Sunday, April 03, 2016

Phisix 7,250: SM Investments Posted NEGATIVE Growth in Real Estate Sales in 2015! Peso-Asian Currencies Fly on Yellen Dovishness

For their part, the central bankers keep all the trappings of capitalism, talking the talk and making the right sorts of gestures and references. They talk “libertarian” as Friedman and then act socialism as Keynes. No matter how little circumstances change, they never do. And that is the ultimate problem; central banks have hijacked capitalism in order to maintain their own authority, using the idea of free markets in order to undercut the very ideas of freedom and free markets. We know this because their only answer to every single problem is the same – them.—Jeffrey P Snider

In this issue:
Phisix 7,250: SM Investments Posted NEGATIVE Growth in Real Estate Sales in 2015! Peso-Asian Currencies Fly on Yellen Dovishness
-Yellen Dovishness Spurs Manic Buying on the Peso and Asian Currencies
-SM Investment’s EPS Growth: Not Just ZERO in 2015, But a Collapse During the Past Two Years!
-SM’s Real Estate Sales Crashed in 4Q 2015!
-SM’s Business Model as Epitome of Malinvestments
-Filinvest Land: Like SM, Gross Revenues and EPS Growth Rates Tumbled in 2015
-Philippine High End Property Prices Deflates (Q-Q)/Decelerates (Y-Y) in 4Q 2015 as Systemic Leverage Balloons!
-CEBU Pacific EPS Marvel: Crash in Jet Fuel Prices More Than Offsets Faltering Topline, Foreign Denominated Debt
-Has the BSP Implemented an Undisclosed Stimulus via the Yield Curve?
Phisix 7,250: SM Investments Posted NEGATIVE Growth in Real Estate Sales in 2015! Peso-Asian Currencies Fly on Yellen Dovishness
Yellen Dovishness Spurs Manic Buying on the Peso and Asian Currencies
The story of the week belongs not to Philippine stocks but to the Philippine peso. Based on official USD php rates went down by .83% to 46.015.

But this has been more than about the peso but about the USD. That’s because the peso simply resonated on how the region’s currencies performed against the USD.
For the week, the biggest USD Asian losers (or winners) were Malaysia’s ringgit 3.63%, Singapore dollar 1.52%, Taiwan and South Korean dollar at 1.29% a piece. On a year to date basis, the USD-Asian biggest losers (winners) has been the Malaysian ringgit 9.38%, Indonesian rupiah 4.5% and the Singapore dollar 4.14%. The biggest winners were ASEAN currencies, aside from the ringgit and rupiah, the USD-thb (Thai baht) 2.4% and the peso 1.88%.
This week’s massive move by the region’s currency was incited by Fed Chair Janet Yellen speech at the Economic Club of New York1 where she reinforced on what seems as the implicit Shanghai Accord by taking on an ultra-dovish stance:

“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy. This caution is especially warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric”

Ms Yellen justified this by citing several risks, namely:
-China: “One concern pertains to the pace of global growth, which is importantly influenced by developments in China. There is a consensus that China's economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth. There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it. These uncertainties were heightened by market confusion earlier this year over China's exchange rate policy.”

-Oil prices: “A second concern relates to the prospects for commodity prices, particularly oil. For the United States, low oil prices, on net, likely will boost spending and economic activity over the next few years because we are still a major oil importer. But the apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms. In the case of countries reliant on oil exports, the result might be a sharp cutback in government spending; for energy-related firms, it could entail significant financial strains and increased layoffs. In the event oil prices were to fall again, either development could have adverse spillover effects to the rest of the global economy.”
-Inflation outlook: “The inflation outlook has also become somewhat more uncertain since the turn of the year, in part for reasons related to risks to the outlook for economic growth. To the extent that recent financial market turbulence signals an increased chance of a further slowing of growth abroad, oil prices could resume falling, and the dollar could start rising again.”
-and Market volatility: “The proviso that policy will evolve as needed is especially pertinent today in light of global economic and financial developments since December, which at times have included significant changes in oil prices, interest rates, and stock values.”


The general idea is that a strong USD would mean tightening global monetary conditions whereas a weak dollar translates to the opposite: accommodative monetary conditions.

“Tightening” extrapolates to financial market Risk OFF, or as example, January’s crash. On the other hand, “accommodation” or “easing” means Risk ON or providing fuel to combust on speculative leverage trades.

So by jawboning down the USD, this simply meant that Ms Yellen, along with her Shanghai Accord peers, have virtually been shoring up price levels of risk assets to prevent its bursting or collapse. Central banks objectives has implicitly shifted from “maximum employment, stable prices, and moderate long-term interest rates” towards nurturing and sustaining bubbles. As analyst Doug Noland aptly pointed out, “the overarching central bank “financial stability” mandate has morphed into ensuring Bubbles don’t burst”2.
Ms Yellen and her contemporaries seem to think that balance sheets don’t matter and that zero bound or negative interest rates would be enough stimulus to provide support to the financial assets in the hope of a “trickle down” to the real economy—a hope that hasn’t been realized since 2009. Why do you think anti-establishments candidates Donald Trump and Bernie Sanders have been rocking the boat in US politics? Or the rise of right wing politics in Europe?
Nonetheless, “accommodation” or “easing” postulated to the return of leveraged carry trades and massive speculations that has exacerbated short covering and panic buying on Asian currencies.

So the runup in both stocks and currencies from January lows has been from central banks panicking over the risk of bubbles bursting hence the coordinated moves to provide support on risk assets via “accommodation” or “easing”.
This applies to the Philippines as well, so the runup in the peso and the Phisix has been a product of speculative excess from “accommodation” or “easing” rather than from normal course of business.

As noted below, it would be an irony to see record highs amidst severe deterioration in earnings growth particularly for the largest listed Philippine firm SM investments.
For the week, the Phsix was down by 1.56% due to three sessions of last minute marking the closes.

So far, the overbought Phisix has been supported by the rally in the peso (faltering USD).
The $64 trillion question is: How long can central banks keep stimulus gambling addicts satisfied?
SM Investment’s EPS Growth: Not Just ZERO in 2015, But a Collapse During the Past Two Years!
Remember I wrote about SM’s ZERO income growth for 2015 a month back? Well, it has been made official.

The largest publicly listed firm, SM Investments released its 2015 annual report this week. And the report essentially confirms on the ZERO income growth for 2015.
Technically it was not zero. 2015 earnings per share (EPS) was at Php 35.68 which was fractionally (.06% or 6/10,000) higher than the Php 35.66 in 2014. But it is allegorically ZERO.
But it is not the ZERO that is important, rather, SM’s eps growth rate has been in a decline for THREE straight years, where earnings growth has plunged from high rates of 15.28% in 2012 and 9.73% in 2013 to just 2.32% in 2014 and .06% in 2015! In short, what matters is the COLLAPSE in EPS growth!
Look at the blue trendline in the chart above: eps growth rate has not only been downhill growth rate since 2012, it has been zero bound in the last two years! They look like interest rates of central banks: from ZIRP to NIRP
Yet despite the headline blitz to promote G-R-O-W-T-H, SM’s reported earnings trend represents a stunning erosion of financial performance! And three years of downtrend hardly signifies an anomaly!

Recall that at the outset of 2015, the public was made to believe that earnings growth for the entire PSE listed universe would be in the mid-teens. And such has been the basis for the frantic and emboldened pumping of equity prices to send the PSEi to record highs in April 2015.
Well, it turned out that mainstream expectations had totally been wrongheaded or out of bounds. Given SM’s dismal showing coupled with the former biggest market cap, PLDT’s huge financial deterioration in 2015, combined with the dismal second and third quarter performance of the overall PSE listed firms, which were censored by the PSE, 2015 should signify as a G-R-O-W-T-H fiasco!!!
But in spite of Big FAT ZERO G-R-O-W-T-H for 2015, SM share prices have incredibly skyrocketed to carve new highs a week back! (see bottom chart)
To repeat: under present conditions, SM’s declining eps trend and the 2015 ZERO growth EQUATES to record high share prices! Earnings, divergent from stock prices, have been the case since 2014. But such brazen disparities have even become more pronounced today!

This only shows that Philippine stocks—have not been about fundamentals, where divergence in valuations and prices have represented an incredible showcase of detachment from reality or egregious misperceptions—but about frenzied speculations!
Nonetheless aside from sustained deliberate pumps to desperately prop up a Potemkin headline index as seen in three instances last week, the public remains spellbound to the consensus incantations of G-R-O-W-T-H.
But sad to say that SM’s G-R-O-W-T-H model seems to have already been fractured.

SM’s ZERO G-R-O-W-T-H has mainly been a function of cascading or decaying topline performance.

SM’s merchandise sales or retail segment grew by only 7.25% in 2015, down from 8.96% in 2014 and 13.84% in 2013 (top window red trendline).

SM’s rental revenues or shopping malls slowed to 10.32% in 2015 from 16.74% in 2014 and 13.09% in 2013. (green trendline)
Worst, SM’s real estate sales was N-E-G-A-T-I-V-E .44% in 2015! To reiterate NEGATIVE! (see lower window)
2015 was the second time in FIVE years for SM’s real estate to post a NEGATIVE sales growth!

In looking from the past, it would seem an irony to see how the public had been hypnotized by the repeated screaming of G-R-O-W-T-H!
For instance, in their 2014 annual performance announcement, SM hinted that real estate sales in 2015 would be vigorous largely due to reservation sales3: “SM Prime’s housing group recorded a 7% increase in real estate sales in 2014 to PHP22.2 billion, with reservation sales increasing 36.5% to PHP35.9 billion”

Curiously, whatever happened to the boom in reservation sales? Why the negative sales in 2015? Has a significant majority of buyers pulled out from long term commitments? Why?
But it appears that the public has either so short a memory or simply dismiss anything negative as irrelevant or politically INCORRECT.
SM’s Real Estate Sales Crashed in 4Q 2015!

SM real estate sales was up by a measly 3.22% through 9 months based on the Quarterly 17-Q Report for the third period, so I was intrigued as to why the NEGATIVE growth for the year
After deducting the yearend from 9 month numbers, it turned out that SM’s real estate sales crashed by a staggering 9.92%!!!
Why the plunge? Because of too much supply? Because of a slowdown in demand? Or because of a combination of both?
Remember the orchestrated two week media hype on Philippine real estate in late October 2015? SM’s real estate performance seem to confirm my suspicions.
Of course, to see headline numbers degenerate in the face of a massive buildup in capacity is by itself stunning in momentousness.
Here is how SM expanded in 2015.
The “SM store” added 20,932 sqm in 2015 to bring a total of 471,700 sqm of net selling area to its 53 stores. SM department store basically expanded by 4.64%
The number of SM supermarkets expanded to 45 with the inclusion of 5 stores in 2015. That translates to 15.4% increase in supermarket sales potential
24 Savemore branches were opened in 2015. Such added to the overall Savemore branches to 136 at the close of 2015. This would posit to about 21.43% of additional store capacity.
Two hypermarts were opened to add to the 44 at the close of the year. This translates to 4.76% hypermart store inventories.
In short, two 5%s, a 21% and a 15% of additional different variety of stores only brought about retail sales growth of 7.25% in 2015! Just exactly where was the substance of the contributions of the new stores? Importantly just what happened to same store sales?

For shopping malls, 5 SM malls were added to its basket of malls which at the end of the year totaled 56. That’s 14.3% of additional malls. In terms of floor area, the 5 malls accounted for 775,441 square meters of gross floor area (gfa) which at the yearend expanded total gfa of SM Malls to 7.3 million sq. m. So a total of 11.9% of gfa expansion for SM’s Malls

As for real estate, SM barely cited the additional inventories to their existing 27 residential projects (25 in Metro Manila and 2 in Tagaytay) in 2015. Although in the early 2015 investor presentation by subsidiary SMPH, the firm’s proposed real estate expansion had been at the range of 12,000-15,000 units which should add to their existing 79,741 units. At 12,000 that’s at least about 15% supply expansion
SM has also docketed two commercial properties in 2015 which upped their commercial inventory projects to 5. That’s a 66% surge in commercial inventory.
Hotels, convention centers and trade halls are also part of the SM’s consumer based business models. Nonetheless, the annual report didn’t expound much of the details of 2015 supply activities except to cite on the overview 1,167 saleable rooms for 5 hotels, 4 convention centers and two trade halls with total leasable space of 35,263 sqm

All these grandiose expansions generated only rental income growth of 10.32% and 7.32% in retail sales in 2015????!!!! Worst, a NEGATIVE -.44% growth for real estate sales???!!!
I presented the actual part of SM’s income statement above because the real estate segment varies from what has been declared by its subsidiary SMPH during their latest investor presentation.
Yet these three segments comprise the core of SM’s revenues: retail 73%, property 23% and banks 4%.
SM’s Business Model as Epitome of Malinvestments
Let us examine SM’s shopping mall business model.
While 2015 rental revenue growth rate (10.32%) seems to reflect on the proportionality of supply expansion (11.9% gfa), what this suggest is that SM Malls have been sorely remiss in the maximization of selling space in order to generate optimum income (as seen through ratio to selling space).

Moreover, this suggest of the inefficient use of mall spaces or low income rates per selling space (g.f.a) or just too much or growing idleness (read my lips: vacancies).

Additionally, if all of SM’s growth rates of rental revenues are attributable to additional supplies, then how about same store sales performance? Instead of augmenting sales growth, has their new malls been cannibalizing sales of existing malls?

Now even if we split the rental revenue growth rates as ascribable to both same store sales and sales from new stores, then what the current growth rate implies has been that retail space demand has significantly been LESS than the barrage of existing and new supplies!
Haven’t all these been symptoms of diminishing returns of additional supplies or the germination of excess capacity?

And this applies not only to SM Malls but to her retail and real estate segments. Yet as noted above real estate sales have already shown NEGATIVE performance in 2015. And this should underscore on the surplus capacity or supply outgrowth!
And what more of the supply contributions from competitors?

Yet SM proposes to keep up with the race to build supply even in the face of growing signs of inefficient use of existing inventories or of excess capacity.

SM officials seem to prioritize on the goal of acquiring the most market share relative to competitors. They seem to believe that the growth trajectory of domestic demand operates in a straight line. They appear to also discern that domestic demand are largely unaffected by capacity conditions. Or that they see additional inventories from them or from competitors as having little or no bearing on profits or even on future demand.

They seem to believe in the idea that “if you build, they will come” or a crude interpretation of Say’s law
But demand doesn’t appear from nowhere or like manna from heaven, as the consensus experts preach or as SM officials seem to espouse.

Demand is a function of mainly income and secondarily savings and credit which translates to individual balance sheet conditions. Demand is also influenced by ever changing individual’s subjective preferences, competition and innovation.

Yet what enabled SM’s gambit have been the continued access to cheap money and the transfer of resources and risk from the public to them (via bond offerings, IPOs, mergers and acquisition using SM and SM affiliated shares).

Of course, what has facilitated such invisible redistribution scheme has been the BSP’s cheap money (negative real rates or trickle down) policies. One might add the FED’s influence to this.
Yet SM officials appear to be so overconfident to expect the continuity, if not perpetuity, of BSP subsidies. Importantly like the consensus, they fail to appreciate that excess capacity adversely affects demand too.
Once excess capacity materializes into financial losses, this would have widespread chain effects that would ripple across the industry first, and subsequently, percolate into the economy.

The transmission mechanism will occur next through investments, which should grind to a screeching halt. And this will reverberate through many other economic and financial channels such as weak demand and spillover financial losses to suppliers (as well as ancillary firms) and to creditors, deterioration in job conditions, increased business uncertainties, balance sheets pressures, eventually the worsening of credit conditions, market volatility among many other possible chain effects.

This may even have social impact such as to raise political risks (see US and Europe’s politics as noted above)
With the flagrant misreading of how economic forces operate which has been the foundation of their current and future actions (expansions), just how can SM’s long projected G-R-O-W-T-H emerge?
And as for “the build and they will come model”, China’s new sunshine industry: build and demolish is proof of its unviability.

SM is the epitome of the much ballyhooed Philippine economic growth paragon based on consumption. And SM’s business model has essentially been mimicked by her competitors or the industry.
Nevertheless, SM’s business model is a lucid example of the formation of malinvestments.

And we are not even talking about how such fantastic misallocation of resources had been financed (mostly through debt).
As final thought, there is one more insight that can be derived from SM’s 2015 financial performance: the Philippine government says 2015’s RGDP was 5.8%. Really?

Filinvest Land: Like SM, Gross Revenues and EPS Growth Rates Tumbled in 2015
SM’s predicament has NOT been isolated. In fact, I have been pointing out here that decaying topline performance, soaring debt levels, cashless profits or profits through receivables expansion and symptoms of excess capacity has emerged in balance sheets of major listed companies as Ayala Corp, PLDT, Robinsons Land and Vista Land.

In short, the above strains has evolved to become a systemic problem rather than just based on a few firms or industry.
Add to this list Filinvest Land.
From their latest Press Release4:
Filinvest Land, Inc. (FLI), one of the country’s largest residential developers and BPO office providers, recorded an 11% rise in consolidated net income of Php 5.10 Billion for the full year 2015 from P4.61 Billion in 2014.

Consolidated revenues rose 7% to Php18.30 Billion from Php17.06 Billion in 2014. The company attributes this increase to the continued strong demand for its BPO office space as well as the growth in revenues recognized from its residential sales business. The company’s profit increase was also driven by its ability to manage costs. Costs of real estate sales and rental services increased by a mere 5%. General, administrative, selling and marketing expenses meanwhile declined by 5%

Revenues from rental assets increased to Php2.95 Billion, a 12% increase from the Php2.63 Billion generated in 2014, as the firm booked increased revenues from its office buildings.
Apparently, FLI appears to have not only assimilated on SM’s business model but likewise appears to have duplicated on SM’s public relations casuistry of applying magical tricks in their announcement of 2015 financial results.

While FLI did announce their consolidated revenues and income, aside from revenues from rental assets, palpably missing in their statement has been the contribution of revenues from its real estate business, which paradoxically accounted for 77% of their 2015 total revenues. Why? Because real estate revenue growth for 2015 was only 6.41% year on year?
Based on their annual report, consolidated net income grew by 10.53% (11%) but this has been way below the 18.75% in 2014, 14.29% in 2013 and 16.67% in 2012. Seen differently, 2015 income growth rate was down by 43.84% relative to 2014, by 26.13% and by 36.83% compared to 2013 and 2012 respectively.
As consolation, at least it remains as G-R-O-W-T-H! And anything positive is what the public wants to hear. For the politically correct crowd, form matters more than substance.
And if one reckons on consolidated revenue growth rate, or what I would call as FLI’s NGDP, 2015’s 7.31% has been shockingly dwarfed by 2014’s 22.08%, 2013’s 17.23% and 2012’s 21.8%. So FLI’s NGDP transitioned from high double digits to mid single digits. I would call this a collapse in NGDP!
Again as consolation, but at least it remains G-R-O-W-T-H!

Seen from the overall picture FLI’s NGDP, EPS, real estate sales and rental revenues have all materially deteriorated in 2015.
FLI concentrates or specializes on middle income housing which accounts for 79.02% of its real estate portfolio.
My perspective has always been about follow the money trail.

For FLI, as topline performance sag, apparently receivables growth remains at high double digits. However, real estate inventory growth has bounced back from a drought in 2014.
Nevertheless slowing topline, which means lesser cash intake plus uncollected sales due to installment payments (via receivables expansion) compounded by capex (or the sustained race to build supply) means dearth of financing.

So, FLI’s recourse has been to absorb even more debt (total payable up 18.34% in 2015 relative to +11.75% 2014 and +40.9% 2013) which means the company has been substantially increasing its reliance on balance sheet leverage (right window).
Philippine High End Property Prices Deflates (Q-Q)/Decelerates (Y-Y) in 4Q 2015 as Systemic Leverage Balloons!
And FLI, SM, VLL and RLC could be just a representative of the whole.
It is truly interesting to note that compared to key emerging markets, Philippine corporations appear to have the most leverage (total liabilities/total assets) based on the IMF data as of 20145. (see left)

What more today where tumbling sales and increasing cash flow deficiency means more debt acquisition?

Of course, the above represents an apples to orange comparison because the sources of debt differs from country to country. Nevertheless, it is a sign of growing vulnerability of the domestic corporate sector.

And another titillating factor has been that despite the conspicuous slowdown in real estate activities as seen through the income statement performance of KEY listed property issues, real estate prices, particularly in Makati CBD, continue to soar (right) …well at least for most of 2015. So 2015 can be characterized by panic buying of Makati CBD properties in the midst of developing slack in the volume in the context of the industry.

However, Q4 2015 reported a sharp downturn in growth rates based on Global Property Guide6: The average price of 3-bedroom condominium units in Makati CBD rose by 2.96% in 2015, down from increases of 4.29% in 2014, 9.86% in 2013, and 4.87% in 2012. Housing prices dropped 0.84% q-o-q during Q4 2015.
Could this be ominous of further declines ahead? Or will momentum accelerate or intensify?


Global Property Guide sees Asian housing markets as “losing steam” with significant downturns seen in Taiwan, Singapore and Indonesia in 2015.

Well they might like to add Hong Kong’s 70% crash in housing sales in February, and Singapore’s .7% housing price decline in Q1 2016 which has been down by 9% from the peak. Moodys even downgraded the credit ratings of Singapore’s big three banks last week. This hasn’t been a surprise considering that even Singapore’s central bank, the Monetary Authority of Singapore (MAS) previously fretted over the nation’s domestic credit bubble.
The takeaway, slowing topline in the face of growing leverage and swelling capacity means the amplification of risks. This is regardless of what central banks may do or has done. Additionally, decoupling especially for Asia, is a mirage.
CEBU Pacific EPS Marvel: Crash in Jet Fuel Prices More Than Offsets Faltering Topline, Foreign Denominated Debt
Again declining topline performance, soaring debt levels, and symptoms of excess capacity can be seen even in the airline industry.
Additionally, remember the mantra low oil prices equal consumption growth? Cebu Pacific’s (CEB) annual performance debunks all such gibberish.
Last week, media yelled in exaltation and babbled over CEB’s 413% jump in eps growth. The general idea was that the profit surge was about G-R-O-W-T-H!
Yet in contrast to mainstream blubbering, despite fabulous bottom line, CEB’s topline had a starkly different message from the bottom line.
CEB’s outstanding bottom line came with topline growth rate at only 8.66%. Such unimpressive growth rate was significantly down by 68% from 2014’s 26.82%, but was slightly up by 5.8% compared to 2013 and considerably down by 25.98% and 48.02% from 2012’s 11.7% and 2011’s 16.6%, respectively. (upper window)
In other words, the CEB’s 2015 topline accounted for the second weakest in the last 5 years.
But how was CEB able pull a huge payout in 2015? The simple answer: The collapse in Jet fuel prices pulled down flying expenses by 20.02% to more than offset foreign exchange losses and vastly reduced consolidated revenues.
As the company explained7:

Flying operations expenses decreased by P5.236 billion or 20.0% to P20.916 billion for the year ended December 31, 2015 from P26.152 billion incurred in the same period last year. This is primarily attributable to the 23.9% decline in aviation fuel expenses to P17.659 billion for the year ended December 31, 2015 from P23.210 billion for the same period last year consequent to the significant drop in jet fuel prices as referenced by the reduction in the average published fuel MOPS price of U.S. $64.79 per barrel in the twelve months ended December 31, 2015 from U.S. $112.48 per barrel in the same period last year. The drop in fuel prices, however, was partially offset by the weakening of the Philippine peso against the U.S. dollar as referenced by the depreciation of the Philippine peso to an average of P45.51 per U.S. dollar for the year ended December 31, 2015 from an average of P44.40 per U.S. dollar last year based on the Philippine Dealing and Exchange Corporation (PDEx) weighted average rates.
Aviation fuel accounted for 84.4% of Flying expenses and 37.7% of total expenses. Based on indexmundi’s quote, U.S. Gulf Coast Kerosene-Type Jet Fuel Spot Price FOB, US$ per gallon crashed by 40% from end December 2014 to end December 2015.
So in 2015, CEB was a major beneficiary from the invisible transfer from the collapse energy prices.
But how much of the decline in fuel prices was passed over to consumers?
Well this was the divergent message between the topline and bottom line. The answer was close to ZERO!
CEB noted that the average fare was down by 2.5% to P2,323 in 2015 from P2,382 for the same period last year.
However, CEB added a lot of capacity in 2015: “Number of flights went up by 7.6% year on year as the Group added more aircraft to its fleet, particularly, its acquisition of wide-body Airbus A330 aircraft with a configuration of more than 400 all-economy class seats. The number of aircraft increased from 52 aircraft as of December 31, 2014 to 55 aircraft as of December 31, 2015.”

So flights increased by 7.6% as plane inventory grew by 5.8%
Perhaps investments on capacity prevented the company from further lowering of passenger fares.
CEB noted that passenger traffic increased by 8.9% but passenger revenues only added 6.2% over the year.
Heck, passenger revenue growth rate of only 6.2% in 2015 (upper window green line) signifies a collapse from 2014’s 26.93%! And such was significantly down from 2013’s 7.04% and from 2012’s 8.71%. Passenger sales accounted for 76% of overall revenues.
In short, 2015 accounted for the weakest passenger sales for CEB during the past FOUR years! It was either consumers stayed away from travel or they traveled via CEB’s competitors!
Cargo rate growth had a better performance with 2015’s 10.01% which was half from 2014’s 20.57% but marginally higher than 2013’s 9.6% and 2012’s 8.56%. Cargo accounted for 6.12% of total revenues
On the other hand, what buoyed the top line had been the booming Auxiliary revenues: 2015’s 19.55% wasd down from 2014’s 28.73%, but up from 2013’s 13.25% and down from 2012’s 31.11%.

Auxiliary revenues consisted of excess baggage (up 20.4% in 2015 and accounted for 47% share), rebooking (up 14.33% and had 32% share) and others (inflight sales, advance seat selections, reservation booking fees and etc… up 26.8% and had a 19% share). Auxiliary revenues accounted for 18.33% of the entire sales for 2015
Basically, CEB’s topline growth (8.66%) only reflected on its additional capacity (7.6% more flights and 6% more planes) with considerable contribution from mostly auxiliary spending of CEB passengers.
So the collapse in oil prices, which allowed CEB to slash ticket prices by 2.5%, produced even LESS passenger revenue growth of 6.2% (compared to previous years). So low oil prices has NOT been equal to consumer spending growth! NOT according to CEB’s annual financial performance.
And given the additional planes and flights in 2015, occupancy rates must have been significantly lower than the previous years. Yes more signs of excess capacity!

As said above, this has NOW become a SYSTEMIC issue.
Nonetheless, even with the windfall from oil prices, CEB’s overall debt continues to ascend, except that rate of growth has tempered down to 2015’s 8.09% from 2014’s 15.11% and from 2013’s 28.28%. This simply means that the bonus from oil crash must have allayed the firm’s cash flow pressures

CEB officials must be very grateful to (OPEC and Non OPEC) national oil producers for not only saving the day, but also providing them with a bonanza, despite the significant headwinds.
But CEB’s 2015 remarkable eps performance, as shown above, has not been about G-R-O-W-T-H!
Has the BSP Implemented an Undisclosed Stimulus via the Yield Curve?
The Bangko Sentral ng Pilipinas reported last week that the banking system’s credit uptake has begun to accelerate upwards. Bank credit expansion had been up by more than 15% during the last two months, specifically 17.4% in February and 15.98% in January. (upper window)
The significant uptick in credit expansion has been accompanied by a resurgence of domestic liquidity (M3) which has now reached double digits specifically 11.8% and 11.5% over the same period.
Of course, changes in the loan portfolio of the banking sector have not been same. For instance, while loans to the mining sector has swelled by 43.28% and 47.28% over the first two months of the year, bank loans to this sector is a smidgen in terms of the share (.71%) to the banking loan portfolio pie.
Among the biggest borrowers by industry, the banking system’s loan portfolio has been significantly boosted by trade (16.23% Feb, 13.65% January), Real Estate (25.45%, 23.36%) and energy (36.42%, 35.75%).

Despite the run in the Phisix, loans to the financial sector (6.33%, 5.25%) underperformed. On the other hand, construction loans have been tilting lower (27.24%, 27.89%) as with a palpable plateauing of consumer loans (15.73%, 16.31%).

Unfortunately, loans to the manufacturing sector remain in doldrums (5.67%, 5.49%). The latter suggests that there has been NO big recovery in manufacturing contra the government survey.
Two factors from the current trend: First, paucity in cash flows has led to more borrowings, or second, the race to build on the supply side has been rekindled. The latter comes even as consumers seem to have second thoughts on increasing their borrowing and spending, and, even as excess capacity has become more evident.
The interesting portion has been that the accelerating credit boom have now been reflected on domestic liquidity, which if sustained, should eventually get ventilated through price channel, in particular, consumer price inflation. While this should be bullish for stocks and for statistical GDP over the interim, any sustained surge in liquidity will prove to be the death knell for domestic demand.
If consumers and producers have been harried and scathed by 10 consecutive months of 30+++% liquidity growth from 2H 2013 to 1H 2014, where the adverse impact have belatedly become evident last year, any significant surge in CPI will emerge as follow-up KO punch on consumers, as soaring CPI should translate to the draining of the consumer’s residual purchasing power. And domestic liquidity won’t need to hit 30% growth rate just to deliver a significant impact as the first strike has already rendered the public to become delicately fragile.

Furthermore, the sizable increase in bank lending has occurred even during a flat curve or even signs of inversion in parts of the yield curve. This only means that banks have lowered their credit standards in order to generate volume for their lending portfolios. So they must be trading off quality for quantity just to chase profits. Subprime anyone?
Moreover, the general domestic yield curve has lately widened by most since I began tabulating them in late 2014. That’s mainly because of the dramatic selloff in ONLY the 10 year bond (upper window). Put differently, only yields of the 10 year government papers has soared on a year to date basis. But this translates to higher rates too!

But the rest of the curve had been aggressively bid, hence the lower yields (especially at the front) and the widening spreads!
It is as if some entity has been trying to tacitly implement ‘stimulus’, even in absence of formal declaration.
Yet the unfortunate effect of the manipulation of the curve has been to cause an inversion between 10 year and 25 year. (lower window) So the attempt to steepen the front has led to the inversion of the back. Interesting.

Every action has consequences.
And perhaps, a partial reason for the managing of the yield curve has been due to the resurgence in consumer NPLs particularly on auto loans in the 3Q. NPLs in Real Estate loans have so far been marginally lower than consumer borrowing growth, hence the appearance of calm.
But as explained before8, the intertemporal difference between NPLs and current loan growth implies that current loan growth must continue to grow faster than past loans in order to suppress NPLs
Total portfolio loan growth has been derived from newly acquired loans during the stated period. However, NPLs have emanated from loans acquired from the past that have gone sour during the above stated reporting period. The BSP defines non-performing loans in different loan categories based on different periods.
So what you have is a ratio that compares the results of aging loans with present (freshly acquired) loans. Thus, the current NPL ratios exhibits credit health in the context of quantitative rather than qualitative conditions. This shows again why politics have been about emphasizing on the form rather than of the substance…
The point is that for as long as new loans outpace growth in NPLs then the statistical metric of loan coverage on NPLs will remain depressed even if NPLs have been growing.
And because NPLs have represented ageing loan portfolio performance, any slowdown in new loan growth will magnify NPLs. In addition, because of the furious pace of new loans growth rate, today’s big growth in loans will become tomorrow’s NPLs.
And don’t forget that many of freshly acquired loans have been made in order to pay for aging loans. In other words, for entities that rely on Debt IN Debt OUT (Ponzi finance), difficulties in access to credit will easily transform into NPLs.
Hence, it would be imperative for the BSP to ensure that credit must consistently be infused into the system, or credit flows must not only be sustained but grow, in order to satisfy the addiction of entities or industries in order to assure of their survival. And this is what Potemkin economies are about.
Has this been why real estate loans have rebounded?
Additionally, given the apparent strains in the income statements and emerging pressures on the balance sheets of major listed companies, in the face of previously flagging credit growth in the banking system, I suspect that the BSP has been aware of this and thus may have acted directly or indirectly to manage the curve in order to boost credit supply.
Yet I warned about the credit cycle at the crest of the 30% money supply boom in 2014 which has been partly realized today9
The refusal to curtail the credit boom exposes on the chronic addiction by the Philippine government on easy money stimulus. Yet the government has been boxed into a corner. Tighten money supply, credit shrinks and so will the economic sectors who breathes in the oxygen of credit that has played a vital role in the sprucing up of the pantomime of the pseudo economic growth boom. 
Tolerate more negative real rates, debt accumulation intensifies, price inflation will rise, the peso will fall and such credit inflation will be reflected on interest rates, where the outcome will be market based tightening regardless of the actions of authorities.
We have seen the first part—the tightening of money supply and credit growth contraction that has incited a downturn in statistical GDP and pressures on balance sheets of listed companies.
Now comes the possible second phase: the resumption of the credit boom and its untoward repercussions.

Like the 3Q concerted media hype on the hissing property bubble, the BSP makes a self-proclamation about how strong the banking system is. Yet if the banking system has indeed been strong and stable, does one really need to announce it? Isn’t the proof of the pudding in the eating?
Or does one apply propaganda or PR gimmickry to camouflage a system in question? Or perhaps, has the Bangladesh central bank heist placed the domestic banking system and the BSP into an adverse spotlight hence the publicity response?
But the crux, which signifies a paradox is: One cannot have a ‘strong and stable’ banking system that finances a bubble. That’s because financing a bubble means playing a significant role in the formation of malinvestments.

So once the bubble implodes, ‘strong and stable’ will prove to be a baseless braggadocio claim.
Yet it is easy to make an audacious and exaggerated claim especially when one doesn’t have skin on the game.
______
1 Janet L. Yellen, Chairwoman The Outlook, Uncertainty, and Monetary Policy Speech at the Economic Club of New York, New York, New York, US Federal Reserve March 29, 2016
2 Doug Noland, Weekly Commentary: Another Coin in the Fuse Box Credit Bubble Bulletin April 2, 2016
3 SM Investments Corp SM Posts 14.4% Growth in Recurring Net Income in 2014 March 4, 2015
4 Filinvest Land FILINVEST LAND 2015 EARNINGS UP 11% March 18, 2016 EDGE.PSE.comp.ph
5 IMF.org INDONESIA SELECTED ISSUES March 2016
7 Cebu Pacific Annual Report 2015 17 A p.18 March 30, 2016 EDGE.PSE.com.ph
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