PSEi’s Vertical Price Pumping: Earnings Placebo in the Face of Dismal Performance!

Placebo. A substance having no pharmacological effect but given merely to satisfy a patient who supposes it to be a medicine (Dictionary.com).

Five of the PSEi issues belonging to the top 15 reported their 2Q and 1H results for 2016.

 

The numbers above tells you why price actions at the PSE have been totally unanchored from reality.  Or rising stocks, which has been presented by the consensus as signifying G-R-O-W-T-H, have merely represented a placebo effect or popular delusions.

Moreover, the slump in the growth Philippine tax revenues to just 1.1% in the 2Q seem to have also been reflected on the above numbers. Based on IMF 2013 data, Philippine taxes (76%) largely accrue from Corporate Income, Personal income and VAT which accounted for 28.1%, 16.1% and 31.9% shares of total revenues collected, respectively. So in spite of tax leakages due to the administration’s collection lapses, the plunge in tax growth most likely has extrapolated to a cascade in economic activities which has been manifested on corporate and personal incomes and or NGDP or both.

Price Action Premised on the Earnings Placebo

Regardless of earnings, still the delirious price pumps.

Example SMPH.  Even if we take into consideration the “core” income growth in both 1Q and 1H at 2016 at 12% apiece as presented by the company, just what justifies a gargantuan 3.15x surge in price returns at 12% core growth???  Because 2H income growth will soar by more than 60%???!!! As a side note, 2Q eps growth (net of extraordinary items in 2015) was only 10.24%.

It has been such furious vertical price pumping that has caused the firm’s PER to explode to 30.45 (based on 2015) and 34.21 (based on 1h 2016 earnings, annualized)!

And it’s not just SMPH. Metrobank has also shown an almost equally vicious price pump, yet for all the massive price inflation, 1H eps growth tanked by 8%!

See? Declining EPS has now served as a fuel for furious price pumping!

TEL and GLO also shows how stocks have been elevated by false premises. TEL’s crash in eps growth in 1H 2016, which has signified an extension of 2015’s 35.34% eps collapse, has only produced a shallow downside of just 5.83%.

TEL appears as being supported by index managers to “buoy” the headline index.

Yet more incredulous, TEL 4G partner Globe Telecoms performance. GLO’s eps growth crawled to a positive +2.88% in 1H 2016 yet share prices returned a massive 21.38% y-t-d for a shocking 7.42x return on eps growth! Or the market paid Php 7.42 for every 1% of eps growth!

And naturally the establishment, represented by the PSE, will continue to promote recklessness via record PSEi in the hope for G-R-O-W-T-H to just reappear.

Earnings recital has not only produced a placebo effect, but has also served as Pavlovian mental conditioning trigger to panic buy—regardless of the earnings outcome.

Just What Will Drive EPS G-R-O-W-T-H?

Since earnings are largely irrelevant to prices then its other function is to entertain.

So for more entertainment, read below…

Yet just what will provide the marginal factors that would bolster G-R-O-W-T-H to these companies?

4G for Telecoms?

Thailand’s 4G should be an example. Profits from Thailand’s 4G providers stumbled reportedly on intense competition for market share. From the Nikkei Asia, “Top Thai mobile carriers Advanced Info Service and Total Access Communication reported profit declines for the April-June quarter on higher marketing costs aimed at luring customers for fourth-generation services. The first quarterly earnings reported since a series of spectrum auctions ended in May suggest the carriers will need time to reach growth and enjoy returns from the new networks, which required hefty investments…The April-June period saw Thailand's three major carriers, including True, offer 4G services for a full quarter for the first time. Competition grew intense when AIS joined the 4G battle in January. The carriers' typical campaign involves the "free handset" distribution to encourage existing customers to subscribe to 4G service… The April-June results indicate that Thai carriers might need to diversify their profit source as long as the mobile campaign competition continues.” (bold added)

The problem appears to be—not limited to competition—but to restricted demand. And restrain in demand has been brought about by Thailand’s economic conditions, which competitors have been intensely vying for. As previously noted, 4G’s are NO free lunches. Not even if they are monopolies.

Will Massive Oversupply Bring About Real Growth in Shopping Malls and Real Estate?

How about SMPH’s malls, condos and hotel model?

While the BSP’s silent stimulus managed to reflate the firms’ 1H 2016 topline in terms of rent: 12.93% from 10.02% in 2015 and 12.47% in 2014; and in real estate: 6.11% in 2016 double from 3.15% in 2015 and -3.65% in 2014. Such has largely emerged from accounting artifices, surging inventories, and importantly, skyrocketing leverage.

1) Accounting Maneuvering

I have deep reservations when SMPH claims that there was a 7% same store sales in rent revenues. Reason? SM Malls have now plagued by massive store churning and rising accounts of vacancies.

Three months back I went to SM Megamall and counted 38 vacant stores with about 12 taken by new tenants but was under construction.

Last week, while about 85% of those vacancies have reopened or had tenants, new vacancies has sprouted (more than a dozen) in June and July, mostly in the new wing or in the Fashion Mall. Meanwhile, SM’s other lesser malls, SM Lights and Podium have only revealed of increases in vacancies rather than turnovers.

As I wrote way back in 2013 (Phisix 7,000: Why Asia’s Rising Star is a Symptom of Mania April 29, 2013): “Periphery to the core would mean initially fast turnover from retail tenants on stalls of lesser traffic areas and of marginal malls. Then the length of vacancy extends and the number of vacancy spreads.”

Such dynamic have precisely been happening today!

Photos taken last week.

Unless the sales rate of growth from existing stores has soared by significantly more, one can hardly generate the cited same store sales growth figures with the incredible number of either turnovers or vacancies or even both. I know, the turnover figures I talk about entails something in the range of anywhere 5-20% of the overall inventory depending on the mall. 

Yet fast turnovers and vacancies has basically been a problem NOT restricted to SM but to shopping malls within the locality.

As earlier indicated, vacancies and turnovers have also swelled in Robinsons Galleria, vacancies have spread to Edsa Shangrila’s East Wing (even as there have been slight improvements on the occupancy at the Main Mall) and vacancies have also percolated to Estancia’s Mall at the Capital Commons.

I haven’t been to Robinson’s Sogo, Starmall Shaw, Edsa Central, Greenfield’s Pavillion Mall and other lesser malls within the purlieu. And Ayala will soon open the Paradigm Mall as part of the Paradigm Corporate Center.

Just think of the massive supply of retail spaces that is bound to, or will overwhelm demand. Demand springs from demographic and income conditions of the population within the area.

And just think of the developing predicament at the Ortigas area in the spectrum of a nationwide phenomenon—as developers race to build supply, financed by credit, with the goal to capture market share. 

And will such overconsumption of resources generate eps or real economy (not GDP) growth? Or will it create excesses that will spur a downturn?

The bursting of fast turnovers and vacancies have been occurring almost simultaneously at various malls. Such phenomenon has only surfaced in 2015 and appears to be snowballing.

Yet when I reported a surge in Shangrila Mall’s vacancies as baptism of fire for the industry in early 2015, Shangrila’s disclosures hardly reflected on these.  It was only at their 2015 annual report where they admitted that “Business was also affected by increased competition from newly opened shopping centers in the nearby areas”

So perhaps many accounting chefs maybe working overtime to spruce up financial statements of many listed firms.

2) Surge in Inventories

Yet for SMPH, the most likely source of accounting income growth may have mostly emanated from new inventories.

SMPH reported 57 malls in 1Q 2016 with retail space of 8.4 million sqm. This became 58 malls with 8.5 million sqm in 1H 2016. That’s largely due to the “newly opened SM City San Jose del Monte in Bulacan, with a GFA of 101,000 sqm”. Yet more malls on the pipeline: “The company is scheduled to open two more malls this year namely Cherry SM Congressional in Quezon City and SM City East Ortigas in Pasig City. SM Prime is also expanding SM Center Molino in Cavite and SM City San Pablo in Laguna this year.”

As a side note SM Cherry is already operational. So far very few tenants.

And sales growth emanated from real estate projects where “SM Development Corporation (SMDC) projects launched from 2013 to 2015 such as Princeton Residences, M Place Residences, Mezza II Residences and Jazz Residences in the cities of Quezon and Makati.”

The odd thing has been that such massive supply growth has only been generating a rather miniscule, if not declining, rate of earnings growth.

3) Skyrocketing Leverage

What has not been told.

SMPH’s topline and bottomline performance have all depended on increased leverage.

While SMPH generated Php 12.9 billion of net income for the 1H 2016 for a core growth of 12%, it borrowed a stunning Php 43.33 billion or up 41.64% year on year. In short, SMPH borrowed Php 3.36 for every peso earnings growth it generated.

If SMPH will not borrow more going to the close of the year, and if 2016 ends at the current rate of income growth, then SMPH’s credit intensity will be reduced to Php 1.68 for every peso growth generated.

Understand again that real estate feeds, survives and thrives on leverage. Developers virtually give away their properties to buyers through zero percent vendor-financing specifically on downpayments.

Moreover, because of cash flow issues brought by the use of leverage to generate sales, supply or project completions also requires heavy leverage for funding.

Real estate constitutes about a third of SMPH sales.

Yet SMPH’s 2016 surge in borrowing hasn’t been a one-time event. As the upper chart showed, leverage continues to scale upwards. Debt growth soared by 50.9% in 2014 and then moderated to 9.1% in 2015 before exploding again to 41.64% this year.

That’s right, the CAGR of SMPH’s debt for the past 3 years has been a shocking 32.58%!

And about 34.7% of the company’s debt outstanding has been in US dollars. This shows SMPH’s “US dollar shorts” or vulnerability to currency risks.

Overall, SMPH’s profits have been puffed up—behind the scenes by humungous leverage.

Yet this demonstrates how such projects have invisibly been subsidized by the BSP’s negative real rates regime. Or how the BSP redistributes wealth in favor of the owners of SMPH and its (credit financed) customers.

Why has BDO Expanded Held to Inventory Assets?

And I also harbor big doubts on BDO’s recent earnings surge. Reason? For the first time in three years, BDO posted huge assets under “held to inventory”.

In fact, the size of 2016 position has represented the largest “held to inventory” assets since 2009!

Why such massive use of held to inventory given the sharp rally in Philippine assets?

Since “held to inventory” represents an accounting category where assets signify as investments that are intended to be held until maturity, they are reported at amortized cost and not subject to market price fluctuations.

The reason I bring this up is because, recall that in the middle of last year, the Commission on Audit (COA) accused the Philippine government’s Development Bank of the Philippines (DBP) in engaging in market manipulation via “wash sales” in order to shift the bank’s “long-dated ‘available-for-sale’ peso government securities worth P20 billion” to a ‘hold-to-maturity’ portfolio in order “to avoid increasing the mark-to-market losses and preserve the accrual income”

As I wrote then: (Phisix 7,600: 5.2% 1Q GDP Another Data Pump! DBP Accused of Market Manipulation; Scapegoating The US Dollar, May 31, 2015)

And not only that, if DBP’s actions have been representative of the industry, then a lot of those published ‘solid’ statistical numbers may have been a charade.

And why shouldn’t the DBP’s actions be illustrative of the many activities engaged by both public and private institutions?

So why the huge and sudden surge in assets that are “held to inventory” by BDO?

Has BDO used the same accounting gimmickry to bolster its eps growth by hiding losses?

Again what we are seeing has truly been monumental irony, vertical price actions as fundamentals stumble or erode!

History is in the making.