Regal Partners Global Investments Limited (6L20.F) Earnings Call Transcript & Summary

Good morning, and welcome to the VG1 Investor Update. My name is Charlie Aitken, Investment Director of Regal Partners, and I'll be hosting today's VG1 webinar. I'd like to refer you to the disclaimer, but particularly that the information in this webinar does not and does not intend to contain a recommendation or statement of opinion intended to be investment advice. Our speakers today are Phil King, Founder and Chief Investment Officer of Long/Short Equities for Regal Funds; Marco Anselmi, Hao, Glen, Shannon and Henry, all from Regal Partners Global Equities Research team. The Regal Partners Group oversees $2.6 billion of ASX-listed LICs and performance has been strong. Regal has a very strong focus on our LICs. One-year portfolio returns have been strong across our entire suite of listed investment companies, as you can see on the table at the left. We are very pleased to see that this strong performance is starting to be recognized by share prices. VG1 returns are also strong versus a global equity LIC peer group with the better performing LICs on the right-hand side of this chart. Regal believes the combination of strong portfolio performance, positive changes to capital management policies in terms of large-scale buybacks and attractive dividend guidance and investments in marketing will continue to see the NTA discount close. Our goal is to move to the top right-hand corner of this peer comparison towards PM Capital, who trade at a premium to NTA. We believe this can happen as investors recognize the strong total returns being generated. To help close the discount, Regal Partners and the VGI Board have implemented significant positive changes to both the investment process and capital management policy of VG1 since the VGI merger. These initiatives have both increased total investor returns and reduced the discount to NTA. On this chart, you can see the NTA discount is reducing as the VGI share price has outperformed portfolio returns. VG1 gives investors access to the strengths of Regal Partners equity research and risk management in a single fund listed on the ASX. VG1 is a portfolio of our highest-conviction global equity ideas, both long and short. I'm now going to hand over to Phil King, Co-Founder and CIO, Long/Short Equities, Regal funds, for a market update and how VG1 is positioned. Thanks, Phil.

Thanks, Charlie, and thanks, everyone, for your time today. We remain very bullish on the outlook for markets. And considering that markets have done well as financial conditions have tightened, we're looking forward to seeing how they perform as financial conditions ease. And we think, especially as we get through the U.S. election and come into the December quarter, we should see a stronger year -- a stronger finish to the year for markets. The fall in bond yields over recent months of over 100 basis points in the U.S. is also very, very positive for valuations. And I think this very much supports the market at current levels. The huge inflows we've seen into index tracking ETFs is also -- continues to create a big bubble in passive investing, and this has created great opportunities for us on both the long side and for short, such as CBA, which I'll talk about in a moment. And we're very pleased with the performance of VG1. We've had a great September. We've really benefited from some of our resource and Asian exposure in the fund. Six months ago, when I did our last webinar, the U.S. market had created headlines because it had just hit an all-time high. And in contrast to the press at the time, I said hitting a new to all-time high was a bullish indicator. And since then, we've had over 40 new highs and pleasingly for our investors, where they've been able to take advantage of this in our funds. And now when we hit new highs, it no longer creates the headlines. But we do believe there's enough value left in the U.S. to be bullish. And so we remain bullish. But we also think it's important to maintain a diversified portfolio, and we're very pleased to get exposure to some of the opportunities that we're seeing both in Europe and in Asia, which we think is compelling value at the moment. And I think that's going to benefit the VG1 portfolio going forward. The real interesting thing about the U.S. market at the moment, and as we highlighted last time, is that the market rally is starting to broaden. The September quarter was the first quarter in 7 quarters where the Magnificent 7 underperformed the broader market. And we think this is a very bullish sign for the market as a whole. There's a lot of conjecture at the moment about U.S. equity valuations. And there's no doubt that the equity risk premium, which is the difference between the expected returns on equities and the U.S. 10-year government bond rate, has collapsed a little. But to me, this is because bond yields have increased. And low bond yields when bonds were less than 1% and even less than 2% and 3%, I don't think, ever got fully factored into equity share prices. Basically, equity investors said they didn't believe them and didn't think they were sustainable. So I think in terms of valuations, we almost need to back out what happened in the 10 years post-GFC when bond yields were less than 3%, and we've got to look at earlier periods for a better guidance as to valuations. And if you look at where U.S. valuations got to in the tech bubble around 2000, the U.S. equity risk premium actually got negative. And there is -- the U.S. equity valuations are nowhere near that at the moment. What we're seeing in the U.S. is that the large companies are actually delivering on their earnings. Large companies aren't too expensively priced. And as a result, I think there's enough value in the U.S. market to retain exposure. And I think we're very happy to have some exposure to the U.S. in the VG1 portfolio. But there's no doubt that looking around the world, there's better value opportunities, both in Europe and Asia. As I said, U.S. equity risk premiums getting close to 0. But because there's better growth opportunities and the equity risk premium doesn't take into account expected growth going forward, we're very happy to retain exposure to the U.S. But certainly, on a headline value basis, the equity risk premium both in Europe and Asia is very, very attractive. And that's why we have very large exposures to both Europe and Asia in our VG1 portfolio. There's certainly been some extreme moves. And we're pleased to say that we have managed to capture a little bit of this move in China stocks. Sentiment in China, in our view, was just overly negative. And many investors have actually given up on investing in Chinese stocks because returns have been so poor over the last 5 and 10 years. But this often creates the opportunity. And when other people are giving up on something, we're happy to look at it. And so 3 of the stocks that we own in VG1 are Alibaba, Meituan and Baidu. And these 3 stocks, we think, are high-quality tech stocks that just got too cheap to ignore. And sometimes, you can overthink things. And sometimes, I think -- and I hate to say this. You've sometimes just got to close your eyes and buy things because you think that they're just too cheap. And that was certainly our view on these Chinese stocks at the moment. There is no doubt that the structural problems in the Chinese economy are going to take many, many years to unwind. The bubble we saw in property prices was not quite as large as the bubble that we saw in Japanese property prices 30 years ago, but it was very, very similar, and the collapse has been even sharper. And that means that there's going to be many, many years of pain ahead. And housing starts in China at the moment were a long way below completions, which means that the contraction in the building industry is going to weigh on the general economy for many, many years to come. And another headwind that China is experiencing at the same time as this collapse in property prices is just the aging population. And so that's going to be another strong headwind for the Chinese economy. Debt levels in China, too, remain high. But unlike Japan, 30 years ago, debt levels in China at the moment are concentrated at the government and local government level. And we think this makes them a lot more manageable than what happened in Japan 30 years ago when listed corporates had a lot of the debt, and this weighed on the stock market for many, many years. So even though there's many parallels with Japan 30 years ago, there's actually many differences with China today as well. And one of the main differences, of course, is the fact that we didn't see the same sort of bubble in Chinese equities that Japan saw 30 years ago. And as a result, we think that means that many Chinese equities are very, very cheap. And we don't think that we'll have that 20-year bear market that we saw in Japan. We think that the beer market in China is nearing its completion. And remember that we think that we'll see Chinese equities turn around a long time before we solve all the problems in the economy. And so even though we think that the current rally might not last, we do think it's important to retain some exposure to the Chinese market just because valuations are so compelling. The other interesting market in Asia recently has been Japan. And we saw a huge move in both the yen and the TOPIX, the Japanese stock market, earlier this quarter. The yen basically strengthened from JPY 160 to JPY 140, and this caused a huge amount of Japanese investors to sell assets. They had to unwind what's commonly called the Japanese carry trade, and this caused pressure on not only the Japanese market but also many asset prices around the world. There was -- fortunate for us, we saw this as a temporary one-off. And as a result, we were able to increase our exposure to Japan and take advantage of some of these sell-off. Obviously, with hindsight, we should have done a lot more. But yes -- no, we saw this very much as an opportunity to our increase exposure. We do think that some of the reasons for the strengthening in the yen remain, but there will -- there are some challenges in the Japanese economy. We certainly see Japan very much as a tale of 2 cities as it were. There is Tokyo and some of the mega cities which are still booming. Exporters are doing very, very well. But many rural areas in Japan remain very, very challenged. So I think Japan is still a very, very interesting market, and we're happy to have some exposure. We're very much encouraged by the focus on shareholder value, the focus on shareholder activism, unwinding some of these cross-shareholdings, returning capital to shareholders, and that's something that we're very much trying to benefit from. And we do think the exporters in Japan will continue to do well, notwithstanding the bounce in the yen to around the JPY 140 mark. We're also actually seeing a lot of focus on shareholder activism and shareholder value in Korea, and we've increased our exposure to Korea as well. And in Korea, they're calling it the Value-Up program. And that's, I think, going to drive share prices in Korea higher as well. The other part of the market that we just thought got too cheap was resources. And part of the fact that resources have got too cheap is just the amount of money that we've been -- seen flowing into Australian banks. And the chart here on the left just shows the huge growth in Australian ETFs. A lot of these ETFs just track the Australian market, which means that the bigger a company gets, the more they have to buy. And that becomes very, very self-fulfilling and creates huge momentum in the market. And that obviously can be a challenge for shorting stocks but also can be an opportunity. And so we certainly think the Australian banks got oversold and -- sorry, overbought. And I think that also meant that many people were selling resources to buy the banks. And I think that created a very much a long/short opportunity, which we were able to take advantage of. Probably the biggest bubble in Australian banks was CBA which, despite the fact that earnings have started to fall and EPS was down in the recent result, is now trading at record levels. And many people think CBA is the most expensive bank in the world. And we certainly think that it's too expensive here, and we would expect the share price to continue to weaken from here. Very much the marginal buyer in CBA over the last 6 to 12 months has been what we call a forced buyer, a buyer who's only there because the share price is going up and is causing pain, whether to someone who's short or whether to someone who's underweight. And once the share price starts to fall, that, I think, will remove that marginal buyer. And many people say that -- I think most seasoned observers would agree that CBA looks very expensive, but most people say, what's the catalyst? I often say the biggest catalyst will be just the fact that the share price starts to go down. I think once the share price starts to go down, momentum could build. And so I think we're very happy to be short CBA at the moment, especially with the share price starting to crack in our view. On the other hand, we're very happy to be long resources. And we've been long resources for a while now, very much long because of what we're seeing on the supply side. It's getting harder and harder to find new economic deposits just as this chart about copper discovery shows on the left. And as a result, many Australian mining companies are reducing the amount they're spending on exploration. And this chart on the left would look even more extreme if we backed out what Australian mining companies had spent on lithium assets in the last 5 or 10 years. And Australian companies, whether it's BHP or Rio, are very much finding it cheaper to buy existing assets rather than build new ones. And so that means that the value of existing assets has gone up, and it just means that there is very little supply coming on, especially in commodities like copper. On the other hand, demand for commodities like copper continues to get better. And this is a chart that BHP recently released on where they see demand for copper going in the next 20 or 30 years. And on their numbers, they see copper demand growing at 70%. We've seen other forecasts where some people think copper will more than double in demand over the next 10 or 15 years. And so you're going to argue about how strong demand will be, but I think there's no argument that the outlook for copper is extremely positive. And so the chart -- copper has gone up over time. And what we like about copper is the fact that when it does have a run, it doesn't go up 20% or 30%. It goes up 3, 4, 5x. And so we can see a scenario where copper not only doubles but maybe goes to $15, $20 a pound over the next 10 years. And we think that's very, very positive for a lot of the mining companies in our portfolio. So just to review the portfolio, investors are probably aware that as of 1 July, we increased our risk guidelines, and we increased the gross exposure that we can run up to 200% from the 150% level where it had been. And this just means that we can have better exposure to a lot of the opportunities that we're seeing in the portfolio, and we aren't so constrained by the capital that we have. And so I think in the long term, a 1 50-50 style strategy is one of the best strategies that investors can get exposed to. They do get a lot of exposure to alpha, and we think we can provide very good returns from our stock picking, but they're also having an inefficient use of capital. So at the same time, they get some exposure to beta as well. So I think that's been a great move for investors, and I think we're seeing the benefits of our increased gross exposure already flow through in our returns. And the other thing that we've done over the last year or 2 is that we've managed to increase our net exposure, and I think this has been a great move as well because it's allowed us to really benefit from the rise in the market. And I think that's been very pleasing, and I'm very proud of the fact that we've managed to capture a lot of the upside in the market over the last year or so. So as you can see here, we have run a conservative portfolio. We haven't got the full upside when the market is going, but the very pleasing thing is that we've done so much better when the market's been falling. We've really used our shorts to protect the downside, and that's something that we're very, very proud of. And so we're very, very pleased with how the portfolio is performing at the moment, and we very much look forward to the future. So I think we're in a great position. And now I'm going to hand over to some of the team to talk about some of the positions in the portfolio. And we're going to start with Marco, who's going to talk about a couple of our U.K. exposures. Thanks, Marco.

Thanks, Phil. So I'll touch on Rightmove first. So we first invested in Rightmove in late 2023 as part of a broader assessment of cheap U.K. opportunities. Rightmove will be familiar to most on this call as the realestate.com equivalent of the U.K. Now our thesis is that the sell-off created by the entry of U.S. property heavyweight CoStar into the U.K. market and the resulting competitive concerns have been mostly overblown and a great opportunity to buy a very high-quality business at its lowest valuation since the GFC, making the risk/reward very compelling, particularly when we consider an improving U.K. and housing macro backdrop. Now we're of the view that taking share away from the incumbent in online property classifieds is very difficult and has actually really happened, particularly when a portal has become as dominant as Rightmove has with over 80% market share. With this backdrop, we found it unsurprising that REA tried to capitalize on Rightmove's depressed valuation by lobbying multiple takeover offers. We were disappointed to see REA walking away and that Rightmove remained uncooperative throughout the process. With the REA bid come and gone for now, we think Rightmove remains well positioned and don't think the stock will retrace back to prebid levels. The new CEO likely has 12 to 24 months to prove the growth re-acceleration that he has promised to the market. But if it doesn't, we think it's likely that shareholders will put more pressure on the Board to sell itself. So going forward, we expect a much higher floor on valuation. We also think that the REA bid is a vote of confidence that the CoStar competitive concern is overblown. So we remain confident in Rightmove as a stand-alone investment and think the stock is cheap here, trading on 21x P/E and in fact, wouldn't be surprised if REA came back in -- at some stage in the next 12 months. Next, I'll move on to Entain. So as I mentioned earlier, the U.K. has been an area of focus for us, and Entain is another U.K. position in the portfolio. Entain is a global online gaming business. People in Australia will be familiar with their brands, Ladbrokes and Neds, although Australia is only 10% of their business. Entain is often overlooked compared to Flutter despite Entain being the #2 or #3 largest player in most markets, including in the U.S., where it operates BetMGM, which is its 50-50 online gaming joint venture with U.S. casino operator MGM Resorts. Now in terms has just gone through a difficult couple of years. It has faced tough regulation in the U.K., in Germany, the Netherlands as well. It has lost share in the U.S., and it has faced a large fine due to issues left behind by prior management. We think this has led to a perfect cocktail of negative events but now think that the business is at an inflection point. So growth has started to turn positive in key geographies like the U.K. and Brazil, which we saw in the latest trading update just a month ago, while the U.S. business has stabilized. And since the start of the NFL season a few weeks ago, BetMGM has gone back to actually growing share. Now if we zoom in on the U.S. business, which is the key to the bull case, people tend to look at the U.S. online gaming as one single market and see BetMGM as a distant #3 player to Flutter and DraftKings. But once we split online sports gaming between sports betting and iGaming, we actually see that BetMGM holds a very strong position in iGaming with around 20% market share. The weaker sports betting position is now being addressed with investment in product and marketing, which will cause Entain's U.S. business to be loss-making in 2024, as you can see in this chart. However, we think the market is wrongly penalizing Entain and giving close to 0 value to the BetMGM business just because it is loss-making today, whereas we think it is a very valuable free option. BetMGM's iGaming business alone is already doing $400 million in contribution profit, and that's with only 7 U.S. states having legalized iGaming compared to 31 states for online sports betting. So we do think that BetMGM still has a very attractive growth runway while the non-U.S. business has now stabilized and should be a solid cash generator growing low to mid-single digit. We also like that 10% to 15% of the register is held by activists. One is Eminence Capital, which also have a Board seat. And other is Corvex, which have extensive experience in gaming. And it's no -- we think it's no coincidence that both Eminence and Corvex were shareholders of another gaming business called Kindred that earlier this year ended up being sold to French lottery operator, FDJ, which was actually a prior investment for VGI. We think Entain is well on its way to turning around. The interim CEO and now Chairwoman, who we met earlier this year in London, has done a great job in stabilizing the business and improving the relationship with MGM. If the turnaround stalls, we think Entain is a strategic asset in an industry that has continued to see consolidation. In the past, not only has MGM expressed interest in buying Entain, but so has U.S. competitor DraftKings as well as private equity. So we think this will limit downside and sets up Entain for a win-win situation. I'll now hand over to Hao to discuss GQG.

We believe GQG is one of the best and fastest-growing fund managers in the world. GQG specializes in managing large cap stocks in global and emerging markets across 4 flagship strategies, investing with a forward-looking quality bias. The business was co-founded in 2016 by Chair and CIO, Rajiv Jain; and CEO, Tim Carver, who have established an investment-led culture and strong client alignment. Staff hold majority ownership, and the majority of key staff personal wealth is invested in GQG strategies. As you can see on the next slide, GQG has seen exceptional growth in its funds under management to reach just over $160 billion today. The investment process at GQG is unique, drawing on the expertise of traditional and nontraditional analysts such as investigative journalists and health care experts. Led by Rajiv, the team has delivered strong investment performance across all 4 flagship strategies, consistently outperforming its benchmark and peers. We believe that GQG's track record of outperformance combined with its global multi-channel distribution platform and competitive fee proposition will continue to drive fund inflows. Each of GQG's 3 distribution channels has generated meaningful funds under management to date, leveraging the considered investment made in people and infrastructure. We believe accelerating momentum in the wholesale and sub-advisory channels and the recent expansion into the Middle East with an investment and distribution hub located in Abu Dhabi will see GTG capture substantial inflows, grow funds under management and, in turn, drive earnings growth. As we've shown on the right, GQG has demonstrated exceptional earnings growth over the last few years with no signs of slowing. And despite this, analysts have faded their forecast of GQG's earnings in the outer years. When we look at GQG, we see things differently. We're excited by the inflow and earnings trajectory and see meaningful upside to consensus forecast. We see opportunity for GQG to re-rate above its ASX-listed peers given its superior growth prospects. And further, potential inclusion into the all-important ASX 200 should free float be improved with the sell-down by management. And now I'll hand over to Glen Barnes, who runs our Asia investment team.

Thanks, Hao. We've had a number of semiconductor longs and shorts on for a while now. In general, we've been long leading semiconductor stocks with decent AI exposure and short weaker semiconductor stocks with minimal AI exposure. This has worked quite well. One of our key longs has been TSMC. So TSMC is the clear global leader in contract semiconductor chip manufacturing, particularly in leading-edge chips. So Apple, NVIDIA, AMD and even Intel are their big customers. It's a crucial player in the supply chain for the most advanced chips, which include the AI chips. While there is some competition from Samsung and Intel, TSMC has significant competitive advantages, and these are actually getting stronger. Moving on to the next page. Despite the strength of TSMC, it is still a semiconductor stock and has some cyclicality, although the volatility of its earnings are generally lower than the overall industry. The cyclicality of the semi industry is ultimately driven by the inventory cycle of the semiconductor supply chain and the growth in its end markets. So smartphones, general servers, AI servers, PC, auto, industrial and a few other things are the most important end markets for semiconductors. And what has been quite interesting about this cycle so far is over the past 12 to 18 months, demand for AI-related semiconductors has been very strong while demand for most non-AI markets has been weaker, although in the past few months, investors have been getting more concern about the whole semiconductor cycle, but mostly given the non-AI part of the market has been weaker than what people had hoped for. So essentially, the non-AI part of the market had slowly been recovering from the start of this year, but the recovery has been more modest than what people had hoped for. And so people are also now starting to think about when potentially the AI part of the market might either slow down or maybe become slightly oversupplied, although it's probably more of a late 2025 or 2026 issue given the demand at the moment is very strong, and it takes time for supply to come in. So these concerns, along with a few other factors, has led to a sell-off in the semiconductor market recently. But if you have a look at the chart on the left-hand side, what you can see is that semiconductor stock prices tend to move in a similar direction to the revenue growth rates of the semiconductor industry. So as growth rates of the revenue is accelerating, it's positive for semiconductor stocks. But generally, semiconductor stocks tend to peak a little bit after the growth rates start to peak. So generally, it depends on the cycle, but it might be 3 months, 6 months, maybe even longer. But our view after looking at quite a lot of factors on not just the revenue growth but on the inventory cycle and numerous other things is, clearly, we are closer to the top than we are to the bottom, but we don't think we're quite at the top of the semi cycle yet. So we remain long TSMC given its dominant market position, its AI exposure, its competitive advantages and its reasonable valuation versus its growth outlook. So just moving to our SK hynix position. SK hynix is one that we've been long for a while and is the second-largest memory stock globally and is currently the leader in AI-related memory and a key partner of NVIDIA. So the memory market has had very similar trends to what I just mentioned about the overall semiconductor market with AI demand being very strong and non-AI demand being fairly weak. And more recently, this non-AI market has been a bit weaker than what people had hoped for at the start of the year. So this has led to the sell-off in semiconductor stocks overall and including memory stocks have also sold off. And it's important to note that the memory market is highly cyclical and its products in general are quite commoditized. Plus there are a number of large leading players in the industry. So meaning that the market structure is not as attractive as the market that TSMC dominates. So we'll be watching closely for a cyclical peak in both the semiconductor and the memory market. But for now, we remain long hynix along with Samsung as well. And just finally, as part of our hedging in terms of the semiconductor cycle and also helping with some of the geopolitical issues around Taiwan. We've been short a number of Taiwanese stocks as well. So our focus has been finding semiconductor-related stocks that have rallied in part because of the strong Taiwanese market and also because of the AI bullishness that's been in the market but finding stocks that don't really have much AI exposure. And even better if they have weak competitive advantages and have been facing other headwinds like increased China competition or weak end market demand. And we've found a number of stocks like this, which we've been short for a while. And these in general, have worked quite well.

Thanks, Glen. Today, we're talking about Shimadzu Corp., which is a leading player in testing instruments in Asia. One of the products Shimadzu provides is mass spectrometers. These are used to identify atoms and molecules in a sample. This can include pharma compounds, pieces of food or drops of water. If we look on the next page, mass spectrometry demand is expected to double over the next decade. The drivers of this include pharmaceutical and biopharma development. You can think of Shimadzu as a key pick and shovel maker for the investment that's going into developing GLP-1 drugs, for example. It's also highly leveraged to India and China, which are 2 of the fastest-growing pharma industries in the world with significant government support. And it's taking share in Western markets as it's shifting from being the Toyota or the sort of best cost of ownership and most reliable provider of mass spectrometers to the Lexus with some of the best sensitivity and fastest throughput, which is seeing it earn higher margins through its high-quality product portfolio. Shimadzu is also leveraged to Asia's rising demand for food and water testing. Asia has 60% of the global population. As these nations advance, they're bringing in significant safety and testing protocols. And Shimadzu, with great relationships with public institutions and government organizations, is winning a lot of orders for testing water and food. From a valuation perspective, we can see Shimadzu's comps in the U.S. as some of the market darlings, including Waters, Agilent, Thermo Fisher and Danaher, which trade on 34x P/E. Shimadzu, on 23.3x P/E, has 45% upside to those comps. But when we consider its net cash balance sheet, it would actually be on 21x ex net cash P/E and have 60% upside to these comps. We think it could even have more because essentially, it's going to outgrow its comps. On the top right, one of the reasons for this is its rising consumables sales ratio. Historically, as a Japanese company, it's led its suppliers sell these consumers -- sorry, consumables to its customers. It is now taking more of this share internally, which is higher margin and higher revenue growth. And finally, on the bottom right, we can see the company has a very strong total shareholder return of 5.5%, which is extraordinarily attractive relative to the Japanese government bond yield of 85 basis points. I'll now hand over to Henry to discuss some short opportunities.

Thanks, Shannon. I'm going to talk about 2 shorts today. The first is Mercedes-Benz Group, which is a luxury automaker with EUR 150 billion of sales as listed in the German Stock Exchange. Our key concern about Mercedes has been its lucrative China business for which we see near and medium-term risks. For some context, China has been a key growth driver of Mercedes over the past decade. As you can see from the chart below, unit sales to China have tripled since 2013, and the country now makes up 40% of global volumes. Given the market skewed towards higher-end vehicles, Mercedes generates higher than group average operating margins in China as well, but we see that as coming under risk in the medium term. Our key concern with Mercedes is the steady rise of Chinese domestic automakers, which have substantially improved their product offering and now dominate the mass market segment, as you can see in the slide below, given their lower price points and comparable quality. But now they're turning to the premium segments of the market for growth, where European brands are currently the dominant players. And feedback is they're beginning to take some share at the premium end of the market, especially in electric vehicles, where Chinese companies benefit from structural cost advantages due to China's battery supply chain expertise and government subsidies. Further, our understanding is that Chinese consumers now see domestic manufacturers as the gold standard of EVs, which reduces some of the brand equity advantage that European auto manufacturers have had. As Chinese automakers continue to improve their offering and the market moves towards increasing proportion of EVs, we see considerable share risk to Mercedes, which has based its China growth strategy around EVs. After a decade of flat revenue per unit growth, Mercedes significantly raised prices by around 30% over the past 3 years, which boosted margins to record levels. We've been able to view these margin levels are unsustainable given the softening industry backdrop. We think the downgrade 2 weeks ago was a step towards margin recalibration that more accurately reflects Mercedes medium-term challenges in China, and we're happy to stay short. The second short I'll be talking about today is UPS, which is a global provider of third-party logistics with over $90 billion of revenue. It's core market is the U.S. domestic parcel delivery. One thing we look for when we're trying to identify short ideas is an industry suffering from overcapacity. This is because we find these issues tend to linger for longer than management and consensus expect. And one of those industries is third-party logistics, which has been hampered by overcapacity after companies like FedEx, UPS and Amazon extrapolated peak COVID demand and significantly ramped capital expenditures. So why did we choose UPS as a short? In May in their Investor Day, UPS provided 2026 operating margin guidance of 12.5%, which would be a record outside of the COVID boom years, as you can see in the chart below. The key driver of guidance was pricing growth with UPS forecasting annualized domestic pricing growth of 2.5% despite industry overcapacity and revenue per parcel already at historically elevated levels. We're skeptical of UPS' ability to sustainably raise pricing into an oversupplied competitive market and therefore hit its guidance targets, setting the company up for a multiyear downgrade cycle. We also see additional headwinds impacting UPS' ability to sustainably raise price, and these include the reliance on low-cost Chinese e-commerce players like Temu for growth and also retailers increasingly looking to prioritize click-to-collect as their preferred method of online sales over delivery, which obviously involves EPS. Longer term, we see the risk of Amazon, which is UPS' largest customer, both taking logistics volumes in-house and expanding its third-party logistics offerings to retailers outside its ecosystem. Walmart and Uber also stand out as potential nontraditional competitive threats, while UPS' main rival FedEx is pushing further into its core market of ground delivery for small businesses. We see any stock price spikes on port congestion as opportunities to add to our short position. I'll now hand back to Charlie.

We're now going to move into the Q&A section of the webinar. Phil, we've had a few questions come in here. The first one is while Chinese equity exposure has done well for you in the last little while, you sounded a little bit half-hearted. Can you give us a bit of your thoughts on the pathway from here?

Look, there's no doubt the structural challenges in China remain, the aging population, the bursting of the property bubble and the excess debt levels. But in my view, valuations just got too compelling. Everyone got too negative. And even if you look back at what happened in Japan in the 20-year bear market, there were times when equities rallied 40%, 50%, 60%. And so I think sometimes just valuations get too cheap that you have to have exposure. And so that's why we have some exposure to China in the portfolio at the moment.

Phil, obviously, the resource exposure has been helpful to VG1 performance in the last little while. Can you give us a bit of your take on what are your favored commodities?

Yes. So obviously, copper, I mentioned. And copper is probably one of our most preferred commodities at the moment. It's no surprise to us that BHP, Rio, Glencore, all the major mining companies have tried to make acquisitions in copper recently. And so copper is something that we very much like, but there's other commodities that we like as well such as met. And I think Glencore has moved into our top 10 stocks at the moment because it's 2 largest commodities at the moment, met coal and copper, and it doesn't have the iron ore exposure that BHP and Rio has. And probably some of our least preferred commodities are things like iron ore. And I think the Chinese property market is probably going to get worse before it gets better. And also lithium. And I think lithium looks heavily oversupplied. And we don't think that's going to turn around in the short term. So they are probably some of the things that we don't like as well.

Here's another question that's come in. I mean shorting CBA, Phil, is known as the widow maker. And why do you think this time it will work?

Well, that's exactly right. When a lot of other people give up shorting something, that might be the best time to do it. And in my mind, it's often best to short the short squeeze as it were. And when you know the buying is forced, when you know that other people are covering shorts, that's often the best time to put the short on. And that is certainly how I see CBA at the moment. And it has hurt a lot of people. I think people have been trying to sort the stock all the way from $60 up. And it's hurt many, many people over the years, but I think it will be right eventually. And what really gives me conviction on the trade at the moment is that many people are scared to short it and also that earnings are starting to crack, and I think that's the real difference. At the end of the day, it comes back to fundamentals. CBA had great earnings growth for 20 years. Then earnings have basically gone nowhere for the last 10 years, and a lot of investors don't realize that. And so it's been very much a share price rally that's been driven by a re-rating over that last 10 years. And now earnings are starting to crack. I'm happy to be short CBA.

Thanks, Phil. I mean obviously, the CommBank share price does look overvalued versus global banks. So I note in the portfolio that you have reasonable exposure to European banks. Can you give us the thesis on that?

Yes. The difference between the valuations on Australian banks and U.K. banks and other European banks is very, very stark. And CBA might trade on 23, 25x P/E whereas we can buy a similar bank such as Lloyd's in the U.K. on a P/E of 6 or 7x. And we actually think Lloyd's will grow earnings over the next 5 years when CBA's earnings will go back. So that difference in P/E is just not sustainable. And the other thing we very much like about both the U.K. and European banks is that we're starting to see some consolidation, and CBA and the other majors in Australia had 20 years of good growth from the consolidation that occurred in the Australian banking sector in the 1990s. That's why Australia survived so well in the GFC. We had what people see as the strong, stable banking sector like Canada, and that's code for basically banks that make a lot of money. And I think we're starting to see the recognition of something similar is needed in both the U.S. and Europe. And I think we're having recognition by regulators and governments. And so we're starting to see consolidation occur, and I think this will be very, very positive for the profits of both European and U.K. banks.

And one of the forecasts you made in the last VG1 webinar is that the manly Sea Eagles would win the NRL premiership. Can you just explain what happened there?

Well, we did okay. We made the semis. We looked good for a while, but then we did fall at one of the last hurdles. But Charlie, you know what I'm like. I'm always an optimist, so hope springs eternal, and there's always next season.

And we might stop there. So thank you, Phil. Thanks to the investment team for their time. Thank you to all of you for your time on listening to the VG1 webinar today and your support of the stock and Regal Partners. Have a good day.