ARX Series
Sector Analysis
A Framework for Investors
CFA Institute presents a series of articles detailing a framework for analysis of investment fundamentals of industries.
Overview
The key to a company’s success depends on how well it executes its business model. This calls for optimising the allocation of limited resources to generate sustainable cash flows, for investing in new products, technologies, and services in responding to the wider competitive landscape or societal changes and mega trends, as well as for devising appropriate responses in the face of an evolving macroeconomic, regulatory, and political environment.
Different industries often require very different business models; and even within the same industry, the model that does add value to the business may vary somewhat from company to company.
To help investors undertake proper due diligence on a company, we have generated a framework of analysis designed to tease out the following: (1) whether the pertinent factors favour the firm in question; and (2) whether management is effective in executing its business model or value-generating strategies, while responding appropriately to its external environment.
This framework is customised to specific sectors and incorporates interviews with professionals within those sectors
Mobile Gaming
The rise of smartphone usage and low-cost, high-speed mobile bandwidth has led to enormous growth of mobile games. The business is fast-paced, requiring agility and short build cycles, but also allows the passive collection of large amounts of data.
5 March 2020 | CFA Institute: Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan, FRM, Chan Fook Leong, CFA
Online Payments
Although the trend towards cashless payments is global, the pace, format and depth of coverage differ among jurisdictions. Service providers no longer need to rely on credit card vendors or retail banks, but must face issues of privacy and security.
5 March 2020 | CFA Institute: Alan Lok, CFA, Eunice Chu, ACCA, Guruprasad Jambunathan, CFA, FRM
Traditional Retail and Its Sub-Sectors
Traditional retail shares many similarities with the food and-beverages industry — location is crucial because it drives traffic flow and therefore revenue. Other factors include operational efficiency, but it should never be achieved by compromising the shopping experience. The industry has been significantly affected by technological advancement, including e-commerce and door-to-door delivery.
2 October 2019 | CFA Institute | 1 CE
Shipbuilding and Offshore Marine
The shipbuilding and offshore marine industry specializes in the manufacture and maintenance of oceangoing vessels, which includes everything from cargo ships, tankers, and oil rigs to passenger liners. In recent years, however, the industry has faced significant headwinds, with overcapacity at the shipyards in mainland China, escalating trade wars, and oil-price weakness combining to ensure that this sector is at the center of a perfect storm.
2 October 2019 | CFA Institute | 1 CE
Semiconductors
The semiconductor value chain comprises six stages: research and development, design, manufacturing, assembly, testing and packing, and distribution. This R&D and supply chain spans continents, as it is impossible for one country to house all six stages in a single location and excel at every stage. In addition to the complexity and geographic spread, the industry is also far from static.
2 October 2019 | CFA Institute | 1 CE
Luxury Products and Retail
The luxury business model is distinct. The demand does not always increase with a decline in price — in fact, one of the industry’s key tricks is to raise the average cost of an item. The rationale for it is that higher prices keep the middle class (the target customer group) chasing the dream of luxury. A luxury brand’s image is not pushed solely at potential consumers. Massive communications to non-target groups create product admiration and a sense of social and economic superiority among actual consumers. Maintaining full control over the value chain, as well as distribution channels, is a necessity rather than a choice. From an analyst’s perspective, this can be a tricky business model to grasp.
2 October 2019 | CFA Institute | 1 CE
Life Sciences and Healthcare
The health care sector can be divided into drug producers, manufacturers of medical equipment and supplies, and health care providers. Stakeholders include producers who compete to deliver the most efficient service; consumers who are better educated and increasingly empowered with Google at their fingertips; and governments that must strike a delicate balance between overregulation and the free market, including choosing the country’s health care model.
2 October 2019 | CFA Institute | 1 CE
Food Producers
Food production is a multidimensional stakeholder sector, where criss-crossing relationships drive innovation. Producers work with processors, who liaise with distributors and retailers. Meanwhile, regulators are keeping a watchful eye, health-food trends come and go, and e-delivery changes consumers' habits.
2 October 2019 | CFA Institute | 1 CE
Environmental Services
The growing awareness of climate change and environmental issues creates investment opportunities. The growing trend of stricter ESG regulations around the world is a boon to many subsectors: solid waste management, recovery/recycling, pollution control, water treatment and environmental services engineering.
2 October 2019 | CFA Institute | 1 CE
Engineering and Construction
The construction industry is being revolutionized by technological advancement. This shift, termed "Industry 4.0" is akin to the changes already happening in the finance and insurance space (fintech and insurtech). Companies are realizing they can enhance product and service delivery through data-based services.
2 October 2019 | CFA Institute | 1 CE
Insurance
Insurance is a curious sector. In years gone by, it was regarded as something of a cash cow, with the likes of Warren Buffett treating the float as a source of money to be invested elsewhere. Insurance companies were also seen as sclerotic, with time-consuming processes that often placed the customer last. It’s not because these firms didn’t care. Instead, the characterisation reflected an
ingrained culture that didn’t quite know how to change.
28 January 2019 | CFA Institute | 1 CE
Logistics
Logistics is the backbone of today’s supply-chain ecosystem, ensuring that people and goods are transported efficiently from one point to another, on time, in good condition, and at competitive prices. The sector is evolving rapidly, as advances in technology respond to distribution demands from e-commerce firms. Furthermore, disruptive forces are in play as new entrants create services that we suddenly cannot live without.
15 January 2019 | CFA Institute | 1 CE
Education
Citius, altius, fortius—faster, higher, stronger—may be the Olympic motto, but it also reflects a basic human desire to improve on what we have already achieved. This is precisely the case with education, where parents—be they millionaires or daily wage earners—instinctively want their children to transcend the achievements of previous generations. This desire is particularly evident in emerging markets.
3 November 2018 | CFA Institute | 1 CE
Palm Oil
From cooking oil to biofuel, to the oleochemicals used in food additives, soaps, cosmetics, lubricants, and textiles, palm oil and its refined derivatives touch our lives in many ways. Given the commodity’s ubiquity, we decided to perform some extraction of our own, and provide insights into the factors and dynamics to consider when analysing companies involved in the production of palm oil.
19 October 2018 | CFA Institute | 1 CE
Gaming
There is an old Chinese saying: “For every ten gamblers, nine will be losers.” Typically, you might picture a down-atluck gamer staring in shock at the card table. However, the casino itself may also not be on a winning streak.
Despite the deep-pile-carpet glamour and general hype about how profitable the casino business model potentially can be, gaming is actually a highly regulated and heavily taxed industry. After all, society expects to be compensated for absorbing the social costs that gambling engenders. As such, few public voices lobby against gaming levies.
8 September 2018 | CFA Institute | 1 CE
Understanding the Investment Fundamentals of Airlines
Perhaps it’s the thrill of voyaging to a far-flung, unfamiliar place. Maybe it’s the teasing prospect of a seat or—even better—an earnings upgrade. Whatever our reasons, we remain seduced and frustrated by the airline industry.
In a 2007 letter to shareholders, Warren Buffett observed that: The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, then earns little or no money—think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
1 September 2018 | CFA Institute | 1 CE
Property Development
In a complex and fast-moving financial world, it’s comforting to know that some sectors remain relatively easy to understand. A case in point is property development. The property developer acquires land and an architect then designs the building and obtains planning approval before passing the baton to the construction team.
At this stage, the developer could choose to undertake marketing and sales before construction is complete or wait until the last brick falls into place. Either way, you can then calculate the gross development value (GDV) of a project or profit from the project, of which the sum of GDV, excluding the developer’s liabilities, will yield the value of the development.
28 June 2018 | CFA Institute | 1 CE
Banking Industry
The role banks play in our lives is vital. Their activities underpin the efficient working of an economy – indeed, they are often among the most significant constituents of a country’s stock market. When we talk about banks, we are not just referring to the familiar branches we occasionally visit to deposit funds or withdraw cash. Banks is an umbrella term that describes an industry subdivided into several segments, including, but not restricted to Consumer Banking & Wealth Management (also known as retail banking), Wholesale (also known as institutional banking) and Treasury.
28 May 2018 | CFA Institute | 1 CE
Telecommunications
For investors exploring the telecommunications sector, it is important to be aware of the key economic, operational and regulatory factors influencing these firms. These not only vary from country to country but also from company to company, depending on the kind of service that is being provided – fixed line, mobile or a combination of the two. Common to all are the opportunities afforded by the growth in data and the proliferation of online services. For operators in developing markets, lower penetration rates offer long-term opportunities. Meanwhile for operators in the developed world, staying relevant by keeping pace with technological advancements is vital. In general, the sector is marked by intense competition, hefty capital expenditure requirements (at least historically) and rigorous regulatory intrusion.
26 March 2018 | CFA Institute | 1 CE
Real Estate Investment Trusts
REITs are vehicles that own and typically operate a portfolio of income-yielding real estate assets. Modelled along the lines of unit trusts, REITs allow for funds to be pooled from a group of investors. Such a structure provides retail investors with several advantages: a low-hurdle of entry and exposure to a diversified pool of real estate assets with a high level of liquidity, which would not otherwise be possible with direct investing.
15 March 2018 | CFA Institute | 1 CE
About the Author(s)
Senior Director: Scott Lee
Project Manager: Natalie Yiu
Coordinator: Christy Leung