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Q2 ROBO Review - Quarterly Newsletter

ROBO GLOBAL
Q2 2017 ROBOTICS QUARTERLY REVIEW


ROBO Global Robotics & Automation Index gained 6.6% for the quarter and nearly 20% YTD. ROBO continues to outperform most global equity indices.

 

RECORD BREAKING YEAR FOR ROBO

The equity market has been resilient in the face of the realization that perhaps no fiscal stimulus is forthcoming this year. This means that impressive gains in the US and world indices this year were not about Trump, infrastructure spending or the tax cuts, but about improving underlying company fundamentals and liquidity.

During Q2 2017, the ROBO Index was up 6.6%. The returns for 11 of 12 subsectors were positive, with only Energy down. The best performing subsectors were Consumer Products and Security, up 22% and 17%, respectively. Within Consumer subsector, iRobot was the best performing company, up 27%. Security outperformed due to strong returns from Aerovironment, up 36%. 

Both top performing subsectors are within the Applications sector of the Index. Applications include all companies that incorporate multiple robotic and automation technologies into their product or manufacturing process to improve efficiency in traditional business lines as well as the development of entirely new business propositions.

INDEX INSIGHT

We continued to refine the ROBO Global Industry Classification and made several changes to the index at the June rebalance, including the strengthening of the Logistics Automation category with the additions of KION (Germany) and Manhattan Associates (US), leading players in automation equipment and software, as well as the upgrade of Zebra Technologies to Bellwether status. PTC (US) and Koh Young (Korea) are new inclusions in the Computing Processing & AI and Sensing categories respectively. Meanwhile, three companies were removed: MobilEye (Israel) following its acquisition by Intel; Adlink (Taiwan) due to the introduction of higher liquidity requirements; and ELBIT Systems following the introduction of the ROBO Global Environmental, Social and Corporate Governance Policy.

We strengthened our exposure to Logistics Automation, which we feel is one of the most promising markets for Robotics & Automation. The industry is at an inflection point as the boom in e-commerce dramatically raises the bar for supply chain efficiency. We expect strong growth in demand for automated material handling equipment (Robotics, Automated Storage and Retrieval Systems, Autonomous Guided Vehicles); Track and trace technologies (Automatic Identification and Data Capture, Enterprise Asset Intelligence); industrial software; factory automation equipment in general (sensing, motion, controls etc.).

The addition of KION Group (Germany) following its $2.1bn acquisition of Dematic, the #1 provider of material handling and supply chain equipment in the US. KION complements Daifuku and Cargotec to play the automated material handling equipment market. KION is now the world’s #3 in supply chain solutions and #2 in industrial trucks and services, with a unique and complete material handling offering for warehouses, from manual trucks to fully-automated solutions. With a very large installed base of 1.2m industrial trucks and over 6,000 systems, KION generates 40% of revenue from services.

The addition of Manhattan Associates (US), the best of breed provider of supply chain management software and services. We view Manhattan Associates as a key beneficiary of the secular automation trends in the logistics/warehouse industry and the boom in e-commerce. The company designs build and install supply chain commerce solutions consisting of software, services, and hardware, which coordinate people, workflows, assets, events, and tasks holistically across the functions of a supply chain, from planning through execution. Manhattan Associates is focused on Supply-Chain Execution (SCE) software, a fragmented market growing in the mid to high single digits. We think the company will benefit greatly from the major transition of the retail industry to Omni channel solutions, which are in the early adoption phase.

We have upgraded Zebra Technologies (US) from an NBW to BW, following the sale of its WLAN business. Zebra is now a nearly pure play on supply chain and field force automation and the global leader of the Healthcare Automatic Identification and Data Capture (AIDC) market.

PTC Inc. is a new addition in the Computing, Processing & Artificial Intelligence category. PTC is a software provider with $1.2bn in annual revenue, primarily from Computer Aided Design (CAD) and Product Lifecycle Management (PLM) offerings, which helps more than 30,000 customers "make stuff", primarily industrial products, aerospace & defense, electronics and automotive. We see PTC as a major beneficiary of the ongoing digitization of manufacturing businesses. The company has been a first mover in terms of investing in IOT software platforms, a small but rapidly growing and fragmented market. PTC has invested more than $600m since 2013 to acquire ThingWorx (IOT platform to build and run apps), Axeda (remote monitoring and control), ColdLight (artificial intelligence and machine learnings) and more recently KepWare (industrial automation connectivity) to bolster its leading position in IOT platforms. PTC has the largest dedicated IoT sales force in the industry marketing an IoT platform encompassing data connectivity, app development, analytics and machine learning.

Koh Young is a new addition in the Sensing category. Koh Young is a Korean provider of 3D inspection and measurement equipment. Koh Young's technology is a key enabler of automation in electronics manufacturing and is in the early stages of adoption in machinery and medical applications. Koh Young is the global leader in Solder Paste Inspection (SPI) tools and #2 in Automated Optical Inspection (AOI) tools. Koh Young is the world’s only player with commercial-grade 3D measurement technologies for SPI and AOI.

We introduced the ROBO Global Environmental, Social and Corporate Governance (ESG) Policy as part of our Industry Classification. This resulted in the exclusion of ELBIT Systems on an ethical basis, for its involvement in the Gaza wall, which the international court of justice deems in contravention of the Geneva Convention.

We raised the liquidity requirements for eligibility to a minimum 3-month average daily traded value of $1m ($0.7m for existing index components), to cater to the growing use globally of the ROBO Global Index Series. This resulted in the exclusion of Adlink.

We removed MobilEye, following its acquisition by Intel. In the three and a half years since the inception of the ROBO Global Robotics & Automation Index series in 2013, eight index members have received acquisition offers, including four in the past year alone.

We continued to refine the ROBO Global Industry Classification. 

We merged the ‘Computing’ and ‘Processing’ sub-sectors into a new ‘Computing, Processing & AI’ category.  Autonomous systems must make decisions at various levels; from determining the state of the environment they are operating in, to optimally planning actions and controlling motion. It is analogous to our brain and is what allows the processing of information to produce actuation to take place. This requires raw computing and processing power as well as increasingly advanced software. Computing can vary from embedded systems smaller than a fingernail to hyper-scale data centers implementing sophisticated algorithms including Artificial Intelligence (AI). Machines are getting smarter as improvements in data storage and processing power has enabled the emergence of AI across a rapidly expanding range of applications. Advancements in AI, especially machine learning, are key to the growth of autonomous systems. AI also encompasses perception, such as machine vision and natural language processing. AI is clearly the next big thing in the automation space, as it will have far-reaching implications on many industries. The task that AI makes abundant and inexpensive is prediction — in other words, the ability to take the information you have and generate information you didn’t previously have. Environments with a high degree of complexity are where machine learning is most useful. ‘Computing, Processing and AI’ is the largest sector in the index with 16 members.

We expanded the ‘Agriculture’ sub-sector to ‘Food & Agriculture’ - Feeding and sustaining the world continues to be one of our most important economic activities. A new generation of autonomous systems, sensors, and data analytics tools are bringing tremendous benefits, not only to farmers and breeders in terms of increased yields and lower costs but also to the environment in terms of improved water, pesticides and fertilizer use. Meanwhile, the food processing industry continues to automate aggressively to meet increasingly demanding volume, cost and safety requirements. Emerging markets offer significant penetration upside for traditional automation equipment from dairy and beverage to bakery and meat processing to packaging. In the more mature food markets, robotics and automation help companies develop a more agile response to changing customer tastes and increasingly stringent safety requirements. Members go date include: Raven Industries - a leader in precision ag; Deere, which is the largest producer of self-driving four-wheeled vehicles in the US today; Krones – the world’s leading provider of bottling, filling and labeling machines; and John Bean Technologies, a top player in food processing solutions.

 

TOP TRENDS IN ROBOTICS: AI


Robotics, Automation and AI will lead us into a massive tech revolution. The closest comparison in recent history occurred around 1900, when the automobile, telecommunications, the airplane and mass electrification all came together at once, radically changing the world from the late 1800s to the 1920s. Such times are particularly disruptive.

The world’s top tech companies are in a race to develop the best Artificial Intelligence and capture that massive market, which means the technology will get better fast—and come at us as fast. IBM is investing $1 billion in its Watson; Amazon is banking on Alexa; Apple has Siri. Google, Facebook, and Microsoft are devoting their research labs to AI and robotics. In September, Salesforce.com announced its adding AI, called Einstein, to its business software. Its value, CEO Marc Benioff said at the launch, will be in “helping people do the things that people are good at and turning more things over to machines.”
 
We’ve networked the entire world, put computing devices in the hands of 3 billion individuals and created the largest pool in the history of educated people working in economies that encourage innovation. Over the past decade, we’ve built a global computing cloud and moved our shopping, friendships, work, entertainment and much else about life online. In this hyper-connected global market, waves of automation can get invented and deployed warp-speed faster than at any time before.

Investing in a world that is going through such rapid and disruptive change requires a deep understanding of the technologies and where the world is going. ROBO Global’s team of experts analyze the entire value chain of robotics to capture the market trends of today and tomorrow. Picking the obvious winners or losers at this point is a fool’s game. We believe investing in the entire ecosystem of technologies and applications is the best approach and this is what ROBO Global focuses on delivering to investors.
 

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