The Philippines Does Not Have Enough Oil Reserve


The passionately growing country is heavily dependent on oil imports

Four days ago, Bloomberg reported that the Philippines has cemented its position as one of the fastest-expanding in the world.

According to the latest report from the Philippines’ Department of Energy, part of the executive branch where the President resides, the country has a crude oil and petroleum products inventory supply of 24.9 million oil barrels that could last the country for about 56 days, as of June 2017. This is actually 24.6% higher than the same period last year, which we could consider, an improvement?

Nonetheless, crude oil reserves in the Philippines, with a country of 103 million people, has been left unchanged at about 100 million barrels in the nearly recent decade (2006-2015), according to data and statistics website IndexMundi.

Meanwhile, Malaysia, with a population of 31 million people, has 4 billion in reserves; Thailand, made up of 69 million people, has 500 million in reserves.

This certainly means that the Philippines mostly rely on imports to help feed Filipinos’ car engines and other oil-dependent machinery.

As of June 2017, the Philippines’ Department of Energy specifically stated that 34.9% of its crude oil supply was from Saudi Arabia, 28.4% from Kuwait, and 15.6% from the United Arab Emirates. Russia also supplied another 7.8% while Qatar formed 5.6%.

Brought by this certain arrangement, the Philippines (like most other net oil importer countries) is unavoidably exposed to any wild fluctuations in oil price.

On the other hand, plenty of proven reserves does not mean automatic panacea for a country. Just look at Venezuela. Unfortunately, political upheaval and oil price crash in recent years brought its citizens to starvation and destruction.

How about those gas guzzlers?

Interestingly, car registration in the Philippines totaled 104 thousand as of 2013, according to official data gathering website Trading Economics. Malaysia had 102 thousand registered cars, and Thailand had 35 thousand as of August 2017.

Nonetheless, the Philippine President Duterte’s order of 30-day government-matter processing should help propagate the endless bureaucratic red tape that engulfs the nation.

Who knows, some big oil discovery may just pop out somewhere out of the country’s 7,000 plus islands.



Too Late To Catch a 20% Yield: Siemens Gamesa

Siemens Gamesa Renewable Energy appears to be promising


Stock: Siemens Gamesa Renewable Energy SA 0H4N, GCTAF, GCTAY 

Siemens Gamesa Renewable Energy, a €7.2 billion 40-year-old Europe-based company, is the world’s fourth-largest Original Equipment Manufacturer (OEM) in the onshore wind industry.

The company has had an unimaginable 20% trailing dividend yield.

In further observation, however, the dividend appeared to be unsustainable given that the Zamudio, Vizcaya, Spain-based company has just provided a little more than €1 billion in payouts while having generated just €176 million in profits in the recent 12 months of its operations.

As it turned out, Siemens Gamesa Renewable Energy (Siemens Gamesa) paid out €1.07 billion in extraordinary and ordinary dividends just in the period between April to September 2017 secondary to its recent merger agreement.

The company paid out (€3.6/share) and an ordinary dividend (€0.11/share) in the recent six months.

According to filings, Siemens Gamesa is the result of merging Siemens Wind Power, which is the wind power division of Siemens AG, with Gamesa Corporación Tecnológica (Gamesa).

As reported in 2016, Siemens Gamesa Renewable Energy is to be 59%-owned by Siemens AG and 41%-owned by Gamesa Corporacion shareholders.

Siemens Gamesa engages in wind turbine development, manufacture and sale (Wind Turbine division) and provides operation and maintenance services (Services division).

As reported by the Wall Street Journal, the Siemens-Gamesa merger would create a new global market leader in wind energy by capacity, surpassing China’s Xinjiang Goldwind Science & Technology, Denmark’s Vestas Wind Systems, and General Electric, according to FTI Consulting.

Meanwhile, Siemens-Gamesa reported poor €135 million losses on revenue of €5 billion in its April to September operations.

*Statement of Simens-Gamesa (highlights by author)

The group’s financial results in the second half of 2017 (the first six-month period in which the merged company was operational) reflect the impact of higher volatility in some of the company’s main markets, such as India and the US. That volatility is the result of the transition towards fully competitive wind energy models, which has resulted in a decline in onshore sales volume and also in an inventory impairment, with no cash impact, as a result of price pressure in those markets.

Consequently, sales in the six-month period declined by 12% with respect to the pro-forma sales figure for the same period of the previous year, and the underlying EBIT margin, excluding the impact of the PPA, stood at 3.8% , and at 6.5% excluding the inventory impairment. Excluding the impact of the hiatus in the Indian market, which was main cause of the decline in sales volumes, group sales fell by 2.4% year-on-year, mainly due to the currency effect, and the underlying EBIT margin pre-PPA and before the inventory impairment was 7.3%. The company ended the period with a net cash position of €377 million, after paying out a €3.6/share special dividend in April as part of the merger agreement, and a €0.11 ordinary dividend out of 2016 earnings.

Although all of these business reduction results seemed disappointing and obviously unappealing, Siemens Gamesa reported that excluding the halt in the Indian market business, the company would have had a 2.4% revenue reduction instead.

The company also stated that it experienced a temporary suspension in the Indian market, but also the reduction in installations in the UK.

Siemens Gamesa also expects that its business in the Indian market will normalize in 2019.

In September 2017, the company also bagged a project to develop India’s first large-scale commercial hybrid wind-solar project.

 “Siemens’s offshore [wind business] is a world market leader, but offshore alone is not enough to become profitable,” said Christoph Niesel, a portfolio manager at Union Investment, a Siemens investor. Mr. Niesel said the deal with Gamesa would allow Siemens to fill this hole in the business (The Hindu Business Line)

As of September, Siemens Gamesa had nearly €7 billion in goodwill and intangible assets, €1.28 billion in debt, €1.7 billion in cash and cash equivalents, and €6.45 billion in book value (vs. market cap  €7.2 billion).

Buying shares of the Siemens Gamesa as of the moment may be a little late if one is trying to have that 20% yield payout, and maybe a little early in anticipation of improved results in the coming future.

In addition, having negative cash flow and having increased its overall debt by €230 million since March of this year may indicate a pass. Some speculative investors may want to capture the newly merged wind company’s shares as it already had provided -11.7% total losses so far this year.

There’s no telling when Siemens Gamesa may deliver healthy positive free cash flow and consistent earnings, but somehow the company sees its operations better by the year 2019.

Meanwhile, the company is a pass.

Disclosure: I have GE notes.

Do PLDT and Globe Allot Enough for Service Improvement?

PLDT has cut its spending dramatically to possible detriment of its subscribers’ experience


(Average Connection Speed, Akamai)

Stock: PLDT (PCOMP: TEL) and Globe Telecom (PCOMP: GLO)

Looking at the Akamai visualization below, the Philippines could be one of the slowest countries out there in terms of internet connection speed.

Certainly, the country far underperforms its neighbors, including Vietnam, Indonesia, and Malaysia. (LINK).

It is right to criticize both PLDT and Globe as both giants hold 84% of the Philippines’ mobile market. In addition, PLDT alone proudly held 70% market share in fixed broadband.

Financially, PLDT has allocated 184 billion Php in captal expenditures (capex)* in the past five years. Globe, meanwhile, spent nearly 140 billion Php.

*Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm (Investopedia).

These capex figures, nonetheless, are just broad figures.

Calculating these expenses as per the respective company’s total revenue and in percentages is more useful and could be compared to other big telecommunications companies overseas.

Going back, PLDT has allocated 22% of its revenue in capex on average in the past five years, while Globe’s capex represented 26%.

Comparing these figures collectively to Indonesia’s biggest telecommunications companies, Telkom, Indosat & XL Axiata, in the same time period, the Philippine phone companies spent 24% of its revenue in enhancing its telecommunications business while Indonesian companies spent 28% of theirs.

For comparison’s sake, 8,207 miles to the east—big United States telephone companies (AT&T, Verizon, and Sprint)—altogether has spent 16.2% of its revenue in capex allocations in the past half decade.

Recent six months of operations and capex allocations

Reviewing capex allocations in both Globe and PLDT’s in its recent six months operations should also be interesting since this period covers the period since President Duterte’s took his oath of office.

Globe’s capex increased 30%, while PLDT’s has actually fallen -43% year over year.

PLDT, according to its filings, actually verified this decline in expenses having stated:

…Our consolidated capital expenditures, including capitalized interest, in the first half of 2017 totaled Php5,727 million, a decrease of Php14,305 million, or 71%, as compared with Php20,032 million in the same period in 2016, primarily due to lower capital spending of Smart Group and PLDT

Globe’s capex, meanwhile, rose 30% having stated:

…Globe spent around P27.5 billion in capital expenditures as of end-June of 2017 to support the growing subscriber base and its demand for data

So if this comparison boils down to the subscriber base, PLDT has 58.7 million mobile subscribers and 1.83 million broadband subscribers as of June, while Globe has 59.7 million and 1.2 million, respectively.

There should actually be no reason for slower capital spending by PLDT with this amount of subscribers knowing that it has significant market share and services that should responsibly be provided to the Filipinos.

Sure, PLDT lost 9.6 million subscribers since the last year, but 58.7 million subscribers are still a bunch of people relying on its services. Besides, PLDT gained 220 thousand more broadband subscribers.

Why then is PLDT trimming its capex this much anyway?

Summing it all up, PLDT failed further to impress as it allocated less cash to improve its operations in recent months. On the other hand, both Philippine phone companies exhibited near at par cash allocations to its expenditures in the past half-decade but failed to provide similar positive gains (such as an increase in internet speed).

Being the chief executive of the Department of Information and Communications Technology, President Duterte (PTV Sa Totoo Lang Video: skip to 1 hour 24 mins onwards) has admitted he may bring new competition in the country to lower down rates paid by the Filipino to these incumbent, spoiled phone companies.

“I was hurrying up the competition.” Philippine President Rodrigo Roa Duterte

Disclosure: I have shares in Globe, AT&T, and Verizon.

Celgene Punishment: Unwarranted


Severe market price drop is not warranted given the company’s historical growth performance

On Friday, Celgene lost a $15 billion of its market value after announcing its third-quarter results that ended in September.

This is a hell of a punishment while having determined that the company would not be able to deliver with its outlook by 2020.
The now $74.8 billion New Jersey-based biotech company has announced that it expects net product sales of $19 to $20 billion (from $21 billion) by 2020 and an adjusted diluted earnings per share (EPS) of more than $12.50 (from >$13). This indicates a rather pessimistic revenue change of $2 billion at most.
In addition, Celgene also revised its GAAP diluted EPS this year down to the range of $4.78 to $5.19 indicated a forward PE ratio of 19.2x (vs. three-year average 54.3x) suggesting a marked discount at current price levels of $95.64 (at the time of writing).
Reviewing its nine months revenue and profit changes, Celgene recorded 15.4% (3-year ave:20%) and a more impressive 92% (3-year ave: 11.3%).
A closer look indicated that Revlimid–Celgene’s top revenue generator–grew 16% in the recent nine months from last year (2-year ave: 18.4%) to $6 billion or 63% of net product sales. Pomalyst, meanwhile, the second most revenue generator grew 25.6% to $1.17 billion or 12.3% of total revenue (vs. 2-year ave: 39%).
Otezla, a recent product that was launched in 2014, grew 27.5% in the recent three quarters compared to an outstanding 115.6% in the fiscal year 2016.
Mark J. Alles, Chief Executive Officer of Celgene Corporation
“In consideration of certain market dynamics and recent pipeline events, we are updating our 2020 outlook, and remain confident in our ability to deliver industry leading growth.”
“Over the coming months, we look forward to sharing data supporting our innovative, next generation pipeline products and significant growth drivers.”
As of September 30, Celgene had $11.8 billion in cash (+$6.7 billion from same period last year), $14.3 billion in debt (-$38 million year prior), and equity of $9.85 billion (+$4.3 billion).
In the past three years, Celgene spent $10.6 billion in research & development, $697 in capital expenditures, raised $10.9 billion in debt, generated $8.6 billion in free cash flow, and repurchase represented 97.9% of the stated free cash flow.
Meanwhile, 34 analysts have an overweight recommendation with a target price of $148.43 a share vs. $99.86 at the time of writing. Using historical revenue growth and multiple averages and a 20% margin indicated a per share figure of $144.90.
In summary, Celgene is a buy with $145 target price.
Disclosure: I do not have shares at the time of this writing, and may buy accordingly.

Amazing Cash Flow Generator: MatsumotoKiyoshi Holdings

Market has rewarded MatsumotoKiyoshi Holdings aplenty


Stock: MatsumotoKiyoshi Holdings Co Ltd  (3088.T)

MatsumotoKiyoshi Holdings, a ¥452.9 billion chain stores, and a retail business operator has provided an impressive 45.7% total return so far this year while trades at PE ratio 21x, PB ratio 2.3x, and PS ratio 0.8x.

According to its website, the 85-year-old has acquired 19% of the population in terms of customer baseline.

As of June, MatsumotoKiyoshi had ¥40.7 billion in cash and ¥0 debt. Its equity also has risen ¥14.5 billion to ¥188.5 billion.

In the past three years, the chain store operator allocated ¥16.9 billion in capital expenditures, reduced its overall debt by ¥5.6 billion, generated an impressive ¥47 billion in free cash flow and provided ¥18.6 billion in dividends and share repurchases.

Using historical revenue growth multiplied with recent PS averages followed with a 10% margin indicated a per share figure of ¥4,823.72 compared to ¥8,290 per share at the time of writing.

In summary, MatsumotoKiyoshi certainly is a great cash flow generator. Knowing that chain stores operate at the narrow margin, the company has maintained steady business growth and $0 debt in recent years.

Nonetheless, the company is wonderfully priced at the moment and is, therefore, a pass.

Disclosure: No shares in MatsumotoKiyoshi.

Hong Kong Chemical Company Generates Hefty Cash Flow

Kingboard is a good company to watch out for


Stock: Kingboard Chemical Holdings Ltd (HK: ticker 00148

Kingboard Chemical Holdings, a $46.8 billion (HKD) Cayman Island-incorporated investment holding company, has provided outstanding 93.4% total returns to its shareholders so far this year.

According to filings, Kingboard Chemical Holdings has been ranked the world’s top laminates producer for twelve consecutive years.

The Hong Kong-based 29-year-old company has businesses in relation to manufacturing and selling of laminates, printed circuit boards, chemicals, liquid crystal displays, magnetic products and property development and investments.

Despite having risen so much so far this year, Kingboard trades at a PE multiple 8x, PB ratio 1.1x, and PS ratio of 1.3x. The company also has 3% trailing dividend yield with 29% payout ratio.

In the recent six months, Kingboard’s revenue increased 1.9% to $18.7 billion (3 year average 0.14%) and with profits rising an impressive 45% to $2.18 billion (3 year average 19.3%).

As of June, Kingboard had $6.5 billion in cash and bank balances (+$61.6 million from December) and $16.4 billion in borrowings (-$479.5 million less) with debt-equity ratio 0.4x compared to 0.45x in December.

Kingboard also increased its equity (book value) by $3.2 billion to $40.8 billion.

In the past three years, Kingboard reduced its debt by $7.8 billion, allocated $2.9 billion in capital expenditures, generated $12.8 billion in free cash flow, and provided $1.5 billion in dividends with 12% payout ratio.

Using historical revenue growth rates multiplied with PS multiple and a 10% margin indicated a per share figure of $15.14 compared to $43.85 at the time of writing.

Clearly, my valuation is out of whack on this one but Kingboard definitely knows how to generate free cash flow.

In the meantime, I take a pass.

Disclosure: I do not have shares in Kingboard.

Cebu Air: Watch Out For Rise in Fuel Expenses

Philippines’ low cost carrier operator profitability has been tested


(In the middle—Philippine President Rodrigo Roa Duterte and Lance Gokongwei, Cebu Pacific President, Chief Executive Officer and Director, screengrab from Presidential Communications)

On October 20, Philippine President Duterte attended the launch of CGY — the airport code for Cagayan de Oro — as the 7th domestic hub of Cebu Pacific at the Laguindingan Airport in Misamis Oriental.

According to the Presidential Communications, Cebu Pacific already operates six other regional hubs located in Manila, Cebu, Davao, Kalibo, Clark, and Iloilo.

In this occasion, a direct recognition was provided by the highest official of the Philippines, therefore, indicating more credibility to Cebu Pacific.

“Alam mo totoo lang, itong mga bright na tao pati un tatay niya, un Senior na Suma Cum Laude rin un. They have a knack of you know, looking for money. They understand the whole gamut of how men are gainfully employed, and how to run a business little by little.”

Philippine President Duterte

In its recent six months of operations that ended in June, Cebu Air reported an increase of 7.7% in its revenue to ₱35.7 billion (vs. 3-year average revenue growth +6.95%) and a contrasting 44% drop in profits to ₱4.33 billion (vs. 3-year average revenue growth +167%).

Cebu Air, a ₱68 billion Cebu City-based leading low-cost carrier in the Philippines, recorded nearly 17% rise in its expenses or ₱4.1 billion more compared to its year-ago period resulting in much lower profits for shareholders in the recent period.

In particular, Cebu Air’s Aviation fuel expense jumped ₱2.3 billion from last year or by 30%, therefore, siphoning off profits for the period.

Here is Cebu Air discussing its operating expenses for the recent six months.

“The increase was primarily due to the rise in fuel prices in 2017 coupled with the weakening of the Philippine peso against the U.S. dollar as referenced by the depreciation of the Philippine peso to an average of P49.93 per U.S. dollar for the six months ended June 30, 2017 from an average of P46.90 per U.S. dollar last year based on the Philippine Dealing and Exchange Corporation (PDEx) weighted average rates. The growth in the airline’s seat capacity from the acquisition of new aircraft also contributed to the increase in expenses.”

Cebu Air

Having recorded profits to ₱4.33 billion, Cebu Air declared a regular cash dividend of ₱1 per share and another special dividend of ₱1.75, which together amounted to ₱1.7 billion—about 39% of its profits.

Meanwhile, Cebu Air has ₱12.6 billion in cash and cash equivalents as of June (+₱1.2 billion more than a year ago) with ₱45.3 billion in debt (+₱7.1 billion more) and a debt-equity ratio of 1.25x compared with 1.22x last year.

Cebu Air’s equity (book value) also rose by ₱4.7 billion year over year to ₱36.2 billion resulting in a price to book ratio of 1.5x.

In the past three years, Cebu Air allocated ₱45.5 billion in capital expenditures, raised ₱9.5 billion in debt net repayments, and provided ₱2.7 billion in dividend payouts while having accumulated a net free cash flow deficit of -₱6.2 billion.

Founded in 1988, the leading low-cost carrier in the Philippines has been exemplary so far this year has provided a total return of 23.6%.

On October 18, COL Financial has a buy recommendation on Cebu Air.

On the other hand, asking a 20% margin from analysts’ average revenue estimates for the fiscal year 2018 indicated a per share figure of ₱102 compared to ₱112.20 at the time of writing.

In summary, Cebu Air has failed to generate any consistent positive free cash flow in recent years.

The significant bump in aviation fuel expenses just showed the company’s profitability is grossly susceptible to the oil commodity. Certainly, Cebu Air has brighter prospects moving forward but is definitely a pass at this time.

“Alam mo, kaibigan ko si Lance. I value his friendship.”

Philippine President Duterte

Disclosure: I do not have shares in Cebu Air.