Company Reports

Generali is a multiline insurer that derives around two fifths of pretax earnings from its home market of Italy. The business has invested significant amounts in data and technology over recent years and those investments have led to improvements in margins, across its nonlife and life insurance business. We think in nonlife insurance versus peers the business holds more limited exposure to commercial insurance and also more limited exposure to insurance written in the Americas region. Nonetheless, the company’s investments have resulted in ongoing improvements in its claims ratio, which we think is the essence of good underwriting. Further, the company went on to acquire the nonlife insurance business of Cattolica a few years ago and that acquisition bolstered its market share in its home country. We think the purchase also introduced more health and property insurance. This division earns above its cost of equity.

EML builds the infrastructure to allow payments via prepaid cards or in real-time. The firm makes money primarily via clipping payment transactions. It also earns fees from breakage, inactive accounts, cash establishments and interest from loaded funds.

CSPC is one of the largest and oldest pharmaceutical companies in China. Anchored by its nervous system business segment due to its flagship drug NBP, CSPC has a portfolio of innovative and generic drugs covering a wide range of diseases. NBP is a Class 1 new chemical drug for acute ischemic stroke. Class 1 drugs under the Chinese classification system are innovative drugs that have never been marketed globally. Thanks to its portfolio breadth, CSPC has been growing its revenue with a 10-year historical compounded annual growth rate of 25.0%, exceeding GDP growth.

NetEase started as a Chinese internet portal in the late 1990s but has now become the second-largest mobile game company in the world. The firm owns one of the most well-known massively multiplayer franchise in China—Fantasy Westward Journey. Over the past decade, NetEase has capitalized on the industry shift toward mobile gaming and now focuses on developing innovative, high-quality, and long-cycle games with a mobile-first approach. Over the past years, the firm has established iconic titles such as Onmyoji, Naraka Bladepoint, and Identity V. Every year, the company publishes dozens of games spanning across almost every genre. In addition, NetEase is also collaborating with firms such as Microsoft and Marvel to release games based on famous global intellectual property like Diablo, Harry Potter, and Lord of the Rings. Over the foreseeable future, we expect NetEase to continue to leverage its in-house research and development capabilities and user data to develop next-generation games.

Pro Medicus’ strategy revolves around renewing existing contracts and winning new clients for its main product, Visage 7, while increasing its price point. The company won six out of six major public tenders it competed for in fiscal 2021, which often involved on-site pilot tests. While this likely highlights Visage 7’s current superior speed, scalability, and resilience, continued investment in research and development is imperative for the firm to remain at the forefront of innovation and consistently win contracts. Most of the firm’s expenses are allocated to over 40 software engineers with the main R&D center located in Berlin. The company also recently extended its R&D capability in New York in collaboration with NYU Langone Health in 2021. Its R&D efforts mostly revolve around software enhancements, program extensions, and research in artificial intelligence to assist in diagnoses.

Like State Street and Bank of New York Mellon in the US, which compete with custodian businesses inside larger US banks like J.P. Morgan, Sumitomo Mitsui Trust Holdings' main competitors are the trust-bank units of Japanese megabank groups Mitsubishi UFJ and Mizuho. Given its shared connections to the Sumitomo and Mitsui keiretsu corporate networks, SMTH's business portfolio would be a good match for Sumitomo Mitsui Financial Group, but SMTH and SMFG do not have any capital connection despite the common name.

Over the past decade, Tencent has capitalized on the industry shift toward mobile gaming. The firm owns some of the world's most popular titles, like Honor of Kings and PUBG Mobile. To date, games remain Tencent's primary monetization model--as we estimate more than 40% of the group's operating income comes from this segment. Tencent should continue to leverage its unrivaled access to user data and financial capital to create innovative, high-quality, and long-cycle games with a mobile-first approach.

Samsonite's revenue and earnings faced significant challenges due to the impact of the coronavirus pandemic. Despite these pressures, the company took steps to safeguard its business, including drastic cost cuts. Now that travel has returned to prepandemic levels, Samsonite is poised to achieve impressive near-record profit margins in the near term. However, this positive momentum is unlikely to last over the long run.

Despite uncertainty around the pace of corporate travel recovery and direct connections between major North American carriers and online travel agencies, we see Amadeus' business demand rebounding in 2024 from the pandemic-caused April 2020 nadir during the next few years. Long term, we expect its leadership position in global distribution systems to endure, driven by its leading network of airline content and travel agency customers as well as its healthy position in software solutions for these carriers and agents. Amadeus is the largest of the three GDS operators (narrow-moat Sabre is number two, followed by privately held Travelport) that control nearly 100% of market volume.

In our view, narrow-moat Ralph Lauren's restructuring over the past few years puts it on solid footing as it navigates macroeconomic challenges. In response to poor inventory control and heavy discounting in years past, Ralph Lauren has closed underperforming stores, reduced exposure to US department store and off-price channels, and cut product lead times. These and other efforts have resulted in strong gross margin increases. Although sales have declined in North America from peak levels, we believe the restructuring, including new merchandise and better pricing for core products, has positioned Ralph Lauren for low-single-digit sales growth and mid-60s gross margins. Further, we forecast advertising support as a percentage of sales in the mid-single digits in the long term and anticipate its direct-to-consumer sales will rise to 75% of sales in fiscal 2034 from 66% in fiscal 2024, thereby reducing the brand’s dependence on US physical retail and providing better control over pricing and positioning. We view an increasing direct-to-consumer business as essential as customer visitation is declining in many retail stores and malls.

Insignia Financial (formerly IOOF) adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating reputational damages stemming from the 2018 Royal Commission. Since then, tighter compliance and operating standards have been enforced. Insignia is also restructuring its advisor network, intending to increase the proportion of salaried advisors within its network, as this helps the firm extract higher gross margins.

Alstom offers a comprehensive portfolio, including rolling stock (53% of revenue), services (23%), and signaling and systems (24%), setting it apart from competitors.

Centuria Industrial REIT is an externally managed Australian real estate investment trust. It owns a portfolio of 88 industrial properties, including distribution centers, manufacturing facilities, and data centers. About 82% of the portfolio by value is in urban infill areas of the major cities, with good prospects for rental growth and potentially redevelopment over the long term for higher and better use, including multistory industrial, mixed use, residential, healthcare, or bulky goods retail.

Bendigo and Adelaide Bank is one of Australia’s top 10 largest banks, but by loans and deposits is much smaller than the four major banks. A higher cost/income ratio and funding costs make it difficult to generate attractive returns on shareholder capital in a competitive market. The acquisitions of Adelaide Bank, Rural Bank, and Delphi Bank have helped scale and diversify the loan book, but revenue gains and synergy benefits to date have failed to generate excess returns on equity given the larger capital base.

Computershare services more than 25,000 firms globally. Alongside its register maintenance services, the firm leverages its records management skills to service adjacent areas like corporate actions or annual general meetings. Acquisitions are pursued to bolster growth, such as the acquisition of Wells Fargo’s corporate trust arm in 2021 and Equatex, an employee share plan provider, in 2018. Its product variety supports cross-selling. Competition is fragmented, and peers struggle to compete with Computershare’s breadth of products, long-dated contracts, high retention, integration experience, and capability in servicing an increasingly transnational securities industry.

Lenovo’s acquisition of IBM’s ThinkPad PC business in 2005 has helped propel the company to be a leader in the PC market with 24% global market share. The successful integration of the ThinkPad business has also enabled Lenovo to increase its commercial-related sales, which currently make up 60% of its PC sales, as well as stabilize its PC margins in recent years. We expect PC sales to continue to make up around 70% of overall sales, while the segment’s profit margins should remain stable, given less intense competition at the higher end of the PC market.

We award a narrow economic moat rating to Keurig Dr Pepper and expect the firm to generate excess investment returns aided by intangible assets and scale benefits in its soft drink portfolio and entrenched retail and brand partner relationships in its coffee business for the next 10 years.

Teva Pharmaceutical is the leading generic drug manufacturer in the world. By our estimate, roughly 70% of its total sales are derived from generics and off-patent branded drugs, and the company continues to suffer low- to mid-single-digit erosion year over year in developed markets like North America and the majority of Europe. Because price and margin headwinds exist predominantly in small-molecule oral tablets that are easy to produce, Teva has been downsizing its generics pipeline and focusing on complex generics. It historically went after 80% of drugs coming off patent, but it will now focus on just 60% because the incremental value from the remaining 20% is marginal. This enables the company to allocate development spending to other more profitable avenues, such as complex generics—drugs that have complex formulations or dosage forms or are injected or have more-complex administration. Complex generics are more difficult to manufacture, which limits competition. Price, volume, and margin are highly dependent on the competitiveness of a drug, so complex generics pave an opportunistic road for Teva. However, other players are employing a similar strategy, so success in this area relies on Teva’s ability to seek out profitable drugs and efficiently launch them to market.

Lowe's is the second-largest home improvement retailer globally, set to capture around $84 billion in sales in fiscal 2024. With continued focus on retail fundamentals (merchandising, operational efficiency, supply chain improvements, omnichannel shopping experience, and customer engagement), Lowe's has been able to better leverage costs while maintaining its low-cost position. The firm retains some of the cost savings and passes the rest on to its customers through everyday low prices, creating a flywheel effect. Intangible asset and scale-based cost advantage support our wide moat rating.

Johnson & Johnson stands alone as a leader across the major healthcare industries. It maintains a diverse revenue base, a developing research pipeline, and exceptional cash flow generation that together create a wide economic moat.