Philippine Markets Newsletter

This real estate developer continues to land on better shareholder value with a Uniform ROA of 8%, not 4%

May 4, 2022

In the decade before the pandemic, the Philippine real estate market enjoyed robust growth rates and opportunities—home prices more than doubled in areas like the Makati CBD (central business district). Yet, this real estate developer with properties in key cities appears to have not been able to take advantage of its prime locations.

Uniform Accounting shows why that is not the case and why the company has been able to generate returns above the cost of capital.

Also below, Uniform Accounting Embedded Expectations Analysis and the Uniform Accounting Performance and Valuation Tearsheet for the company.

Philippine Markets Newsletter:
Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus
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Giant real estate developers in Metro Manila like Filinvest Land (FLI:PHL)Megaworld Corporation (MEG:PHL), and Vista Land & Lifescapes (VLL:PHL) have benefited from being a part of a larger firm with diversified businesses. This setup helped them weather the negative impacts of the pandemic.

Fortunately, small developers like Cityland that primarily focus on more affordable residential buildings were able to mitigate the negative impacts of the pandemic.

Established in 1979, the Cityland group’s primary operations revolved around acquiring land sites to develop them for residential, office, and commercial uses. Currently, its projects are mainly condominium development in cities within and close to Metro Manila such as Makati, Mandaluyong, Manila, Quezon, and Tagaytay City.

Today, the Cityland group has three publicly-listed companies: the parent company in Cityland, Inc. (CI:PHL), its first-tier subsidiary with Cityland Development Corporation (CDC:PHL), and a second-tier subsidiary with City & Land Developers, Incorporated (CLDI:PHL).

There are no strict distinctions in target market, purpose of the unit, or location for these three developers—they simply differ in acquired and developed projects.

That said, Cityland as a group mainly focuses on medium to high-rise condominium projects that can be used for residential, office, and commercial purposes.

Due to its cyclical nature, the real estate development market was one of the hardest-hit industries in 2020. With the uncertainty surrounding the pandemic, demand for condominium projects declined.

Furthermore, as we discussed in our Monday Macro Report on Residential Real Estate Price Index (RREPI), the pandemic provided opportunities to work remotely in developing areas where residential properties are more affordable.

Despite that trend, the Cityland group recorded sales declines in 2020 only for its real estate properties division across its three companies. All other sources of revenue, such as financing and rent, continued to improve through 2021.

With the Philippine economy opening up and employees are now headed back to the office in key cities, Cityland is poised to recover some of the lost revenue in 2020. In fact, it has already recorded higher total sales in 2021 compared to the prior year.

Among the three publicly-listed companies, Cityland Development Corporation (CDC:PHL) contributed to 45% of the group’s revenues in 2021. Its properties reside mostly in Mandaluyong and Quezon City.

Looking at as-reported metrics, it appears that Cityland Development Corporation is not generating enough shareholder value, with return on assets (ROAs) reaching below cost of capital levels since 2016.

In reality, the company’s performance actually did much better than expected, with Uniform ROAs reaching a robust Uniform ROA of 8% even during the pandemic.

What as-reported metrics fail to do is to consider the company’s excess cash on the balance sheet. While most companies inherently need some level of cash to operate, the portion of that balance that is earning limited or no return—or excess cash—ends up diluting as-reported ROAs.

When excess cash remains included in the company’s asset base in computing its performance metrics, the company’s profitability and capital efficiency may appear weaker than it actually is. Removing excess cash allows investors to see through the distortions that come from management carrying much more cash on the balance sheet than what is operationally required.

For 2021, Cityland Development had a significant amount of excess cash sitting idly in its balance sheet for up to 14% of its as-reported total assets.

Cityland Development’s earning power is stronger than you think

As-reported metrics distort the market’s perception of the firm’s recent profitability. If you were to just look at as-reported ROA, you would think that the company is a weaker business than real economic metrics highlight.

Through Uniform Accounting, we can see that the company’s true ROAs have been mostly understated beyond the past decade. For example, as-reported ROA was 4% in 2021, but its Uniform ROA is double that at 8%.

Cityland Development is a more efficient business than you think

As-reported metrics significantly understate Cityland Development’s asset utilization. For example, as-reported asset turnover for the company was 0.1x in 2020, lower than Uniform asset turns of 0.2x, making the firm appear to be a less cost efficient business than is accurate.

Moreover, as-reported asset turnover has never gone beyond 0.4x, distorting the market’s perception of the company’s asset utilization over the past decade. Asset turns based on Uniform Accounting have actually reached a peak of 0.5x in the same time period.

SUMMARY and Cityland Development Corporation Tearsheet

As our Uniform Accounting tearsheet for Cityland Development Corporation (CDC:PHL) highlights, the company trades at a Uniform P/E of 6.2x, below the global corporate average of 24.0x, but around its historical P/E of 6.9x.

Low P/Es require low EPS growth to sustain them. In the case of Cityland Development, the company has recently shown a 53% Uniform EPS growth.

Sell-side analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, sell-side analysts’ near-term earnings forecasts tend to have relevant information.

We take sell-side forecasts for Philippine Financial Reporting Standards (PFRS) earnings and convert them to Uniform earnings forecasts. When we do this, Cityland Development’s sell-side analyst-driven forecast is to see Uniform earnings shrink by 2% in 2022, and see immaterial growth by 2023.

Based on current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Cityland Development’s PHP 0.73 stock price. These are often referred to as market embedded expectations.

The company is currently being valued as if Uniform earnings were to shrink 22% annually over the next three years. What sell-side analysts expect for Cityland Development’s earnings growth is above what the current stock market valuation requires through 2023.

Moreover, the company’s earning power is above the long-run corporate average. Furthermore, cash flows and cash on hand are 17x above total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals low credit risk.

Lastly, Cityland Development’s Uniform earnings growth is below its peer averages, and also currently trades below its average peer valuations.

About the Philippine Markets Newsletter
“Wednesday Uniform Earnings Tearsheets – Philippine-listed Focus”

Some of the world’s greatest investors learned from the Father of Value Investing or have learned to follow his investment philosophy very closely. That pioneer of value investing is Professor Benjamin Graham. His followers:

Warren Buffett and Charles Munger of Berkshire Hathaway; Shelby C. Davis of Davis Funds; Marty Whitman of Third Avenue Value Fund; Jean-Marie Eveillard of First Eagle; Mitch Julis of Canyon Capital; just to name a few.

Each of these great investors studied security analysis and valuation, applying this methodology to manage their multi-billion dollar portfolios. They did this without relying on as-reported numbers.

Uniform Adjusted Financial Reporting Standards (UAFRS or Uniform Accounting) is an answer to the many inconsistencies present in GAAP and IFRS, as well as in PFRS.

Under IFRS, each company’s financial statements are rebuilt under a consistent set of rules, resulting in an apples-to-apples comparison. Resulting UAFRS-based earnings, assets, debts, cash flows from operations, investing, and financing, and other key elements become the basis for more reliable financial statement analysis.

Every Wednesday, we focus on one Philippine-listed company that’s particularly interesting from a UAFRS vs as-reported standpoint. We highlight one adjustment that illustrates why the as-reported numbers are unreliable.

This way, we gain a better understanding of the factors driving a particular stock’s returns, and whether or not the firm’s true profitability is reflected in its current valuations.

Hope you’ve found this week’s Uniform Earnings Tearsheet on a Philippine company interesting and insightful.

Stay tuned for next week’s Philippine company highlight!


Angelica Lim
Research Director
Philippine Markets Newsletter
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