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.”
Ms.
Yellen’s March
29 speech sent Asian currencies flying
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?
And
has this been more confirmation of my
suspicion of the widening cracks in the real estate bubble in the 2H
of 2015?
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
6
Global
Property Guide, Review
of the world's housing markets in 2015: Europe and North America in
full scale boom, Asia, Middle East slowed sharply March 22, 2016
7
Cebu
Pacific Annual
Report 2015 17 A p.18 March 30, 2016 EDGE.PSE.com.ph
8
See
Phisix
7,500: Surprise! Philippine Authorities Signals the Public to Brace
for Lower G-R-O-W-T-H!!! June 7, 2015
