Philippine Markets Newsletter

This dividend fund from one of the country’s largest banks continues to outperform the PSEi with a Uniform earning power almost 2x as-reported metrics

October 23, 2020

This unit investment trust fund (UITF) from the first privately-owned local commercial bank in the Philippines has outperformed its benchmark, the Philippine Stock Exchange Index (PSEi), both year to date and since inception.

However, as-reported metrics would leave investors confused with the fund’s stock picks. Uniform Accounting financial metrics help make sense of the fund’s investments and how it continues to outperform its benchmark.

In addition to examining the fund’s portfolio, we are including fundamental analysis of one of the fund’s largest holdings, providing you with the current Uniform Accounting Performance and Valuation Tearsheet for that company.

Philippine Markets Daily:
Friday Uniform Portfolio Analytics
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China Banking Corporation, commonly known as China Bank, is the first privately owned local commercial bank in the Philippines.

Established in 1920 in Binondo, Manila, the bank initially catered to the banking needs of Chinese-Filipino businessmen. In 1925, China Bank’s first international bank opened in Xiamen, China, followed by a Shanghai branch in 1929. Both branches closed down in 1944 when China’s political environment started causing problems to the banks’ operations.

China Bank eventually got its license to operate as a universal bank in 1991. Today, it’s one of the largest universal banks in the country, coming in 6th based on total assets in 2019.

We’ve written about one of China Bank’s UITFs before: China Bank Equity Fund. This week, we’ll focus on the China Bank High Dividend Equity Fund.

China Bank High Dividend Equity Fund was launched on June 26, 2015. Its strategy is to invest in exchange-listed companies that have a regular payment dividend policy and dividend payment track record. The objective of this UITF is to outperform its benchmark, the Philippine Stock Exchange Index (PSEi), by generating returns from both capital appreciation and reinvested dividend payments.

China Bank High Dividend Equity Fund started with a net asset value per unit (NAVPU) of PHP 1.00 at its 2015 inception. The fund’s NAVPU dropped to PHP 0.90 in January 2016, a 10% decrease, due to the oil price crash. Meanwhile, the PSEi underperformed the fund during this period with a decrease of 20%.

From there, the fund climbed to its peak of PHP 1.29 in January 2018, a 43% increase. The PSEi outperformed the fund with an increase of 49% in this period.

The fund’s NAVPU then dropped to PHP 1.02 in November 2018, a 21% loss from its peak in January due to uncertainties regarding Brexit and the U.S.-China trade war. Meanwhile, the PSEi recorded a loss of 24% over the same time span.

The fund ended 2019 with a NAVPU of PHP 1.11. In March 2020, the fund’s NAVPU dropped to its lowest point of PHP 0.70 due to the downturn caused by the coronavirus pandemic. However, the fund has rebounded slightly, recording a NAVPU of PHP 0.88 as of October 16, 2020. The fund has outperformed its benchmark year to date, recording a lower loss of 21% compared to the PSEi’s loss of 25%.

Moreover, the fund has outperformed its benchmark with a loss of only 12% since inception, almost half of the PSEi’s loss of 23%.

Looking at China Bank High Dividend Equity Fund’s investments using as-reported metrics, it is not apparent that the fund invests in stable and established companies.

As-reported metrics would have investors believe that this portfolio consists of companies that do not generate economic profit. However, Uniform Accounting reveals the truth behind the companies this fund invests in.

The table below shows the core non-financial holdings of the China Bank High Dividend Equity Fund along with their Uniform return on assets (ROA), as-reported ROA, and ROA distortion—the difference between Uniform and as-reported ROA.

All of the companies in the China Bank High Dividend Equity Fund show as-reported ROAs at or below cost-of-capital levels, suggesting that they are not generating economic profit. In 2019, the fund generated an as-reported average ROA of 5%, slightly below global corporate average returns.

However, on a Uniform Accounting basis, this UITF has actually delivered stronger earnings with an average Uniform ROA of 9%, almost 2x the as-reported ROA averages. These companies have strong returns, with all of them having a Uniform ROA above the 6% global average returns.

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 the 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 45% to 103%, with JG Summit Holdings Inc. (JGS:PHL) and SM Investments Corporation (SM:PHL) both having distortions of more than a hundred percent.

JGS is not just a 4% ROA firm like what as-reported numbers suggest. It is, in fact, an above-average company with 8% Uniform ROA, and has consistently been generating returns of at least around 7% over the past five years.

Similarly, as-reported ROA understates the profitability of SM, suggesting a below-average company with an as-reported ROA of 6%. In reality, this company is a high-quality firm with a 12% Uniform ROA, 2x the as-reported number. Moreover, SM has never seen its Uniform ROA dip below 7% levels over the past five years.

By focusing on as-reported metrics alone, China Bank would never pick most of these companies because they 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 the 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 of when we convert consensus sell-side analyst estimates 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 by 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 2-year Uniform EPS growth and market expected Uniform EPS growth.

On average, Philippine companies are expected to have 6% annual Uniform earnings growth over the next two years. Meanwhile, China Bank High Equity Dividend Fund’s major holdings are forecast to underperform with a 14% projected Uniform earnings shrinkage in the next two years, while the market is seeing a 1% Uniform EPS shrinkage.

None of these companies have positive Uniform earnings growth dislocations, with the spread ranging from -29% to -1%.

The market is pricing JGS’s Uniform earnings to shrink by only 3% in the next two years. However, sell-side analysts are projecting the company’s earnings to shrink by 32% moving forward.

Furthermore, the market is expecting SMPH’s Uniform Earnings to grow by 5%, while analysts are projecting a 13% Uniform earnings shrinkage over the next two years.

Overall, as-reported numbers would have investors incorrectly conclude that this portfolio consists of low-quality companies. While these firms suffer from the adverse effects of the coronavirus pandemic, dragging down their short-term earnings growth expectations, Uniform Accounting metrics show that these mature, low growth but high return companies have intact business models that should drive economic profitability moving forward.

SUMMARY and SM Prime Holdings, Inc. Tearsheet

Today, we’re highlighting one of the largest individual stock holdings in the China Bank High Equity Dividend Fund—SM Prime Holdings, Inc. (SMPH:PHL).

As the Uniform Accounting tearsheet for SMPH highlights, it trades at a Uniform P/E of 34.2x, well above global corporate averages, but below its historical averages.

High P/Es require high EPS growth to sustain them. In the case of SMPH, the company has recently shown a 23% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that poorly track reality. However, sell-side analysts have a strong grasp on 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, SMPH’s sell-side analyst-driven forecast shows that Uniform earnings are expected to shrink by 50% in 2020, but grow by 54% in 2021.

Based on the current stock market valuations, we can back into the required earnings growth rate that would justify PHP 30.45 per share. These are often referred to as market embedded expectations.

The company would have to grow Uniform earnings by 5% over the next three years to justify current price levels. What sell-side analysts expect for SMPH’s earnings growth is below what the current stock market valuation requires in 2020, but above what the market requires in 2021.

The company has an earning power around the long-run corporate averages. However, SMPH’s cash flows and cash on hand fall short of obligations within five years, but the company has an intrinsic credit risk 100bps above the risk-free rate. This indicates that SMPH has a moderate credit and a high dividend risk.

To conclude, SMPH’s Uniform earnings growth is below peer averages, but the company is trading well above peer average valuations.

About the Philippine Markets Daily
“Friday Uniform Portfolio Analytics”

Investors who don’t engage in the buying or selling of securities for a living oftentimes 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, 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 China Bank High Equity Dividend Fund interesting and insightful.

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


Angelica Lim
Research Director
Philippine Markets Daily
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