Union Securities Research Team

research@unionsecurities.ch

June 29, 2020

Next-Gen Leaders

Introduction

Of the S&P’s five hundred constituent companies, only half would have been included in

the index 20 years ago. In two short decades, innovation and entrepreneurship have led

to massive industry shifts and vindicated, time and again, Schumpeter’s principle of

creative destruction.

The Next-Gen Leaders are a selection of the most promising high-growth companies in

the US and Europe that will benefit from major technological innovations and structural

changes in corporate and consumer behavior.

Thousands of companies are now developing new technologies and unique

business models which promise to reshape the future of businesses and

consumers.

There are many listed and tradable companies with cutting-edge products and exciting

growth profiles that investors need to be invested in.

June 29, 2020

Introduction

Traditional financial concepts still apply!

Next-Gen Leaders must operate in an industry benefiting from strong secular

growth drivers;

They must have structural advantages and a defendable position through product

differentiation, technological advantage or high barrier to entry;

They must have a scalable business and a large addressable market to allow for

sales and earnings growth;

Companies must have a strong topline growth or generate some Free Cash Flow

and have a comfortable EBIT Margin;

Stocks should exhibit price momentum and ideally a decreasing valuation.

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Introduction

How to deal with so many opportunities and such risky investments ?

We invest in innovation themes primarily and then find the companies with

the strongest fundamentals;

We have identified many areas of innovations in the Technology, Media,

Consumer, Healthcare, Industrial and Financial sectors.

We classify those innovations within large groups and a number of sub groups.

Business to Business : Productivity, Knowledge, Security and Healthcare.

Business to Consumer : Media, E-commerce, FinTech and Personal Care.

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Innovation Themes

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Innovation Trends

Once the coronavirus pandemic settles, some companies will emerge stronger, and

many corporates will have to adapt to the new environment and accelerate their digital

transformation procedures.

Major transformations had already started before the crisis and are now moving faster

across all sectors.

Recently, a number of high profile CEOs in the digital world (ServiceNow, Splunk, Palo

Alto, Microsoft, etc…) have expressed a marked optimism regarding the impact of the

COVID crisis on digital transformation.

We believe that most Next-Gen Leaders have low underlying exposure to the crisis

beyond the technical recession that will weigh on corporate spending, and that underlying

trends (Digitalization, Cybersecurity, Consumer Media, e-commerce, etc…) will

improve.

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Business to Business

Means of Production

Boosting Creativity

Software as a Service (SaaS)

CyberSecurity

Knowledge

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Technology – Means of Production

New solutions help businesses improve their overall productivity through better creativity

and design, streamlined product lifecycle management, more attentive customer service,

and lower SG&A costs (Selling, General and Administrative Expenses).

The growing availability of SaaS-based solutions is encouraging new adoption and

spending across many subcategories, such as Customer Relationship Management

(CRM), IT Service Management (ITSM), Financial Management Systems (FMS), Human

Capital Management (HCM), and analytic applications. Leaders in that field are

Salesforce.com, Workday and ServiceNow.

Some legacy software vendors have transitioned to a SaaS model. Among them, design

and creativity software continue to exhibit robust growth and have a large TAM (Total

Addressable Market).

The move of enterprises to a cloud or hybrid infrastructure poses security risks and offers

opportunities for innovative players such as Palo Alto Network or CyberArk.

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Technology – Boosting Creativity

Adobe supplies creativity software to create and

distribute images (PhotoShop), web pages

(Dreamweaver), and other digital content such as

video or Flash animations. It also provides

solutions for digital marketing campaigns (30% of

revenues).

Dassault Systemes and Ansys provide software

for engineering and design that is used to create,

model, and test designs for a wide range of

products from cars and airplanes to plastic toys

and toothbrushes. They also produce lifecycle

management solutions to accelerate time-to-

market and reduce production costs.

Autodesk provides engineering software and

applications for 3D design, animation and

gaming. Their AutoCAD brand is the most

popular software of its kind among architects.

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Adobe Photoshop

Dassault Systemes - Solidworks

Technology - Software as a Service (SaaS)

Salesforce provides cloud-based Customer

Relationship Management (CRM) solutions to

businesses. It is used for sales, marketing, and

customer support. It also offers e-commerce

analytics and social media tools.

Workday offers cloud-based Human Resources

(HR) and Finance solutions to businesses. It is

used to manage payrolls, expenses, time

tracking, finances, procurement, etc.

ServiceNow delivers a number of cloud-based

solutions to various industries. These include IT

management, Project Management, and Risk

and Compliance. Consumers also use its

platform to create custom automation

applications.

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Workday – Workforce Planning

Salesforce – Lightning

Technology - CyberSecurity

Palo Alto Networks offers a Next Generation

Firewall, that offers enterprise-wide Internet

security to protect companies from breaches in

their corporate networks.

CyberArk is the leading vendor in the security

market of Privileged Access Management (PAM)

which helps enterprises secure their assets in a

hybrid environment.

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CyberArk Enterprise Vault

Palo Alto Firewalls

Technology - Knowledge

“Scientia potentia est” - Knowledge is power.

Informed decisions are crucial for businesses. They

require research, datasets, and analytical tools to

process the vast amount of information collected from

websites, clients, and production operations. The

following companies supply the means to carry out

these functions:

Consulting

Cap Gemini is the European leader in IT

consulting for emerging technologies.

IT Trends

Gartner helps clients understand the IT

industry and make informed decisions about

IT Products

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Cap Gemini – Agile strategy

Gartner Hype Cycle

Technology - Knowledge

Financial & Real Estate Data

CoStar Group affords detailed,

building-specific information to the US

commercial real estate industry.

IHS Markit is a leading contributor of

data and indices for the financial

industry.

Big Analytics

Splunk provides software that collects,

indices, and examines data generated

by websites, networks and mobile

devices.

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Splunk Data Analysis

CoStar property research

Improving Healthcare

Improving Diagnostics

Illumina provides DNA and RNA

sequencing products and services

used for testing and diagnosis.

Improving Surgical Procedures

Intuitive Surgical and Stryker develop

systems that allow doctors to perform

robotically-aided surgery from a remote

console.

Improving Clinical Research

IQVIA offers a broad range of

biopharmaceutical development and

contract research services. The

company, the largest of its kind, assists

clients by outsourcing clinical trials,

laboratory analytical services, and

market research.

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Illumina Sequencing systems

Intuitive Surgical - da Vinci robot

Business to Consumer

Video Games

e-Commerce and Internet Services

FinTech – Payment Technology

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Media - Video Games Publishers

Gaming is the largest entertainment sector in

the world and reached $135Bn in revenue in

2018, $70Bn of which stemmed from mobile

games, and the remaining from PC and console

games;

Asia accounts for more than 50% of the

industry, and China alone accounts for half of

this.

Digital downloads have rapidly gained pace and

will continue to grow especially since 5G is

deployed in the US and other countries, allowing

publishers to bring major PC & Console

franchises to the mobile world;

Digital downloads and the transition to

subscription services and game streaming to

replace the traditional physical sale of games is

driving improvement in operating margins for

publishers.

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eSport tournament

MMPORG game : World of Warcraft

Media - Video Games Publishers

Activision Blizzard is the world’s largest

publisher. It owns franchises such as World of

Warcraft, Guitar Hero, Call of Duty, and Candy

Crush through its acquisition of King in 2016.

Electronic Arts is another large video game

company in possession of FIFA, Star Wars

games, Madden NFL, Battlefield, The Sims and,

Apex Legends.

Take Two is world’s third largest video game

publisher, known primarily for its major labels:

Rockstar Games, 2K Games, and 2K Sports.

Franchises include GTA, Red Dead Redemption,

and NBA 2K.

Ubisoft is a French video game publisher and

producer of educational software. It holds global

franchises such as Assassin’s Creed, Just Dance,

Raving Rabbids, Far Cry or Prince of Persia.

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Electronic Arts – Apex Legends

Ubisoft – Just Dance

Consumer – Media and Internet Services

Match Group is the leader in online dating and

operates websites and applications such as

Tinder, Match.com or Meetic.

Zalando is the dominant online fashion retailer in

Europe. It sells branded clothing, shoes, and

apparel for women, men, and children.

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Zalando Website

Match.com interface

FinTech – Payment Technology

Paypal operates a technology platform for digital

and mobile payments. It also owns the highly

successful Venmo application that allows rapid

money transfers between users.

Square acts as a merchant account provider,

delivering hardware and software payment

products. Square’s card-readers attach to

smartphones and tablets providing businesses

with a low-cost point of sale system. Square also

launched a P2P (peer to peer) application

enabling cryptocurrency transfers in order to

compete with Venmo.

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PayPal Venmo App

Square Terminal

Methodology

Stock Selection Approach

Financial Ratios

Rebalancing Methodology

Risk Factors

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Stock Selection Approach

We select stocks using:

Our thematic and sector views;

Fundamental criteria based on top line growth;

Identification of stocks already engaged in a phase of outperformance.

Investments are selected using a fundamental approach:

Stocks may be initially identified by a screening approach but are mostly identified by our

constant observation of financial markets;

A thorough fundamental analysis is always performed before any inclusion in the portfolio.

Stocks are classified as:

Core Investments for the more established and financially stable companies;

Speculative Investments for the riskier, less mature, high growth, high valuation companies;

Under Watch for the list of stocks we consider for a potential inclusion in the portfolio (or

Bench)

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Financial Ratios

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Value Creation

Sales Growth

Earnings Per Share Growth

Return On Equity

Valuation (1Y and 2Y Forward)

Estimated EV/Sales

Estimated Price/Sales

Estimated EV/EBITDA

Estimated P/E – as reported

Estimated P/E – GAAP

Cash Flow generation

EBIT Margin

Net Margin

Free Cash Flow Margin

Free Cash Flow Yield

Financial Leverage

Debt/Asset Ratio

We focus on

• EV/Sales for Hyper-Growth stocks

• P/E, Return on Capital, sustainability ofmargins and Free Cash Flow Generation for moremature companies.

Salesforce.com : Exponential Growth

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Salesforce.com historical performance showsexactly what type of story we are looking forin a Next-Gen Leader candidate:

- An exponential growth of the topline;

- A transformation of growth into profitsafter a few years;

Salesforce.com : Decreasing valuation

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And, if possible, a decreasing valuation that shows that the market isreasonably pricing in the future normalization of growth.

Rebalancing Methodology

The portfolio allocation follows a “Quantamental” approach where stocks are selected

using fundamental analysis while allocation is determined by a quantitative tool to avoid

any behavioral bias.

The Core Holdings (roughly 2/3 of the positions) have a very low turnover while the

Speculative Holdings will be actively traded.

We do not have a specific rebalancing period. Allocations are modified whenever we add or

remove a stock from the list.

Portfolio diversity is a function of the market capitalization of each stock in concert with

our proprietary smoothing method.

Theme Allocation is not a consequence of a top-down approach. We prefer to allocate

risk to themes we find more financially sound and superior stock investing opportunities.

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Rebalancing Methodology

We allocate positions based on their market capitalization using a proprietary smoothing

method (see graph below) to ensure that each stock within the portfolio brings a

reasonable contribution to the overall risk level.

We may use some weight adjustments when we add two stocks in the same sub-industry in

order to diversify our exposure within the sector without adding too much risk.

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0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

$7 $12 $20 $42 $48 $65 $67 $70 $89 $89 $94 $102 $106 $147 $208 $225 $291 $294 $480 $828 $946 $948

Allocation

Market Cap in $Bn

No Adjustment Adjusted Weight

The Dark Blue line shows the

allocation per stocks as a

function of its market

capitalization when using the

market cap weighted

method.

The Light Blue line shows the

allocation when using our

smoothing method.

Risk Factors

The main sources of risk arise from weak global markets and investors appetite for high

growth stocks. The strategy performance tends to be correlated with the Nasdaq while

exhibiting a high beta and a higher volatility.

Many stocks in the list are highly volatile but company specific risks have a limited impact

on the total risk due to the high diversification level of the portfolio.

Sector allocation is not a consequence of a top-down approach. Our selection process

leads us to have a strong bias to industries were we see a more promising outlook.

We have a strong inclination towards Technology, Media, Healthcare and Consumer

Discretionary stocks.

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Contacts

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CONTACT US

Union Securities Switzerland S.A.

Address11 Cours de Rive

1204 Geneva, Switzerland

Let’s Talkresearch@unionsecurities.ch

Want to know more about us ?

www.unionsecurities.ch

Union Securities Switzerland SA is a FINMA-registered Securities Dealer.

Disclaimer

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