Contents Page
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4 Page
Quick Take on Iberian Markets Cryptocurrencies: Traditional Investors Cryptonite?
7
Evergrande, Too Big to Fail?
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Business Deep Dive: Intuitive Surgical
12 Page
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NIC-UD Fund: Monthly Performance
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Quick Take on Iberian Markets Spanish political tensions put pressure on business to act. Tensions are high as the Spanish government and Spanish businesses need to work together in order to get a big prize: €140bn of grants and loans that the EU’s coronavirus recovery fund has allotted Spain over six years, only if some reforms are made in sectors like government finance, labor rules and pensions. Highlighting the problem with the hospitality sector is important. Raising the minimum wage in a postpandemic scenario is a way for the government to get under the business owners’ skins as they are yet trying to recover from major losses. With the Spanish political spectrum going head-to-head, businesses have a crucial role in unifying left and right as Brussels demands results in order to give out the prize, the deadline is coming, and Spain is still trying to get a piece of the pie. After upgrading Portugal's rating, Moody's has decided to improve the main banks' ratings. Moody’s decided to upgrade the ratings of the main Portuguese banks: Caixa Geral de Depósitos (CGD), BCP, Santander Totta, BPI and Crédito Agrícola, while the Novo Banco’s rating remained unchanged. This decision came after the upgrade of Portugal’s Rating from Baa3 to Baa2 due to the expectation of economic improvement in the long run. However, some uncertainties remain regarding the impact of the pandemic on Portuguese banks’ asset risk and profitability. Despite a good improvement in financing and liquidity, these banks still have high corporate exposure, and they are still very sensitive to market sentiment and market shocks. Greenvolt made its debut on the PSI-20. On September 20th, Greenvolt, a subsidiary company of Altri, that operates in the renewable energy industry, made its debut on the PSI-20. After filling in for a €150m IPO on the 15th of July, the company has now issued 4,588,235 new shares at €4.25 each. In the Q1 of 2021, Greenvolt’s profits fell 82.3% due to the stoppage for maintenance of their centrals in Portugal and the acquisition of the British company Tilbury.
João Coelho IBEX 35 fell 1.4% as estimates significantly revise down Spain’s Q2 growth. A second estimate revealed that the economy grew 1.1% on a seasonally-adjusted QoQ basis in Q2, a much softer increase than the 2.8% expansion reported in the preliminary release. This reflected a poor performance in the month of September for the IBEX 35. One of the worst performers was ArcelorMittal falling around 9.29%. PSI-20 on an ascending route driven by the big Portuguese sharks. In September, the PSI-20 Index closed at 5,460.80, reflecting a (+0.8%) difference when comparing to last month's growth and a 34.3% difference in increase when compared to the same period in 2020. The key issuers on the Index were Jerónimo Martins (+13.47%), EDP Renováveis (+12.73%) and BCP (+10.04%). EDP Renováveis is recording good performances despite the poor performance from its “mother” company, EDP. It’s important to highlight the growth of Millennium BCP’s stock that is happening due to an announcement that the Portuguese bank is on the market looking for investors to issue sustainable debt. Spanish Supreme Court confirms a €900k fine from 2017 to EDP. This fine comes from a problem that EDP had with an ex-client. EDP fined this client in the value of €2,400 due to his change in supplier, despite the 15-day warning that was given by the client, and which is predicted in the law. This situation finds a finish line after many years of being dealt by EDP and the Spanish courts. Banco de Investimento Global (BiG) purchases DIF Broker. DIF Broker is a financial entity that operates in Spain, Portugal and Poland that manages around €290m in assets. This purchase emphasises BiG’s strategy of being an active player in the international markets and especially in the Iberian markets. DIF Broker’s CEO, Pedro Lino, stated that this will help DIF with a better performance in the brokerage area and that DIF will now be able to supply a bigger variety of financial services to their clients. 3
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Cryptocurrencies: Traditional Investors Cryptonite? Financial Markets: Prepare for the Unexpected Introduction In finance, there is this unwritten rule that you must be prepared for the unexpected because you never truly know what the market has in store for you next, and the longer you follow markets and see this first-hand, the more this ideology becomes a reality, certainty just does not exist when we talk about the financial markets. The year 2009 was a further testament to this, with the creation of the first-ever decentralized digital currency: Bitcoin. In recent years, the subsequent rise of cryptocurrencies has been as spectacular as it has been shocking, with a current market cap exceeding that of JPMorgan & Chase, Bank of America, Morgan Stanley, and Goldman Sachs all combined. It is quite literally, too big to ignore. However, scepticism remains high, driven by its alarming volatility, lack of intrinsic value, and bubble-like characteristics. Yet despite all these reasons, the most used justification for not investing in cryptocurrency, especially by traditional investors, is “I don’t invest in what I don’t understand”. This article does not aim at justifying the current valuation of cryptocurrencies nor does it aim at predicting its future, but rather investigate this final phrase, not investing because one does not understand and the potential implications for the future of cryptocurrencies and the financial markets as a whole.
Discover, Analyse, and Invest (or not) Knowledge is a very powerful tool. Understanding what we are invested in is a fundamental base to sustain any sort of long-term investment as it gives a higher risk tolerance and significantly reduces the reaction to short-term market fluctuations. If we have the sense that we are in control or ‘are at the wheel’ we fear far less any bumps along the road. But with constant disruptions and innovations in the world we live in come investment opportunities for those who are attentive. Whether that be the creation of the internet, Artificial Intelligence or anything in-between, there is a constant need for
Tomás Forte Vaz
analysts and investors to stay up-to-date, to identify these opportunities, analyse them, and then decide whether or not to take calculated risk. Not simply respond, “I do not understand”.
“The future belongs to those who see opportunities before they become obvious” A simple yet powerful simplification of what investing is: Identifying and capitalizing on opportunities wherever they may be. If we were to apply this principle of not investing based on lack of knowledge, it should imply that those who do not understand should aim to learn from those who do. Yet that is not the case, those who do not understand and remain like this, are because they are reluctant to do so, which is a far more interesting response than simply not understanding. The idea that there could be alternative motives or perverse incentives behind many of the claims discrediting cryptocurrencies or the technology behind them could shine a light on the muchheated debate.
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No one wants to be left out However, with the growth of cryptocurrencies coupled with the fear of being left out, it must be noted that this tendency has to some extent shifted, as a study conducted by PwC in partnership with AIMA and Elwood found that close to 20% of traditional hedge funds are now invested in the digital asset class although with an average weight of 3%. It also reiterated that over 85% of the hedge funds in the survey expect to extend or add their position in cryptocurrency. But the fundamentals behind this shift are far more relevant than the shift itself and understanding the reluctance of some traditional investors can provide significant insight into its future.
Cryptocurrencies: Risky and Riskier Many investors stay away from cryptocurrency for one simple reason, risk. Cryptocurrency is far from a safe investment given the uncertainty surrounding both its creation and its future which is then reflected in its volatility. For instance, Bitcoin in the last 10 years has fallen by 50% on multiple occasions which is a clear signal of its aboveaverage volatility. The debate on the possibility of its application as a currency despite this volatility could not be more divided, with El Salvador announcing Bitcoin as a legal tender and China banning cryptocurrencies transactions in the same month being a clear representation of this. Christine Lagarde, President of the European Central Bank, outlined how speculative activity and high levels of volatility massively invalidate bitcoin as a potential currency, whilst also remembering the carbon emission driven from large-scale mining. To say cryptocurrency is risky may be considered an understatement, and this subsequent volatility and uncertainty are without a doubt the main contributing factor for the previously defined reluctance, however, it is not the only source.
The threat of a decentralized digital currency Touching back on the initial claim that there could be a reason for not wanting to understand cryptocurrencies, may be explained by a simple economic concept, incentives. The introduction of digital currencies and the decentralised technological system behind them, blockchain, has several consequences for the financial sector, one being the removal of the much-contested middleman, banks. The ability to transfer large sums of money quickly with significantly low transaction costs would thus outplace many banks who act as a intermediary in many of these transactions. In June 2020, a Twitter account Whale Alert outlined that an anonymous user completed a transfer of 101,857 BTC, approximately $1bn, with a transaction cost of just 50 cents. The prospect of eliminating the middleman and the additional anonymity can encourage suspicious activity, such as money laundering, as hinted by Christine Lagarde. Nonetheless, the possibility of reducing transaction costs whilst enabling greater efficiency and security in transactions would massively harm banks. A further potential justification for certain resistance beyond simply its volatility. JPMorgan CEO, Jamie Dimon recently commented on cryptocurrencies stating that “Bitcoin could rise 10x but I still would not care”, further exemplifying the stance many executives in the banking sector have taken, simply not caring, or at least that is the message they want to pass.
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Another aspect of a decentralized currency that may cause some fear, is the subsequent inadequacy of central banks, especially through the implementation of monetary policy. Many households and investors are discontent with the large-scale augmentation in money supply in response to the pandemic. In 1 year, money supply (M2) rose by 26% in the US with the current CPI reaching a decade high of 5.4%. The view that the constant printing of the US Dollar, or any currency for that regard, ends up eroding significantly household savings may lead to a severe response by households. This would directly conflict with the approach of the ECB and Federal Reserve using extensively expansionary monetary policies, in the context of an economic recession, which involves increasing the money supply in circulation, which is dependent on the fact that currency is centralized. The transition from a centralized to a decentralized currency would be an immensely tedious shift, both from a legal and economic framework, far more than the previous example. However, its prospect would weaken the tools central banks have to influence markets and thus could represent a threat to the central bank and their respective goals.
currency could harm both institutional and central banks. But innovation drives changes, inefficiency should, in theory, gravitate towards efficiency. This is the dynamic nature of markets, if cryptocurrency is truly the most efficient solution, then it will inevitably become the outcome. The question lies not in predicting the expected outcome but understanding that there is always those who stand to gain and those who stand to lose, and more importantly, understanding that incentives speak louder than words.
The Efficient Market Hypothesis The future of cryptocurrency is nothing short of uncertain, it has been the subject of a series of debates and discussions regarding its future with no conclusive answer insight, not just at the individual level but also from a global perspective. Nonetheless, there has been a consistent resistance from traditional investors, driven not only by lack of knowledge or high volatility but also a question of incentives, the potential impacts of large-scale application of a decentralised digital 6 NIC Undergrad Review
Evergrande, Too Big to Fail?
Source: Financial Times
In 2017, the Shanghai Real Estate Price Index registered a 698% increase in the previous 16 years. China’s Mega cities like Shenzhen, Beijing or Shanghai have now an Average Price to Income Ratio that more threefold those of London or New York. In 2020, Beijing imposed regulations limiting credit, and starting a liquidity crisis among real estate developers. Evergrande, the most indebted property developer in the world, whose total liabilities amount to around 2% of China’s GDP, is now in risk of default with its obligations. 7 NIC Undergrad Review
Evergrande, Too Big to Fail? How changing market conditions disrupted Evergrande’s business model Understanding the Chinese Real Estate Sector In 1988, to drive new economic growth, the Chinese government changed the constitution to allow rights to use land, under long-term leases. This quickly became a source of funding to Beijing as the country entered a period of rapid urbanization. The real estate sector continued to grow, and since the 1990s the share of real estate activities in Chinese GDP grew to 29%. This is in great part due to the real estate boom and a banking sector willing to lend. From 2009 to 2015 alone, Beijing received $3tn (22T yuan) from private enterprises. China’s extraordinary population growth played a very important role in feeding this industry. Since the famous 1979 one-child policy, the average birth rate has been decreasing consistently, and China now faces a possible population crisis, as the current birth rate of 1.3 births per female isn’t enough to sustain the country. In 1971, China’s
Diogo Luís
population was growing at 2.8% per year; in 1988 at 1.6% and in 2020 it grew only 0.3%. To change this, in 2016, was established a two-child policy, however, the fertility rates continue well below the optimum of 2.1%. Another characteristic of Chinese society is the heavy state intervention during economic cycles. The continuous on-off policies during the last decades have made the real estate sector too volatile for a sector with such a large share of GDP. Additionally, over the past years, the increase in the use of debt to finance the country’s push forward started to erode the base of the real estate sector, and developers are exposed to business cycles now more than ever. As a result, the pace of development in the real estate sector became unsustainable, and oversupply did not take long to be felt. As of 2021, China has enough empty housing for 90M people, and house sales in 52 major Chinese cities decreased by 16% in the first half of September YoY.
Real-estate related activities share of GDP (%)
Source: KLEMS
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The Three Red Lines
Riding the Wave
China´s huge investment in real estate became unfounded, and one of the main drivers of the economy was no longer a good allocation of capital in the eyes of Xi Jinping, the Chinese paramount leader. Asset prices didn’t match real wages, and inequality meant that the high and mid-range housing would rapidly become unsafe in times of economic slowdown. Consequently, Beijing intervened in the sector by constraining developers to new rules, in hope that this would improve capital allocation in the country, especially prioritizing a more consumer-based economy.
The China Evergrande Group was founded in 1996 during the Chinese real estate boom. The company went public in 2009 in the Hong Kong Stock Exchange (SEHK), raised $722m in its initial public offering, and on the first day of trading, its share price rose by 33%. At the time the company already had a great pipeline of projects and had 55m square meters of land under management. The company had a simple business model: lease land, develop housing and buildings and sell it to owners and investors. Following the plan, the company used the IPO’s funds, debt, and prebuilds to buy more land. By the end of 2009, it had 75% more land in its balance sheet. Just 3 years later, in 2012, rumours that the company was not only insolvent, but also fraudulent, became public. Some even predicted a liquidity crisis by the end of that year. Evergrande dismissed the accusations as “sensationalists” and “false, misleading and likely to alarm ordinary investors”. Shortly after, the investor responsible for the accusation received a 5-year trading ban from the Hong Kong Stock Exchange.
Evergrande Group Three Red Lines Metrics
Source: Bloomberg
The most important guidelines were set in August 2020 and became known as the Three Red Lines: (1) Liabilities to Assets no higher than 70%, (2) Net Debt to Equity no higher than 100%, and (3) Cash to ShortTerm Debt higher than 100%. Private enterprises that failed to satisfy the three red lines would be met with severe constraints in their access to credit. However, even if all the red lines are satisfied, enterprises in the sector are still limited to a 15% annual increase in debt. Residential property tax has also been discussed in Beijing as a possible tool to cool off the market, however, the implementation of the policy has been fought inside the Chinese Communist Party as many of the state officials use real estate to safeguard their wealth.
Real estate loans as % of total yuan loans by financial institutions
Financial Distress The financial decline of the group started way before the strict regulations of 2020. The market conditions disrupted the business model, and the financials of the company became symptomatic of what was to come. The company’s cash conversion cycle was becoming increasingly long, from an average of 599.05 days in 2011 to 1340.43 days in 2017. This influenced how the group could cover its liabilities and the cash ratio reached an all-time low of 0.11, compared with 0.21 in 2013. Profit Margins also got progressively slimmer, from 6.74% in 2014 to 3.39% in 2019, and 2.07% in 2020. This had a big impact on the group´s ROE, from 30.62% in 2017 to just 5.52% in 2020. All this contributed to a Total Debt CAGR of 40%, meaning that it has more than tenfold since 2011.
Evergrande Liquidity Solution Source: Bloomberg Source: Bloomberg
The high debt figures have always been familiar to the company, but the increasing levels of leverage hhh 9 NIC Undergrad Review
used by the company would soon or later confirm the accusations made in 2012. The long cash conversion cycles of construction proved to be one of the key obstacles for Evergrande to have a sound business model. The executive started to explore other industries, becoming present in important emerging markets, and key strategic industries, including electrical vehicles (Evergrande New Energy Auto), theme parks (Evergrande Fairyland), media (HengTen Networks), and even a soccer club (Guangzhou F.C.). Despite the expansion, real estate still accounts for 90% of the company's earnings. A close analysis of the group records suggests that Evergrande primarily uses these enterprises as a source of capital for its main business, as the overall business model fails to generate enough free cash flow.
Bond Issuance In 2019, as a response to the pressing liquidity concerns, Evergrande Wealth started to offer wealth management products that promised yields of more than 12%. It seemed “ to big to fail” and for more than 80,000 investors that was enough. The wealth management products raised more than $15.4bn (100B Yuan). “The investors trusted Evergrande and bough Evergrande´s WMPs out of our love for and faith in the Party and government”- said the investors to the press. Today, $6.1bn (40bn yuan) are now outstanding, and with more than $300B in debt, fears of default from the giant Chinese developer made the global economy shake. Evergrande Bond Price(USD) Source: Bloomberg
Lehman Flashbacks
Source: Bloomberg
In 2021, the group is a giant. With 200,000 employees, and as many as 4,000,000 subcontractors per year, Evergrande operates in more than 280 cities, in 1300 projects, and has upwards of $300bn in debt. Is it too big to fail? In the worst-case scenario, Evergrande starts to fire sale its assets and turns the market correction into a global crisis. The subsequent effect would good 10 NIC Undergrad Review
affect the global economy, with Chinese workers in the first line of fire, and banks in the second. Many funds added Evergrande to their holdings just before the liquidity crisis. A HSBC-run high yield fund increased Evergrande’s bond holdings by 38% since February. Ashmore, an investment management firm, had the highest exposure with $400mn in Evergrande’s bonds. UBS had close to $300mn of exposure. The China Fortune Land Development defaulted in March, which included BlackRock and HSBC funds among its investors, as well as other bad results, and placed the real estate markets under scrutiny. The Chinese market “represents the most significant risk to global credit markets at this point”-said analysts from Bank of America. In June, as prices started to fall, investors started to bet heavily against Evergrande’s bonds. The bond was trading at 57 cents on the dollar on August compared with almost par in May.
Where is Beijing? Will Beijing intervene? Probably yes, but not in the way we might be expecting. Given the high danger of an Evergrande fallout to the Chinese economy, and the political turmoil that would arise, it is considered almost certain that the government will be forced to act. The government plan of action might not be made public, but it is expected to fuel Evergrande’s activities at half-speed, just enough to guarantee that it pays creditors and suppliers, even if with great delay. How exactly this can be made sustainable in the long run remains unanswered, given the vast range of creditors. A governmentplanned restructuring seems to be a key piece in the solution process. However, the foreign holders of Evergrande’s bonds will most likely be left to pursue their money in international courts.
Conclusion
Evergrande’s web of borrowings
As unprecedented as it may seem, Evergrande is just the first of many enterprises to succumb to a change in the direction of Chinese development, from a property-driven growth model to an economy focused on high-tech manufacturing and green technologies. The drastic slowdown of a high leveraged real estate industry that represents almost a third of China’s GDP will certainly bring future economic growth to surprisingly low levels. Evergrande Share Price (USD)
Spillovers from China It is no secret that China is a global powerhouse, importing many raw materials in great quantities. Among others, one of China´s greatest imports is iron ore, a key material in the steel production and construction industry. Australia is responsible for 60% of Chinese iron ore imports and is already bracing for cuts, with 45,600 jobs affected. It is almost certain that fallout in the construction industry would ripple through the $2tn in trade executed by the second-largest economy of the world.
Source: Bloomberg
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Business Deep Dive: Intuitive Surgical
João Castilho
João Freire
Headquartered in California, Intuitive Surgical brings an artistic flair to advanced surgical equipment and automation. The firm develops, manufactures and sells robotic products designed to improve clinical outcomes of patients through minimally invasive surgery that aim to increase surgeon's precision, intuitive control, range of motion, and vision during procedures.
Markets Intuitive Surgical is listed in Nasdaq since 2000, under the ticker (ISRG). Since its IPO in 2000, the stock has risen approximately 16683%. However, the stock lost about three-quarters of its value twice in its first decade as a public company and has dropped by more than a third twice in the past 10 years. This may lead to the conclusion that an investor may have to face some periods of losses if he wants to achieve legendary returns. The company's annual revenues are up by more than 16000% since its IPO, and its gross profit has climbed 33000%. The firm’s IPO left the stock price almost unchanged within the first three years after the price entered on an uptrend creating resistance on $30.3. This ascending trend was verified from March 2009 to February 2020 when the price settled at $613.
With a market capitalization that has grown 26500% since its IPO, it might be hard to believe that the business fundamentals had kept up with the stock price, however, the solid position of Intuitive Surgical in the market and the huge optimist regarding the potential of the medical robotization industry made the stock-price grow and reach all-time records of $1087.01 in September 2021. Company Data Price (USD) 52-week range (USD) Market Cap (USD Bn.) P/E ratio EPS Beta
334,94 217,67 - 362,34 39,35 25,03 13,38 1,07
Source: Bloomberg
Price Performance
Source: Bloomberg
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Industry Overview Intuitive Surgical operates in the healthcare technology industry, commonly referred to “healthtech”, which refers to the use of technologies developed for the purpose of improving all aspects of the healthcare system. The sector refers to any IT tools or software designed to improve the hospital and administrative productivity, with new insights into medicines and treatments, or simply the boost overall quality of care provided. Tech tools are being slowly integrated into the main sector, with two key major troubles: quality and efficiency. Due to this combination with Artificial Intelligence, waiting lists and times are decreasing, also due to a higher analytically efficiency. Surgical procedures and recovery times are being reduced thanks to the ultra-precise robots that assist in the surgery, making procedures less violent and evasive. Robotic surgery, one of the strands of healthcare technology, works on a base of four robotic arms, one camera, two operating the surgery, and the fourth clears obstacles that may appear. However, the robotics do not operate all by themselves, as a team of surgeons are behind a console controlling all branches of the robot through a special device. The console filters any tremors and also increases the range of motion in the operation. Robotic surgery offers smaller incisions and less trauma to the body, as it increases the precision and enhances dexterity, besides having a better visualization of the surgical field. Recovery time is also reduced, as it is a minimally invasive surgery, shortening the pain and scarring. Accuracy is increased and allows access to smaller cavities and areas of difficult access due to the small size of the robotic branches. Overall, the surgery can be better performed with the help of healthtech and a surgeon who knows how to control the device. Operations with high technological usage present a higher cost of the procedure and treatment, and it is considered a risk either when used by a doctor with lower know-how or in a situation of a failure in the equipment. With the constant evolution of the technology, better machines will be produced, resulting in higher capital costs and running expenses, besides the training in how to work with the robots. The arms are made of tough plastic, as occasional tears on the tip of the arms can cause several injuries, and often a big delay between the hhh
orders of surgeons and the actual surgery occur. In the past five years, the Health Tech has grown 200% in Venture funding, allowing $11.7bn to flow into this sector inside the healthcare industry, which estimates a value of $10tn in 2022, and the new branch has allowed the employment of 10000 workers, being the UK the highest supporter of the robotic surgery. This growth was seen as necessary, being digital health seen as the disruption of the healthcare industry. The growth of the sector was also due to consumers being too connected to technology, as technology disruptions have already occurred in most industries, and the recent news of Amazon investing in the combination of AI and healthcare, with the attempt on having faster prognosis. Consumers are beginning to take more care about their health and aesthetics, particularly in most developed countries and areas, which has resulted in an increase in demand for the healthcare sector.
Company Overview Intuitive Surgical has defined its business model as a razor and razor-blade strategy, which involves selling products that will generate recurring revenue through the sale of complementary and dependent goods, throughout the lifetime of the product. Strategic Goals The company aims to expand to a larger population the MIS (minimally invasive surgery) aiding in treatments and have the purpose of benefiting patients with better surgical outcomes and faster recovery times. They strive to achieve this goal by bringing value to the patients, surgeons,
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and hospitals through technological advancements and the evolution of the surgical systems. To achieve these purposes, it is required a deep, broad, and well-designed ecosystem of products and services. To deliver the best care to clients, it is required to reach a balance between people, process, and technology, resulting on having the best robots, instruments, imaging, accessories, training methods and technologies. Procedures Performed 5% General Surgery
15% 50%
Gynecology Urology
30%
Others
Geographical Revenue Segmentation
32%
USA 68%
Others
With the aim of improving the target surgical procedures, the company has defined the goal of converting open procedures into da Vinci MIS procedures, the main source of revenue of the company, doing so carries the purpose of facilitating MIS operations, which will have to occur with the increase of the number of surgeons qualified to handle the da Vinci surgery, and enabling a singleport surgical option to minimize the evasiveness of the surgery and improve future outcomes (postoperation, minimize future risks). For those purposes to be fully achieved, the company has launched some initiatives such as the increase of the number of system placements, a rise in placements under operating leases, and most importantly the expansion across general specialty, not limiting the number of options. Besides, the company is also establishing a focus on the
development and launch of different products. The goal of minimizing the total cost of care is to provide value to customers and expand across potential high-growth segments internationally, especially in Europe and Asia. The most advanced equipment of intuitive surgical has been performing in several types of surgeries, including general surgery, gynaecology, urology and other types of interventions. The Da Vinci The Da Vinci operation is divided into four sectors: The Dual Surgeon Console, where the doctor operates seated while mirroring at a console viewing a 3D image. The fingers grasp the master controls, with hands and wrists naturally positioned relative to their eyes. The system connects to the branches of the robot, on a real-time movement, not causing delay. The Patient-Side cart, three to four robotic arms, two to three instruments, and one endoscope, all execute the surgeon´s commands. The laparoscopic arms pivot at the incisions, eliminating the use of the patient´s body wall for leverage, thus minimizing tissue damage. The EndoWrist Instruments, which are designed to mimic the dexterity of the human hand and wrist. Finally, the Vision System, with high definition, provides a 3-D image of the actual scene. Through the complementarity and the high level of technology, Intuitive Surgical products are sold at a high price. The Da Vinci Surgical System itself rounds a price between $600k and $2.5m alone. Different instruments and accessories that complement the System and that are needed in every surgery, not forgetting the fact that does complementary goods need to be switched within every intervention, which have a cost between $700 and $3200, along with Annual Service agreements that complement the overall sales of the company for $170k, the company gets most of their revenues from this Surgical System. Shipment of MIS instruments USA
5% 14% 17%
Asia 64%
Europe Others
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The response to Covid-19 The firm, like most throughout the covid pandemic, has suffered some setbacks during the year 2020. During most tight moments, there were some constraints regarding staff and surgeons therefore delaying not as important surgeries. Besides, people´s fears regarding the ongoing virus, led to a shortening of health screenings and diagnosis, mostly getting postponed. Throughout the year 2020, Intuitive Surgical formed the COVID-19 incident management team, which included medical, manufacturing operations, commercial, costumer training, facilities, human resources, communications, and policy leaders, all with the purpose of better responding to customer needs and better adjust to any covid possible news and outbreaks. The first actions were to track the science of the pandemic, install measures to protect staff and clients, and related communities. In the second quarter of the year, it was implemented a global customer financial relief program to reduce the need to travel of customers, and trainees. The Net Promoter Score, a standardized measure of customer sentiment assessed via JD Power benchmark surveys, has shown a good response from clients to the measure taken throughout the pandemic, thus being in the excellence tier of the measured companies for the second consecutive year. At the beginning of the pandemic, the operations, medical, and facilities leaders redesigned the production facilities and methods to adopt best practices for employee safety, such as screening, distancing, cleaning, and education practices for the staff. The Human Resources team updated a bonus policy to support employees with ongoing personal problems on pandemic related topics, and the IT department provided a workfrom-anywhere assistance. Through the close contact with supply chains, there was an outstanding supply performance, allowing the maintenance and development of the current and future products. Finally, with a partnership with Intuitive Foundation, the company was able to manufacture and donate more than one million pieces of personal protective equipment in support of the healthcare industry, with the company´s engineers producing and updating ventilator designs, making them easier to produce. The company has set some major business objectives to better fight the previous year. In 2021,
the company is focused on the continuation of the agility and creativity in terms of support to the customers worldwide, as clients recover from the pandemic times. The purpose of deepening the regional capabilities outside the United States is also on top of the table. The firm has set the goal of launching new and most advanced products, such as the port platform of Da Vinci, to better transport it geographically, the Ion, a flexible robotics platform that allows and perfects a minimal Invasive biopsy in the area of the lungs, and finally the informatic programs to better develop the abilities of surgeons. Finally, as always, there is the goal of expanding clinically, economically, and hospital-by-hospital validation, in America and other countries, thus expand geographically. The top philosophy and priority is to invest in organic opportunities to improve the outcomes, the patient experiences, care team experiences, and lower the cost to the patient, thus leveraging all the aspects of the technologically enabled ecosystems. The second priority is to invest in operational and scale efficiencies that drives a virtuous cycle to the customers, thus reaching a better quality product, lower product costs, and increased scale. The third priority is to find partners and possible acquisitions to accelerate the drive of reaching the quadruple goal. Finally, being able to return the capital invested to the shareholders with a long-term value on the distributions. Future Ambitions Intuitive Surgical has created an ecosystem resulted in a mixture of design, robotics, computing, imaging, human factors and machine to better achieve the quadruple goal. It is in the early stages of a long-time adaptation and improvement of the healthcare sector. For a long-term objective of the firm, it is believed that it is possible to reach the 20 million procedures per year, according to the current market demand and possible evolution, and the current global regulatory clearances, with the usage of the most technological development so far of the healthcare sector. With this, the firm has also set the long-term goal of continuing on investing in highly capable and oriented staff, increase the ability to serve health systems interested in these techniques, and finally developing and acquiring technologies and teams that can truly make the difference. 15
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Performance Analysis Income Statement Between 2017 and 2020 the revenues from Intuitive Surgical had risen from $3.14bn to $4.358bn, growing on average 13,1% year on year. Before analysing the COVID-19 impact on the performance of the company, it is important to highlight how the company has been able to increase revenues until 2019, without compromising profit margins (kept at ~31%). With the hit of the Covid-19 pandemic, trends were reversed in the robotic surgery’s industry. Volumes were negatively impacted, and their related treatments were deferred. In the first quarter of 2020 procedures in China declined by 90% and in the USA declined by 30%. The recovery was slow during the next quarters since, hospitals were facing constraints in staff and intensive care unit (ICU) capacity, deferring surgical procedures that could wait. Despite the huge impact on activities, instruments and accessories revenue increased to $2.46bn in 2020, compared to $2.4bn in 2019. Even though demand decreased, and costs rose, service revenue remained unchanged due to the base installed of da Vinci. On the other hand, Systems’ revenues decreased by 12%. Due to what was stated above, net income fell 31,3% and the profit margin dropped by 9 percentual points. The increase of 3% in selling and G&A costs and the increase of 7% in R&D expenses may justify these negative results. 2016 4500 4000 3500 3000 2500 2000 1500 1000 500 0
2017 Income 2018Statement 2019 2020
2021 60% 40%
company has been increasing its tangible assets (especially PP&E) and its intangibles, especially patents, which are an extremely important driver of this industry. On the opposite side, company liabilities have registered an average 10.3% year on year growth on the last 4 years, it is important to mention that the company did not increase its debt throughout the pandemic, in fact, in 2020, liabilities decreased to $1.409bn compared to the $1.448bn value, this may be explained by the decrease in investing activities, the company decided not to incur in debt in order to finance their investments. Once analysing the Debt-to-Assets ratio, we can observe on the graph that the company is decreasing the amount of liabilities per unit of debt. This metric is now fixed at 13% and the company has shown the capacity to maintain these low values. Intuitive Surgical’s cash flows are probably the section where the company reveals less predictability. Overall, the company has been able to generate cash, however, these values have not been following a pattern. The company ended 2020 with $1.48bn, a decrease in comparison to the $1.6bn registered in Lisbon, however in both years, the net cash provided by these activities exceeded net income, this may be justified by the fact that the net income of the company includes significant items such as the share-based compensation ($395m) and depreciation expenses ($226m). In 2020 Investing activities amounted to $940m (less 213 million than in 2019): acquisitions of PP&E and Orpheus Medical represented the biggest portion of it, nevertheless, the company is also investing in high-quality fixed income securities such as US treasuries and corporate bonds. 2016
2017
12000 20%
2018 Balance 2019 Sheet 2020
2021 60%
10000 8000
0%
2017 2018 Revenues
2019
2020 Net Income
6000
30%
4000 2000
Source: Bloomberg
Balance Sheet From the balance sheet analysis, it can be concluded that Intuitive Surgical was able to increase assets by 93% in the last 4 years. The
0
0%
2017 Assets
2018 2019 Liabilities Debt to Assets
Source: Bloomberg
16 NIC Undergrad Review
Statement of Cash Flows On financing activities and to conclude the statement of free cash-flows’ analysis, we can observe stock-option exercises and employee stock purchases as a main item. Moreover, in the last year, the company used $134m in cash to repurchase 200k shares of Intuitive’s stocks in the open market. The key point is that that the company has the cash provided from operating activities as a main source of liquidity. Since 2018 the company has been constantly increasing its amounts of free cash-flows, and this has been used to expand the acceptance of the products worldwide. The company is making substantial investments in commercial operations, product development and intellectual property and it is projected that the
management team continues to do so, the current cash together with the income derived by the sales are, so far, enough to meet the liquidity requirements imposed to the company. Cash Flow
2000 1000 0
2017
2018
2019
2020
-1000 -2000 -3000 Operating
Financing
Investing
Source: Bloomberg
Valuation Overview Peers
Market Cap ($bn) P/E Ratio Dividend Yield (%) Net Debt/EBITDA
ROE (%)
Operating Income Margin (%)
INTUITIVE SURGICAL INC
142,4
80,73
0
-2,32
15,16
34,92
STRYKER CORP MEDTRONIC PLC ABBOTT LABORATORIES Average Median
117,4 98 167,4 131,3 129,9
32,83 31,65 29,76 43,7 32,2
0,97 1,95 1,49 1,1 1,2
2,8 2,08 0,87 0,9 1,5
22,73 10,48 21,5 17,5 18,3
17,05 10,75 13,62 19,1 15,3
Source: Bloomberg
As of the 6th October, Intuitive Surgical was trading at $326.28. We decided to conduct a peer valuation taking into consideration that there are several companies that compete within the medical instruments’ market, therefore we benchmarked Intuitive Surgical with the peers that are competing more heavily on the robotic surgery niche, which are Stryker, Medtronic, and Abbot Laboratories. In the following analysis, we included Intuitive Surgical on the computations of the mean and of the median. The company presents the second largest market capitalization in the industry, making it one of the biggest players with current high demand. Even though the price, the investors are still willing to pay at values around $330. In fact, ISRG created a support base at $330 in the last months, which was just broken recently. The company’s P/E ratio, which measures the price of the security relative to the firm’s earnings, is approximately 80.73, placing the firm far above the remaining competitors. In fact, even though this
can indicate that the company is currently extremely expensive in relation to the industry, this has to do with the high expectations of the investors in what regards the high-tech solution Intuitive is providing, namely Da Vinci. For instance, Abbott Laboratories, which is the company that registers the lowest ratio (29.76), focuses on diabetes’ diagnostics, using an easy to copy technology that does not represent huge advantages in relation to the remaining health industry. Regarding dividends, and as we can see, the industry is currently, on average, distributing earnings in the modest percentage of 1.1%. Intuitive has decided not to pay out dividends since they are reinvesting all the earnings they collect. The Net Debt to EBITDA shows once again the solid financial position Intuitive is featuring, with a ratio of (2.32) way under the industry median. The company shows being extremely efficient in paying back its debt, especially comparing to Stryker, its closest competitor, which would take 2.8 years to pay its debt if both items are held constant. 17
NIC Undergrad Review
Peers
Market Cap ($bn) P/E Ratio Dividend Yield (%) Net Debt/EBITDA
ROE (%)
Operating Income Margin (%)
INTUITIVE SURGICAL INC
142,4
80,73
0
-2,32
15,16
34,92
STRYKER CORP MEDTRONIC PLC ABBOTT LABORATORIES Average Median
117,4 98 167,4 131,3 129,9
32,83 31,65 29,76 43,7 32,2
0,97 1,95 1,49 1,1 1,2
2,8 2,08 0,87 0,9 1,5
22,73 10,48 21,5 17,5 18,3
17,05 10,75 13,62 19,1 15,3
Source: Bloomberg
On Return on Equity, the company presents a lower value than the industry median, however, this is due to the large amount of capital that the technologies request in order to generate profits. On average, we can observe that, even though the large amounts of R&D requested, the industry is being able to manage efficiently equity capital. On the opposite side, Intuitive has the highest operating margin (34.92), way above its industry median of 15.3. The only player in the medical market which has a higher Operating margin is Hologic, a company that provides image solutions (not mentioned on the table), all the remaining peers seem to have lower profitability than Intuitive, hasten to add that it can be explained by the monopoly the company has established on the specific patent they own, targeting their prices disregarding the rest of the market. Overall, despite the high price of the stock and after a DCF model, we reached the conclusion that the company is around 4% undervalued. Intuitive is undoubtedly performing extremely well in relation to its peers and since we project an 8% annual increase on earnings, we see some available space for extra gains. Once taking a value investing approach, we can identify a company that is being able to explore new trends and technologies by itself without compromising their results, Intuitive is indeed generating cash-flows, even during times when the demand for these services falls. We strongly believe that the high-grow potential that minimally invasive surgery has (expected to grow 100% in the next five years), allied with the unique technology the company develops, can build up a trend around Intuitive, creating even better results and good returns to its shareholders.
Outlook Intuitive Surgical, a 26-year-old company, is already the main leader regarding Minimally Invasive
Surgeries and is in a sector with potential development, especially if reaches the possibility of reducing costs overall. The success of the company has emerged majorly through the sales of the Da Vinci, a product that besides performing MIS (Minimally Invasive Surgery), has also complement goods along with them, which has forced users to purchase accessories and inventories to Intuitive Surgical. The company performing in the healthcare sector, has set for throughout the year almost the same business model and strategy, which as resulted in growing revenues until 2019 (prepandemic year) while keeping profit margin at the same range. The company has had a positive evolution throughout the years, but as always it has some upcoming difficulties, and possible barriers to its development. The firm has identified some possible future setbacks. The company´s products are subject to a long and precise regulatory process, in which if not accepted the company is not eligible for the product selling, besides if not meeting the federal, state, or other manufacturing standards, the company might have to temporarily close operations, imports/exports, where if not passed the international legislation, it is not possible to sell abroad, and recall some products, revealing delivery delays and lost revenues. The company is always subject to federal, state, and government laws regarding the business practices, which if violated could result in penalties to the firm, in which possible investigations would cause adverse publicity, causing harm to the name of the company. Regarding hospitals, and clients, the case of the need to suspend most surgery related operations (such as during Covid-19), or even an all-out shutdown, presents a risk of finishing all possible usages of the Da Vinci robot and its accessories. With this, the company will be put to the challenge, following straight rules, and never good
18 NIC Undergrad Review
falling outside the project and strategy. Alongside technological development, the firm will be tested in the strength of the company´s firewalls and ways of banishing possible hackers, where if not fully protected the company might suffer from third party actions, arming the full development of the robot, and worst possible outcomes. The damage to other intellectual property rights could cause a large loss of capital, as payments to other entities, or forbidding the commercialization of the company´s products. Regarding the business the company competes in, due to the highly competitiveness of the industry, costumers may choose and opt on purchasing from current peers and competitors, or even not accept the Da Vinci Surgery, which would lead to loss of revenues and market share. If the products do not meet the market acceptance, there will not be enough capital inflow to support the current business. Regarding the pandemic, current repercussions could continue to harm the materialization of the firm. The company has also in mind the possibility of any damaged product, that
could result in the loss of interest of the product, thus reducing sales, and possible future lawsuits. As consequences of the constant presence of risks, the stock price of the company is very volatile, and will likely continue being such way. Future operating results may be below the expectations of investors and analysts, which could lead to a decline of the share price. Finally, some changes on the financial accounting standards may affect the results of the firm. In summary, Covid hit the company hard, especially on the second quarter, but fast responses from the company led to a smoothening of the situation. The highly competitive market is seen as a potential grower, as the entrance of this type of technological development is still very recent into the healthcare sector. The company seeks to improve future outcomes, lower the total cost of care, and improve patient and care team experiences, all with the purpose of filling the society needs, stabilize the already volatile stock price, and possibly increase it.
19 NIC Undergrad Review
NIC Fund: Monthly Performance The “September Effect” weighed in on global markets as rising inflation and supply chain disruption worry investors
Bernardo Patrício
Global Markets The last month of September was one of the poorest months in terms of performance for global equities, erasing the gains that we were experiencing during the past quarters, although still with a positive year-to-date return. The main worries in investors’ minds have been the slowdown of the economic growth experienced in developed countries (which may indicate lower future earnings growth and, thus, a higher than desired P/E ratio for the market), supply chain disruptions with the increasing price of shipping containers and delays on the automobile production due to the lack of components as examples, and rising inflation (Eurozone stands at 3% YoY headline inflation, UK with 3.2% YoY and US 5.3% YoY) due to an increase in demand and constraints in the supply side. In China, the focus was on Evergrande’s possible
$300bn debt default, which would make it the biggest financial disaster and with damning consequences for Xi Jinping, but also for the world that depends on Chinese money (being China the 2nd largest lender to the USA). The Chinese government stepped in and a debt restricting seems to be underway that could save the company. Still, S&P Global Ratings affirmed that it would likely default on its notes totaling $246m due on October 18th. The elections in Germany were also a highlight of this month. While SPD (centre-left party) lead by Scholz won the most seats, it fell short of the majority and, thus, needs a coalition to form a government. Currently, either SPD and CDU will try to convince FDP (centre) and the Greens (centreleft) to form a government with them and talks may take weeks or even months.
Current Positions Although our portfolio was negative for the month of September, it was able to lose less than the other indexes despite having a less diversified and aggressive investing profile. Our best performers were Kirkland Lake Gold (KL) with a share price decrease of 6.72% and Blackline (BL) with a performance of 6.19%. Positions Weight on Total Equity
7,59% 14,55% 5,91%
5,08% 14,27%
3,96% 3,06% 4,70%
2,15% 8,33%
7,01% 4,08%
3,47% 6,26%
5,94% 3,64%
Entertainment US Pharma US Internet US Utilities US Gaming ETF Renewables US Electric Batteries ETF Gold Miner Consumer Products EU Pharma Retailer Chinese Govt Bonds Aerospace & Defense UK Tobacco UK Oil & Gas US Accounting Software Cash
Nº
Industry
Type
1
Streaming/Entertainment
US Equity
Current Price Open Price $169,17
$141,70
2
Gaming/eSports
ETF
$38,83
$25,21
3
Pharmaceutical
US Equity
$71,21
$71,36
4
Accounting Software
US Equity
$118,43
$103,60
5
Social Media/Internet
US Equity
$339,39
$175,75
6
Renewables
US Equity
$78,52
$75,49
7
Utilities
US Equity
$9,60
$9,67
8
EV Battery
ETF
€15,39
€9,98
9
Consumer Products
EU Equity
€59,05
€47,80
10
Gold Miner
CND Equity
$41,59
$44,74
11
Pharma Retailer
US Equity
$47,05
$47,14
12
Sovereign China Bonds
Bond ETF
$5,55
$5,34
13
Aero & Defense
UK Equity
£5,65
£4,93
14
Tobacco
UK Equity
£25,67
£27,98
15
Oil & Gas
US Equity
$22,63
$23,23
20 NIC Undergrad Review
NIC-UD Share Price (Inception Cumulative Returns) 12% 11% 10% 9% 8% 7% 6% 5% 4% 9/11/2021
9/16/2021
9/21/2021
Benchmark Analysis
9/26/2021
Monthly Performance
oc k # oc 9 k # 1 St oc 0 k St #11 oc k #1 2
St
St
#8
#3
ET F
#7 St
oc k
#6 St
oc k
#2 St
oc k
#5
ET F
#4
#3 St
oc k
#2 St
oc k
#1
oc k
St
oc k
ET F
#1
8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% St
As stated before, September was a bad month for equities. The S&P 500 fell 4.79%, being the worst-performing index in our selection of benchmarks, mainly due to supply chain disruptions and growing fears regarding the federal debt ceiling. China had a mixed month, showing no signs of growth in equities despite the Evergrande debt problem, while its Asian counterpart, Japan’s Nikkei 225, grew 3.84% with the acceleration of vaccination and decrease in COVID-19 cases. Europe was another victim of the “September effect”, with the Eurostoxx 50 and FTSE 100 falling 4.23% and 0.88%, respectively, due to rising inflation. Regarding big tech companies, the FANG+ index performed poorly after months of extraordinary returns. All in all, we are able to outperform most of our benchmarks, despite having a negative share price increase.
oc k
9/6/2021
St
9/1/2021
Portfolio Returns vs Benchmarks 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6%
3,84%
0,03%
-0,88%
-3,64%
-3,20% -4,25%
-4,23%
-4,79%
Portf oli o MSCI World S& P 500 (Share Index Price)
FTSE 100
Euros toxx 50
Nikkei 225
Shanghai Com pos ite
FANG+
Corporate News The first highlight was the announcement of a merger of equals between Kirkland Lake Gold and Agnico Eagle, with the new combined company being “Agnico Eagle Mines Limited”, an ESG-focused mine producer of gold. Every share from KL will be exchanged for 0.7935 shares of Agnico Eagle, implying a share valuation of 40$ and a 1% premium compared to the 10-day weighted share price value. It is expected that the combined company will create pre-tax synergies in the amount of $0.8bn over the next 5 years and $2bn in the next 10 years. Facebook was also a hot topic during the end of the month with a whistleblower citing unethical practices to increase the firm’s profits. More specifically, she stated that Facebook was partially to blame for the January 6th Capitol Riot due to changes in their algorithm. “Facebook has realized that if they change the algorithm to be safer, people will spend less time on the site, they’ll click on less ads, they’ll make less money,” she stated. Finally, Walt Disney Co. has suffered a slight decrease in its share price after the new CEO confirmed that its subscription service will have low single-digit millions of subscribers increase. 21 NIC Undergrad Review