nt Perspectives ¡ª US and the Americas
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Where we see the greatest risks from European banks deleveraging ¨C our heat map Emerging markets ¨C we see greatest risks to CEE High in SEE/CEE We see major risks in CEE/SEE where European banks represent ¾ of the banking system. 12 of the 16 major European banks in CEE (representing ~78% of these banking assets) either had a capital shortfall in the recent 9% test or are TARP recipients. We expect the greatest strain in SEE although the EBRD is helping. We see growing risks to global trade finance ¨C French banks looking to reduce $ dependency represent 25% of outstanding trade finance. In an orderly scenario we think this will be passed to local banks or selected global banks (HSBC, STAN, JPM, C). If the deleveraging were to become disorderly, we could see a repeat of what happened in 2008-09 when European banks reduced their exposures by 20%. Within this, STAN and HSBC ¨C which today are over ½ of the European banks lending to the region ¨C were far more stable ¨C (7)% vs (31)% for non-UK banks. We are concerned that stresses in bank and sovereign funding as well as capital challenges will impact Spain and Italian banking markets. We note the largest capital deficits in the EBA stress tests outside of the programme countries were in Spain and Italy. We also note the significant increase in Italian bank usage of ECB lines ¨C standing at €105bn (or 2.7% of bank assets). Continental European banks, notably the French, are looking to reduce their need for $ funding by not renewing or limiting new loans. Our deal by deal analysis of the last 3 months suggests some are being picked up by leading US large cap banks (such as JPM, C, USB, WFC) as well as some Asian and international banks. ~€0.5tr of existing structured credit assets (about 2/3 in $) held by European banks will continue to act as an overhang in the market, impacting asset prices. We also think European investment banks may look to shed 1/4-1/2 of their Basel 3 RWAs in fixed income and legacy assets over the coming years, eg we forecast CS to shrink theirs by 48% and UBS by 55%. We see some lenders constraining CRE lending (e.g. CBK¡¯s Eurohypo announced that it has suspended all lending outside Germany). Asset quality and large concentrations in portfolios, particularly in UK banks to Ireland and within Spanish banks, remain a focus. Over 25% of outstanding aircraft leasing is reportedly for sale*. We think Japanese banks could be buyers and beneficiaries given their funding profiles. Asian & some US banks could find opportunities too. Private equity should be rarer given funding. Assets that can be sold to private equity & non-funding heavy (private banking, custody, asset management, & some parts of insurance) look reasonably supported, but those that require heavy bank funding ¨C including EM bank units ¨C may not see such compelling pricing, impacting those banks dependent on large asset sales ¨C hence our caution on RBS, CBK etc
EM ¨C Asia/LatAm
Much lower than CEE
Southern and Peripheral Europe
High
US$ assets e.g. commodity finance & parts of syndicated lending Structured credit and securitised assets
Likely to be passed to US/global banks High on overhang
Commercial real estate
Mixed, some weak spots
Leasing (aircraft, car, shipping) Non-core units (various)
Possible buyers to replace Mixed
* According to Dow Jones News 6 November 2011 (unconfirmed). Source: Morgan Stanley Research Prices: Commerzbank €1.58, RBS 21p, Sberbank $2.68, BNP €31.81, BARC 174p, DnB NKr 63 HSBC 504p, KBC €13.53, Deutsche Bank €28.64, MPS €0.30, Banco Popolare €1.01, Bankinter €4.15, Lloyds 28p, Raiffeisen €18.22
62
MORGAN STANLEY RESEARCH November 16, 2011 Investment Perspectives ¡ª US and the Americas
International November 9, 2011
Fast Retailing J-Insight: Initiate at EW: Time to Appraise as a Global Growth Stock Morgan Stanley MUFG Securities Co., Ltd.+
Stock Rating: Equal-weight Price target Up/downside to price target(%) Shr price, close (Nov 8, 2011) Mkt cap, curr, basic(bn) Div yld (08/12e)(%) Fiscal Year ending Revenue, net(¥bn) Operating profit(¥bn)* Recurring profit(¥bn)* Net income(¥bn)* EPS, basic(¥)* ModelWare EPS(¥) P/E, basic* * = GAAP or approximated based on GAAP e = Morgan Stanley Research estimates
Reuters: 9983.T Bloomberg: 9983 JP ¥14,400 8 ¥13,340 ¥1,358.2 1.7 08/11 820.3 116.4 107.1 54.4 534.0 729.2 27.1 08/12e 940.0 127.0 119.0 66.3 651.2 738.8 20.5 08/13e 1,108.8 150.5 144.5 81.6 801.4 891.6 16.6 08/14e 1,226.6 171.3 165.3 94.5 928.6 1,022.6 14.4
Yukimi Oda Yukimi.Oda@morganstanleymufg.com
We expect UNIQLO international business to generate 21.5% of total F8/13 OP as store openings accelerate in Asia. Given high risk of an earnings undershoot in F8/12, however, our PT implies limited upside of 8%, and we thus initiate at EW. Domestic retailer comparisons no longer valid: UNIQLO international business generated 7.2% of OP in F8/11, which we expect to swell to 12% in F8/12 and 21.5% in F8/13. Adding global brand business, overseas operations are structurally positioned to create most of future profit growth. With profit drivers already shifting overseas, we think global retailers such as H&M and Inditex are now the appropriate benchmark for valuation. Early mover advantage over the top two in Asia: Fast Retailing had 96 stores in China, Hong Kong and Taiwan at end-Aug. This already outstrips H&M (47 stores in the region), and plans to expand to 172 stores at end-F8/12 and 254 at end-F8/13 will put the firm comfortably ahead of Inditex (143 stores currently). And in Korea, Fast Retailing¡¯s store expansion is far outstripping these two rivals. As the regional strategy is different from H&M and Inditex, which are building out in Europe, we are not worried about debilitating direct competition in the near term. Expect monthly sales to swing share price between optimism and pessimism till year-end: Same-store sales decline of 6.4% YoY in Sep-Oct (firm¡¯s forecast was 5% growth) heightens risk that earnings will miss F8/12 targets. Since 1Q contributes 40% and 1H 70% of full-year profit, stock price movement will be tied to monthly data until the end of the year. However, we expect margins overseas to improve progressively, and do not anticipate sharp sell-offs as seen in the past. And if the share price were to undershoot towards year-end, the investment case would gain appeal as the upside implied by our PT widens (our bear case fair value is ¥12,100).
Price Performance Fast Retailing Co. Ltd. (Left, Japanese Yen) Relative to JAPAN TOPIX (Right) Relative to MSCI World Index /Japan (Right)
300 18,000 16,000 14,000 12,000 150 10,000 8,000 6,000 07 08 09 10 11 100 50 250 200
Source: FactSet Research Systems Inc
Company Description Japan¡¯s largest retailer of casual clothing. Sells clothing developed in-house under the UNIQLO store banner. Features high margins as a manufacturing retailer with comprehensive operations covering raw materials purchasing, planning, manufacturing and marketing. At the end of F8/11 there were 843 UNIQLO stores in Japan (including 21 franchise outlets) and 181 abroad. Aims to become the world¡¯s top manufacturing retailer of apparel, with chain expansion focused on Asia, and especially China. Retail/Japan Industry View: In-Line Amid lingering economic uncertainties, we believe company-specific strategies become increasingly important, highlighting the gap between "winners" and "losers".
63
MORGAN STANLEY RESEARCH November 16, 2011 Investment Perspectives ¡ª US and the Americas
International Risk-Reward Snapshot: Fast Retailing (9983, ¥13,290, EW, PT ¥14,400) Risk-Reward View: Time to Appraise as a Global Growth Stock ¥20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Nov-09 ¥ 13,290 ¥17,600 (+32%) ¥16,000 (+20%) ¥14,400 (+8%) ¥12,100 (-9%)
Investment Thesis x Growing earnings in Asia, centering on China (incl. Taiwan, Hong Kong) and S. Korea x We estimate 56.7% OP growth in UNIQLO international business over the next 5 years, with ratio to total OP rising to 12.2% in F8/12, 21.5% in F8/13, 27.6% in F8/14, 33.4% in F8/15 x We expect constant 3% total sales growth in UNIQLO Japan business (with flat same-store sales) on stable demand for annually upgraded (functionality, quality, design) core-lineup products Key Value Drivers x Maintenance and improvement of GPM by minimizing losses from price movements (price cuts) x Expansion of scale advantages and profitability as number of overseas stores increases (mainly in China and S. Korea) x Ability to generate cash flow Potential Catalysts x Quarterly results show improvement in UNIQLO international business earnings Price Target Risks x Slower-than-expected UNIQLO international business earnings growth x UNIQLO Japan business slump that offsets profit contributions from overseas
May-10
Nov-10
May-11
Nov-11
May-12 Current Stock Price
Nov-12 WARNINGDONOTEDIT_RRS4RL~9983.T~
Price Target (Nov-12)
Historical Stock Performance
Price Target ¥14,400
PT applies P/E of 18x to our F8/13 EPS forecast. This marks a 10% discount from the base case P/E, as we believe (1) the high risk of earnings undershooting in F8/12 and (2) smaller overseas profit contributions than at its two main global peers (H&M, Inditex) mean it will take longer than our PT-implied time horizon of 12-18 months for the market to value the stock at the multiple earned by this pair. The stock earns a premium to the P/E of global peers reflecting OP growth rate of 18.5%, vs. 10-14% for H&M and Inditex. Domestic same-store sales growth is 2%, OP ¥157.1bn (+23.7% YoY) in F8/13. Fair value is 20x F8/13 EPS. With UNIQLO international business generating more than 20% of total profit and presence in Asia rising, the stock earns a valuation in line with its two global peers. Domestic same-store sales growth is 0%, OP ¥150.5bn (+18.5% YoY) in F8/13. Domestic same-store sales growth is negative, eroding the impact of overseas contributions. This scenario factors for the possibility that the market will still regard comparisons with domestic retailers as appropriate, at least for UNIQLO Japan business. P/E of 16x blends a multiple of 14x for UNIQLO Japan with 20x for UNIQLO international and global brand business, weighted for the respective profit contributions. Domestic same-store sales drop 2%, OP is ¥142.7bn (+12.4% YoY) in F8/13.
Bull Case ¥17,600
F8/13e EPS ¥876 x P/E 21
Base Case F8/13e EPS ¥16,000 ¥801.4 x P/E 20
Bear Case ¥12,100
F8/13e EPS ¥765 x P/E 16
Note: Share price as at November 7, 2011, close; EPS adjusted for consensus e = Morgan Stanley Research estimates. Source: IFIS, FactSet, Morgan Stanley Research
64
MORGAN STANLEY RESEARCH November 16, 2011 Investment Perspectives ¡ª US and the Americas
International
Entering a new growth stage Debate 1: Can the firm succeed as a latecomer to overseas