Cannabis: The Beginning Of A Global Seismic Shift Initiating Coverage On Canopy Growth, Cronos, Aphria January 17, 2019 Our Conclusion Investors rarely get to witness the birth of an industry. Such historic events include the gold rush, inventions of the automobile and aircraft, and the internet. In most instances, investors rush to pour capital into the sector, and while the industries develop, very few companies live up to their lofty expectations.

We expect cannabis to follow this course. Dozens of small/medium-sized firms will likely earn moderate revenues and earnings, but our view is that only a handful will come to dominate the global market.

We believe Canopy and Cronos are likely to be two of those winners; meanwhile, we view Aphria as a manufacturing and automation expert, but believe concerns about capital allocation and corporate governance could deter investors.

Effective January 17, we initiate coverage of Canopy Growth with an Outperformer rating and $65 price target; Cronos Group, with an Outperformer rating and $22 price target; and Aphria, with a Neutral rating and $10 price target.

Implications Our investment preference points us toward the Canopy ecosystem (both Growth and Rivers) as well as Cronos, mostly for one reason: best-in-class management. We believe the actions and visions of each of these management teams stand above the rest of the field. This has been reinforced by significant investments from outside firms, including beverage alcohol (Constellation Brands/Canopy) and tobacco (Altria/Cronos).

Our view is that the strategies deployed by these companies combined with their strong balance sheets make these companies the most likely to attain the status of industry titan.

As for Aphria, the debate over the value of its international assets, as well as corporate governance concerns, have obscured the value of the company’s quality domestic assets, cultivation expertise, and national distribution capabilities. In our opinion, the concerns about corporate governance and, more importantly, capital allocation are not without some validity and are enough to leave us on the sideline when it comes to Aphria stock.



4 Strong Management Teams Are Key
7 Valuation Not The Key Driver Of Returns
7 Still Early Innings In A Global Movement
8 Our Favoured Names
8 This Is America: Capital Flowing South
11 Potential Stock Catalysts.
12 The Industry: No Shortage Of Valuation Concerns
14 Sobering Thoughts
15 Derivative Products: Where The Market’s Going
16 Brands Matter
17 Canopy Growth Corporation: Marketing Machine
19 Company History
19 Strategy
19 Balance Sheet And Capital Allocation
21 Early Returns On Canada
24 Distribution
25 Brands
27 Production And Supply Chain
27 Key Management
28 Other Considerations
28 Key Financial Metrics
28 Conclusion

29 Price Target Calculation
30 Key Risks To Price Target
33 Cronos Group: Beyond Cannabis
34 Company History—From Also-ran to Industry Leader
34 Strategy—Beyond Cannabis
35 Balance Sheet And Capital Allocation
36 Early Returns On Canada
39 Distribution
40 Brands
41 Production And Supply Chain
43 Key Management
44 The Ginkgo Deal
45 Other Considerations
46 Key Financial Metrics
46 Conclusion
47 Price Target Calculation
48 Key Risks To Price Target
50 Cannabis: The Beginning Of A Global Seismic Shift – January 17, 2019 3 Aphria Inc.: Never A Dull Moment
52 Company History
52 Strategy.
52 Balance Sheet And Capital Allocation
54 Early Returns On Canada
56 Distribution
57 Brands
58 Production And Supply Chain
59 Key Management
61 Hindenburg Research
62 Other Considerations
68 Key Financial Metrics
68 Conclusion

69 Price Target Calculation
70 Key Risks To Price Target