The Philippines in Bear Market

Not more than 24 hours ago, the Philippine stock market has broken the bear market territory. At the time of this writing [11:40 PM CST (12:40 PM Manila Time)], the PSEi has bounced up a little back to 7,068 from its low of 6,923.

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From a range of fears: higher inflation rate than expected, weaker peso vs. the USD, Fed rate hikes, BSP rate hike not enough, and foreign fund outflows just would not abate.

Everything else seems at its worst at this point of time, and this could be a wonderful opportunity to start accumulating more shares of any companies of interest as long as one has performed due diligence on it.

A quick check list this blog would like to share to any prospecting stock buyers out there are as follows:

  1. Make sure the company has good balance sheet (look at debt-equity ratio).
  2. Make sure the company’s book value has grown over time (look at years not just quarterly numbers).
  3. Make sure the debt figures are not climbing year-over-year.
  4. Make sure sales and profits are stable or better yet, increasing in recent years.
  5. And more importantly, Make sure you are not emptying your emergency funds to invest in this market.

These are the times when the market appears irrational and for the investors that are prepared to dive in, a rewarding return could be awaiting months or even years from this point of time.

..bear markets since the 1930s have an average duration of only 18 months and an average loss in value of about 40 percent… (Forbes)

A Warning Shot at the Philippine Oil Industry

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Investors should prepare for any backlash spoiled Philippine oil giants may have

Philippine Stocks involved: Petron (PCOR), Pilipinas Shell (SHLPH)

The Philippines’ Department of Energy has identified Petron, Pilipinas Shell, and Chevron as the major oil companies in the country.

As of June 2017, Petron held a market share of 28.6% of total petroleum products, Pilipinas Shell with 20.7%, and Chevron with 6.6%.

At the time of this writing, Petron has a full market value of 90.8 billion pesos, and Pilipinas Shell at 96.7 billion pesos. Talking about some overvaluation for Shell, but this could be further dissected at a separate time.

Chevron Philippines, meanwhile, is not publicly listed but operates nearly 700 Caltex service stations in the country with other business interests including its 45 percent non-operated working interest in the Malampaya gas-to-power project, according to the company’s website.

Using historical data, there was actually an asymmetric pattern response in Philippine retail gasoline price response to crude oil price changes. This was found in a study made by Jaewook Kim in 2012 whereby oil price information was gathered from 2005 to 2010.

(Link to the study: Behavior of Retail Gasoline Prices in the Philippines to Changes in Crude Oil Prices: Is it Symmetric or Asymmetric? Jaewook Kim)

Kim stated that rather than using WTI or Brent oil price in comparison, Dubai crude oil is more fitting when comparing to the Philippines retail gas price.

In a more recent period, Dubai crude price has climbed 4.1% to $55.58 a barrel since January to October 2017, but the Philippine retail gas price has risen 300% more than Dubai’s or at a rate of 12.4% to 48.85 pesos per liter in the same period.

In the United States, where latest oil & gas technologies are being applied, retail gasoline price has risen 4.4% to $2.59 per gallon.

Are these local refiners grinding more and therefore need to raise their prices this much? Or these unified price hikes are just a market manipulation managed by the big oil players in the Philippines?

To boot, the Philippines has not suffered like what Texas to Louisiana areas have to deal with the hurricanes Harvey and Maria recently this year where refineries were shut down and refined products drop afterward.

Nonetheless, one thing Filipinos should hope for and also vigilantly follow is the newly re-assembled investigative team, the Department of Energy and the Department of Justice Task Force, in determining if there are market abuses being employed by the oil companies.

If proven, painful penalties could be a result.

Disclosure: I do not have shares of any of the companies mentioned.

The Philippines Does Not Have Enough Oil Reserve

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The passionately growing country is heavily dependent on oil imports

Four days ago, Bloomberg reported that the Philippines has cemented its position as one of the fastest-expanding in the world.

According to the latest report from the Philippines’ Department of Energy, part of the executive branch where the President resides, the country has a crude oil and petroleum products inventory supply of 24.9 million oil barrels that could last the country for about 56 days, as of June 2017. This is actually 24.6% higher than the same period last year, which we could consider, an improvement?

Nonetheless, crude oil reserves in the Philippines, with a country of 103 million people, has been left unchanged at about 100 million barrels in the nearly recent decade (2006-2015), according to data and statistics website IndexMundi.

Meanwhile, Malaysia, with a population of 31 million people, has 4 billion in reserves; Thailand, made up of 69 million people, has 500 million in reserves.

This certainly means that the Philippines mostly rely on imports to help feed Filipinos’ car engines and other oil-dependent machinery.

As of June 2017, the Philippines’ Department of Energy specifically stated that 34.9% of its crude oil supply was from Saudi Arabia, 28.4% from Kuwait, and 15.6% from the United Arab Emirates. Russia also supplied another 7.8% while Qatar formed 5.6%.

Brought by this certain arrangement, the Philippines (like most other net oil importer countries) is unavoidably exposed to any wild fluctuations in oil price.

On the other hand, plenty of proven reserves does not mean automatic panacea for a country. Just look at Venezuela. Unfortunately, political upheaval and oil price crash in recent years brought its citizens to starvation and destruction.

How about those gas guzzlers?

Interestingly, car registration in the Philippines totaled 104 thousand as of 2013, according to official data gathering website Trading Economics. Malaysia had 102 thousand registered cars, and Thailand had 35 thousand as of August 2017.

Nonetheless, the Philippine President Duterte’s order of 30-day government-matter processing should help propagate the endless bureaucratic red tape that engulfs the nation.

Who knows, some big oil discovery may just pop out somewhere out of the country’s 7,000 plus islands.

 

Do PLDT and Globe Allot Enough for Service Improvement?

PLDT has cut its spending dramatically to possible detriment of its subscribers’ experience

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(Average Connection Speed, Akamai)

Stock: PLDT (PCOMP: TEL) and Globe Telecom (PCOMP: GLO)

Looking at the Akamai visualization below, the Philippines could be one of the slowest countries out there in terms of internet connection speed.

Certainly, the country far underperforms its neighbors, including Vietnam, Indonesia, and Malaysia. (LINK).

It is right to criticize both PLDT and Globe as both giants hold 84% of the Philippines’ mobile market. In addition, PLDT alone proudly held 70% market share in fixed broadband.

Financially, PLDT has allocated 184 billion Php in captal expenditures (capex)* in the past five years. Globe, meanwhile, spent nearly 140 billion Php.

*Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm (Investopedia).

These capex figures, nonetheless, are just broad figures.

Calculating these expenses as per the respective company’s total revenue and in percentages is more useful and could be compared to other big telecommunications companies overseas.

Going back, PLDT has allocated 22% of its revenue in capex on average in the past five years, while Globe’s capex represented 26%.

Comparing these figures collectively to Indonesia’s biggest telecommunications companies, Telkom, Indosat & XL Axiata, in the same time period, the Philippine phone companies spent 24% of its revenue in enhancing its telecommunications business while Indonesian companies spent 28% of theirs.

For comparison’s sake, 8,207 miles to the east—big United States telephone companies (AT&T, Verizon, and Sprint)—altogether has spent 16.2% of its revenue in capex allocations in the past half decade.

Recent six months of operations and capex allocations

Reviewing capex allocations in both Globe and PLDT’s in its recent six months operations should also be interesting since this period covers the period since President Duterte’s took his oath of office.

Globe’s capex increased 30%, while PLDT’s has actually fallen -43% year over year.

PLDT, according to its filings, actually verified this decline in expenses having stated:

…Our consolidated capital expenditures, including capitalized interest, in the first half of 2017 totaled Php5,727 million, a decrease of Php14,305 million, or 71%, as compared with Php20,032 million in the same period in 2016, primarily due to lower capital spending of Smart Group and PLDT

Globe’s capex, meanwhile, rose 30% having stated:

…Globe spent around P27.5 billion in capital expenditures as of end-June of 2017 to support the growing subscriber base and its demand for data

So if this comparison boils down to the subscriber base, PLDT has 58.7 million mobile subscribers and 1.83 million broadband subscribers as of June, while Globe has 59.7 million and 1.2 million, respectively.

There should actually be no reason for slower capital spending by PLDT with this amount of subscribers knowing that it has significant market share and services that should responsibly be provided to the Filipinos.

Sure, PLDT lost 9.6 million subscribers since the last year, but 58.7 million subscribers are still a bunch of people relying on its services. Besides, PLDT gained 220 thousand more broadband subscribers.

Why then is PLDT trimming its capex this much anyway?

Summing it all up, PLDT failed further to impress as it allocated less cash to improve its operations in recent months. On the other hand, both Philippine phone companies exhibited near at par cash allocations to its expenditures in the past half-decade but failed to provide similar positive gains (such as an increase in internet speed).

Being the chief executive of the Department of Information and Communications Technology, President Duterte (PTV Sa Totoo Lang Video: skip to 1 hour 24 mins onwards) has admitted he may bring new competition in the country to lower down rates paid by the Filipino to these incumbent, spoiled phone companies.

“I was hurrying up the competition.” Philippine President Rodrigo Roa Duterte

Disclosure: I have shares in Globe, AT&T, and Verizon.

Philippines’ Internet Speed is SHAMEFUL

Filipinos should carefully track the House Bill (HB) 5337

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Stock: PLDT (PCOMP: TEL) and Globe Telecom (PCOMP: GLO)

In addition to foreign-ownership that is in violation of the Philippine Constitution, these telecommunications companies appear to be far less caring about their internet speeds.

In the past decade, the Philippines has mostly underperformed its neighboring countries in terms of average connection speed.

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(Average Connection Speed, Akamai)

The Philippines is a complete underdog when it comes to connection speed.

Vietnam and Malaysia, both of whom have roughly 12,000 square miles more land area than the Philippines, have a far better connection speed than our country.

Sure, experts could reason out that the Philippines is made out of 7,107 to 7,500 islands, but only 2,000 or 28% of these beauties are actually inhabited.

Compare this to Indonesia’s 18,307 islands of which over 6,000 islands are inhabited representing 33%.

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(Average Connection Speed, Akamai)

Then how come Indonesia far exceeds the Philippines average connection speed by 1,752.546 kbps as of March 2017?? This is just inappreciable and now has just gotten into the nerves of certain Philippine government officials.

On October 18, the National Telecommunications Commission (NTC) backed a House Bill (HB) 5337 principally authored by Makati City Rep. Luis Campos Jr. making broadband access as a “basic service.” (BusinessMirror)

In review, the bill is formed to force telecommunications companies to provide faster internet speeds with monetary penalties not in accordance with the proposal ranges from 100,000 Php a day to 50 million Php.

The bill’s pending case should be watched closely by the Filipino republic on its whereabouts during this period where more and more Filipinos are clamoring for better internet speed.

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In addition, NTC is an attached agency of Department of Information and Communications Technology, which overall is part of the executive branch of the government—headed by no other than the chief executive of the land himself, President Rodrigo Roa Duterte.

Disclosure: I still have shares in Globe Telecommunications (ticker GLO).

Philippine Lottery Equipment Provider Has Provided Steady Growth

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Pacific Online Systems’ arrangement with PCSO entails a deep moat

Stock: Pacific Online Systems Corp (ticker LOTO)

Pacific Online Systems’ shares have been on its lowest point for the past year at 10.98 Php at the time of writing.

As gaming systems and equipment lessor provider to the Philippine Charity Sweepstakes Office (PCSO), Pacific Online Systems surely is worth a look.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

Pacific Online Systems

According to filings, Pacific Online Systems was founded in 1993. Pacific Online Systems’ has majority direct and indirect ownership in the following companies: Loto Pacific Leisure, Lucky Circle, Total Gaming Technologies, and Falcon Resources.

As of December 2016, Pacific has over 6,000 lottery terminals nationwide, and has 100% coverage of Visayas and Mindanao, while just 8% in Luzon.

In 1995, the company had an Equipment Lease Agreement (ELA) with the PCSO’s online lotto operations in the Visayas and Mindanao operations. Since then, the ELA has been amended in 2004, 2012, 2013, and 2015.

The ELA amendment in 2015 extended this agreement until 2018 along with a 5 million Php cash bond on Pacific to ensure liquidity in its operations until then.

According to its ELA, Pacific is to earn rental revenue per equipment at a fix 35,000 Php per terminal or whichever is higher, annually.

Total Gaming Technologies

Meanwhile, Pacific’s 98.92% ownership of Total Gaming Technologies, which does online keno (Lotto Express) operations nationwide for PCSO, makes it possible for Pacific to earn revenue at a fixed annual rate of 40,000 per terminal or whichever is higher, annually.

Total Gaming Technologies has an ELA agreement with PCSO that expires in 2020.

Lucky Circle

Pacific owns 97.64% of Lucky Circle. Lucky Circle is an authorized PCSO agent operating online betting stations that sell sweepstakes, lotto, keno and instant tickets in outlets located in major shopping malls like SM Supermall, Robinsons, and Gaisano nationwide. Lucky owns a certain percentage of the sales as commission income.

Falcon Resources

Interestingly, Falcon is 100% owned by Total Gaming Technologies. Falcon is engaged in consultancy services for Total Gaming Technologies and a sub-distributor of instant scratch tickets

Ownership

50.1% of Pacific is owned by Premium Leisure Corporation (ticker PLC) and 8% owned by the company’s chairman, president, and director since July 1999, the 56-year-old Willy Ocier.

Premium Leisure defined itself as an investment holding company that participates in gaming-related businesses in the Philippines. Willy, on the other hand, is engaged in different chairman and chief executive positions in other companies such as Belle Corporation (ticker BEL), Premium Leisure, Tagaytay Midlands Golf Club, Philippine Global Communications, among others.

Operations

Pacific has two segments: Leasing activities and Distribution and retail activities.

Leasing activities

In the first half that ended in June, revenue for Pacific’s leasing activities rose 18.9% year over year to 893 million Php or 85% of total revenue. The leasing business generated 35% income before tax margin compared to 32% a year earlier.

Distribution and retail activities

Revenue in the distribution and retail business grew 13.9% to 158.8 million Php (15% of revenue) and generated 35% in income before tax margin compared to 42% a year earlier.

First-half operations summary

In its latest six months operations, Pacific’s overall revenue increased by 12% compared to its year-ago period to 511.8 million Php. In contrast, profits fell by 18% to 109.1 million Php brought by higher costs and expenses.

Sales and profits

In the past three years, Pacific generated 4% revenue growth on average, 7% profit growth, and had a profit margin average of 20.75% (Morningstar).

Valuations

Pacific trades at some discount in terms of earnings multiple having a 10.84 times price-earnings ratio vs. sector figure of 12.37 times, and a price-sales ratio of 2.35 times vs. 13.6 times. The company also has a trailing dividend yield of 2.73%.

Total returns

The company has provided a meager 3.02% total returns so far this year compared to the iShares MSCI Philippines ETF (ticker EPHE) 15.45% (Morningstar).

I consider EPHE as a barometer of the overall Philippine Stock Market’s performance.

Cash, debt and book value (equity)

As of June, Pacific had 272 million Php in cash and cash equivalents, and 101.75 million Php in lease obligations with a leverage ratio of 0.05 compared to 0.04 a year earlier.

Overall obligations increased by 17.5 million Php while equity declined by 85.9 million Php year over year to 1.94 billion Php.

Cash flow

In the recent six months of operations, Pacific’s cash flow nearly doubled to 405 million Php brought by higher income before tax, and cash flow from retirement cost, unrealized foreign exchange activities, trade and other current liabilities among others.

Capital expenditures were 40 million Php leaving Pacific with 364 million in free cash flow compared to 203 million Php a year earlier.

In addition, Pacific’s dividend payouts in the period represented 70.6% of its free cash flow.

The cash flow summary

In the past three years, Pacific allocated 508 million Php in capital expenditures, raised 289 million Php in stock issuances, generated 641 million Php in free cash flow, and paid out 747 million Php in dividends and share repurchases at an average free cash flow payout ratio of 124%.

Conclusion

Looking at Pacific’s recent business operations that ended in June, the company surely has maintained healthy growth in its operations only hampered by increased in overall expenses resulting in lower profitability.

The company’s restricted entry in Luzon, which has generated about 63% of PCSO lotto sales nationwide, also is a weak spot or an opportunity for the company to pursue more business in the future.

Nonetheless, Pacific demonstrated healthy organic business growth as it discussed higher lottery sales resulting from higher jackpot prizes and additional draw for Lotto, increased Keno terminal rollouts and higher instant ticket sales resulting from increased public awareness—all as part of its recent performance.

Using historical price-sales average, 15% margin, with shares outstanding growing at the same rate as in 2016, would leave a price per share of 10.41 Php compared to 10.98 at the time of writing.

Watching from the sidelines and observing Pacific’s share to drop could be a long patient wait, but at the current price of 10.98 Php, Pacific is a hold.

Disclosure: I do not have shares of any of the companies mentioned.

Try to Stop Losing Your Hard-Earned Money in Savings Accounts (Philippine-version)

Being too conservative with your money will make you actually lose some of it

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In assumption, a simple man or an ordinary working Filipino would typically get his hard-earned money in a payroll savings account. From the payroll account, one could decide on how to use this purchasing power, the Philippine peso(s).

The money-losing strategy starts if one chooses to keep his money altogether in the payroll savings account and assume it will just naturally grow and serve as a good retirement money cushion someday.

The deposit interest rate in the Philippines has remained unchanged since 2015 at 1.59%. Sure, at this rate, the money kept would double at the 45th year anniversary through the power of compounding.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Albert Einstein

Importantly, a solid compound interest result could be achieved in any savings account (payroll and the like) if it has been kept active to avoid unnecessary servicing fees, and that no reduction has taken place from the initial money saved in it.

Why is it a money-losing strategy? Inflation.

The problem lies in the inflation. This is where the money kept in the savings account eventually loses its buying power.

Inflation is the rate at which the general level of prices for goods and services is rising. In the past decade, the Philippines had an annual average inflation rate of 4.1%.

An example, a 10 pesos pandesal bread ten years ago would now cost somewhere between 14 and 15 pesos, or even more in the same panaderia.

Meanwhile, the average deposit interest in the past decade has been at 2.7%.

The same 10 pesos ‘saved’ and held in the savings account in the same ten-year period would now be 13 pesos.

An individual wanting to buy the same old pandesal would have to actually pitch in two more pesos to buy the same bread. As a result, this individual lost 2 pesos over the long-term.

Meanwhile, the Philippines largest bank in terms of assets, the Sy-led Banco de Oro, provides a paltry 0.25% interest rate per annum, and Ayala-led Bank of the Philippine Islands provides the same interest rate in its savings accounts.

Where to safely put the money?

Brought by the recent tax reform plan, more Filipinos would be able to retain more of their hard earned money rather than remitting it back to the government in form of taxes.

This would eventually trickle down to better spending power, and hopefully, investment capabilities.

There is no silver bullet or cure-all in where to put the money and generate far better than the almighty inflation rate.

But the safest would be the Philippine Government Treasury. Treasuries are debt obligations of a national government. These investment instruments barely go bankrupt, unless of course, an entire country goes down economically, and credibility to pay debt has gone out of the window.

There are several different government treasuries fulfilling an individual investor’s needs: Treasury Bills, Treasury Notes, and Treasury Bonds. Treasury Bills usually matures in a year, Notes every ten years, and bonds ten or more years.

Why the different maturities? What does maturity mean?

An individual has certain needs. If he anticipates that he would not need his money and could set it aside for a year, investing in a Treasury Bill may be of best decision. If money would not be foreseen needed in the next ten years or so, a bond or note would be preferable.

The government would return all the capital and interest rate upon maturity. Further, most, if not, all banks offer these treasuries. Since these are government-backed investments, initial investment could be as low as 5,000 Php to as high as 50,000 Php.

No worries, these are GUARANTEED investments.

What are the current Treasury Government Interest Rates?

At the time of this writing, two-year Philippine Government Bond yields (or has an interest rate) at 3.553%. Five-year Treasury bond has a yield of 4.6%, and ten-year Treasury bond yields 4.64%.

An example, a 10 pesos invested at 4.64% Philippine Government 10-Year Bond would become 15 pesos by its maturity.

Should inflation hover around 3 to 4% (as could be conservatively forecasted), a treasury investment yielding more than 4% would be a prudent choice.

If you really intend to create your retirement nest egg, and would not want it to be touched until years from now, investing in government treasuries would surely be smart.

Other options

An individual who seeks higher returns who has a great money-making idea should probably start his own business.

And for those who would rather make money passively and other people work for them should find undervalued companies in the public stock market, figure if it has sound operations and shareholder-friendly management, buy its shares, and hold it for a long-term (years).

These options definitely are riskier but could be more fruitful in return.

Seeking undervalued companies would be a little more of a daunting task, and may serve as another blog in the future.

In addition, only in recent memory that the Philippine stock market has been under a firebrand leader, President Rodrigo Duterte, and outperformed a similar strong leader in the United States.

Successful calls

A couple of good success calls I can reflect on as of this time were Integrated Micro-Electronics (ticker IMI) and Panasonic Manufacturing Philippines Corp. (ticker: PMPC).

IMI was at 5.64 Php when I wrote about it back in July 14, 2016, and now trades at 19.6 Php, illustrating a bountiful 247.5% share price appreciation.

PMPC, meanwhile, was at 6.65 Php in March 9, 2017, and now trades at 13 Php therefore indicating a 97% share price increase.

How to buy/sell stocks in the Philippines?

COL Financial is the broker I use for buying and selling stock in the Philippines. Here is a 12-minute video tutorial by the brokerage.

“My wealth has come from a combination of living in America, some lucky genes, and compound interest”.

Warren E. Buffett

Net worth as of 9/21/2017: $78.8 billion 

Disclosure: I still own IMI and PMPC shares. PMPC was pitched to me by a good fellow investor, Mr. A.T.

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