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IMPORTANT INFORMATION
This presentation (‘Presentation’) has been produced by Magellan Asset Management Limited (‘Magellan’) ABN 31 120 593 946, AFS Licence No 304 301and has been prepared for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase anysecurity or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, InformationMemorandum or other offer document (collectively ‘Offer Document’) relating to a Magellan financial product or service. A copy of the relevant OfferDocument relating to a Magellan product or service may be obtained by calling Magellan on +61 2 9235 4888 or by visiting www.magellangroup.com.au.This Presentation does not constitute a part of any Offer Document issued by Magellan. The information contained in this Presentation may not bereproduced, used or disclosed, in whole or in part, without the prior written consent of Magellan.Past performance is not necessarily indicative of future results and no person guarantees the performance of any Magellan financial product or service orthe amount or timing of any return from it. There can be no assurance that a Magellan financial product or service will achieve any targeted returns, thatasset allocations will be met or that a Magellan financial product or service will be able to implement its investment strategy and investment approach orachieve its investment objective.Statements contained in this Presentation that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs ofMagellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.Additionally, this Presentation may contain “forward-looking statements”. Actual events or results or the actual performance of a Magellan financial productor service may differ materially from those reflected or contemplated in such forward-looking statements. Certain economic, market or companyinformation contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neitherMagellan or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. No person,including Magellan has any responsibility to update any of the information provided in this Presentation.This Presentation must not be regarded as advice or a recommendation in relation to a Magellan financial product or service, or that an investment in aMagellan financial product or service is suitable for you or any other person. This Presentation does not take into account your investment objectives,financial situation or particular needs. In addition to carefully reading the relevant Offer Document you should, before deciding whether to invest in aMagellan financial product or service, consider the appropriateness of investing or continuing to invest. Magellan strongly recommends that you obtainindependent financial, legal and taxation advice before deciding whether to invest in a Magellan financial product or service.© 2019 Magellan. All Rights reserved. MAGELLAN and EXPERTS IN GLOBAL INVESTING and the Magellan logo are registered and unregisteredtrademarks of Magellan Asset Management. Third-Party trademarks, logos, and service marks contained herein are the property of their respectiveowners.
The gravity of interest rates
US 10 YEAR BOND YIELD 1992 - 2020
Source: Refinitiv. As at 12 February 2020
0%
2%
4%
6%
8%
1992 1996 2000 2004 2008 2012 2016 2020
1.7%
0%
10%
20%
30%
40%
1992 1996 2000 2004 2008 2012 2016 2020
GREEK 10 YEAR BOND YIELD 1992 - 2020
Source: Refinitiv. As at 12 February 2020
1.0%
WHAT IS DRIVING LOWER INTEREST RATES?
Ageing population
Quantitative easing
Persistent low inflation
Bank capital liquidity
requirements
Global saving
surplus
Anchoring effect of low rate
Secular stagnation
Low growth
Long term wealth
accumulation
LOWER INTEREST RATES LIFT VALUATIONS
17x 21x
26x
35x
-
10x
20x
30x
40x
10% 9% 8% 7%
Forw
ard
Price
-to-F
CF M
ultip
le
Discount Rate
Theoretical forward P/FCF multiple For 4% growth company
Source: Magellan Data
Lower rates have a positive valuation impact
THE PHILLIPS CURVE
Source: Magellan Data. Image: Wikipedia
0%
2%
4%
6%
0% 2% 4% 6% 8% 10%Unemployment rate
Wag
es g
row
th
William Phillips MBENew Zealand
economist1914 – 1975
IS THE PHILLIPS CURVE DEAD? PAST 30 YEARS – A LONGER TERM PERSPECTIVE
Source: Refinitiv. PCE Inflation ex. food and energy
0%
2%
4%
6%
8%
10%
12%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Where is the
inflation?
▬ Unemployment rate ▬ Inflation 1989 2019
1990-91 recession Tech
crash
GFC
POSSIBLE DRIVERS OF LOW INFLATION
Technology
De-unionisation
Digitalisation
Globalisation
Amazon effect Gig economy
Monopsony markets
Walmart effect
Lower growth
US shale oil
Data economyForward guidance
Automation
Negativeinterest rates
EMERGENCE OF NEGATIVE INTEREST RATES
Sources: Magellan estimates and Bloomberg. As at 31 January 2020
US$14 trillion of negative yielding bonds
24% of the world’s bonds have a negative yield
DISTORTIONS FROM NEGATIVE INTEREST RATES
Time value of money
Savings repression
Bank profitability
Asset bubbles
Hoarding of cash
Reaching for yield
Working capital management
Are negative interest rates causing asset bubbles?
ARE U.S. STOCKS EXPENSIVE?
Source: Robert R Shiller
0
10
20
30
40
50
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Shille
r cyc
lical
ly a
djus
ted
P/E
(CAP
E) ra
tio
▬ Shiller CAPE ▬ Median
U.S. stocks appear
expensiveStocks more expensive
Stocks less expensive
Great Depression
Tech bubble
15.8
Today
ARE U.S. STOCKS EXPENSIVE?Adjusting for interest rates
Source: Robert R Shiller, Federal Reserve Bank of St Louis
-10%
-5%
0%
5%
10%
15%
20%
Hi t i l
Stocks more expensive given interest rates
U.S. Stocks appear fairly
valued
Stocks less expensive given interest rates
Great Depression
Tech bubble
Today
IS U.S. PROPERTY EXPENSIVE?
Source: Bloomberg
5.5%
6.5%
7.5%
8.5%
9.5%
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
U.S.
CRE
cap
italis
atio
n ra
te
▬ Commercial Real Estate capitalisation rate
Property more expensive
Property less expensive
Pre GFC
U.S. property appears
expensive
Today
IS PROPERTY EXPENSIVE? Adjusting for interest rates
Source: Bloomberg and Federal Reserve Bank of St Louis
0%
1%
2%
3%
4%
5%
6%2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Property more expensive given interest ratesU.S. property appears fairly
valued
Property less expensive given interest rates
Pre GFC
Today
AREAS TO WATCH
Investors reaching for yield
High yield credit markets
Investment implications
U-TURN BY THE U.S. FEDERAL RESERVE
Source: Bloomberg, 1 January – 31 December 2018
2,000
2,500
3,000
3,500
January June November
-20%
2018 TIGHTENING
S&P
500
Rate hikes Decembermeeting
2,000
2,500
3,000
3,500
2019
U-TURN BY THE U.S. FEDERAL RESERVE
Source: Bloomberg, 1 January – 31 December 2019
29%
2019 EASING
S&P
500
January meeting
March meeting
Rate cuts
Ends quantitative tightening
0%
1%
2%
3%
4%
5%
6%
1998-2007 2008-2017 Short-term cycle Long-term cycle
Pre-GFC~5% average
WHAT HAVE WE DONE?
Sources: Refinitiv, Magellan Data.
10 year U.S. Treasury yields
Reduced our interest rate assumption
Return to QE
WHAT CAN GO WRONG?
Inflation shock Asset bubble
Prudent to be cautious
China
URBANISATION IN CHINA
Source: United Nations World Urbanisation Prospects
0%
20%
40%
60%
80%
100%
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050
▬ % of population in urban areas ▬ UN forecast
2019 Middle classpopulation
2029 Middle class population
CHINA - THE CONSUMPTION ECONOMY
Source: Magellan estimates
~1.5x Mass middle class = 4% p.a.
~4x Mass affluent = 15% p.a.
~6x Affluent = 20% p.a.
~2x Middle class = 7% p.a.
IS IT TOO RISKY TO INVEST IN CHINA?
Escalation of ‘War’ with
the U.S.
Chinese government
risk
Lack of transparency
Economic slowdown
All investments involve risk
Quality companies
Brands or platforms
Consumption or technology
Know what you don’t know
Diversification of risk
Due diligence
MAGELLAN APPROACH TO INVESTING IN CHINA
CHINA FOCUSSED INVESTMENTS
As at 31 December 2018
12 MONTHS AGO
CHINA FOCUSSED INVESTMENTS
As at 31 December 2019
TODAY
Alibaba
ALIBABA
China’s leading e-commerce platforms
Emerging international e-commerce platforms ≈
ALIBABA
China’s leading payments platform
≈
ALIBABA
#1 cloud platform in China
≈
ALIBABA
China’s leading advertising platform
≈
ALIBABA
China’s leading logistics network
≈
ALIBABA
Local services and entertainment platforms
≈≈
ALIBABA
Alibaba Business Operating System
≈
CHINA MARKETPLACES – TMALL AND TAOBAO
Source: Euromonitor International Limited [China][2019] © All rights reserved. Company disclosures. Magellan estimates. Note: Figures shown based on the twelve months to December 2019. Market share based on Euromonitor Total Retail market share as at December 2019.
Enormous engaged user base
Strong revenue growth
Strong profitability
Enormous Gross Merchandise Value
711 million active customers
Significant market share
#1 Marketplaces in China
12% of total retail
+25% growth
US$24 billion EBITA
US$960 billion (over 2x Amazon)
Source: company disclosures
“…we know in the future no company, no
country, no business can survive without
data, so we have to focus on data.”Jack Ma, Alibaba Co-founder, 2017 Investor Day
Data integration across all channels
Precise consumer profiling
Superior consumer insights
VALUABLE DATABANK
Source: Company disclosures. Images: asiatimes.com
Unique Identity
Across 711 million active customers
ALIBABA’S VALUATION IS COMPELLING
Source: Magellan estimates, including stock-based compensation expense. Based on Bloomberg pricing and estimates as at February 2020.1 Removes losses. Assumes value of US$70bn for Alibaba Cloud and US$33bn for Alibaba’s 33% stake in Ant Financial. 2 Magellan adjustments for New Retail (Hema), Lazada, Ele.me, Digital Media and Entertainment, Innovative Initiatives and minority investments.
High quality business at an attractive valuation
~31x~27x
~20x ~19x
0x
5x
10x
15x
20x
25x
30x
35x
Alibaba Alibaba(adj. for Cloud
& AntFinancial¹)
Alibaba(other MAM
adjustments²)
S&P500
1-ye
ar fo
rwar
d P/
E
~15% ~35%
~19x
Starbucks
WHAT IS STARBUCKS?
Sources: Company data as at 31 December 2019.
31,800 Stores
82 Countries
Personalised drinks
100 million weekly visits
Digital engagement
STARBUCKS - GROWTH AT SCALE
Source: Company data as at 31 December 2019
U.S.15,200 stores
China4,300stores
Starbucks / NestleCoffee
Alliance
2019 2029
~2x
STARBUCKS CHINA – A MASSIVE OPPORTUNITY
Sources: Magellan estimates. Sources: McKinsey and Euromonitor, coffee consumption per capita for population >15 years old
CHINA MIDDLE CLASS DOUBLING COFFEE CONSUMPTION(cups per capita per year)
U.S. 420 CHINA <7
CHINA COMPELLING NEW STORE ECONOMICS
China Store Economics Tier 1 and 2 Cities Tiers 3-5 Cities
Year 1 average volume U.S.$ 0.7 million U.S.$ 0.6 million
Pre-tax cash return* 85% 87%
Source: Company data as at May 2018 for the 2017 class of stores. * ROI is calculated as total store level cash profit (pretax) over total investment in local currency.
STARBUCKS CHINA - MASSIVE GROWTH DRIVERNext decade
Source: Company data as at 31 December 2019, Magellan estimates. *Profit reflects operating profit
2019 2029
China - revenue
China Stores2019 4,300
2029 13,000
China contributes 40% of profit
growth*
STARBUCKS - DRIVERS OF SHAREHOLDER RETURNSNext decade
Source: Company data, Magellan estimates, priced as at 6 February 2020.
Net incomegrowth
Buybacks Dividend yield Totalshareholder
return
6% - 9% p.a
2% p.a
2% p.a 10% - 13% p.a
Don’t miss the next decade