EastWest Banking Corporation has been growing its business through strategic partnerships. In fact, Mitsubishi Motors Philippines Corporation (MMPC), the second-biggest seller of automobiles in the country, hailed Eastwest Bank as the brand’s top bank partner for 2021.

EastWest Banking Corp. has also renewed its existing partnership with Singapore Airlines for five more years with the benefits-packed credit card, the EastWest Singapore Airlines KrisFlyer Mastercard.

Added to this, EastWest Bank has partnered with JCB International Co., the only international payment brand from Japan. Such partnership resulted in the launching of a new credit card that will bring forth the Japanese payment experience to the Philippines.

Today, we look at one of the institution’s unit investment trust funds (UITF). On top of examining the fund’s portfolio, we will provide you with the current Uniform Accounting Performance and Valuation Tearsheet for one of the fund’s largest holdings.

Philippine Markets Newsletter:
Friday Uniform Portfolio Analytics
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EastWest Banking Corporation has launched a new credit card – the EastWest JCB Credit Card, which is the fruit of its partnership with JCB International Co. The signing of the memorandum of agreement (MOA) to seal this partnership was held at the Hotel Okura Manila last November 2022.

Unlike most other issuing partnerships, JCB and EastWest Bank support the provision of Japan’s “customer-centered focus” into everyday banking products used by Filipinos. The President and COO of JCB International pointed out that the MOA signed was historic since EastWest Bank is the first issuing partner of JCB in the Philippines for the past 25 years.

While there is positive growth in the bank’s services and partnerships, let us also take a glimpse of its investment activities, focusing on one of its UITFs, the EastWest PSEi Tracker Fund.

The EastWest PSEi Tracker Fund was launched on December 1, 2015 and passively managed by EW Trust & Asset Management Group. It seeks to achieve investment returns that track the performance of the Philippine Stock Exchange Index (PSEi) by investing in a diversified portfolio of stocks comprising the PSEi in the same weights as the index.

• At its inception in December 2015, EastWest PSEi Tracker Fund’s beginning net asset value per unit (NAVPU) was PHP 100. The fund’s value initially shrunk to PHP 87 or 12.6% in January 2016 when the decline in exports of manufactured products reflected the general weakness of the global manufacturing sector. Its benchmark slightly outperformed at 12%.
• At the start of 2018, the fund began to grow by 43% while slightly underperforming PSEi which grew by 44% following the new transition of leadership in the country. However, before the year ends, the fund shrunk by 22% while its benchmark shrunk by 23%.
• After two years of stable movement, the fund’s NAVPU dropped to PHP 66, a 31% shrinkage from its price in October 2018, following the announcement of the lockdown due to COVID-19. PSEi slightly underperformed by 33% shrinkage during the same period.
• The fund was able to recover at PHP 104 by the start of 2021 from its bottom in March 2020, and the fund’s 57% growth slightly underperformed its benchmark growth of 58%. This is due to the availability of COVID-19 vaccines and fewer restrictions on economic activities.
• In response to the U.S. Fed’s aggressive raising of interest rates to fight inflation, the fund had a stable average price of around PHP 94 in the third quarter of 2022, and its movement was aligned with its benchmark.
• By the first quarter of 2023, the fund and PSEi reached by 8% and 11% shrinkage, respectively. Since its inception, the fund outperformed its benchmark, recording a 2% shrinkage versus PSEi’s 6% shrinkage.

With the fund underperforming its benchmark, let’s take a look at the quality of the companies in its holdings. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that don’t appear to break even. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top eight core non-financial holdings of EastWest PSEi Tracker Fund along with its Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

Most of the companies in EastWest PSEi Tracker Fund show as-reported ROAs below cost-of-capital levels, suggesting that they are not generating economic profit. Moreover, the fund is generating an average as-reported ROA of 4%, below the global corporate average returns of 6%.

However, on a Uniform Accounting basis, this UITF’s holdings have actually delivered a Uniform ROA of 11%, a profitability above the global corporate average.

The Uniform Accounting framework addresses financial statement inconsistencies attributable to the flaws present in the Philippine Financial Reporting Standards (PFRS). This enables investors to determine the true underlying performance of companies and avoid distorted financial analysis and valuation.

As such, it should not be surprising that when analyzing the non-financial holdings of EastWest PSEi Tracker Fund, the figures that easily stand out are the large discrepancies between Uniform ROA and as-reported ROA for these companies.

While at a glance, the difference between as-reported ROA and Uniform ROA may not seem that great, the distortion in percentage ranges from -133% to 332%, with International Container Terminal Services, Inc. (ICT:PHL), SM Investments Corporation (SM:PHL), and Aboitiz Equity Ventures, Inc. (AEV:PHL) having the highest positive distortions.

Among these holdings, only JG Summit Holdings, Inc. (JGS:PHL) is below as-reported ROA, presenting a potential cause for concern. Companies such as this need to be closely monitored for drastic changes that could negatively affect the fund itself, especially when the support behind the stocks’ performance begins to wane.

As-reported metrics understate the profitability of International Container Terminal Services, Inc., suggesting an as-reported ROA of 11%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 45% above the average cost of capital. In addition, the company has consistently generated returns of at least 7% over the past decade.

Similarly, as-reported metrics understate the profitability of SM Investments Corporation with an as-reported ROA of 5%. In fact, its Uniform ROA is at 13%, when its lowest was 8% over the past decade.

Likewise, as-reported metrics understate the profitability of Aboitiz Equity Ventures, Inc., suggesting a below-average firm with an as-reported ROA of only 3% when this company actually has a 9% Uniform ROA.

By focusing on as-reported metrics alone, these companies look like anything but profitable businesses.

That said, looking at profitability alone is insufficient to deliver superior investment returns. Investors should also identify if the market is significantly undervaluing a company’s earnings growth potential.

This table shows the earnings growth expectations for the major non-financial holdings of the fund. It features three key data points:

1. The two-year Uniform earnings per share (EPS) growth represents the Uniform earnings growth the company is likely to have for the next two years. The earnings number used is the value when we convert consensus sell-side analyst estimates according to the Uniform Accounting framework.
2. The market expected Uniform EPS growth represents what the market thinks Uniform earnings growth is going to be for the next two years. Here, we show how much the company needs to grow Uniform earnings in the next two years to justify the current stock price of the company. This is the market’s embedded expectations for Uniform earnings growth.
3. The Uniform EPS growth spread is the difference between the two-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 5%-6% annual Uniform earnings growth over the next two years. Meanwhile, EastWest PSEi Tracker Fund’s major holdings are forecasted to significantly outperform with a 17% projected Uniform earnings growth in the next two years, while the market is forecasting -34% Uniform earnings.

Most of the companies in EastWest PSEi Tracker Fund have positive Uniform earnings growth. Among these companies, JG Summit Holdings, Inc. and Ayala Corporation (AC:PHL) have the highest positive Uniform earnings growth spread.

The market is pricing JG Summit Holdings, Inc.’s Uniform earnings to shrink by 275% in the next two years, while sell-side analysts are projecting an immaterial growth for the company’s earnings.

Moreover, the market is pricing Ayala Corporation’s Uniform earnings to shrink by 2% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 89%.

Overall, as-reported numbers significantly understate the expected earnings of these companies, as shown by the Uniform-adjusted sell-side estimates.

Uniform Accounting metrics show that these mature but high-growth and high-return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and Aboitiz Equity Ventures, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the EastWest PSEi Tracker Fund, Aboitiz Equity Ventures, Inc. (AEV:PHL).

As the Uniform Accounting tearsheet for Aboitiz Equity Ventures, Inc. highlights, the company trades at a Uniform P/E of 14.2x, which is below the global corporate average of 18.4x but is around its historical average of 14.4x.

Low P/Es require low EPS growth to sustain them. In the case of Aboitiz Equity Ventures, Inc., the company showed a 160% Uniform EPS shrinkage last year.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp of near-term financial forecasts like revenue and earnings.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings as a starting point for our Uniform earnings forecasts. When we do this, Aboitiz Equity Ventures, Inc.’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 191% in 2023 and grow by 90% in 2024.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Aboitiz Equity Ventures, Inc.’s PHP 56 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power 2x the long-run corporate averages. Moreover, its cash flows and cash on hand consistently exceed its obligations, and it also has an intrinsic credit risk of 240bps. Together, these indicate a moderate dividend risk and moderate credit risk.

Lastly, Aboitiz Equity Ventures, Inc.’s Uniform earnings growth is below peer averages and in line with peer average valuations.

About the Philippine Markets Newsletter
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living often rely on professionals to manage their own investments within the scope of their investment policies.

With so many funds and managers out there, it can get confusing and difficult to decide which one best suits your needs as an investor.

Every Friday at the end of the month, we focus on one fund in the Philippines and take a deeper look into their current holdings. Using Uniform Accounting, we identify the high-quality stocks in their portfolio which may not be obvious using the as-reported numbers.

We also identify which holdings may be problematic for the fund’s returns that they would need to reconsider from a UAFRS perspective.

To wrap up the fund analysis, we highlight one of their largest holdings and focus on key metrics to watch out for, accessible in our tearsheets.

Hope you’ve found this week’s focus on EastWest PSEi Tracker Fund interesting and insightful.

Stay tuned for next month’s Friday Uniform Portfolio Analytics!

Regards,

Angelica Lim

Research Director
Philippine Markets Newsletter
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