Research
We have provided investment research and strategic insights to investment banks, asset managers, governments, corporates, NGOs and policymaking institutions for over three decades. Our experience extends from emerging economies in Asia, Africa and Latin America to the EU, the US and Japan. Our most recent focus covers food security, trust & policy; international development & trade, agribusiness technology and emerging markets. We value the independence of our research and so do our clients. This platform provides a forum for our research some of which is highlighted below.
China’s One Belt One Road (OBOR) Initiative is a strategic challenge to the West’s relationships with many developing countries and requires a comprehensive and collective response. To date the most prominent reactions have been defensive (and informal) security measures rather than offensive (and formal) economic ones. For many African nations, enhanced competition between China and the West should be seen as an unrivalled opportunity to become a material destination for investment capital and fund flows.
Many things will keep a member of China’s State Council awake at night. Food security would figure highly and access to an otherwise ordinary oilseed – soybeans – would feature prominently. China’s need to find an additional annual 50m tonnes of this vital component of the country’s growing affluence has significant strategic ramifications for Brazil, Argentina, Africa and the West.
The paper traces the history of land use, ownership, and development in Malawi from the colonial era to the present.
The CASA programme is a flagship programme of the UK Foreign, Commonwealth and Development Office (FCDO) and is intended to increase global investment in agribusinesses which trade with smallholders in equitable commercial relationships, increasing smallholders’ incomes and climate resilience. The programme aims to help agribusinesses to scale up and trade in larger commercial markets. As part of its work CASA generate new evidence and analysis that supports a stronger, fairer and greener agribusiness sector.
Over the past two decades, global patterns in tobacco production and trade have shifted dramatically. While research by tobacco control groups and public health organizations has focused on tobacco production and elucidated several key trends driving these shifts, considerably less is known about patterns of tobacco trade. Understanding the global tobacco economy—and the major players in it—depends on developing a more complete knowledge of all stages of the tobacco supply chain, including production of tobacco, trade of unmanufactured tobacco leaf, processing of tobacco leaf into various tobacco products, and trade and consumption of manufactured tobacco products. As with many other commodities, tobacco has its own unique and evolving supply chain. This report focuses on understanding patterns in production and trade of unmanufactured tobacco leaf.
The future of British agriculture lies not in inefficient subsidies and misallocated capital. Rather the UK has the potential to re-pivot, refocus and redeploy its capital and energies towards the nation’s value-added agricultural technologies and cutting-edge science capabilities. The potential benefits to the country are not simply economic and commercial; they can also reinforce trade, aid and economic diplomacy.
The possibility of a Brexit-driven reconfiguration of the UK’s food and agricultural sector suggests that a period of significant transformation and structural adjustment lies ahead. Set against an industry already in the midst of rapid technological displacement, value-chain disruption and regulatory change, a transformative event such as Brexit appears to add to existing uncertainty.
At the core of the transformation that shook New Zealand’s agriculture sector in the 1980s and 1990s was a pressing need to access new markets in the face of external economic shocks and structural adjustments, such as the UK’s decision to join the then European Economic Community (EEC) in 1973. The New Zealand experience indicates that an agenda focused on long-term goals can deliver significant economic and social benefits, but may come with considerable short-term costs. The battle about to commence in the UK is set to be as brutal, complex and ideological as that which determined the direction of the British economy in the late-1970s and early 1980s.
Food security’s significance as a key geostrategic theme was confirmed in 2007-2008 when it emerged at the top of the international political agenda. Although food price inflation has receded in recent years, the underlying supply challenges remain demanding. The collapse in oil prices has forced food security and agricultural development to the top of the political and economic agenda across Africa. To thrive economically and socially, Africa needs first to deal with its own US$35bn structural food deficit before it can play a role in alleviating long-term strategic supply impediments across the world.
Evidence of an economic slowdown in China is demonstrated clearly by the leading indicators of falling commodity prices. Soft commodity prices have paralleled the decline of copper, oil and gas in recent months. But there is a significant difference between them. China is likely to shift its economic emphasis from a high-investment, export-driven model towards one spurred by domestic consumption. In crude, almost simplistic terms, manufacturing and infrastructure spending slows while a service economy emerges over time. Thus, while there might be some short-term adjustment, growing affluence should remain the norm. In short, the need to build bridges, highways and commercial property will become less prominent but diets will continue to change. This will place enormous burdens on an already challenged domestic food system and have significant ramifications on international trade in agriculture.
China’s shifting dietary patterns, driven by an increasingly wealthy, urban middle class will have significant political, economic, social and cultural implications for the country. China’s food system will require a major transformation if it is to avoid long-term structural problems, and this process will create investment opportunities across global markets.
There is widespread hope that newly elected Indian Prime Minister Narendra Modi’s will be able to implement deep reforms that mirror Manmohan Singh’s efforts in the early 1990s. A number of commentators believe the reformist zeal, which seemingly characterized the agriculture sector in his home state of Gujarat, may be replicated at national level. However, much of this “success” in Gujarat was largely independent of the Modi Administration’s initiatives and due to other external – and uncontrollable – factors. Moreover, agriculture is a state issue and not a central government issue. In short, the centre cannot force reforms on individual states.
African agriculture is likely to be transformed over the next two decades, and mirror the Brazilian experience over the previous two decades. Urbanisation, the advent of the super farm, a lack of legacy structures and a desire for food security; plus new thinking on aid, sustainability and investment models, will play a major part in changing the continent from one dominated by smallholders to one at the cutting edge of agriculture practice.
The dominance of the traditional trading houses is shifting, due to two simple changes in the landscape: the emergence of larger farming groups; and, crucially, the availability of cheap information, which is no longer under the control of the larger trading groups. These drivers, in tandem with resource nationalism, food security and what we call market dislocation, are having a profound impact on the structure of the industry. This loss of oligopolistic power will force the traditional trading houses to enact fundamental and radical changes to their existing businesses.
We are not scaremongering neo-Malthusians. However, we believe that China’s self-sufficiency in several key grains – wheat, rice and corn – may be reversed in a dramatic fashion in the next few years with significant consequences for soft commodity prices. China’s changing diet, which has seen meat consumption per capita increase by 21% in the past decade, has had a dramatic impact on demand for soybeans and corn. We believe that the interaction of the key variables defining prices – output, consumption, yields, planted areas, imports, exports and inventories – are at a major inflection point.
We are witnessing the third great sub-contracting wave of the modern era: twenty years ago, manufacturing headed to China. A decade back, IT services shifted to India. Now we are witnessing the shift of agriculture from high-cost, inefficient producers to low-cost producers such as Brazil, Argentina, Russia, Ukraine and Kazakhstan. The latest great industrialisation process is underway
One of our anchor themes which we believe will support grain prices in the coming months is the likelihood that supply will remain volatile a result of adverse weather conditions. Comments from Ukrainian agricultural scientists two days ago and US commentators yesterday highlight two regions where problems might appear in coming months in the Northern Hemisphere. We believe that it only takes a single drought in one major exporting nation to ensure another sharp rise in cereal prices. This may be accentuated by the fact that cereal inventories are running at lows last seen in the 1970s.
A proper functioning market should balance the conflicting aims of the producer (profit maximization and a return) with those of the consumer (quality products at the lowest prices) and competition is usually the best way of achieving this state of equilibrium. The Brazilian wireless market is not in a state of equilibrium: it is a consumer’s market and suffers few of the duopolistic issues that afflict other wireless markets. It is highly competitive and, in the aftermath of the recent 3G auction, will likely remain so.
The euphemism “exotic” is often applied to emerging markets. It covers a plethora of meanings such as bizarre, chaotic and incomprehensible but it implies an ability to deliver above average returns. Orascom (ORTE EY, EGP82.47, Neutral) has a reputation for operating in some of the most exotic markets on the planet. Wireless markets like Somalia, Sierra Leone, Liberia and Iraq are exotic in that their lack of convention is compensated by an ability to generate vast returns to investors. North Korea is, therefore, not genuinely exotic – perhaps that will follow in the Hermit Kingdom over time. For the time being it remains incomprehensible and bizarre. We maintain our Neutral call on Orascom, the proud owner of a new 3G licence in North Korea.
Orascom Telecom’s failure to secure its temporary licence in Iraq and turn it into a 15-year licence is damaging in our view. While competition intensifies in its key markets, fewer opportunities for expansion are presenting themselves elsewhere. For Turkcell, the failure to win a licence in the auction is of little consequence. The company continues to sit on a cash pile that is growing daily and protects it during these turbulent times.
Making forecasts for Orascom Telecom’s businesses, despite the breadth and complexity of the variables involved, is a relatively straightforward affair compared to working out the company’s broader corporate strategy. We believe that the company’s growth ambitions could raise the company’s risk profile over time as it engages in acquisitions and pursues expansion opportunities. We dislike the company’s focus on scale and size – the traditional Achilles’ heel of many wireless carriers and the potential for conflicts of interest with its majority shareholders. The company’s organic growth prospects are genuine but they seem to be fully captured in the current stock price.
América Móvil: as good as it gets
The possibility of corporate restructuring, continued dominance of the Mexican wireless market and consolidation in Brazil are all viewed as positive for América Móvil (AMX). Underpinning these strengths are reasonably robust subscriber growth figures, stable operating conditions and financial resilience. Yet even under the brightest of outlooks, AMX’s premium rating seems difficult to justify. We believe that all these positive features are already factored into the stock price and the current year might see that premium rating eroded as expectations are arrested.
Urbanisation and changing social patterns will be the two leading drivers of wireless growth across Africa and the Middle East in the next few years. In addition, wireless markets are benefiting from increasingly pragmatic and benign regulation, all of which points to a continued robust outlook for the region’s wireless sector. Following the acquisition of Investcom Holdings, MTN has a clear focus on organic growth. Trading on an FY07 EV/EBITDA of 5.1x and an FY07 PER of 12.1x, the shares look good value. Our DCF fair value estimate is ZAR85.88.
A conglomerate exists to spread risk. Lower risk, cash generating and mature businesses provide the resources for cash consuming and growing businesses. Sistema, Russia’s leading consumer services company is a key player across the telecoms services industry and is nurturing a range of businesses which might provide longer-term growth opportunities for the company. In a high growth but risky economy where consumer expenditure is booming but listed vehicles are few in number, Sistema provides a well diversified conglomerate poised to take advantage of Russia’s growth prospects while providing an element of diversification for investors.
This study begins with a simple question: why did the currency board system in Argentina fail so spectacularly in 2002 while a supposedly similar system in Hong Kong, weathered all manner of political and economic storms and is now celebrating its 21st anniversary? A second question is to ask whether the reason for success and failure lay with the mechanism itself or whether there were other circumstances that led to these opposing results.
Communists, socialists and Keynesians saw the economy as a machine: tweak one input and you can dictate a certain output. Even monetarists would agree with that. A neo-classicist might tell you the economy is more akin to the human body: tweak one part and you cannot be certain what will happen, or where - there are simply too many random variables involved. As the telecoms sector follows society’s pivotal shift from state-sponsored socialism to market-driven Nirvana, can we honestly say we know where we are going? Does competition work? Can it replace the regulator? Have we been duped into dismantling what was, all along, a natural monopoly? Do we place too much faith in the referee? What if the regulator never extricates itself from long-running battles with the incumbents? Will we reach the point where the social costs and economic losses of deregulation prove unbearable?
We live in an age of sound bites and maxims, it seems. At times, easy copy and empty slogans appear to masquerade under the banners of wisdom, research and informed opinion. Economic downturns and sliding stock prices — if the former weren’t so appalling for ordinary people on less-than-ordinary incomes — do provide some relief from the white noise propagated by the “informed” few on the impressionable many. Nowhere is this more true than China’s telecoms sector, where the terms size, scale and magnitude are apparently the keys to the door marked “rational analysis”. To our mind, those same terms might be more usefully employed to describe the structural deficiencies, regulatory risks and operational problems faced by China’s listed carriers, China Unicom and China Mobile (Hong Kong) (CMHK).
Analysts are supposed to add clarity to confusing pictures and get to the heart of the matter with strong recommendations. Try doing that in the telecoms sector - anywhere. And then add China to the equation. Following a series of company visits in China last week, we are none the wiser as to the future form of the country’s telecoms landscape. In our view, many commentators look at a top-down picture which rarely encompasses much beyond the notion of 1.3bn people and an impressive wireless growth rate. Not for them the fact the policymaking is becoming less, not more, transparent. This lack of clarity, alongside our valuation framework, underpins our negative stance on China’s telecoms sector.
We have said before that the integrated-carrier model looks flawed and that the future belongs to niche operators and single-product carriers. But Telstra Corporation (Telstra) is different. The company’s 3G licence cost is lower than that of its global peers, it has a strong financial position, high profitability and a customer focus. We think domestic competition will ease in the medium term, with smaller operators facing operational and financial constraints. We believe when capital is rationed, incumbents prosper. Although Telstra is trading at an 18% discount to our DCF estimate, its short-term earnings outlook is clouded by a slowing economy and higher retention costs.
The notion that telecoms is a “global” sector driven by “global” themes is fraught with contradiction. When stock prices were rising across the board, this didn’t appear to matter much. As those stocks began to decline last year, many commentators then highlighted how different Asia is from everywhere else. That hardly matters now. Like it or not, investors compare Vodafone with China Mobile (Hong Kong) and Deutsche Telekom with Singapore Telecom. In other words, if you still see downside in the valuations of European or US carriers, Asia will follow. Even if there are differences between Asian carriers and the rest, these differences are not necessarily positive. Many Asian operators have unique characteristics - negative ones. In summary, be wary of the short, sharp recovery in European telecoms valuations and be defensive in your choice of Asian telecoms stocks.
This report is not about the new economy or a new paradigm. Put to one side the B2B and B2C stuff, and forget for now all talk of vortals, portals, “first-mover advantage” and the lexicon of hype that comes with the new economy. Instead, focus on that dull subject which predates the first industrial revolution and has been kicking around since the notion of exchange began - cashflow. Cashflow is the lifeblood of any business - new economy or not - and part of the daily spreadsheet grind. That grind is balanced out by what one former colleague termed, “the excesses of the marketplace that make this job interesting.” The other portion of this report examines the business divisions of PCCW and the challenges facing the company as it attempts to reconcile rhetoric with execution.
Strip out the Internet mantras and Pacific Century CyberWorks (PCCW) emerges as a new, or perhaps an old, company. PCCW seems to have become just what Cable & Wireless HKT (C&W HKT) was when it was the stock on the eight ticker: an integrated telco fighting to hold its own in a fast-changing market place. The key difference this time is that instead of a cash-rich vehicle with a high-dividend payout ratio and reasonable yield, one gets a heavily indebted incumbent with no dividend payout, no yield and few opportunities to break out of its alarming downward cycle.
The point at which investors show a complete lack of interest in a sector is often the time when the most profitable investments can be made. A case in point is Hong Kongs wireless sector, which for many investors seems to have lost its appeal amid issues over 3G licensing, the spectrum auction, price wars, a lack of profitability, 70% 2G penetration, and handset subsidies. But we like what we see: wireless valuations in Hong Kong look all set to recover and the sector itself should enjoy a renaissance in 2001.
In the two minutes it takes to read this page, 114 people will have joined a wireless network in China, another 98 will have hooked up to a fixed-line telephone for the first time and 19 will have been introduced to the ”wonders” of moving pictures on a cable-TV system. By most estimates, one in three of the world’s new mobile customers is located in China, and the country is adding access technologies and fibre-optic lines at a prodigious rate. Indeed, China is a land of superlatives. With figures like these, who needs analysis? The world of big numbers should do the job for you. Hold on a minute. China might invite comparison with other developed markets and its telecoms operators appear to have logical parallels with peers in developed and developing markets ó in fact, echoing a familiar theme, even the vice-minister in charge of the Ministry of Information Industry (MII) thinks 99% of China-related portals are likely to go bust. But several factors cloud this panglossian assessment.
On 22 May, Hong Kong's Office of the Telecommunications Authority (OFTA) will end its consultation period over the issuance of IMT- 2000 (third-generation, or 3G) licences. The success of the UK's spectrum auction has prompted several other countries, notably Italy, France and the Netherlands, to reconsider their own spectrum- allocation strategies. In light of this, we believe the time is ripe for Hong Kong to consider a similar approach. While OFTA director- general Anthony Wong appears to have rejected the notion, a spectrum auction would have profound implications for Hong Kong's existing wireless operators.
For decades, the utility nature of a business where cosy monopolies were aided by a benign regulatory framework meant the company analyst was able to report on a dull and unwavering industry where profitability was virtually guaranteed. That environment has disappeared. OFTA’s decision to issue external FTNS licences comes as part of a concerted effort to safeguard Hong Kong’s status as a regional telecoms hub. If Hong Kong is to have a future as a services centre, an efficient telecoms sector is a pre-requisite. And that does not mean protecting the incumbent operator from the cold blast of competition, or protecting a potential cartel for that matter.