PSEi 30 1H 2018 NET Income Grew 6.22% to Php 20.242 Billion Financed by Debt Growth of 12.33% to Php 442.5 Billion!

Prosperity, built on debt, inflation, and false government promises, is illusionary and can disappear quickly. It will be necessary that the people learn, or relearn, that debt is not wealth, paper is not money, free stuff is not justice, war is not peace, and government coercion is not liberty. Signs of social chaos are readily apparent and are a predictable consequence of the economic distortions created by the excesses of the QE bubble—Ron Paul

In this Issue

PSEi 30 1H 2018 NET Income Grew 6.22% to Php 20.242 Billion Financed by Debt Growth of 12.33% to Php 442.5 Billion!

-1H 2018 Net Income Grew 6.22% to Php 20.242 Billion

-1H Net Income: Concentrated Gains, Padded by One-Off Deals and Accounting Gymnastics and Distortions From TRAIN and Inflation

-For Every Peso of Net Income, 26 Ex-Banks PSEi Firms Borrowed Php 21!!!! PSEi 30 Debt Jumped by an Incredible Php 442.5 Billion!

-San Miguel: The King of Debt on a Panic Borrowing Spree! Borrowed Php 204 Billion! Why?

-A Formula for Disaster: Mispriced Securities, Rapid Record Debt Buildup as Rates Surge!

PSEi 30 1H 2018 NET Income Grew 6.22% to Php 20.242 Billion Financed by Debt Growth of 12.33% to Php 442.5 Billion!

Pray, tell me, how sustainable is a system that borrows Php 21 (or even Php 12) to generate Php 1 of profit or net income?

These developments will not exist under free markets.   Such deformities are products of political interventions on the economy and the financial markets through monetary channels.

1H 2018 Net Income Grew 6.22% to Php 20.242 Billion

The 1H financial report card by PSE listed demonstrates this.

2Q and 1H data reveal the asymmetric performance and distribution of net income activities of member firms of the headline index.

Figure 1

Properties (2Q +22.02%, 1H +15.86%), industrials (+15.87%, +6.18%) and the holding firms (+9.66%, +8.78%) carried the load of the PSEi 30’s 2Q (+6.28%) and the 1H expansion (+6.22%), while services (-22.44%, -5.35%) and the banking system (-1.98%, -1.86%) weighed on aggregate net income.

1H net income expanded by 6.22% (year on year) or by Php 20.242 billion

On an industry basis, properties (2Q +22.02%, 1H +15.86%), industrials (+15.87%, +6.18%) and holding firm (+9.66%, +8.78%) companies outperformed while banks (-1.98%, -1.86%) and services (-22.44%, -5.35%) endured declines.

The bottom line exhibited the transmission of the banking system’s cash and deposit woes. Oh, did I mention deposits? Well, I'll come to that soon.

And it has been a paradox that while banking system endured liquidity strains for the period, properties which immersed and gorged heavily on debt flourished! The property sector has been the banking system’s largest client. In June, the banking system’s property loans accounted for 19.1% share of the overall production loans and 17.5% of total banking system debt (exclusive of reverse repos)

Industry profits likewise surged. TRAIN’s excise tax, helped by the BSP’s QE, proved to be a pivotal factor in boosting revenues of energy and power firms. However, since 3 out of the four energy firms in the PSEi 30 reported declines in gross margins, the benefits from the from the inflation tax and TRAIN tax may be fleeting. Gross Margins: AP 25.87% 2018 and 26.71% 2017; FGEN 34.98% 2018 and 40.52% 2017 and PCOR 7.62% and 9.09%

Only Meralco benefited from the inflation arbitrage to expand its gross margins (20.81% and 15.34%).

Income tax cuts boosted retail revenues, but the latter has begun to wither in the 2Q. That being the case, TRAIN and the inflation arbitrage helped boosted artificially the industry's bottom line for the period

The first-semester performance of the telecom duopoly had been divergent.

Although holding firms had a mixed showing, the four largest net income growth of the PSEi 30 were domiciled here.  

1H Net Income: Concentrated Gains, Padded by One-Off Deals and Accounting Gymnastics and Distortions From TRAIN and Inflation

 

Figure 2

The percentage gains can mislead and glare the public to bear the impression that PSEi 30 fundamentals have been thriving.

In the 1H, seven issues (23.3%) registered a decline in net income performance while 18 firms (60%) posted double-digit growth.  5 firms (16.67%) produced single-digit net income growth.

As it turns out, nominal net income expansion in the 1H had been concentrated on a few companies.

LTG Group, Metro Pacific, Ayala Corp, SM and Ayala Land were responsible for 85% of the Php 20.24 billion of additional net income. On the other hand, TEL and JGS were responsible for their reductions of 23.5% and 27.72% in the share of net income, respectively.

And aggregate numbers don’t give a complete picture. A significant portion of this period’s net income growth had been due to non-recurring income and accounting adjustments.

Because operating income was down in the 1H by 15.9%, LTG’s net income performance of Php 11.4 billion emanated principally from net earnings of associate and the sale Real and Other Properties Acquired (ROPA).

LTG’s Php 5.7 billion of added profits for the period accounted for a whopping 27.9% share of the Php 20.242 billion of the group’s aggregate net income.

In the meantime, the inclusion of Meralco and Global Business Power Corporation on the financial statement accounted for the bulk of Metro Pacific’s scintillating performance. Interestingly, the big jump in MPI’s revenues had been accompanied by a steep fall in gross margins from 58.74% in 1H 2017 to 49.6% in 1H 2018. The fall in margins may be a result of price elevation or inflation on inputs. The margin squeeze also shows that MPI earnings have been about accounting gymnastics.

Back to the real estate. The industry’s outperformance in revenue and net income in the 2Q departs from the GDP story. The GDP may be understating activities of the sector for the period. However, while PSEi 30’s real estate firm posted a Php 5.97 billion (+15.86%) profit, it borrowed a staggering Php 26.5 billion (+5.68%)! Real estate firms and their customers have been gobbling debt with such frenzied intensity.

In the light of GDP, 1H real net income grew by 2.92% (using the GDP’s deflator or implicit price index).

Much of the 1H’s net income growth has not only been about DEBT but by distortions brought about by the inflation tax and TRAIN.

For Every Peso of Net Income, 26 Ex-Banks PSEi Firms Borrowed Php 21!!!! PSEi 30 Debt Jumped by an Incredible Php 442.5 Billion!

And speaking of debt, non-banking PSEi 30 recorded a 12.33% in debt expansion over the same period or accounting for almostTWICE the net income growth rate.  

Change in percentages can be deceiving, the base level of comparison matters.

 

Figure 3

Let us see: (again) PSEi 30’s 1H Net income growth was a mediocre 6.22%, but debt growth (ex-banks) blasted off by 12.33% or 98% FASTER than profit growth!!!

In nominal terms (current prices), PSEi 30’s net profit was up a meager Php 20.242 billion that had been financed by a stunning Php 442.505 billion of leverage!

Spectacular!

San Miguel’s stunning Php 204.55 billion accounted for 47% of the group’s debt intake. As a group, for every peso of profit produced, a striking Php 21.86 of additional debt was generated for the period! Excluding San Miguel, for every peso profits earned, a still remarkable Php 11.76 of debt was germinated.

Such represents solid proof that PSEi 30 earnings have been anchored primarily on debt!

San Miguel: The King of Debt on a Panic Borrowing Spree! Borrowed Php 204 Billion! Why?

San Miguel borrowed Php 172 billion in the 1Q and followed this up with another Php 33 billion in 2Q.  

San Miguel’s shocking Php 754 billion of debt represents 117% over its market cap value (as of August 17), 76% of 2018 annualized sales, 67% of its liabilities and 46.8% of its assets!

1H 2018 debt growth accounted for 80.14% share of the company’s accrued annual debt growth of Php 255.4 billion in the past 6 years! (lower pane, figure 3)

In the 1H, SMC’s net income grew Php 1.492 billion or by 5.72%, while its debt grew Php 204.55 billion or by 37.25%

Interestingly, 17% of SMC’s Php 1.6 trillion of assets constitutes “goodwill” and “other intangibles” which account for the third and second non-cash assets of the company

Seen in the context of the banking system’s total resources at Php 19.6 trillion as of June, SMC’s Php 754 billion debt accounts for a staggering 3.8% share.

And SMC’s hastening buildup of debt has hardly been about infrastructure. Rather, infrastructure has been used as a pretext to camouflage its unsustainable debt onus. And the spate of subsidiary reorganization has been used to deflect on its mounting debt troubles

While SMC’s share prices have been racing to record highs, its debt levels and growth rates have blasted faster.

I’d suggest that extreme divergences as seen in SMC’s swift debt buildup, falling earnings, and soaring stocks are hallmarks of the terminal phase of this bubble.

At the end of this cycle, a prime candidate for liquidation would be SMC

A Formula for Disaster: Mispriced Securities, Rapid Record Debt Buildup as Rates Surge!

And it has not just been SMC, as % share of the Php 404.552 billion debt growth in the 1H, Ayala Corp (20.67%), GTCAP (11.15%), MPI (5.88%), PCOR (4.23%) and ALI (4.44%) were the biggest contributors.

Here’s a counterfactual question: what would be the PSEi’s net income growth rate if debt growth would be one-fourth, if not, one half its current size? My bet: the answer won’t be pretty.

And this reveals the artificiality of the earnings growth that had been boosted principally by the BSP’s record low debt and QE regime.

You see, on its own, the sheer speed and scale of the leverage buildup ensure that the system will eventually seizeup. Rising interest rates won’t be necessary, but should accelerate this process.

 

Figure 4

Finally, in the 1H the annualized earnings of PSEi 30 firms produced an average Price Earnings Ratio of 17, and a market cap weighted PER of 21. (upper pane Figure 4)

The PSEi 30 is a market cap weighted index.

With debt growing at a rate significantly faster, the artificiality of earnings growth shows of the grotesque mispricing of the PSEi 30.

And the toxic combination of panic acquisitions of debt in the face of rising rates and mispriced assets are a formula for disaster.

Perhaps, despite the massive price fixings, the PSEi 30 chart may already be exuding such clues.  (middle window)