Charts of the Day: Phisix 8,500!

Just two charts to highlight the rendition to a new record at 8,500 from today’s stellar 1.8% performance!

First, the percentage change of PSEi 30 components(daily)...

 

Next, the corresponding PER ratio based on the PSE’s published 2016 eps…

Phisix Market Cap Weighted PER now at 27.5!

 

Lastly, the incredible two-day path to 8,500!

Phoenix Petroleum Bailouts Ayala Land-SSI in FamilyMart, Why Have Consumer Loans Been Weakening?

Published October 9th, three listed companies announced the completion sale of the FamilyMart chain three Mondays later or on October 30, subject to the approval of the government’s Philippine Competition Commission (PCC).

Didn’t I say that the news was, in reality, a corporate press release which implicitly advertised the sale of FamilyMart?

Though presented as news, another way to read the article is to construe it as an advertisement in favor of the sellers. 

Ayala Land-SSI Group’s FamilyMart For Sale? Media Expert Utters an Economic Taboo: OVERSUPPLY! October 9, 2017

Wow, what a fast break; three weeks to sell a business worth hundreds of millions of pesos!

Isn’t this (press release cum news) a very effective advertisement medium?

I purposely labeled the FamilyMart sale a ‘bailout’. The buyer, Phoenix Petroleum essentially bailed out, the sellers, the Ayala Land and the SSI Group consortium, from their miseries in the convenient chain sphere. (I discussed the convenient store predicament then)

Why? Because the disclosures of the Ayala Land [PSE: ALI], the SSI Group [PSE: SSI], and Phoenix Petroleum [PSE: PNX] hardly mentioned any conduct of due diligence in the transaction process. Also, there had barely been clues, even from media, of preliminary discussions by the transacting parties, antecedent to the October news broadcast.

Mr. Dennis Uy led Phoenix Petroleum bought the company with seemingly scanty information!

It would appear that there had been little haggling or bargaining in the transaction.

Moreover, the buyer’s complete confidence and trust in the sellers could have been a factor in deal’s closing.

Or maybe the self-assurance displayed by Phoenix was due to its political backing.

Technically, because the approval of the government is required, the deal was reportedly completed through a Memorandum of Understanding. Perhaps, PNX would use the waiting period for the necessary due diligence. But then again the deal supposedly had been finalized.

As a side note, since the government arbitrarily defines of competition, which consequently means establishing which deal or deals falls within its allowable parameters, being a favorite of the administration assures a luscious payoff.

Moreover, stringently regulated competition hardly represents free market competition at all. Instead, it works as a protective wall favoring cronies against the free market competition. If I had been a part of PCC, I’d work to emasculate such legal barriers and promote genuine competition.

Of course, who else can afford to make such expeditious decision?

The buyer, a close ally of the administration, as I previously noted, seems on a grand buying spree.

Mr. Uy’s fortune is on a roll. The Duterte government’s Philippine Amusement and Gaming Corp. have reportedly awarded the businessman’s consortium a gaming license to operate an integrated casino in Cebu. Perhaps the firm will get listed too. This means more transfers from the public’s savings to Mr. Uy’s businesses. Of course, the BSP’s easy money policies will facilitate for such implicit subsidies.

The PSE’s Jinx, Political Entrepreneurship as a Winning Formula and Banking Fraud as Symptom of Market Tops, July 24, 2017

Mr. Uy’s flagship Udenna acquired listed logistic company 2GO early this year, which it tacked into its recently listed subsidiary Chelsea Logistics [PSE: CLC].

Mr. Uy’s Udenna also reportedly finalized a deal to acquire a company developing a $1-billion 177-hectare logistics hub called Global Gateway Logistics City in Clark City, just two weeks ago!

Bear in mind, because of its intricate process, Mergers & Acquisitions are a complex dynamic. But, Mr. Uy has strikingly truncated and simplified them. As testament, these mammoth deals were concluded in about 8 months! Ain’t these signs of ingenuity?!

Yet, one would have to wonder from whence the wherewithal of these deals has been sourced?!

So the acquisition of FamilyMart would most likely be financed by MORE debt or possibly by political money looking for legitimacy and or partly through public listings.

And according to the grapevine, the Sys have cozied up to Mr. Uy; BDO has accommodated a credit facility worth $300 million to Mr. Uy’s firms. 

Yet, who among the establishment outfits would refuse to partake of freebies from politically erected financial moats?  Of course, such opportunities would signify more than just about easy profits. Of greater importance would be access to political power.

Put differently, in a statist political economy, the privilege of the being close to the political leadership would be about access to rent-seeking economic opportunities and its protection.

Therefore, under these circumstances, wouldn’t it be intuitive that Mr. Uy should receive an avalanche of offers from various sources, a greater amount of credit and equity money?

To reemphasize what I wrote last July

This means more transfers from the public’s savings to Mr. Uy’s businesses. Of course, the BSP’s easy money policies will facilitate for such implicit subsidies

So have I not been validated?

The rapidity of the deal should likely benefit Ayala Land and the SSI group more than PNX.

Since there could have been little bargaining involved, ALI and SSI could have gotten more in value than had it sold to other buyers. Or, PNX bought FamilyMart with a lot less discount from the sellers. Prices are likely less elastic (or price sensitive) for politically motivated buyers.

Importantly, the ALI-SSI consortium sold at the top of the present business cycle.

Finally, with the majors giving up on the retail convenient chain sector, this should be a momentous (tipping point) event for the industry!

Why Have Consumer Loans Been Weakening?

On a related note, the Bangko Sentral ng Pilipinas published last Monday, the monthly loan activities of the banking system

While the rate of growth of industry loans (+20.68%) jumped to its highest level since November 2011, the rate of growth of consumer loans significantly weakened (20.05% in September, 22.76% in August, 22.3% in July and 22.54% in June)

 

Consumer loans had been plagued mainly by the declining rate of auto loans (24.47% in September, 30.22% in August and 28.14% in July) and by the plunging rate in payroll loans (15.3% in September, 18.85% in August and 23.52% in July) which had a 44% share and 13.23% in September, respectively.

Meanwhile, the growth rates of credit cards have rocketed to its highest level in the last 5 years.

The decline in auto bank loan portfolio dovetails with the substantially slowing rate of sales growth in units registered by the car industry as reported by CAMPI auto since mid-2016.

Payroll loans, which constitute the lower segment of the income group, have significantly slowed since July of 2016.

And customers of retail convenient chains have likely constituted this sector of bank borrowers.

On the other hand, raging growth in credit cards could signify two things; financial inclusion- more unbanked consumers seeking the access of formal credit - or consumers with bank accounts now tapping increased credit lines to expand their spending capacity.

 

The plummeting payroll loan growth rate has hardly supported the former. However, the latter could extrapolate to inadequate income growth in support of present lifestyle.

With spiraling real economy prices (upper window*), such lifestyle may now be under duress. Hence, to cover shortfalls in income growth consumers have now used credit cards.

*I am assuming here that government’s data is accurate.

Nevertheless, higher CPI leads to lower headline GDP. (middle window) That’s because Real GDP is derived from nominal GDP (NGDP) deflated by the PSA’s measure of inflation.

And as of the 3Q, the government’s CPI remains lofty.

Finally, the government’s measure of consumer spending seen via the national accounts or the Household Final Consumption Expenditure (HFCE) appears to lead the rate of change in the BSP’s consumer loans (lower window)

If the government data has some accuracy to the real world, then ALI-SSI’s exit makes them a genius!

And pressure on the consumer won’t be limited to convenient chain stores, there will be spillover effects.

At the end of the day, there is no such thing as a free lunch – forever.

Parallel Universe: The So-Called Golden Age of Infrastructure Boom as Gov’t Construction Data, Holcim and Cemex Sales and Earnings Plunge in Unison!

In this issue

Parallel Universe: The So-Called Golden Age of Infrastructure Boom as Gov’t Construction Data, Holcim and Cemex Sales and Earnings Plunge in Unison!

-Parallel Universe: Building Boom as Government Data Proves the Opposite

-Lackluster 3Q Bank Loans, Construction Material Prices, Steel and Cement Prices

-Build, Build and Build Boom: Holcim and Cemex Sales Collapsed in the 3Q and in 9-months Period!

-Cement Industry: Another Consensus or One-Way Trade

Parallel Universe: The So-Called Golden Age of Infrastructure Boom as Gov’t Construction Data, Holcim and Cemex Sales and Earnings Plunge in Unison!

Parallel Universe: Building Boom as Government Data Proves the Opposite

Sometimes it feels like this world exists in a parallel universe – a hypothetical self-contained reality co-existing with one's own (Wikipedia). 

That is when deeply entrenched popular wisdom goes astray with empirical evidence perceptional deviations seem to split the world into parallel realities

The popular notion is that there is an ongoing construction boom.  Such popular impression is reinforced through my thoughts especially when I witness bristling construction activities first hand. Because I personally see it, therefore, it must be true!

Importantly, because everybody thinks it is, a theme incessantly amplified by media, it MUST be true!

Never mind the idea that this could be a local phenomenon instead of a holistic one. And never mind the economic concept of “compared to what”?

There have been lots of construction activities on the street alright. But as recently shown, even the government’s construction permits took a dive in the 1H. (upper window) [Another Wow. 2Q and 1H Construction Permits Plunged! Worst Decline in 6 years! September 6, 2017]

Since permits precede actual construction activities, then this data should presage a slowdown in private construction activities.

Nevertheless, compared to the last 3-5 years, sure, construction has been brisk. But when compared to the latest numbers, even in nominal figures, the impression of a persistent boom just fizzles. (lower window) Though current construction activities may still be teeming, it has been less animated from last year. So from an observational standpoint, marginally fewer activities have barely been noticeable.

The patent irony in the construction downturn in the 1H of 2017 has been that this has surfaced in the midst of the acceleration in fiscal spending and from the escalation in money supply growth as cumulative consequences of the BSP’s debt monetization and the banking system’s unleashing a torrent of credit money.

When M3 rocketed in 2013-2014 and also in 2015-2016, construction permits boomed. That relationship just stalled in 2017.

Thus, when statistics reveal of negative price changes, which denote of contractions, this can’t be interpreted as in a boom, unless the world exists in parallel realities.

Lackluster 3Q Bank Loans, Construction Material Prices, Steel and Cement Prices

The setback in 1H construction permits may have filtered into bank loans and construction retail and wholesale prices.

The BSP will release its September data, most likely tomorrow (October 30). So unless there will be a humongous spike in construction and real estate loans in September, present credit activities have been less vigorous at present compared to the same period last year. In 2017, construction loan growth registered 19.56% and 18.64% in July and August (21.57% and 17.95% in 2016) while real estate loans posted 18.94% and 18.05% over the same period (18.82% and 19.54% in 2016).

A caveat on reading real estate loans. The BSP has a bank loan cap on the real estate industry. Thus, credit activities could be suppressed or most likely diverted into other sectors.

When the BSP “tapered” monetizing the National Government’s spending in early 2017, M3 slowed. Construction material prices, along with real economy prices, followed suit. The opposite happened when this nuclear option has once again been redeployed in the 2Q. Construction material retail and wholesale prices have turned upwards.

Please take note that wholesale prices have mostly been about government construction spending, hence such data essentially embodies the ballyhooed "the golden age of infrastructure".

As a side note, the government’s MRT-3 reportedly suffered its 11th technical glitch this week. Eleven malfunctions in one week. One of these has supposedly been due to a wayward diaper. If existing infrastructures can barely be managed well, then how does one suppose the attainment of economic elixir from the installations of new ones?  Because promises are better or more reliable than actual performances?

Cement prices printed a relative narrower decline in August at -3.55% from July’s -3.95%.  The paradox has been that cement prices continue to sag and deviate from the effects of a recharged M3

In addition, the government’s steel prices have had diverse price actions in the two months of the third quarter. Following a near collapse, reinforcing steel bounced to reflect on the resurgent M3 (August 2.09%, July 1.51%). Structuring steel prices have also revved up which seemed resonant with M3 (August 3.94%, July 2.79%).

The point is steel prices appear to have been more receptive to a revitalized M3 compared to cement prices, which have so far become deviant.

Part of that explanation is oversupply.  As cement prices fumbled, manufacturers continue to churn substantial output (August 14.55%, July 8.7%).

With government’s data showing unimpressive numbers, just how will construction be presented in the 3Q GDP?

Build, Build and Build Boom: Holcim and Cemex Sales Collapsed in the 3Q and in 9-months Period!

The beauty about economics is about the logical consistency of the causal relations of the fundamental theory that gets manifested on empirical data. Though government numbers may not have accurately reflected on the actual economic conditions, they have, so far, provided useful clues. Put bluntly, micro EQUALS macro!

(As an aside, government cement sales dropped only in the 2Q and 3Qs while prices fell mildly relative to what the majors have declared below)

The substantial fall in the government’s barometer of cement prices has reverberated with the sales performances of the two of the biggest cement manufacturers - Holcim Lafarge’s Holcim Philippines [PSE: HLCM] and the Cemex Philippines [PSE: CHP].

Holcim’s 3Q sales plunged 18.03%, contributing to the 17.15% crash in its 9-month sales. In the company’s 3Q 17Q, the lackluster performance was blamed on “soft market demand particularly the first half of the year that impacted our nine-months of operations coupled with challenging price environment and aggressive competition.” As a result, HLCM’s 9-month net income and eps dived by 57.7% (3Q eps crashed 81%!).

In the company’s presentation, cost pressures became a considerable factor: “Tighter competition and higher production expenses challenged the performance of building solutions provider Holcim Philippines, Inc. in the third quarter but the company continues to sustain its investment and expansion plans in the country, believing in the growth ahead…. Holcim Philippines also experienced cost pressures from rising energy expenses and the declining peso.”

The BSP has been attempting to raise NGDP, for tax and inflation based redistribution purposes, through inflation targeting channeled through emergency ICU measures of debt monetization and zero bound rates.

Bolstering NGDP means to raise price pressures in the real economy. Thus, price pressures have translated into higher business costs for manufacturers like HLCM and the general manufacturing sector in the 3Q. However, the limits of the markets to absorb price increases, compounded by oversupply, extrapolated to a profit squeeze. Or, manufacturers bore the yoke of the inability to pass through price increases to consumers, thus the restrained output and likely losses by the sector in the 3Q [Sorry Folks, Manufacturing Growth Tumbled in the 3Q… (The Revenge of Economics II) October 16, 2017]

The BSP fails to understand that not only that there is no such thing as a free lunch forever, the costs - from stripping away the purchasing power of the citizenry - are NOT benefits.

But these setbacks do little to curb utopian expectations from the “golden age of infrastructure”.

Since just about everyone in the industry believes that “build, build, build” should lead to massive shortages of cement in 2020, major participants have been stampeding to raise capacity.

And soft demand today may radically shift to supply shortfalls thus for HLCM: “Despite this, Holcim Philippines continues to ramp up its support for Mindanao with its Php 2.7 billion project expansion in Davao with groundbreaking of its facilities upgrading this October in rites to be attended by key government and top company officials. This will bring its cement production capacity in the city to 2.2 million metric tons, as part of raising Holcim Philippines’ total cement capacity by 2019 to 12 million metric tons from the current 10 million metric tons.”

Curiously, Cemex has a different take on its staggering 11.4% dive in the 3Q and 12.88% plunge in 9-months sales.

From CHP (bold mine): “Domestic cement volumes increased 2% year-on-year during the third quarter. Sequential activity improved with volumes increasing 4% versus prior quarter. • We estimate that positive demand, supported by a pick-up in infrastructure spending and stability in private sector construction, resulted in mid-single digit growth for the industry year-on-year. • Sequential volume growth despite adverse weather, which affected logistics capabilities. Domestic cement prices during 3Q17 declined by 13% year-over-year and by 5% sequentially. The decline in prices reflect heightened competitive conditions”

For cement prices to plummet by 13% where volume only increased by 2%, the disproportion in price-quantity balance has represented an outcome of competitive conditions??? Really???

If true, then prices wouldn’t have dropped by such extent or some manufacturers or importers would have absorbed the astounding scale of CHP’s marketing lapses. The competitor would have seen a tremendous jump in sales! Surely, HLCM was not the competitive force which grabbed CHP’s share in 2017.

AEV and Eagle will come out with their 3Q results soon, so we would see if any of these firms had been responsible for snatching CHP’s markets away.

Besides, if such claim is true, CHP should fire or overhaul their entire sales and marketing hierarchy for gross incompetence.  Or has CHP’s management been looking for a scapegoat?

Yet in their presentation, CHP noted that cement prices cratered by 10% in 9-months (year on year) and 5% (quarter on quarter). Did competition deliver such significant price drag? What role did demand play to have allowed such sequential dramatic price reductions?

Isn’t the Philippines supposedly in a building boom?

Even from a quarterly basis, the 5% drop in domestic cement prices had been significant enough to shed light that competition has hardly been a factor here.

Instead, such downside price pressures have highlighted what HLCM noted as “soft demand” and of oversupply conditions as the combo principal reasons.

And like HLCM, CHP noted of rising costs of sales and distribution expenses attributed to higher fuel prices, shutdown expenses and lower utilization of logistic assets that severely affected its 9-month bottom line (eps saw an -86%! tailspin; 3Q eps -81%!).

And like HLCM, CHP has embarked on a US $255 million capacity expansion program of its Solid Plant which it expects to start operations in the fourth quarter of 2019.

Despite the partial distortions from implicit price controls and from regulated imports, aside from the BSP’s monetary policies, the market pricing system in the cement industry remains functional!

Cement Industry: Another Consensus or One-Way Trade

As a final note, if you haven’t noticed because EVERYONE seems FIXATED on the DEMAND SIDE from the supposed “golden age of infrastructure”, NO ONE seems to have been noticing the SUPPLY SIDE RESPONSES from such unanimity.

It is as if only demand matters while supply has only a neutral impact.

In other words, everyone sees almost ONE PERCENT 100% SUCCESS from such political undertaking to plough insane amount of money and resources into building capacity, which alternatively, means NO ONE is taking the other side of the trade.

By sheer virtue of faith, risks have been vanquished as an obsolete force.

Do you see now what would happen in any event that such political undertaking falters? And even if “build, build, build” goes as planned (good luck on this), what would happen to such massive scale of capacity once they simultaneously go on stream?

By the way, don’t forget “build, build, build- the golden age of infrastructure” has NATURAL constraints. Just ask the USD-peso, real economy prices and the interest rates (bond yields).

Oh and another thing. Has anyone from the mainstream seen what has been happening to the cement industry today????

A so-called booming building economy. Yet faltering cement prices and construction activities. Doesn’t it feel like a parallel reality?