Hello everyone this is Dr Zhao, in this video you'll learn how to perform an analysis on market potentials, growth and profitability. The objectives are to assess the overall market potential as well as individual but typical company's performance. The metrics includes market size, growth rates, profitability, efficiency such as return on assets, and trends over time. To start, let's first take an overview on the 11 industry sectors, such as energy, consumer staple, information technology, real estate, consumer discretionary, industrials, healthcare, telecom services, materials and utilities and financials, before diving into more specific industries. If you're unfamiliar with some of these sectors, please go over the reading materials. We choose 2019 because it is a "normal" year. We'll see what happened from 2019 to 2020 by a trend analysis later on. Using the US as an example, let's first look at the total revenue of all these sectors. Clearly, consumer discretionary, health care, industrials and IT are the largest sectors in size in the US, where materials, telecommunication, utilities and real estate are the smallest in size. However, if we look at the size of a typical company as measured by the median revenue in this country we'll see that, materials and telecom have the largest companies, indicating likely monopolized markets for these sectors, in contrast to healthcare, financials and IT with much smaller companies, right, which implies more competitive and less concentrated markets, for these industries, these sectors. Now let's look at profits, we expect a profit from the median company, from every sector except health care where a significant loss is expected. And this is confirmed by the probability of breaking even where the health care sector is the lowest. Which sectors have the highest growth in revenue and profits? To answer this question, let's look at the growth rates for the US in year 2019. We first see that financials, healthcare and IT have the highest growth rates in total revenue in this year. While materials and energy have the lowest. The same observation can be made on the medium revenue growth rates, except that health care in this case has the highest. Now, although the revenues are growing, the profits may not. In year 2019 only telecom, utilities and real estate sectors have a growth in a total operating income. Energy and materials declined badly on both total and medium operating incomes. What about operating efficiency such as return on assets, return on invested capital, and sales general and administrative costs over total revenue. We can see that for the US in year 2019 healthcare has the highest medium operating costs over revenue ratio, way above everybody else, and a strong negative return on assets and return on invested capital, indicating a very different cost structure of the health care sector from other sectors. One explanation is the intensive research and development activities conducted by the sector. And we can also see that consumer staple and IT have the second highest median operating cost over revenue ratio. Because our primary interest is in American airlines, let's find out its industry classification by the navigator. We can see that industrials is the sector, transportation is the industry group, and airlines is the industry and sub-industry. Taking a closer look at the transportation industry, we can see that it includes air freight and logistics, airlines, which is our primary interest, marine, road and rail that includes railroads and tracking, and finally transportation infrastructure such as airport services, highways and marine ports. The structure of the transportation industry has implications on both domestic and international trade. For instance, high revenues for air freight, logistics and airlines implies heavy trade, both domestic and international. High marine volume means mostly heavy international trade, while high revenue of railroads and trucking means mostly heavy domestic trade. This is true for countries with large geographic span such as the US, China, European union, India, Australia and so on. For the US in year 2019, we can see that airfreight and airlines quite dominated the transportation industry, right, which is followed by tracking and railroads. Marine is almost negligible. So this implies both heavy international and domestic trade. In addition, you can see that airfreight and logistics has a larger revenue but with a lower total operating income that airlines implying a lower margin than the airlines. Now we can also see that although smaller in total revenue, railroads has the largest companies in this sector. So this likely implies monopolized markets for the railroads. And finally, marine ports and services is very small and performed pretty badly in this year. In comparison, let's look at China's transportation industry in Year 2019. Clearly air freights and logistics dominated the industry with airlines being the second in size, marine the third, and railroad force. Trucking is almost negligible. This implies a much heavier international trade than domestic trade for China. And this is the primary difference between the US and China. We also observed that although smarter in total revenue, the Chinese airlines has the largest companies, indicating a likely monopolized market. Finally, individual company wise, highways in China has the highest profit, and this is also different from the US. If you are an airline, have you ever thought about expanding your business to airfreight or even to airport services? So let's find out the differences in their market potential, trend and profitability. From the trend analysis on the industry total size for the US, we can see that air freight and airlines are much bigger than airport services, and they were constantly growing until 2020 when airfreight accelerated its growth, but the airlines plummeted in both revenue and profits, due to COVID 19. In fact, almost all airlines and all airports lost money in this year. However, if we exclude 2020, airlines clearly enjoy higher profits than the air freight. The industry trend analysis on profitability confirms our observations and further shows that airport services, although quite small, has the highest gross margin, and comparable operating and net margins to the airlines, which is better than the air freight before 2020. However, COVID 19 is detrimental to both airlines and airports, only airfreight is not negatively affected. Let's wrap up, it's important to understand the market potential, growth and profitability. Transportation industry structure has serious implications on domestic versus international trade. The pandemic has a different impact on different parts of transportation, and expanding from airlines to airfreight would help during pandemic.
