A Year in Review: 2022 at AlphaValue 

2022 was an exciting year for AlphaValue! We started covering more stocks, expanded our research, and held events and whatnot. We held over 50 events on the current topics and our monthly strategy meetings with our co-founder and head of strategy, Pierre Yves GAUTHIER. 3 sectors were particularly exciting in 2022: luxury, oils and gas and payments.  

EVENTS 

This was a great year in terms of events here at AlphaValue. We stayed proactive and made sure that we put our opinion out there as soon as possible. You can find a short summary of some of our events over the year below.  

Along with these events, we also had our monthly investment strategy meeting with our co-founder and head of strategy, Pierre Yves Gauthier. Every month, he picked up what is relevant and discussed it along with its implications on the markets.  

SECTORS 

Now, let’s look at some of the most interesting sectors in 2022- Luxury, Oil and Gas and Payments.  

Luxury 

The luxury sector is covered by Jie ZHANG.  

In 2022, the luxury sector was heavily impacted by the zero covid policy in China. China was the first to control the pandemic but in 2022, while every other country reopened and normalized, China suffered. American consumers contributed to the sector the most in 2022. In the future, China will continue to be the main driver of growth for the sector. 

The outlook for the luxury sector in 2023 is plagued by a lot of uncertainties like energy prices, inflation in the US, the cost of living crisis, rising input costs etc. It depends heavily on the recovery shape of Chinese luxury consumption. To discuss this more, the analyst held a meeting to discuss the resilience of the luxury sector. At the end of November, several customer meetings were even scheduled to push the sector even more.  

We believe that in the short and midterm, the Chinese recovery will be slower than the last recovery (2020). The zero covid policy is being lifted gradually but it impacted the economy the whole year. The unemployment rate for younger people (16-24) reached approximately 20%. The services industry was particularly hit – restaurants, theatres and entertainment were closed. Small structures suffered a lot, and this segment of people are losing their wealth. This will impact the base of luxury consumers in China. The economic outlook of China isn’t very optimistic either. Until 2030, China will continue to be the main driver of the growing base of luxury but eventually, it will normalize or slow down compared to pre-pandemic conditions (2019). 

TOP PICKS: LVMH & RICHEMONT 

The positioning of the brands is ultra-luxury. With all these uncertainties, it is better to take exclusive brands. The supply is always scarce to maintain resilience. Their consumer base consists of rich consumers who are less impacted by macroeconomic uncertainties.  

LVMH is very diversified. It has many different businesses encompassed in it like travel luxury experiences, wines and spirits etc. LVMH was resilient even during the previous economic downturns like the SARS 2003, the 2008 recessions and the anti-gifting in China. The margins have continued to be resilient. The most profitable division of LVMH is leather. The growth for this division is 25%. 40% or above is the new margin of this segment.  

Richemont – The luxury jewellery segment is growing very fast. It was growing fast before the pandemic also. For jewellery, the growth rate is 24%. Richemont has absolute leadership in the jewellery segment. In 2022, Richemont reached an agreement to separate from YNAP (YOOX Net-à-Porter). They bought YNAP in 2018 but since the acquisition, every year, YNAP resulted in €200 Million in operating losses. After the separations, margins improved drastically. The separation could lift the margin to over 20% and narrow the gap with its soft-luxury rivals. Before the separation, Richemont had a market cap comparable to LVMH and Hermes but now, the valuations will reduce.  

Oil & Gas 

The Oil and Gas sector is covered by Elif BINICI  

The story of 2022 equity markets was dominated by one sector and that to nobody’s surprise is energy. 

The energy equities have been the true winner of 2022, particularly the oil and gas stocks, due to elevated prices. Experienced traders at integrated oil and gas companies bagged handsome profits, capitalizing not on high prices but also volatility. 

The price of energy commodities had been on the rise since H2 FY2021. Russia’s invasion of Ukraine in February 2022 however carried the prices and the volatility to a greater level and exacerbated the supply shortages. The volatility in gas and oil futures continued in the last quarter albeit at a muted scale and the prices came down as demand forecasts were revised down owing to the recession expectations and the erratic zero-covid policy in China. To put it simply, two agents muffled the louder confidence in the energy sector: central banks and China. Despite the global headwinds, the integrated oil and gas companies under the AlphaValue universe recorded very attractive returns to shareholders with massive buyback and dividend programs.  

Looking ahead, what do we expect? The short answer, therefore, is anybody’s guess. Yet again, we are daring to explain our expectations. 

1) Although the demand will remain muted in Q1, we expect better dynamics in Q2. The oil demand story for us is not related to China’s reopening, but the demand for Chinese goods, namely, world trade. More production in China, more exports hence better global trade and higher oil demand.  

2) The supply will remain tighter in the gas market in 2023/2024. Here’s why: 

• No Russian molecules will flow from NordStream 1 pipeline. In the 2022 filling season, NordStream 1 flows helped a lot. 
• Europe will add 50 bcm of LNG import capacity. This is surely not enough to replace 140-150 bcm annual imports from Russia. Despite rising LNG imports and added measures, a 10%-15% shortage in supply could occur. 
• Gas demand from China could pick up. 
• Gas demand from the power sector is less likely to decrease substantially in case of a dry summer and prolonged nuclear outage. By the end of the year, 2/3 of the French nuclear capacity came back but more maintenance could happen. 

3) Despite the political pressure to increase supplies, capital expenditure by Integrated Oils will remain limited. The growth, albeit minor, will by and large stem from the increased costs rather than greenfield projects to expand production. Aware of the fact that record 2022 profits will not be repeated, capital discipline will continue to be the mantra of the sector. The priority for the integrated oil and gas companies has shifted towards shareholder remuneration, focus on value projects and portfolio optimization, invest in energy transition projects against the backdrop of increasing political and social pressure. 

The ongoing recession and tightening by central banks will continue until H2 FY2023, weighing down on global demand growth. With added volatility, neither investors nor the companies will walk on the sunshine, but on the wild side. 

TOP PICKS: TOTAL ENERGIES & NESTE 

TotalEnergies: TotalEnergies remain our top choice. After a historical 2022, the medium term also bodes well for the company. Apart from benefitting from high prices as the global sector did, TotalEnergies also managed to restructure its hydrocarbon production towards gas with new investments. On the renewables and clean energy fuels side, it is one of the most aggressive investors with a quickly expanding portfolio with targeted investments with good cash flow. Its strong governance also managed to steer the company through a politically unstable period as most European countries were embroiled in windfall tax discussions.

Neste: Neste is our top pick among the European refineries. The company, unlike others in the sector, is forecast to record EPS growth in 2023 and 2024 (€2.28 and €2.56, respectively). Moreover, the growth of biofuels with expansions in Singapore and Rotterdam and new supply agreements with major airliners enable Neste to strengthen its position in the sustainable aviation fuel market which is expected to become more competitive, especially in Europe. 

Payments  

The payment sector is covered by Gregoire HERMANN 

Throughout the world, the way we shop, travel, socialize, work and access services have changed drastically over the past two years. This has reshaped the payments industry in many ways. The payments industry is surfing on the wave of the transition to a physical cashless society. Coupled with increasing online consumption, printed in our consuming habits since the COVID-19 crisis, its outlook looks radiant, especially considering additional innovations enhancing these effects (i.e., BNPL). For businesses, the pandemic has made digitalization inevitable, and this will continue as consumers and businesses alike have become increasingly used to the convenience and opportunities that digital services can provide. As part of this phase, payments are becoming an enabling function that is embedded and invisible to provide an immersive, seamless, and frictionless customer experience. The B2B payments segment is witnessing rapid digitization. BigTechs, PayTechs, and industry newcomers are ready to jump in with newfangled solutions to help underserved small to medium-sized businesses (SMBs). They are new threats to the existing big players in the payments industry. To explore this topic more, ‘What is Going on in the Payments Industry and What are the Threats? Disruptors disrupted: How to Play Payments’ we held an event with breakfast in April with 40 of our clients.  

We have heavily pushed Wise, the online money transfer company. Wise is a strong performer in our fintech equity research universe. Wise wants to drive the cost of remittances and cross-border transactions to zero, granting a strong pricing advantage vs. competitors plus, a strong barrier to entry. In August, we said that Wise was our top pick, and it will survive no matter what. And, it did. We are still pushing this idea with its unique infrastructure. It is resilient and sustainable. The firm has adopted a set-up in which money never crosses borders in about half of the cases. As depicted in the chart below (company source), whenever a money transfer is requested from, let’s say the US (USD) to Thailand (THB), Wise itself puts at work its own accounts in both countries and currencies. 

 Apart from this setup, Wise’s core business is about KYC, AML, compliance, licenses, regulatory approvals and relationships, and, ultimately, integrations. In fact, for every transfer order it receives, Wise makes sure that the transaction is not fraudulent and is legitimate. We held a conference discussing Wise and its infrastructure in November. We still very strongly believe in its Wise and its potential.  

The payments industry has many threats currently like cryptocurrency and BigTech threats (Apple). Apple is launching its own Buy Now Pay Later (BNPL) solution. This is not much of a surprise since we know that the Cupertino-based firm intends to penetrate the broad payments business and acquired Credit Kudos last March. It is obviously bad news for BNPL firms such as Klarna, Affirm and Zip, but also the PayPal solution and Square’s Afterpay. In fact, BNPL has suffered profitability hits in recent months due to the high cost of advertising their solutions and hiring talent but also following the deterioration of the credit quality on board. Most of BNPL’s listed firms have lost more than 80% of their market value since last Fall/Winter. As many BNPL firms have announced layoff plans, Apple’s momentum to launch its service is on the spot. One needs to realize the reach of the firm based in Cupertino. With c.1bn people owning an iPhone, Apple only needs a couple of engineers and an IOS update to roll out its products, with possibly a push notification to remind everyone that “you can now pay for your purchases in several instalments with Apple Pay”. Let’s not forget that BNPL is a wide-open door for Apple to anchor in the super-app/open banking segment as a next step. 

In the coming years, we believe that embedded finance will lead the next payments revolution. We believe that embedded finance and payment firms will compete. Payments is a very confusing industry and very few people understand it. Bolstered by increasing demand for more frictionless payments, embedded finance has grown drastically. According to McKinsey, the industry grew into a US$20bn market in the United States alone in 2021, and it is expected to grow in the following 3-5 years before becoming a US$7tn industry globally in the next decade. The application of embedded finance will increase in parallel with the advance of global eCommerce markets. According to Statista, the sales figure of e-retailers exceeded US$5.2tn globally in 2021 and is projected to continue soaring in the coming years. As a result of this growth, we will see more productive cooperation between incumbent banks and new fintech entrants, the former with established credit and infrastructure while the latter can unlock diverse applications, increasing the flexibility of payment making and receiving. Against the current volatile financial environment, embedded finance could be the hub for more innovative disruptors. Both financial institutions and companies from all sectors still can bite into a piece of this dynamic industry. This will unveil and deconstruct the whole fintech space which is full of layers of different actors who seem to be competing but are cooperating.  

TOP PICK: ADYEN 

Adyen is a payment services company providing full-stack payment solutions to merchants (handling gateway, risk management, processing and acquiring). Its services are suitable for online and in-shop payments, platforms, unified commerce, and card-issuing solutions, enabling its merchants to centralise all payment process steps on one single platform, from all channels (omnichannel solution). It is our top pick thanks to its technology and its new generation of embedded finance products. Adyen has broadened its offering by taking live two new embedded financial products - Capital and Accounts - which are now available to platform and marketplace businesses in the US and Europe via Adyen’s single integration. Embedded finance is a hot topic and it will continue to be hotter in the future. Adyen is the only actor in Europe which is listed and offering these kinds of products. 

The AlphaValue team would like to wish you a Happy New Year 2023!  

AlphaValue provides unbiased, reliable and independent equity research. We believe that this is key to ensuring market integrity. Find out more about us here. 

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