Philippine Markets Newsletter

This bank has made partnerships with Xendit to easily fund an e-wallet, and with BDBPO to enhance its payroll processing solutions… also, AC tearsheet

March 3, 2023

The Sy-led China Banking Corporation has teamed up with fintech provider Xendit to safely connect its clients’ accounts and seamlessly fund their Maya accounts.

Another progress carried out in the last quarter of 2022 is enhancing its China Bank Payroll 2.0 powered by BDBPO’s SweldoMo for corporate customers. Lastly, it rolled out CBS GO as part of its Build & Rise program that promotes financial inclusion, consumer confidence, and the spirit of entrepreneurship needed for rapid economic recovery. This serves entry-level depositors to gain real-time control over their finances.

Here 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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With a growing rate of smartphone ownership in the Philippines, many Filipinos still lack access to formal banking services, which can cause financial exclusion and impede the country’s economic development.

To address this issue, China Bank Savings Inc. (CBS) launched a mobile app called CBS GO, which aims to accelerate the country’s shift to a cash-lite economy and support the Digital Payments Transformation Roadmap of the Bangko Sentral ng Pilipinas (BSP). The roadmap aims to increase the percentage of Filipino adults with bank accounts to 70% and shift 50% of retail payments to electronic channels by 2023.

Moreover, China Banking Corporation (China Bank) has collaborated with BD Business Process Outsourcing Solutions, Inc. (BDBPO) to improve its automated payroll processing solution for corporate clients as part of the bank’s efforts to enhance its business services. This improved solution includes new features such as a self-service online portal and real-time data processing, making timekeeping, attendance tracking, and government report generation more efficient and affordable through a tiered pricing scheme.

Furthermore, in collaboration with financial technology (fintech) provider Xendit, China Bank has launched a new feature that enables customers to fund their Maya account directly from their China Bank accounts safely and seamlessly. This partnership eliminates the need for customers to personally transact over the counter for their financial needs.

To further examine the operations of China Bank, let’s focus on one of its UITFs, which is the China Bank Equity Fund.

The China Bank Equity Fund was launched on June 11, 2013, with the goal of achieving capital appreciation through investing in a diverse range of equity issues listed in the Philippine Stock Exchange (PSE). The Fund has the flexibility to invest up to 95% of its assets in equity issues at any given time, while the remaining balance will be allocated to tradable fixed-income securities and bank deposits. Its objective is to exceed its benchmark, which is a combination of 95% in the PSE Index (PSEi) and 5% in the Bloomberg Philippine Sovereign Bond Index Money Market (BPHILMM Index).

This type of investment is recommended for investors with an aggressive risk appetite and an investment horizon of at least one year willing to take on higher risks involving volatility of returns and possible erosion of principal for potential long-term growth.

  • At its inception in June 2013, China Bank Equity Fund’s beginning net asset value per unit (NAVPU) was PHP 1.00. The fund’s value grew by 27% in April 2015 and shrunk by 20% in January 2016 when the oil prices plummeted. Its benchmark slightly underperformed, shrinking by 25%.

  • In November 2017, the fund peaked at around PHP 1.40, which lasted for a month. This was a 37% growth from its lowest in January 2016, as the economy gained multi-billion dollar investment and assistance support from Asia’s two biggest economies, China and Japan, as well as strengthening ties with archrivals U.S. and Russia. PSEi also recovered and climbed by 40% in the same period.

  • In around two years of the stable movement, the fund’s NAVPU dropped to PHP 0.83, almost half of its peak price, following the announcement of the lockdown due to COVID-19.

  • The fund was able to recover at PHP 1.23 at the end of the year 2020 from its bottom in March 2020, and the fund’s 49% growth underperformed its benchmark growth of 56%. With the availability of COVID-19 vaccines and fewer restrictions on economic activities, the fund still slightly grew by 6% at the start of 2022 while it outperformed its benchmark with 1% growth.

  • In response to the U.S. Fed’s aggressive raising of interest rates to fight inflation, the fund dropped by 20% in the third quarter of 2022 from its climb at the beginning of the year, and it slightly outperformed its benchmark’s drop of 22%.

  • By the end of 2022, the fund and PSEi recovered by 13% and 14%, respectively. Since its inception, the fund managed to outperform its benchmark, recording a 23% gain versus PSEi’s 4% growth.

With the fund outperforming its benchmark, let’s take a look at how high-quality the companies in its holdings are. As-reported metrics would have investors believe that the fund’s portfolio consists of companies that only generate average economic profit. Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the top six core non-financial holdings of China Bank Equity 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 China Bank Equity 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 better profitability with an average Uniform ROA of 11%, almost double the average as-reported ROA.

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 China Bank Equity 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 44% to 269%, with International Container Terminal Services, Inc. (ICT:PHL), Aboitiz Power Corporation (AP:PHL) and SM Investments Corporation (SM:PHL) having the highest positive distortions.

Among these holdings, no company was revealed to have a Uniform ROA in line with or below the 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 above-average firm with an as-reported ROA of 9%. In reality, this firm more closely resembles one that is highly profitable, with a Uniform ROA of 33% 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 Aboitiz Power Corporation with an as-reported ROA of 4%. In fact, its Uniform ROA is at 10%, its lowest over the past decade.

Likewise, as-reported metrics understate the profitability of SM Investments Corporation, suggesting a below-average firm with an as-reported ROA of only 4% 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, China Bank Equity Fund’s major holdings are forecasted to significantly outperform with a 48% projected Uniform earnings growth in the next two years, while the market is forecasting an average with a projected 5% Uniform earnings growth.

Most of the companies in China Bank Equity Fund have positive Uniform earnings growth. Among these companies, Ayala Corporation (AC:PHL), Ayala Land Inc. (ALI:PHL), and SM Investments Corporation have the highest positive Uniform earnings growth spread.

The market is pricing Ayala Corporation’s Uniform earnings to grow by 4% in the next two years, while sell-side analysts are projecting a 141% growth for the company’s earnings.

Moreover, the market is pricing Ayala Land Inc.’s Uniform earnings to grow by 13% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 59%.

Additionally, the market is pricing SM Investments Corporation’s Uniform earnings to grow by 4% in the next two years, while sell-side analysts are projecting the company’s earnings to grow by 36%.

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 Ayala Corporation Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the China Bank Equity Fund, Ayala Corporation (AC:PHL).

As the Uniform Accounting tearsheet for Ayala Corporation highlights, the company trades at a Uniform P/E of 14.9x, below the global corporate average of 18.4x and its historical average of 19.5x.

Low P/Es require low EPS growth to sustain them. In the case of Ayala Corporation, the company showed a 327% 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, Ayala Corporation’s sell-side analyst-driven forecast shows that Uniform earnings are expected to grow by 351% and 29% in 2022 and 2023, respectively.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify Ayala Corporation’s PHP 670 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company has an earning power below the long-run corporate averages. Moreover, its cash flows and cash on hand fall short of obligations, and it also has an intrinsic credit risk of 220bps. Together, these indicate a high dividend risk and moderate credit risk.

Lastly, Ayala Corporation’s Uniform earnings growth is well above 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 Ayala Corporation interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Newsletter
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