Tinkering with security valuations doesn’t create aggregate “wealth” – it simply takes future returns and embeds them into current prices. Long-term “wealth” is largely unchanged, because the actual wealth is in the future cash flows that will be delivered to investors over time, and once a security is issued, somebody has to hold it at every point in time until that security is retired. The only thing elevated investment valuations do is provide an opportunity for current holders to receive a transfer of wealth by selling out to some poor schlub who pays an excessive price for the privilege of holding the bag of low future returns over time—John P. Hussman, Ph.D.
In this issue
PSYEi 30: 2Q and 1H Revenue Growth Slack Equals Profit Boom! The Backlash On Chinese POGOs To Affect Properties
-PSYEi 30: 2Q and 1H Revenue Slack Equals Profit Boom!
-PSYEi 30 Net Income Growth Inflated by Non-Recurring Income, Subsidies and Accounting Magic
-PSYEi Firms Borrowed Php 6 For Every Peso Net Income Growth in 1H 2019!
-Backlash on POGOs To Curb Artificial Chinese Demand on Philippine Properties
-Historic Weekly Mark-The-Close Pump Designed to Save the 9-Month Trend!
PSYEi 30: 2Q and 1H Revenue Growth Slack Equals Profit Boom! The Backlash On Chinese POGOs To Affect Properties
PSYEi 30: 2Q and 1H Revenue Slack Equals Profit Boom!
Listed firms at the Philippine Stock Exchange (PSE) published their 17Qs or quarterly disclosures by August 15th.
Figure 1
Interestingly, despite slower gross revenue growth for members of the headline composite index, the PSYEi 30, net income growth zoomed. Gross revenues grew 8.36% in 2Q to drag 1H revenue growth to 9.97%. (figure 1)
The remarkable boom in Treasury assets buoyed the banks share of revenues growth to the second spot at 21.32%. Excluding banks, gross revenue growth was only 6.82% in the 2Q, which pulled lower the 1H growth rate to 8.38%. And thanks to the indirect subsidies provided by the National Government, through mass borrowings and cash hoarding, such contributed to the meaningful inflation of revenues and net income of the four of the biggest banks during the period*.
Banks powered net income growth in the second quarter with a phenomenal 35.12% clip. In close second was the holding firm sector with equally amazing 32.53%. Property and industrials took third and fourth spot with 15.36% and 11.98%, respectively. Services and Mining lagged with 6.26% and 3.3%.
In total, the headline index’s 2Q’s net income growth of 25% levitated the 1H’s growth rate to 16.61%.
Amazing, right? But that’s only the surface.
PSYEi 30 Net Income Growth Inflated by Non-Recurring Income, Subsidies and Accounting Magic
Figure 2
Aside from NG subsidies to the banks, one-off gains likewise played a significant role in the substantial jump in the net income growth of holding firms.
Ayala Corp’s marginal net income of Php 22.07 billion accounted for the largest share 39.21% of the aggregate Php 56.3 billion net income of the elite 30 in the 1H. (figure or table 2)
Yet, a significant share of Ayala Corp’s sizzling net income growth of 146.53% in the 2Q and 79.85% in the 1H came from“Equity earnings from Ayala’s business units, which include divestment gains from the merger of AC Education with iPeople and partial divestment of AC Energy’s thermal assets doubled to ₱41.7 billion in the first semester.”
At 2.03% increase, Ayala Corp’s gross revenues barely grew at all in the 2Q to weigh on its 1H’s 3.52%.
Non-recurring income gains were also responsible for puffing up JG Summit’s net income growth. According to the company’s press release, net income growth was “further boosted by mark-to-market and forex gains on the back of a favorable macroeconomic environment, as well as UIC’s Php3.0 billion gain arising from its acquisition of additional stakes in Marina Centre Holdings and Marina Mandarin Hotel.” JG Summit’s marginal net income of Php 9.2 billion accounted for the second-largest share at 16.34% of the aggregate.
If the top two contributors to the net income growth had been from non-recurring transactions, the third-largest net income contributor was BDO Unibank with Php 7.03 billion or a 12.48% share which income was bolstered by NG subsidies.
These three issues accounted for 68% share of the aggregate Php 56.3 billion during the same period.
The thing is, a substantial segment of the 2Q and 1H income growth had accrued from one-time deals, NG subsidies and or accounting gymnastics.
PSYEi Firms Borrowed Php 6 For Every Peso Net Income Growth in 1H 2019!
Figure 3
Public opinion has almost always been fixated on the benefits while ignoring the costs. For instance, there has been little appreciation that the disproportionate growth in balance sheet leverage or gearing help underwrites the degenerative trend in earnings or net income growth or even the real economy.
For the consensus, the effect of massive debt acquisition can only be beneficial, at best, or neutral at worst. So the debt data is largely ignored or dismissed.
While aggregate net income in the 1H at Php 342.8 billion for non-banks, the marginal growth was Php 44.387 billion. In the meantime, the same companies acquired a cumulative Php 4.23 trillion worth of debt for a nominal growth of Php 273 billion!Yes, non-bank listed firms acquired Php 6.15 in debt for every peso it generated as net income! (figure or table 3)
So not only has such massive borrowings led to a surge in debt levels, but such has also magnified the diversion of resources towards debt servicing that have contributed to the crimping of corporate margins, and worst contributes to the stymieing of investments and consumption in the real economy.
That is, the cost of drawing resource utilization from the future, to enhance earnings and GDP of the present, through increased absorption of debt and misallocations has only been taking its toll through decaying earnings growth and GDP trend. And the crowding-out effect from the NG’s expansive budgets likewise compound on this.
After all, there is no such thing as a permanent free lunch.
And the ongoing slowdown in the real economy, mainly from financial tightening, would not only amplify margin compression from debt servicing, but it also risks exposing the weak links in the financial credit chain.
Backlash on POGOs To Curb Artificial Chinese Demand on Philippine Properties
Figure 4
A brief take on POGOs.
Though the GDP has been slowing, condominium prices have rocketed in the 1Q to take the world’s center stage as the best performing real estate market running at 15.15% clip (Global Property Guide).
According to the Philippine national accounts data, even the real GDP of the real estate and rental sectors have been heading south! (figure 4, upper window)
Based on PSE disclosures, the headline index’s real estate sector posted a topline growth of 9.14% and 9.71% in the 2Q and 1H.
So in spite of the GDP slowdown, moderate gains in revenues, real estate prices have boomed. The real estate sector has become an object of rampant speculation!
Many have raved about how Philippine Offshore Gaming Operators (POGO) has been juicing up demand for domestic real estate.
Back in April I warned**,
And because of mass buying of overseas properties by Chinese have affected housing prices that have spilled over into domestic politics in Canada, New Zealand, and Australia, several of them have responded with a variety of curbs (Canada, New Zealand, Australia). These experiences demonstrate the vulnerability of excessive reliance on overseas demand.
Domestic politics have now begun to cloud on the Chinese demand for properties.
Also, since China prohibits online gambling, the Chinese government requested its domestic counterparts to ban all online gambling.
And demand to impose tightened control over them has increased since POGOs and their activities have caught the public's attention. A local government has recently issued violations on POGO hubs within their locality. The gaming regulatory agency, PAGCOR, has recently imposed a moratorium on POGO applications.
And if public scrutiny on POGOs is a symptom of a growing aversion to mainland Chinese presence here, like elsewhere, this would take a sting out of the most recent artificial demand for real estate. That said, a vastly reduced demand from overseas Chinese would expose the industry’s excess capacity or malinvestments.
Historic Weekly Mark-The-Close Pump Designed to Save the 9-Month Trend!
The largest single-day mark-the-close pump occurred this month in particular on August 13.
Figure 5
In an apparent attempt to protect the 9-month trendline, index managers embarked on a massive 235.73 points pump on this holiday truncated week, the largest ever in history. The PhiSYx closed the week up 93.43 points or 1.2%, which is about 40% of the cumulative 3% end-session pumps executed in 3-days. Without these, the index would have been down big time! The trend would have broken and sent momentum on a waterfall.
Desperate times call for desperate measures?
Only in the Philippines.
For true disciples of economics, they understand that grotesque distortions of the marketplace would lead to an eventual boomerang proportionate to the scale of imbalances.
