts of their business; this includes a broad range of companies
such as Samsung, AT&T and industries such as investment banks. The stocks we
highlight below have a focus on the "enablers" of big data; even in this space, the list can
be very lengthy. Hence, Figure 140 only focuses on key stocks.
29 September 2014
Global Equity Themes 99
Credit Suisse has a Delta One Basket structured around the Big Data theme which was
created on 31 July 2014, CSGLBIGD (Bloomberg <GO>); see our report, Thematic Trade
Ideas Q3 – Macro risks to micro theme, in which this basket was created.
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names across our coverage. These are not mutually exclusive.
Figure 140: Stocks exposed to the Big Data theme
Beneficiaries
Company Ticker CS rating Region Exposure to
the theme
Explanation
Oracle ORCL.N O/P US High The dominant player in the data warehousing market with > 40% share.
Oracle is uniquely positioned to increase performance and lower storage
hardware costs through innovation in the software stack that cannot be
replicated by hardware vendors.
SAP SAPG.F O/P US High SAP HANA (High-Performance Analytic Appliance), a preconfigured
hardware appliance with pre-installed SAP software, is the cornerstone of
the company's in-memory strategy. We view SAP HANA as the most
disruptive product to database market share since SQL Server's
emergence in the 1990s.
Splunk SPLK.OQ O/P US High Splunk is the leading platform for providing Big Data analysis on
massively growing machine data. We believe that Splunk's disruptive
technology, combined with the large market opportunity and the early-
stage adoption of Big Data technologies, position Splunk Enterprise for
significant, sustained revenue growth
Microchip Tech MCHP O/P US High Leverages the Internet of Things (IoT), lack of customer concentration,
diverse end-market exposure (industrial, appliance, security etc)
Micron Tech MU O/P US High Execution of strategy to diversify revenue stream from primarily DRAM to
include NAND and NOR. Industry consolidation allows for improved
pricing environment driven by margin expansions.
SanDisk Corp SNDK O/P US High Continued mix shift towards higher value added segments like Enterprise
Storage. Robust demand growth driven by applications of Big Data
Analytics and Cloud.
Intel INTC O/P US Medium IoT consists of “things” that are connecting to the internet. Intel provides
the building blocks for IoT solutions that connect, secure, manage and
analyze data.
Tableau DATA.N O/P US High Big data analytics company which has a suite of data visualisation
products focused on business intelligence.
Informatica INFA.OQ N US High Leading provider of data integration solutions, with products and services
designed to help customers better manage their data to improve
operational efficiency. It is the largest independent data integration
solutions vendor.
Experian EXPN.L O/P Europe Medium They provide data & analytical tools to a range of organizations and
consumers across the world. Clients use these to manage credit risk,
prevent fraud, target marketing offers and automate decision making.
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 100
Figure 141: The Big Bang of Data – Relevant research
Report Date Highlight
The Next Big Thing: The Next Big Thing - Wearables Are In Fashion
17-May-13 Primer: Wearables Are In Fashion - We are at a potential inflection point in market adoption for wearable technology.
Does Size Matter Only?: Big Data’s Complexity + Fast Data = Dynamic Data
18-Oct-11 Primer: We view MapReduce and Hadoop as opening up new data analytics scenarios that were previously not achievable or economically practical.
The Need for Speed: The Next "Killer Apps"
30-Mar-11 Primer: The enterprise IT industry is approaching another tectonic shift that will drive a new breed of “killer apps” is the merging of columnar databases and in-memory computing.
Feeling G(rowth)-Forces: It's Time to Get Back into High-Growth Software
12-June-14 We recommend investors begin to re-accumulate stock in the high-growth software sector. We believe that the high-growth software universe is bottoming, as EV/Revenue multiples have generally fallen in line to historical levels.
MU: Big Data Drives Even Bigger DRAM
10-June-14 We see ecosystem dynamics around Big Data which is setting the foundation for significant upside to Enterprise DRAM demand.
Data Deposition - DAC 2014: More Signs of Moore’s Stress
8-June-14 SNPS and Imagination indicated that IoT (energy, Healthcare and agriculture), Wearables, Automotive and Big Data are the expected to be the growth drivers for Semiconductor industry.
Semiconductors: Semis 2014 Outlook : Data Growth, the Best Product Cycle
14-Jan-14 The most important unifying product cycle in our opinion is Data Growth – it is perhaps the only demand curve in all of Tech that we are certain investors are underestimating.
Software Decoded 2014 6-Jan-14 We expect the expanded capabilities of Hunk, Hadoop Connect, and DB Connect to result in even more spending on Splunk, as users extend their use of the Splunk platform to include Big Data-related tasks.
A Hunk-y, Splunk-y Platform = BFD 26-Nov-13 We believe that the Splunk platform is uniquely positioned to emerge as a key, next-generation unified data platform real-time and batch data analytics.
Agencies: Managing the digital transition
18-Sep-13 There's upside for the Agencies to tap into new, incremental CIO/CTO budgets, e.g. in eCommerce, Big Data.
DATA: Big DATA, But Big Valuation Too
11-June-13 The potential for increased adoption of business intelligence solutions offers a sizeable opportunity to meaningfully to increase its market.
SAP: HANA's Bringing Sexy Back to Database
8-Apr-13 We view SAP HANA as the most disruptive product to database market share since SQL Server’s emergence in the 1990s.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 101
X Automation – the second wave Theme Dynamics and Drivers
We have previously discussed the emerging market labour-inflation / productivity drivers of
automation spend, and this thesis seems to be borne out now as robot demand in markets
such as China has remained strong, even as the broader macro-economy has slowed
down. It remains a source of structural growth in the industrial arena. Aside from emerging
markets, we see now that rising IT penetration in the manufacturing sector can also drive a
second wave of automation investment in developed economies.
The emergence of Industry Software
IT penetration within the industrial world is lower than in other sectors of the economy
(pharmaceuticals, financial services). However, we now see software moving 'down' from
the plant-wide level (ERP systems, CRM, finance functions etc) within industrial
companies, towards the factory floor ('Industry Software'), and this is accelerating
automation within manufacturing.
Figure 142: Automation convergence axes
Source: Credit Suisse research
There are several types of Industry Software:
■ Enterprise Resource Planning (ERP) is a software system that integrates
information across an organization, incorporating supply chain data, inventory, sales /
service orders, and customer information. These systems facilitate the flow of
information between all business functions and manage the connections to outside
customers. Some automation OEMs will offer / integrate SAP and ORACLE systems
as part of a total solution. For example, Rockwell’s Factory Talk integrator is a system
designed to serve as a bridge between ERP software and plant-level systems. Thus,
Rockwell can connect its own MES product to another vendor’s ERP system and offer
the entire package as a total solution.
■ Product lifecycle management (PLM) software is used to develop a product and the
corresponding production process (computer simulated factory) and ERP is used to
organize the resources (raw materials, inventory, customer orders) at a company’s
disposal to maximize production efficiency. There are four primary players including
Dassault (via its 2009 acquisition of IBM’s PLM business), Siemens (via its 2007
acquisition of UGS), PTC and Autodesk. Dassault estimates that the PLM market is a
~$10bn opportunity (including CAD). Smaller PLM vendors include Agile Software,
MatrixOne and SAP.
Electric equipment / Multi-
Industry
Julian Mitchell
212 325 6668
29 September 2014
Global Equity Themes 102
■ Manufacturing Execution System (MES) is a "plant level" software system; it uses
information provided by the ERP to optimize plant level decisions and provides
information to the SCADA, which controls the physical production process (sends
commands to robots, drives, motors, etc.). The MES receives product definitions,
electronic work instructions, and equipment settings from the PLM and order
requirements from the ERP. The MES then reports production performance results,
and consumed materials to the ERP. Most major players have a stake in the MES
market as integrators but not providers (GE, Invensys, Mitsubishi, ROK, and
Siemens). Invensys (acquired by Schneider in 2013) is the primary player with its
Wonderware line of products. Smaller players include Aspen Tech (a software
technology firm that specializes in systems aimed at optimizing process
manufacturing) and CDC Software (a software firm that specializes in customer
relationship and supply chain management).
■ Metrology software is 3D measurement software used to test and inspect products
after scanning their surfaces for flaws. It is used in combination with measurement
hardware (3D scanners) to render the produced object in CAD; a product can then be
compared to its original design. During manufacturing, metrology software provides
data which allows production equipment to properly calibrate so the object produced
matches its intended design. Post-manufacturing, metrology software is used to
inspect products, test quality and identify physical production flaws.
■ Spatial Information Management: Spatial information management software (also
called geographic information system (GIS)) includes tools for data entry/conversion
(surveying/COGO, aerial photo rectification, remote sensing, GPS, and others),
mapping/spatial query, and business analysis.
Figure 143: From planning to execution within the plant – Industry Software is increasingly important
Major players
ERP: SAP, Oracle, Microsoft, Sage, Intuit, CDC Software
Plant Design & Simulation: Aveva, Aspen, HON, Invensys
CAD (computed aided
design)
PLM: Siemens, Dassault, PMTC, SAP, Oracle, Autodesk
CAD: Siemens, Dassault, PMTC, Autodesk, Bentley
VMES: Invensys, CDC Software, Aspen, Rockwell, HON
V SCADA: Siemens, Invensys, ABB
V
V
DCS: ABB, HON, Yokogawa, EMR, ISYS
PLC: Rockwell, Siemens, Omron, Mitsubishi, Schneider
V ^ V ^
Computerized
Numerical Control
(CNC) V CNC: Fanuc, Siemens, Mitsubishi
V ^ V ^ V V
Drives Sensors
Robots Machine Vision
Metrology: Faro, Hexagon, Renishaw
3D Printer
Plant Design & SimulationEnterprise Level
Controls
Plant Level
Controls
Plant
Instrumentation
Metrology (3D Inspection & Scanning)
Enterprise Resource Planning (ERP)
Manufacturing Execution System (MES)
Product Lifecycle Management (PLM)
Programmable Logic Controller
(PLC)
Supervisory Control and Data Analysis (SCADA)
Process Factory
Distributed Control System
(DCS)
Valves Sensors Machine Tools
3D Printer: XONE, SSYS, DDD
Robots: ABB, Fanuc, Kuka, Yaskawa
Drives: ABB, Danaher, Mitsubishi, EMR, Siemens, ROK
Machine Tools: Mori Seiki, Gildemeister
Source: Credit Suisse research
The increasing complexity of production, and the ability to reduce time-to-market, are key
reasons why manufacturing companies are looking to increase their software capability, as
a source of competitive advantage.
29 September 2014
Global Equity Themes 103
Figure 144: Merging two worlds by seamless integration of automation equipment and
PLM tools
Source: Siemens Capital Markets Day Presentation, 11 April 2013
To put the revenue opportunity from software in perspective, Siemens estimated in 2012
that Industry Software represents a ~$24bn annual opportunity.
Figure 145:Industry Software - $24bn Market
Source: Siemens CMD, April 2013
Increasing connectivity throughout the
manufacturing / industrial world
Connectivity (ethernet, wireless) penetration is accelerating around industrial sites (due to
cheaper cost of wi-fi chips, emergence of ‘cloud’ storage) off a very low base. Devices in
the field / at the customer (pumps, jet engines, railway locomotives) and on the factory
floor (electric drives, machine tools) are therefore able to send data (on rotation,
temperature, speed) back and forth to a central location or to each other, which is
increasing productivity, and collapsing the old ‘topologies’ within factories and at the field
device level.
29 September 2014
Global Equity Themes 104
Figure 146: The old world automation hierarchy, from
firm-wide ERP, down to PLM, to MES to SCADA, to PLC,
to drive, to robot…
Figure 147: …To a ‘flatter’ world, where the robots talk
directly to each other, and to the central control / software
layer of the plant / firm
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
This trend clearly has applications beyond just the factory floor, as industrial companies
look to expand their ability to generate services revenues, through increased software
offerings. The amount of data in the industrial world is increasing dramatically, and only a
small portion of this data is being used today – more software will be needed if industrial
companies and their customers are to utilise this data intelligently. According to Enrique
Andaluz, Worldwide discrete manufacturing at Microsoft, "of the big volume of data that’s
currently capable of being gathered, only about 7 percent of it is used." Companies such
as TYC and HON now allocate 40-50% of their R&D spend to software.
Figure 148: Growing role of "software as a service"
MRO software
"industrial internet"
Conception Design Product Sourcing Manufacturing Service
Plant level MES (manufacturing plan) Remote diagnostics
PLM (product planning)
ERP (resource planning)Enterprise level
Source: Credit Suisse research
For instance, the "Industrial internet" which GE has been increasingly vocal about, is
intended to maximize performance in the field; it is a web of collected industrial data from
machines and people. By using remote monitoring sensors and software that capture
operational performance (and in some cases amalgamate industry data), GE can provide
operational consulting services to improve business efficiency based on anticipating
machine failures, reducing shop visits, part requirements, and inventory levels. GE's
software licensing sales reached ~$4bn in 2012.
29 September 2014
Global Equity Themes 105
Figure 149: The Industrial Internet Figure 150: Potential Performance Gains
Source: GE Source: GE
Increasing IT penetration, and AM, may help manufacturing recover in the US
The role of the US in global manufacturing may be about to increase, as evidenced by the
emergence of additive manufacturing / 3D printing. Cheaper domestic energy costs and
rising wages in China have created the conditions for manufacturing’s decline in the US to
abate somewhat. The rise of additive manufacturing (next-generation manufacturing
technology) provides an interesting example – the top 3D printer manufacturers globally
are based in the US, whereas there are no longer any large US manufacturers of industrial
robots (current-generation of manufacturing technology).
Figure 151: There is evidence of stabilization in
manufacturing's share of US employment…
Figure 152: …and US GDP
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
21.0%
23.0%
25.0%
Apr-64 Apr-69 Apr-74 Apr-79 Apr-84 Apr-89 Apr-94 Apr-99 Apr-04 Apr-09 Apr-14
US manufacturing employment as % of total employment
10%
12%
14%
16%
18%
20%
22%
1980 1984 1988 1992 1996 2000 2004 2008 2012
Manufacturing as % of GDP Services (Finance, Insurance, Real Estate, Leasing)
Source: Thomson Reuters Source: Thomson Reuters
China – data suggests dramatic automation growth lies ahead
Recent evidence suggests that our thesis from two years ago, that China's inflection point
for robot penetration has been reached, is very much intact. As a reminder, the
manufacturing sector is becoming less labour-intensive and more automated, as labour
costs increase and China strives to increase the quality of its manufacturing output. China
appears to be at the same stage of its robot maturity today, as Japan was in the late
1970s, S Korea in the late 1980s, and the early 1990s.
Our analysis in 2012 suggested that Chinese robot demand growth should be very high in
the coming years, if it matches a similar path to these other E Asian manufacturing
economies. The data suggests this is indeed happening – in 2013 for instance China
overtook Japan as the #1 location for annual robot installations, and robot demand grew
by >30%. In June, the head of the China Machinery Industry Federation stated that he
expects domestic robot demand to treble from just under 37,000 units in 2013, to 110,000
by 2020.
29 September 2014
Global Equity Themes 106
Figure 153: The industrial robot density ‘S’ curve
(base year = 1978 for Japan, 2010 for China) Robots per 10,000 manufacturing employees, unless otherwise stated
Figure 154: Industrial robot shipments in China in units, unless otherwise stated
0
50
100
150
200
250
300
350
T+0 T+5 T+10 T+15 T+20 T+25
Japan Robot Density
China Robot Density
Estimate
0
2
4
6
8
10
12
14
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Shipments
Density (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research
Potential and Limitations
We think industry software and robots will be among the higher growth segments, and
potentially process automation if we really see US downstream petrochemical projects
come through. We think these sub-groups should see growth of 6%+ globally in the
medium-term, or twice the overall end-market growth rate average for industrial
companies.
Figure 155: Market Forecasts – Software set to grow above-average %, unless otherwise stated
Revenue YoY% 2013E 2014E 2015E 2016E 2013-16E AVG
Industry Software
Manufacturing Execution Systems (MES) 6.7% 7.5% 8.3% 8.9% 7.8%
Product Lifecycle Management (PLM) 9.4% 8.6% 8.5% 9.2% 8.9%
Industry Control Systems
SCADA 3.7% 4.8% 5.4% 5.4% 4.8%
DCS 6.1% 6.0% 6.1% 6.1% 6.1%
PLC 0.7% 3.5% 4.4% 4.4% 3.3%
Industry Field Devices
Robotics 8.6% 7.5% 7.5% 7.5% 7.8%
Machine Vision 3.7% 4.1% 5.2% 5.4% 4.6%
Sensors 3.0% 4.2% 4.2% 4.3% 3.9%
Relays & Switches 3.6% 4.2% 4.3% 4.3% 4.1%
Motion & Drives -1.4% 2.8% 3.5% 3.5% 2.1%
Average Growth Rates
Industry Software - Average 8.0% 8.1% 8.4% 9.0% 8.4%
Plant Control Systems - Average 3.5% 4.8% 5.3% 5.3% 4.7%
Field Devices - Average 3.5% 4.6% 4.9% 5.0% 4.5% Source: Credit Suisse estimates
Commentary from traditional automation players also suggests software growth rates are
very attractive. Recent presentations from Siemens and Invensys indicate that software
growth should outpace hardware growth over the medium term, by around 2-3x (see
below).
29 September 2014
Global Equity Themes 107
Figure 156: Siemens Market Forecasts (2012-2016 CAGR) %, unless otherwise stated
Figure 157: Invensys Market Forecasts (2012-2016 CAGR) %, unless otherwise stated
3%
4%
4%
5%
5%
6%
8%
8%
11%
0% 2% 4% 6% 8% 10% 12%
Control Components and Systems Engineering
Industrial Automation Systems
Sensors and Communication
INDUSTRIAL AUTOMATION MARKET
General Motion Control
Geared Motors
Siemens PLM Software
LV AC Inverter
MV Inverter
4.3%
4.9%
5.0%
8.9%
11.5%
0% 5% 10% 15%
Field Devices & Valves
Process Control & Safety Systems
INDUSTRIAL AUTOMATION
MARKET
Advanced Real Time Applications
Manufacturing Intelligence
Source: Siemens CMD 2013, Credit Suisse research Source: Invensys CMD 2013, Credit Suisse research
Limitations
We would highlight the following constraining factors on automation investment growth:
■ In the end, automation investment is a function of corporate capex; if corporate
sentiment deteriorates because of weak macro-economic conditions, automation
spending will therefore be hit hard, as it was in 2009, and to a degree in developed
markets in late 2012 / early 2013;
■ In China, if the government / plant managers do not manage to successfully convert
the manufacturing sector into a higher value-add, more productive one, manufacturing
will simply migrate to other emerging markets, which will reduce the incentive of
domestic plant managers to invest in automation;
■ The 'real-time' nature of factory floor activity vs transaction-based firm-wide software
limits the application of software on the factory floor, and hence may limit the
penetration of automation;
■ The Automotive sector is a key end-market for discrete automation, and capex among
developed and emerging market based Auto OEMs has been on a significant upswing
since 2010. The risk is that further incremental capex increases in the US will be tough
given the high 'base' of capex, and no increases are needed in Europe due to weak
trend demand / excess capacity.
■ Increasing competition from emerging Asian automation vendors may pressure
margins for the incumbents. Chinese companies we have met with for instance are
targeting share gains across process and discrete automation - in valves and industrial
robots, as well as PLCs and DCS within the control layer;
■ The petrochemical sector is a key end-market for process automation, and regulatory
factors within the US may hold back petrochemical projects.
Selected stocks exposed to this theme
Clearly the range of stocks exposed to this theme is very wide; we highlight some
specific names across our coverage. These are not mutually exclusive.
Our preferred automation picks globally are EMR (Americas), Siemens (Europe), Fanuc
(Japan), Teco and Hollysys (non-Japan Asia).
■ EMR – the company is 'cleaning up' its non-core assets (embedded computing &
power, power transmission, potentially parts of Commercial & Resi Solutions), while
Industrial Automation is enjoying a cyclical recovery, and Process is winning market
share.
29 September 2014
Global Equity Themes 108
■ Siemens – the stock should benefit from improving short-cycle momentum, on-going
buyback support, cost savings execution and potential for further portfolio alignment.
■ Fanuc - Investors had harboured concerns over structural problems in the RoboDrill
business until the beginning of 2014, but the market now appears concerned over the
risk of falling orders after the sharp recovery in RoboDrill We view the current price as
effective for accumulating on weakness ahead of a pick-up in machine tool orders
from June and the release of positive 1Q results in late July.
■ Hollysys - We think HOLI will continue to grow in FY15 on the back of: (1) strong
government capex on railway equipment and rapid construction of high-speed rail and
inter-city lines, and (2) gradual market share expansion in the industrial automation
segment, thanks to its growing track record and government support to Chinese
suppliers. We expect subway CBTC and track circuit new products to add to growth in
FY15 and FY16.
■ Teco – Automation sales are expected to see strong growth this year, helped by share
gains in China, while motors demand in the US is improving. Wind power may also
become a new earnings contributor by year-end.
Some of the characteristics we favour are as follows:
■ Companies with industrial robotics exposure (such as ABB, Fanuc, and Yaskawa)
given the growth rates we expect in Chinese robot installations;
■ Companies with a strong software footprint in industrial automation (such as Siemens,
and Schneider), as this is likely to be a higher growth part of the spend within a
factory, given the emergence of Big Data, and its impact on the manufacturing sector;
■ Emerging Asian companies who are taking market share (Airtac, Teco, Hiwin,
Hollysys);
■ Process instrument manufacturers (Emerson, Rotork).
Credit Suisse has a Delta One Basket on the Automation theme: CSERATMN (Bloomberg
<GO>).
Figure 158: Performance of the Delta One Automation
basket since inception
Figure 159: Relative performance of the Delta One
Automation basket since inception
90
100
110
120
130
140
150
Nov 12 Feb 13 Jun 13 Oct 13 Jan 14 May 14 Aug 14
CSERATMN Index MXWO INDEX
95
100
105
110
115
120
Nov 12 Feb 13 Jun 13 Oct 13 Jan 14 May 14 Aug 14
CSERATMN Index relative to MXWO INDEX
Past performance should not be taken as an indication or guarantee
of future performance
Source: Thomson Reuters, Credit Suisse estimates
Past performance should not be taken as an indication or guarantee
of future performance
Source: Thomson Reuters, Credit Suisse estimates
29 September 2014
Global Equity Themes 109
We show below the major industrial automation plays globally.
Figure 160: Stocks exposed to the industrial automation theme
Beneficiaries
Company Ticker Rating Region Exposure to
the theme
Explanation
Emerson EMR O/P US High Process instrumentation global leader
Rockwell
Automation
ROK N US High Top 3 global player in discrete automation
Siemens SIEGn.DE O/P Europe High Global market leader in discrete automation with the broadest product ranger
Schneider SCHN.PA N Europe High Global player in discrete and process automation
Rotork ROR.L N Europe/UK High Strong position in process and industrial controls
Fanuc 6954 N Japan High Robot and CNC equipment for machine tools
Yaskawa 6506 N Japan High Robot and Servo motor with invertor
SMC 6273 O/P Japan High Pneumatic equipment for Automation e.g. robot hands
THK 6481 O/P Japan High Linear motion guide and parts for robots
Hollysys HOLI O/P China High Leading Chinese automation & control provider; strong in rail
ABB ABBN.VX O/P Europe High Strong presence in industrial robotics
Airtac 1590.TW N Asia Pac Medium Pneumatic products for equipment
Teco 1504.TW O/P Asia Pac Medium Large motor and servo motor with invertor
Hiwin 2049.TW N Asia Pac Medium Linear motion products for machine tools and automation equipment
Source: Credit Suisse research
Figure 161: Automation – the second wave – Relevant research
Report Date Highlight
Global Industrial Automation – The Next Growth Phase
14-Aug-12 Primer: We explain why we think the industrial automation market is an attractive long-term investment opportunity, identify key trends, and provide an overview of key products, technologies, and vendors.
Industry Software Deep-Dive 15-Jul-13 Primer: Our core thesis is that traditional IA vendors should focus their capital and attention on software.
Additive Manufacturing 17-Sep-13 Primer: We launch coverage of three 3D printing companies; DDD, SSYS, XONE. Our main conclusion is that additive manufacturing revenue growth could potentially exceed consensus forecasts for ~20% annual sales growth in the coming years.
Advanced manufacturing - IMTS: ROK-Fanuc Controls Alliance; Asimov's First Law; Mobile Manipulation
12-Sep-14
There are a number of interesting themes evident in manufacturing technology ("convergence," integration, ease-of-use, mobile manipulation, collaborative robotics, additive manufacturing), which are driving customer spending, and strategic shifts by automation vendors.
Additive Manufacturing: GE and the rise of 3D metal production
25-Jul-14
3D stocks implications: GE had multiple SSYS and DDD plastic printing machines, using materials manufactured by those OEMs; given the high margins associated with materials, we are encouraged to see industrial customer use of OE materials in a high utilization environment.
ABB: PA to improve; Low Voltage fairly valued?
21-Jul-14 We continue to believe that ABB currently offers the most attractive investment case over the next 12m in European Electricals.
Hannover Automation Fair - Software and data analytics on the rise; Industry 4.0
11-Apr-14 Data analytics was the dominant theme at this year's Automation Fair. All companies that we met with were more positive on current demand conditions than they were at last year's fair.
Additive Manufacturing 21-Jan-14 We focus on the 3D printing pro-sumer, consumer, and education-type end markets which we now estimate are a ~$800m annual revenue opportunity in 2016.
EE/MI 2014 Outlook 1-Jun-14 Themes we highlight for 2014: Industrial Automation convergence will accelerate; Increased competition in 3D printing /additive manufacturing.
European Capital Goods Sector Outlook 2014
Dec-13 ABB and Siemens balance sheet re-leveraging potential, focus in automation acquisitions.
Process Automation Market: Intensifying Competition Underway
22-Nov-13
Our Global Capital Goods team finds that the Process Automation (PA) industry's strong top-line outlook is attracting numerous other players, particularly in the petrochemical / oil & gas sector. They consider further consequences of a "convergence" trend.
Source: Credit Suisse research
29 September 2014
Global Equity Themes 110
Appendix Figure 162: Selected thematic reports published
Report Date Highlight
The Shale Revolution 13-Dec-12
• This report leverages the expertise of over 40 research strategists and analysts and paints a
clear geographic and sector picture of the shale phenomenon, uncovering significant
investment opportunities globally.
The Shale Revolution II 1-Oct-13• We draw on the insights of over 50 global equity analysts, economists and strategists to
revisit the key investment theme of the shale revolution and chart new developments.
Global Industrial Automation – The Next
Growth Phase14-Aug-12
• We explain why we think the industrial automation market is an attractive long-term investment
opportunity, identify key trends, and provide an overview of key products, technologies, and
vendors.
Industry Software Deep-Dive 15-Jul-13• Our core thesis is that traditional IA vendors should focus their capital and attention on
software.
Additive Manufacturing 17-Sep-13• We launch coverage of three 3D printing companies; DDD, SSYS, XONE. Our main conclusion
is that additive manufacturing revenue growth could potentially exceed consensus forecasts for
~20% annual sales growth in the coming years.
Themes in Energy Efficiency 3-April-14• As part of our global energy efficiency research, this report reviews building energy
efficiency challenges and investment opportunities.
Sugar: Consumption at a crossroads 11-Sep-13• In the long term we see lower demand growth for sugar and high-fructose corn syrup (HFCS)
and potentially a decline in consumption.
Does Size Matter Only? 18-Oct-11• We view MapReduce and Hadoop as opening up new data analytics scenarios that were
previously not achievable or economically practical.
The Need for Speed 30-Mar-11• The enterprise IT industry is approaching another tectonic shift that will drive a new breed of
“killer apps” is the merging of columnar databases and in-memory computing.
Smartphones – A Lasting Disruptive
Force11-Jul-13
• We summarize the key stats, drivers, the competitive situation, and ultimately the lasting
disruption that has come with the rise of today's smartphone.
Technology – The Next Big Thing 17-May-13• Wearables are in fashion and we are at a potential inflection point in market adoption for
wearable technology
ESG Investing Themes 11-Oct-12
• A focus on social responsibility and sustainability has become a key focus of portfolio
construction and style analysis – both implicitly and explicitly. A key question is whether
incremental return is added from such strategies.
Source: Company data, Credit Suisse estimates
29 September 2014
Global Equity Themes 111
Companies Mentioned (Price as of 22-Sep-2014)
Harum Energy (HRUM.JK, Rp2,105) 3D Systems (DDD.N, $47.83) 3Legs Resources (3LEG.L, 16.375p) ABB (ABBN.VX, SFr21.58) ABM Investama (ABMM.JK, Rp2,700) AIA Group (1299.HK, HK$41.6) ARC Resources Ltd. (ARX.TO, C$29.7) ARCADIS (ARDS.AS, €26.56) AT&T (T.N, $35.5) AVEVA (AVV.L, 1574.0p) Abengoa Yield (ABY.OQ, $36.3) Access Midstream Partners, LP (ACMP.N, $63.61) Adaro Energy (ADRO.JK, Rp1,255) Airtac (1590.TW, NT$262.5) Alfa Laval (ALFA.ST, Skr152.4) Altera Corp. (ALTR.OQ, $36.08) Amazon com Inc. (AMZN.OQ, $324.5) Anadarko Petroleum Corp. (APC.N, $103.54) Andritz AG (ANDR.VI, €42.97) Anritsu (6754.T, ¥909) Anton Oilfield Services Group (3337.HK, HK$2.98) Apollo Hospitals Enterprise (APLH.NS, Rs1142.6) Apple Inc (AAPL.OQ, $101.06) Arch Coal, Inc. (ACI.N, $2.43) Arista Networks (ANET.N, $83.84) Asahi Kasei (3407.T, ¥918) Aspen Pharmacare Holdings Ltd (APNJ.J, R329.0) Aspen Technology (AZPN.OQ, $38.74) AstraZeneca (AZN.L, 4577.5p) Athlon Energy Inc. (ATHL.N, $44.29) Autodesk Inc. (ADSK.OQ, $54.88) Avago Technologies Ltd. (AVGO.OQ, $87.18) BHP Billiton (BHP.AX, A$34.86) BYD Co Ltd (1211.HK, HK$51.55) Baidu Inc (BIDU.OQ, $214.86) Baker Hughes Inc. (BHI.N, $66.15) Baytex Energy Corp. (BTE.TO, C$42.41) Beach Energy (BPT.AX, A$1.48) Beijing Capital Co., Ltd (600008.SS, Rmb7.62) Beijing Enterprises Water Group Limited (0371.HK, HK$5.35) BioAmber Inc. (BIOA.N, $10.75) Boeing (BA.N, $128.61) Bristol Myers Squibb Co. (BMY.N, $51.67) British Sky Broadcasting (BSY.L, 888.0p) Broadcom Corp. (BRCM.OQ, $40.28) Bumrungrad Hospital Pcl (BH.BK, Bt129.5) Buru Energy (BRU.AX, A$0.77) CF Industries Holding Inc. (CF.N, $255.78) CIMC Enric (3899.HK, HK$8.17) CNOOC Ltd (0883.HK, HK$14.1) CONCHO RESOURCES, INC. (CXO.N, $126.63) Cameron International Corp. (CAM.N, $69.36) Canadian Natural Resources Limited (CNQ.TO, C$43.56) Canadian Pacific Railways (CP.N, $202.98) Carrizo Oil & Gas Inc. (CRZO.OQ, $54.98) Caterpillar Inc. (CAT.N, $100.9) Celladon (CLDN.OQ, $10.08) Centrica (CNA.L, 320.0p) Check Point Software Technologies Ltd. (CHKP.OQ, $69.79) Chevron Corp. (CVX.N, $123.49) China Coal Energy Co. (1898.HK, HK$4.48) China Everbright (0165.HK, HK$15.18) China Everbright International Ltd (0257.HK, HK$10.74) China Pacific (601601.SS, Rmb18.79) China Petroleum & Chemical Corporation - H (0386.HK, HK$6.89) China Singyes Solar Technologies Holdings Limited (0750.HK, HK$13.84) Chubu Electric Power (9502.T, ¥1,265) Cimarex Energy Co. (XEC.N, $127.8) Cisco Systems Inc. (CSCO.OQ, $24.97) Clean Enrgy Fuel (CLNE.OQ, $8.33) Coloplast B (COLOb.CO, Dkr489.5) ConocoPhillips (COP.N, $79.68) Continental (CONG.DE, €159.7) Continental Resources Inc. (CLR.N, $67.44) Ctrip.com International (CTRP.OQ, $59.95) Cummins Inc. (CMI.N, $136.04) DELPHI Automotive PLC (DLPH.N, $65.01) DMG Mori Seiki (6141.T, ¥1,406) Daikin Industries (6367.T, ¥6,991) Danaher Corporation (DHR.N, $78.16) Dassault Systemes (DAST.PA, €52.57)
Denso (6902.T, ¥4,902) Deutsche Post DHL (DPWGn.DE, €26.09) Devon Energy Corp (DVN.N, $69.98) Diamond Offshore Drilling, Inc (DO.N, $37.29) Diamondback Energy, Inc. (FANG.OQ, $73.46) Dominion Resources (D.N, $68.3) Dongfang Elec (600875.SS, Rmb12.94) Dongjiang Environmental Company Limited (0895.HK, HK$32.9) Dow Chemical Company (DOW.N, $52.86) Drillsearch (DLS.AX, A$1.31) E-commerce China Dangdang Inc. (DANG.N, $12.31) EOG Resources (EOG.N, $101.74) Eastman Chemical (EMN.N, $83.83) Eli Lilly & Co. (LLY.N, $66.08) Emerson (EMR.N, $64.25) Enbridge Inc. (ENB.TO, C$55.61) Encana Corp. (ECA.N, $21.32) Energy Recovery Inc. (ERII.OQ, $3.89) Energy Transfer Equity, LP (ETE.N, $60.8) Enterprise Products Partners, LP (EPD.N, $40.31) Epistar Corporation (2448.TW, NT$56.8) Essilor (ESSI.PA, €87.46) ExOne (XONE.OQ, $25.74) Experian (EXPN.L, 1037.0p) ExxonMobil Corporation (XOM.N, $96.54) FOREPI (3061.TW, NT$16.15) Facebook Inc. (FB.OQ, $76.8) Fanuc (6954.T, ¥19,265) Faroe Petroleum (FPM.L, 109.75p) First Solar (FSLR.OQ, $67.17) Flowserve Corp. (FLS.N, $72.95) Fluor (FLR.N, $68.54) Formosa Plastics (1301.TW, NT$73.5) Fortis Health (FOHE.NS, Rs123.3) Freescale Semiconductor Inc. (FSL.N, $21.61) Fresenius Medical Care AG & Co. (FMEG.DE, €54.25) General Electric (GE.N, $26.08) Global Logistic Properties (GLPL.SI, S$2.78) Google (GOOG.OQ, $587.37) Google, Inc. (GOOGL.OQ, $597.27) Guangdong Investment Limited (0270.HK, HK$8.92) Gulfport Energy (GPOR.OQ, $54.51) Haier Electronics Group Co., Ltd. (1169.HK, HK$21.0) Halliburton (HAL.N, $64.68) Halma (HLMA.L, 622.0p) HanKore Envrnmnt (HETG.SI, S$0.805) Hannon Armstrong (HASI.N, $14.07) Harbin Electric Company Limited (1133.HK, HK$4.56) Hexagon AB (HEXAb.ST, Skr235.4) Hikma Pharmaceuticals Plc (HIK.L, 1663.0p) Hilong Holdings Ltd (1623.HK, HK$3.8) Hiwin (2049.TW, NT$280.0) Hollysys Automation Technologies Ltd. (HOLI.OQ, $22.03) Honeywell International Inc. (HON.N, $94.7) Honghua Group Ltd (0196.HK, HK$1.88) Hyundai Wia Corp. (011210.KS, W225,000) IGas Energy (IGAS.L, 92.25p) IHH Healthcare (IHHH.KL, RM5.0) IMI Plc (IMI.L, 1323.0p) INPEX Corporation (1605.T, ¥1,529) ITT (ITT.N, $46.76) ITV (ITV.L, 212.3p) Indika Energy (INDY.JK, Rp780) Infineon Technologies AG (IFXGn.DE, €8.8) Informatica (INFA.OQ, $33.1) Intel Corp. (INTC.OQ, $34.71) International Business Machines Corp. (IBM.N, $193.11) Intouch Limited (INTUCH.BK, Bt70.75) Itron (ITRI.OQ, $40.04) JB Hunt Transport Services (JBHT.OQ, $73.63) JGC Corporation (1963.T, ¥2,942) Japan Airlines (9201.T, ¥5,880) Jinko Solar (JKS.N, $30.21) Juniper Networks (JNPR.N, $22.6) KBR Inc. (KBR.N, $20.1) KPJ Healthcare Bhd (KPJH.KL, RM3.85) Kansas City Southern (KSU.N, $119.66) Kao (4452.T, ¥4,210) Keihin (7251.T, ¥1,526) Keyence (6861.T, ¥46,790) Kinder Morgan, Inc. (KMI.N, $37.5) Korea Gas Corp (036460.KS, W55,200)
29 September 2014
Global Equity Themes 112
Kuka (KU2G.DE, €48.4) L'Oreal (OREP.PA, €126.05) Legrand SA (LEGD.PA, €43.32) LinkedIn (LNKD.N, $206.89) Luxfer (LXFR.N, $16.78) LyondellBasell Industries (LYB.N, $112.61) Marathon Oil Corp (MRO.N, $38.71) MarkWest Energy Partners, LP (MWE.N, $77.43) Maruti Suzuki (MRTI.NS, Rs3066.2) Marvell Technology Group Ltd. (MRVL.OQ, $13.57) MasterCard Inc. (MA.N, $76.16) Mediclinic International (MDCJ.J, R93.61) Mellanox Technologies Ltd. (MLNX.OQ, $42.06) Merck & Co., Inc. (MRK.N, $60.58) Merck KGaA (MRCG.DE, €72.63) Merida Industry Co Ltd (9914.TW, NT$208.0) Microchip Technology Inc. (MCHP.OQ, $48.0) Micron Technology Inc. (MU.OQ, $30.6) Micros Syst (MCRS.OQ, $67.99) Microsoft Corporation (MSFT.OQ, $47.06)
Mitsubishi Corp (8058.T, ¥2,332) Mitsubishi Heavy Industries (7011.T, ¥711) Molopo Australia (MPO.AX, A$0.145) Moneysupermarket.com (MONY.L, 198.0p) Motorola Solutions (MSI.N, $61.68) Mylan Inc. (MYL.OQ, $46.53) NRG Yield, Inc (NYLD.N, $49.07) NXP Semiconductors N.V. (NXPI.OQ, $70.8) Naspers (NPNJn.J, R1299.0) Netcare Limited (NTCJ.J, R32.89) Netflix, Inc. (NFLX.OQ, $442.78) New Oriental Education (EDU.N, $21.93) News Corporation (NWS.AX, A$18.75) NextEra Energy Inc. (NEE.N, $94.62) NextEra Energy Partners, LP (NEP.N, $35.2) Nextera (NXRA.PK, $1.0E-4) Nobel Biocare (NOBN.S, SFr17.0) Noble Energy (NBL.N, $70.36) Novartis (NOVN.VX, SFr88.25) Novo Nordisk A/S (NOVOb.CO, Dkr279.8) Nucor Corporation (NUE.N, $56.96) Nuverra Environmental Solutions (NES.N, $14.92) Omron (6645.T, ¥4,780) Ono Pharmaceutical (4528.T, ¥9,600) Oracle Corporation (ORCL.N, $39.58) Osaka Gas (9532.T, ¥446) Oversea-Chinese Banking Corporation (OCBC.SI, S$9.72) PDC Energy (PDCE.OQ, $53.38) PTC (PTC.OQ, $37.33) Palo Alto Networks (PANW.N, $97.93) Peabody Energy Corp (BTU.N, $12.65) Penn Virginia Corp (PVA.N, $11.69) Pentair PLC (PNR.N, $67.07) Perusahaan Gas Negara (PGAS.JK, Rp6,050) PetroChina (0857.HK, HK$10.26) Pfizer (PFE.N, $30.18) Phillips 66 (PSX.N, $83.84) PhosAgro (PHOR.MM, Rbl1347.0) Ping An (2318.HK, HK$60.8) Pioneer Natural Resources (PXD.N, $195.91) Plains All American Pipeline, LP (PAA.N, $58.01) Priceline.com (PCLN.OQ, $1165.79) Proofpoint (PFPT.OQ, $38.45) Prudential (PRU.L, 1414.0p) Qinghai Potash (000792.SZ, Rmb17.36) Raffles Medical Group (RAFG.SI, S$3.96) Range Resources (RRC.N, $70.25) Renishaw (RSW.L, 1666.0p) Roche (ROG.VX, SFr283.2) Rockwell Automation (ROK.N, $115.0) Rolls-Royce (RR.L, 1003.0p) Rosetta Resources Inc. (ROSE.OQ, $44.2) Rotork plc (ROR.L, 2812.0p) Royal Dutch Shell plc (RDSa.L, 2400.5p) SAP (SAPG.F, €58.0) SIIC Environment Holdings (SIIC.SI, S$0.18) SMC (6273.T, ¥29,710) SPT Energy (1251.HK, HK$3.44)
Sage Group (SGE.L, 377.0p) Salesforce.com Inc. (CRM.N, $57.32) Samsung Electronics (005930.KS, W1,188,000) San Leon (SLEN.L, 2.3p) SanDisk Corp. (SNDK.OQ, $98.78) Sanofi (SASY.PA, €88.87) Santos Ltd (STO.AX, A$14.23) Schlumberger (SLB.N, $101.72) Schneider Electric (SCHN.PA, €62.11) Senex Energy Limited (SXY.AX, A$0.58) Shimano (7309.T, ¥12,780) Siemens (SIEGn.DE, €95.97) Sihuan Pharmaceutical Holdings Group Ltd. (0460.HK, HK$6.02) Siloam International Hospitals (SILO.JK, Rp15,825) Smith & Nephew (SN.L, 1068.0p) SolarCity (SCTY.OQ, $60.84) Sonova Holding (SOON.VX, SFr150.7) Sony (6758.T, ¥1,896) Sound Global Co. Ltd (0967.HK, HK$8.15) Splunk (SPLK.OQ, $54.59)
Stratasys (SSYS.OQ, $122.37) Straumann (STMN.S, SFr215.9) Suez Environnement (SEVI.PA, €13.47) Sun Pharmaceuticals Industries Limited (SUN.BO, Rs797.35) SunEdison Inc. (SUNE.N, $19.5) SunPower Corp. (SPWR.OQ, $34.92) Superior Energy Services, Inc. (SPN.N, $32.84) TAG Oil Ltd. (TAO.TO, C$1.82) TAL Education Group (XRS.N, $34.59) THK (6481.T, ¥2,751) TRG Pakistan (TRGP.KA, PRs11.21) Tableau Software, Inc. (DATA.N, $72.07) Tambang Batubara Bukit Asam (PTBA.JK, Rp12,825) Teco (1504.TW, NT$34.8) Tenaris (TENR.MI, €17.86) Tencent Holdings (0700.HK, HK$121.1) Teradyne Inc. (TER.N, $20.16) Tesla Motors Inc. (TSLA.OQ, $250.03) Tianjin Capital Environmental Protection (1065.HK, HK$5.74) Time Warner, Inc (TWX.N, $75.67) Tokyo Gas (9531.T, ¥622) Total (TOTF.PA, €50.13) TransAlta Corporation (TA.TO, C$12.02) TransCanada Corp. (TRP.TO, C$60.68) Transocean Inc. (RIG.N, $33.63) Twitter (TWTR.N, $51.94) Union Pacific (UNP.N, $108.5) United Technologies Corp (UTX.N, $106.47) Uralkalii (URKA.MM, Rbl141.61) Vallourec (VLLP.PA, €36.49) Value Partners (0806.HK, HK$5.74) Veolia Environnement (VIE.PA, €14.1) Verint Systems Inc. (VRNT.OQ, $54.06) Viacom (VIAB.OQ, $79.42) Vipshop Holdings Limited (VIPS.N, $200.68) Visa Inc. (V.N, $213.88) Vivendi (VIV.PA, €19.46) Voestalpine (VOES.VI, €33.44) Wal-Mart Stores, Inc. (WMT.N, $76.31) Walt Disney Company (DIS.N, $89.29) Weatherford International, Inc. (WFT.N, $21.18) Weir Group (WEIR.L, 2593.0p) Western Refining Inc. (WNR.N, $42.23) Westport Innov (WPT.TO, C$12.01) Wood Group (WG.L, 750.0p) Xilinx (XLNX.OQ, $43.59) YPF Sociedad Anonima (YPF.N, $36.26) Yamato Kogyo (5444.T, ¥3,670) Yandex (YNDX.OQ, $28.74) Yara International ASA (YAR.OL, Nkr312.9) Yaskawa Electric Corporation (6506.T, ¥1,512) Yokogawa Electric Corporation (6841.T, ¥1,453) Zebra Tech (ZBRA.OQ, $73.56) eBay Inc. (EBAY.OQ, $52.47) Agrium Inc. (AGU.N, $92.29) Natura Cosméticos S.A. (NATU3.SA, R$37.9) Rockwell Collins, Inc. (COL.N, $79.36) Unicharm (8113.T, ¥2,413)
Disclosure Appendix
29 September 2014
Global Equity Themes 113
Important Global Disclosures
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 44% (55% banking clients)
Neutral/Hold* 39% (50% banking clients)
Underperform/Sell* 14% (43% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
See the Companies Mentioned section for full company names
The subject company (0700.HK, BHP.AX, INTC.OQ, TOTF.PA, SCTY.OQ, HLMA.L, EOG.N, DAST.PA, MSFT.OQ, MCHP.OQ, DANG.N, FSLR.OQ, PXD.N, IFXGn.DE, ORCL.N, CVX.N, MA.N, SNDK.OQ, ADSK.OQ, SPLK.OQ, NFLX.OQ, DHR.N, VIV.PA, ROG.VX, XRS.N, SPWR.OQ, 0270.HK, PCLN.OQ, 1299.HK, SAPG.F, EMR.N, ITV.L, FB.OQ, PFPT.OQ, ABBN.VX, PANW.N, UTX.N, SCHN.PA, GOOGL.OQ, SLB.N, LYB.N, 8058.T,
29 September 2014
Global Equity Themes 114
0857.HK, CHKP.OQ, 600008.SS, PRU.L, 0386.HK, BSY.L, 2448.TW, SIIC.SI, 0371.HK, BMY.N, IBM.N, AMZN.OQ, 6758.T, JKS.N, 0460.HK, 1898.HK, HON.N, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, SUNE.N, XOM.N, NWS.AX, WMT.N, CXO.N, 0883.HK, SOON.VX, KPJH.KL, MLNX.OQ, BTE.TO, ERII.OQ, BIOA.N, CRZO.OQ, CONG.DE, ROSE.OQ, ANET.N, YAR.OL, ACMP.N, DATA.N, SN.L, MRVL.OQ, CLDN.OQ, PFE.N, NXPI.OQ, AVGO.OQ, 601601.SS, 005930.KS, JNPR.N, SEVI.PA, 3337.HK, UNP.N, FANG.OQ, SPN.N, CSCO.OQ, ATHL.N, MWE.N, VIE.PA, MONY.L, KMI.N, BRCM.OQ, TENR.MI, ENB.TO, ALFA.ST, DVN.N, IHHH.KL, XEC.N, NOVN.VX, XLNX.OQ, NBL.N, KSU.N, SILO.JK, OREP.PA, RRC.N, VRNT.OQ, KBR.N, VOES.VI, EBAY.OQ, PGAS.JK, WEIR.L, NOVOb.CO, INDY.JK, FSL.N, ABMM.JK, STO.AX, ADRO.JK, TAO.TO, PTBA.JK, LLY.N, APC.N, COLOb.CO, NUE.N, NOBN.S, PVA.N, NPNJn.J, CNQ.TO, TRP.TO, 2318.HK, GPOR.OQ, NEE.N, NEP.N, PAA.N, T.N, WNR.N, FLR.N, ETE.N, COP.N, CP.N, CAM.N, CF.N, CAT.N, BA.N, DOW.N, ECA.N, COL.N, AGU.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (0700.HK, INTC.OQ, TOTF.PA, SCTY.OQ, EOG.N, MSFT.OQ, FSLR.OQ, PXD.N, ORCL.N, SPLK.OQ, VIV.PA, SPWR.OQ, 0270.HK, 1299.HK, ITV.L, FB.OQ, PFPT.OQ, ABBN.VX, PANW.N, SCHN.PA, GOOGL.OQ, LYB.N, 600008.SS, SIIC.SI, 0371.HK, BMY.N, IBM.N, AMZN.OQ, 6758.T, JKS.N, 0460.HK, 1898.HK, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, XOM.N, WMT.N, CXO.N, 0883.HK, SOON.VX, KPJH.KL, BTE.TO, BIOA.N, CRZO.OQ, ROSE.OQ, ANET.N, ACMP.N, DATA.N, CLDN.OQ, PFE.N, NXPI.OQ, AVGO.OQ, 601601.SS, 005930.KS, SEVI.PA, UNP.N, FANG.OQ, SPN.N, CSCO.OQ, ATHL.N, VIE.PA, MONY.L, ENB.TO, DVN.N, IHHH.KL, NOVN.VX, NBL.N, SILO.JK, OREP.PA, RRC.N, VRNT.OQ, EBAY.OQ, PGAS.JK, FSL.N, TAO.TO, PTBA.JK, LLY.N, APC.N, NOBN.S, PVA.N, TRP.TO, 2318.HK, GPOR.OQ, NEE.N, NEP.N, T.N, WNR.N, ETE.N, COP.N, CP.N, CAM.N, ECA.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (0700.HK, MSFT.OQ, ROG.VX, ABBN.VX, 8058.T, CHKP.OQ, PRU.L, IBM.N, HON.N, GE.N, XOM.N, CONG.DE, CSCO.OQ, BRCM.OQ, 2318.HK, DOW.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (0700.HK, TOTF.PA, SCTY.OQ, EOG.N, SPLK.OQ, VIV.PA, SPWR.OQ, 0270.HK, 1299.HK, FB.OQ, PFPT.OQ, PANW.N, GOOGL.OQ, LYB.N, SIIC.SI, BMY.N, JKS.N, 0460.HK, MU.OQ, GE.N, RIG.N, XOM.N, WMT.N, 0883.HK, BTE.TO, BIOA.N, ROSE.OQ, ANET.N, ACMP.N, DATA.N, CLDN.OQ, PFE.N, NXPI.OQ, SEVI.PA, UNP.N, FANG.OQ, CSCO.OQ, ATHL.N, MONY.L, ENB.TO, DVN.N, IHHH.KL, NOVN.VX, SILO.JK, VRNT.OQ, EBAY.OQ, FSL.N, TAO.TO, APC.N, PVA.N, TRP.TO, 2318.HK, NEE.N, NEP.N, T.N, ETE.N, CP.N, CAM.N, ECA.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (0700.HK, INTC.OQ, TOTF.PA, SCTY.OQ, EOG.N, MSFT.OQ, FSLR.OQ, PXD.N, ORCL.N, SPLK.OQ, VIV.PA, SPWR.OQ, 0270.HK, 1299.HK, ITV.L, FB.OQ, PFPT.OQ, ABBN.VX, PANW.N, SCHN.PA, GOOGL.OQ, LYB.N, 600008.SS, SIIC.SI, 0371.HK, BMY.N, IBM.N, AMZN.OQ, 6758.T, JKS.N, 0460.HK, 1898.HK, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, XOM.N, WMT.N, CXO.N, 0883.HK, SOON.VX, KPJH.KL, BTE.TO, BIOA.N, CRZO.OQ, ROSE.OQ, ANET.N, ACMP.N, DATA.N, CLDN.OQ, PFE.N, NXPI.OQ, AVGO.OQ, 601601.SS, 005930.KS, SEVI.PA, UNP.N, FANG.OQ, SPN.N, CSCO.OQ, ATHL.N, VIE.PA, MONY.L, ENB.TO, DVN.N, IHHH.KL, NOVN.VX, NBL.N, SILO.JK, OREP.PA, RRC.N, VRNT.OQ, EBAY.OQ, PGAS.JK, FSL.N, TAO.TO, PTBA.JK, LLY.N, APC.N, NOBN.S, PVA.N, TRP.TO, 2318.HK, GPOR.OQ, NEE.N, NEP.N, T.N, WNR.N, ETE.N, COP.N, CP.N, CAM.N, ECA.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1504.TW, 0700.HK, BHP.AX, INTC.OQ, TOTF.PA, SCTY.OQ, HLMA.L, XONE.OQ, EOG.N, 1169.HK, DAST.PA, MSFT.OQ, 0967.HK, MCHP.OQ, DANG.N, FSLR.OQ, PXD.N, IFXGn.DE, ORCL.N, CVX.N, SNDK.OQ, ADSK.OQ, SPLK.OQ, NFLX.OQ, DHR.N, VIV.PA, XRS.N, SPWR.OQ, 0270.HK, YNDX.OQ, PCLN.OQ, 1299.HK, SAPG.F, BPT.AX, AZN.L, EMR.N, ITV.L, FB.OQ, PFPT.OQ, ABBN.VX, PANW.N, 4528.T, UTX.N, SCHN.PA, GOOGL.OQ, SLB.N, LYB.N, 8058.T, 0257.HK, 0857.HK, EDU.N, FPM.L, 600008.SS, 6273.T, SUN.BO, PRU.L, 0386.HK, BSY.L, 2448.TW, SIIC.SI, 6841.T, 0371.HK, BMY.N, SXY.AX, IBM.N, AMZN.OQ, BHI.N, 6758.T, MRCG.DE, BIDU.OQ, JKS.N, 0460.HK, 1898.HK, HON.N, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, SUNE.N, XOM.N, NWS.AX, WMT.N, CXO.N, 0883.HK, SOON.VX, KPJH.KL, 7309.T, MLNX.OQ, BTE.TO, ERII.OQ, AAPL.OQ, BIOA.N, BH.BK, CRZO.OQ, ROSE.OQ, ANET.N, 9914.TW, HRUM.JK, YAR.OL, ACMP.N, CRM.N, DATA.N, SN.L, MRVL.OQ, CLDN.OQ, PFE.N, NXPI.OQ, AVGO.OQ, 6367.T, 601601.SS, 005930.KS, 3407.T, JNPR.N, SEVI.PA, 3337.HK, UNP.N, DPWGn.DE, FANG.OQ, RAFG.SI, 1301.TW, SPN.N, CSCO.OQ, ATHL.N, MWE.N, VIE.PA, MONY.L, 4452.T, CLR.N, 6902.T, ENB.TO, ALFA.ST, DVN.N, IHHH.KL, XEC.N, 7011.T, NOVN.VX, XLNX.OQ, NBL.N, KSU.N, SILO.JK, OREP.PA, RRC.N, VRNT.OQ, APLH.NS, KBR.N, ALTR.OQ, VOES.VI, EBAY.OQ, PGAS.JK, WEIR.L, INDY.JK, FSL.N, TSLA.OQ, ABMM.JK, STO.AX, ADRO.JK, 1251.HK, TAO.TO, PTBA.JK, LLY.N, APC.N, COLOb.CO, NUE.N, NOBN.S, PVA.N, NPNJn.J, TRP.TO, 2318.HK, GPOR.OQ, MRO.N, NEE.N, NEP.N, PAA.N, T.N, WNR.N, FLR.N, ETE.N, COP.N, CP.N, CMI.N, CAM.N, CF.N, CAT.N, BA.N, DOW.N, JBHT.OQ, ECA.N, NATU3.SA, COL.N, 8113.T, AGU.N) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0700.HK, MSFT.OQ, ROG.VX, ABBN.VX, 8058.T, CHKP.OQ, PRU.L, IBM.N, HON.N, GE.N, XOM.N, CONG.DE, CSCO.OQ, BRCM.OQ, 2318.HK, DOW.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (INTC.OQ, SCTY.OQ, XONE.OQ, SSYS.OQ, EOG.N, MSFT.OQ, ROK.N, MCHP.OQ, YPF.N, DANG.N, FSLR.OQ, PXD.N, ORCL.N, CVX.N, SNDK.OQ, ADSK.OQ, EPD.N, SPLK.OQ, NFLX.OQ, DHR.N, XRS.N, SPWR.OQ, YNDX.OQ, PCLN.OQ, VIPS.N, EMR.N, FB.OQ, PFPT.OQ, PANW.N, UTX.N, GOOGL.OQ, SLB.N, LYB.N, 8058.T, DDD.N, EDU.N, CHKP.OQ, V.N, CTRP.OQ, BMY.N, IBM.N, AMZN.OQ, BHI.N, 6758.T, HOLI.OQ, BIDU.OQ, JKS.N, HON.N, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, SUNE.N, XOM.N, WMT.N, CXO.N, INFA.OQ, MLNX.OQ, ERII.OQ, AAPL.OQ, BIOA.N, CRZO.OQ, ROSE.OQ, ANET.N, ACMP.N, CRM.N, LNKD.N, DATA.N, MRVL.OQ, CLDN.OQ, PFE.N, NXPI.OQ, AVGO.OQ, JNPR.N, UNP.N, FANG.OQ, ITRI.OQ, LXFR.N, WFT.N, SPN.N, CSCO.OQ, ATHL.N, MWE.N, KMI.N, CLR.N, BRCM.OQ, DVN.N, XEC.N, XLNX.OQ, NBL.N, KSU.N, RRC.N, MSI.N, VRNT.OQ, DLPH.N, KBR.N, ALTR.OQ, EBAY.OQ, PDCE.OQ, FSL.N, TSLA.OQ, LLY.N, APC.N, NUE.N, PVA.N, TER.N, GPOR.OQ, MRO.N, NEE.N, NEP.N, PAA.N, T.N, WNR.N, FLR.N, ETE.N, D.N, COP.N, CP.N, CMI.N, CAM.N, CF.N, CAT.N, BA.N, DOW.N, JBHT.OQ, ECA.N, COL.N, AGU.N).
Credit Suisse may have interest in (KPJH.KL, IHHH.KL)
29 September 2014
Global Equity Themes 115
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (1504.TW, TOTF.PA, IFXGn.DE, VIV.PA, RDSa.L, SAPG.F, BPT.AX, ITV.L, IMI.L, ABBN.VX, 0857.HK, SIEGn.DE, 1590.TW, PRU.L, 0386.HK, 2448.TW, 6758.T, 2049.TW, MRCG.DE, JKS.N, RIG.N, EXPN.L, SOON.VX, AAPL.OQ, VLLP.PA, 9914.TW, MRVL.OQ, DPWGn.DE, MWE.N, RR.L, NOVN.VX, APC.N, NOBN.S, 2318.HK, ETE.N).
Credit Suisse has a material conflict of interest with the subject company (INTC.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO).
Credit Suisse has a material conflict of interest with the subject company (VIV.PA) . Credit Suisse are advising GVT Holding SA and Vivendi SA on a potential sale and/or merger with Tim Participações SA.
Credit Suisse has a material conflict of interest with the subject company (1299.HK) . Jack So (IB in HK) is an Independent Non-Exec Director of AIA (previously was a Non-Executive Director).
Credit Suisse has a material conflict of interest with the subject company (FB.OQ) . Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc.’s May 2012 initial public offering. Credit Suisse’s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits.
Credit Suisse has a material conflict of interest with the subject company (UTX.N) . Credit Suisse Securities (USA) LLC is acting as an advisor to Goodrich (GR) in a potential transaction with United Technologies Corp.
Credit Suisse has a material conflict of interest with the subject company (0857.HK) . Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has neither reviewed nor approved this report and/or any of the statements made herein.
Credit Suisse has a material conflict of interest with the subject company (0386.HK) . Credit Suisse is acting as financial advisor to both CNOOC Ltd. and SINOPEC on the acquisition of Marathon Oil Corporation's 20% interest in Block 32, offshore Angola.
Credit Suisse has a material conflict of interest with the subject company (GE.N) . Credit Suisse is acting as financial advisor to General Electric Company (GE) in connection with the announced proposed acquisition of certain assets from Alstom S.A.
Credit Suisse has a material conflict of interest with the subject company (MRK.N) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Merck (NYSE: MRK) on its announced proposed acquisition of Idenix Pharmaceuticals Inc. (NASDAQ: IDIX).
Credit Suisse has a material conflict of interest with the subject company (0883.HK) . Credit Suisse is acting as financial advisor to both CNOOC Ltd. and SINOPEC on the acquisition of Marathon Oil Corporation's 20% interest in Block 32, offshore Angola.
Credit Suisse has a material conflict of interest with the subject company (AVGO.OQ) . Credit Suisse Securities (USA) LLC is acting as financial advisor to Intel Corp (INTL) on its announced proposed acquisition of LSI’s Axxia Networking Business from Avago Technologies Limited (AVGO).
Credit Suisse has a material conflict of interest with the subject company (005930.KS) . Credit Suisse is acting as exclusive financial advisor to Samsung Electronics and Samsung Fine Chemicals in relation to the proposed sale of their ownership stakes in the semiconductor wafer joint ventures with SunEdison, SMP Ltd and MEMC Korea Company Ltd, to SunEdison.
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (ORCL.N). As of the date of this report, an analyst involved in the preparation of this report, Sitikantha Panigrahi, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in call options of Oracle Corporation (ORCL.N).
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (AAPL.OQ). A Credit Suisse analyst involved in the preparation of this report has a long position in the common stock of AAPL.
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Vamil Divan, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in the common stock Pfizer (PFE.N). A member of the analyst's household is an employee of Pfizer (PFE.N).
As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (PFE.N). As of the date of this report, an analyst involved in the preparation of this report, Ronak Shah, has the following material conflict of interest with the subject company. The analyst has a long position in the common stock Pfizer (PFE.N).
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (1504.TW, 0700.HK, BHP.AX, INTC.OQ, TOTF.PA, SCTY.OQ, HLMA.L, XONE.OQ, SSYS.OQ, EOG.N, 1169.HK, DAST.PA, MSFT.OQ, ROK.N, 0967.HK, 0895.HK, MCHP.OQ, YPF.N, DANG.N, FSLR.OQ, PXD.N, LEGD.PA, IFXGn.DE, ORCL.N, ORCL.N, 6481.T, CVX.N, INTUCH.BK, MA.N, SNDK.OQ, ADSK.OQ, EPD.N, SPLK.OQ, NFLX.OQ, DHR.N, VIV.PA, RDSa.L, 6954.T, ROG.VX, XRS.N, SPWR.OQ, 0270.HK, YNDX.OQ, 0750.HK, PCLN.OQ, 1299.HK, VIPS.N,
29 September 2014
Global Equity Themes 116
SAPG.F, ROR.L, AVV.L, BPT.AX, ARDS.AS, AZN.L, EMR.N, ITV.L, FB.OQ, SGE.L, IMI.L, PFPT.OQ, ABBN.VX, PANW.N, 4528.T, UTX.N, SCHN.PA, GOOGL.OQ, SLB.N, FMEG.DE, LYB.N, 8058.T, 0257.HK, DDD.N, 0857.HK, EDU.N, SIEGn.DE, FPM.L, CHKP.OQ, 1590.TW, 600008.SS, V.N, RSW.L, CTRP.OQ, 6273.T, 6141.T, SUN.BO, PRU.L, 0386.HK, BSY.L, 6506.T, 2448.TW, SIIC.SI, 6841.T, 0371.HK, BMY.N, SXY.AX, IBM.N, AMZN.OQ, BHI.N, 6758.T, 2049.TW, HOLI.OQ, MRCG.DE, BIDU.OQ, JKS.N, 0460.HK, 1898.HK, WG.L, 1065.HK, GLPL.SI, HON.N, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, SUNE.N, XOM.N, NWS.AX, WMT.N, 5444.T, CXO.N, 0883.HK, EXPN.L, SOON.VX, INFA.OQ, KPJH.KL, 1623.HK, 7309.T, 6861.T, MLNX.OQ, BTE.TO, ERII.OQ, AAPL.OQ, BIOA.N, BH.BK, CRZO.OQ, CONG.DE, ROSE.OQ, VLLP.PA, ANET.N, 9914.TW, HRUM.JK, 1211.HK, SASY.PA, YAR.OL, ACMP.N, CRM.N, LNKD.N, OCBC.SI, DATA.N, SN.L, MRVL.OQ, CLDN.OQ, PFE.N, PFE.N, PFE.N, NXPI.OQ, AVGO.OQ, 6367.T, 601601.SS, 005930.KS, 3407.T, JNPR.N, 0165.HK, SEVI.PA, 3337.HK, UNP.N, FANG.OQ, ITRI.OQ, RAFG.SI, LXFR.N, 1301.TW, WFT.N, SPN.N, CSCO.OQ, ATHL.N, STMN.S, MWE.N, 1963.T, VIE.PA, MONY.L, 4452.T, CNA.L, KMI.N, CLR.N, 6902.T, BRCM.OQ, TENR.MI, RR.L, ALFA.ST, DVN.N, IHHH.KL, XEC.N, 7011.T, NOVN.VX, XLNX.OQ, 1605.T, NBL.N, KSU.N, 011210.KS, SILO.JK, OREP.PA, RRC.N, MSI.N, VRNT.OQ, APLH.NS, DLPH.N, KBR.N, ALTR.OQ, VOES.VI, 7251.T, 9201.T, EBAY.OQ, PDCE.OQ, PGAS.JK, WEIR.L, NOVOb.CO, INDY.JK, FSL.N, TSLA.OQ, ABMM.JK, STO.AX, ADRO.JK, 1251.HK, ARX.TO, TAO.TO, PTBA.JK, LLY.N, APC.N, 1133.HK, COLOb.CO, NUE.N, NOBN.S, PVA.N, 6754.T, NPNJn.J, TER.N, 0806.HK, 2318.HK, GPOR.OQ, MRO.N, NEE.N, NEP.N, PAA.N, T.N, WNR.N, FLR.N, ETE.N, D.N, COP.N, CP.N, CMI.N, CAM.N, CF.N, CAT.N, BA.N, DOW.N, JBHT.OQ, ECA.N, NATU3.SA, COL.N, 8113.T, AGU.N) within the past 12 months
An analyst involved in the preparation of this report has visited certain material operations of the subject company (AAPL.OQ, TA.TO, DPWGn.DE, ENB.TO, CNQ.TO, TRP.TO) within the past 12 months
The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses.
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.
Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (HLMA.L, ITV.L, WG.L, MONY.L).
The following disclosed European company/ies have estimates that comply with IFRS: (HLMA.L, DAST.PA, LEGD.PA, VIV.PA, RDSa.L, SAPG.F, AZN.L, ITV.L, SGE.L, IMI.L, ABBN.VX, SCHN.PA, FMEG.DE, SIEGn.DE, 6141.T, PRU.L, BSY.L, BMY.N, WG.L, XOM.N, EXPN.L, SOON.VX, CONG.DE, VLLP.PA, SASY.PA, YAR.OL, SN.L, 3407.T, DPWGn.DE, VIE.PA, CNA.L, TENR.MI, RR.L, ALFA.ST, OREP.PA, VOES.VI, WEIR.L, NOBN.S).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (0700.HK, TOTF.PA, SCTY.OQ, EOG.N, MSFT.OQ, FSLR.OQ, PXD.N, INTUCH.BK, SNDK.OQ, SPLK.OQ, VIV.PA, SPWR.OQ, 0270.HK, 1299.HK, FB.OQ, PFPT.OQ, ABBN.VX, PANW.N, GOOGL.OQ, FMEG.DE, LYB.N, SIEGn.DE, 600008.SS, PRU.L, SIIC.SI, BMY.N, IBM.N, JKS.N, 0460.HK, WG.L, DO.N, MU.OQ, GE.N, HAL.N, MRK.N, PSX.N, RIG.N, XOM.N, WMT.N, 0883.HK, BTE.TO, BIOA.N, CRZO.OQ, CONG.DE, ROSE.OQ, ANET.N, ACMP.N, OCBC.SI, DATA.N, CLDN.OQ, PFE.N, NXPI.OQ, 601601.SS, SEVI.PA, UNP.N, FANG.OQ, CSCO.OQ, ATHL.N, MONY.L, CNA.L, ENB.TO, DVN.N, IHHH.KL, NOVN.VX, SILO.JK, RRC.N, MSI.N, VRNT.OQ, DLPH.N, EBAY.OQ, FSL.N, ARX.TO, TAO.TO, APC.N, PVA.N, TRP.TO, 2318.HK, NEE.N, NEP.N, T.N, WNR.N, ETE.N, COP.N, CP.N, CAM.N, BA.N, ECA.N) within the past 3 years.
As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% or more of STMN.S
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
For Thai listed companies mentioned in this report, the independent 2013 Corporate Governance Report survey results published by the Thai Institute of Directors Association are being disclosed pursuant to the policy of the Office of the Securities and Exchange Commission: Intouch Limited (Excellent) , Bumrungrad Hospital Pcl (Very Good)
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse Securities (Europe) Limited......................................... Richard Kersley ; Andrew Garthwaite ; Eugene Klerk ; Ashlee Ramanathan
Important Credit Suisse HOLT Disclosures
With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.
29 September 2014
Global Equity Themes 117
The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.
Additional information about the Credit Suisse HOLT methodology is available on request.
The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.
CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
29 September 2014
Global Equity Themes 118
29 September 2014
Global Equity Themes 119
29 September 2014
Global Equity Themes 120
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved.
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
XX6367EU.doc
