Mega-politics tells us that people don’t always say what they want, know what they want, or get what they want. Instead, they think what they need to think... do what they want to do... and get what they deserve. And they end up where they ought to be... carried along by the deep currents of history—Bill Bonner
In this issue:
Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy
I. The Incredible Q1 2024 FOMO in the PSEi 30
II. The Two-Speed Economy: Q1 2024 PSEi 30 Firms Posted a Substantial Slowdown
III. Despite Tapering Financial Performance, Debt Absorption Increased for the PSEi 30
IV. Q1 2024 Consumer Slowdown: Decreasing Growth Rates in Retail Chains (Non-Construction and Food Services)
V. Q1 2024 Consumer Slowdown: Declining Sales Growth in the Midstream and Downstream Real Estate Industry
VI. The SSI Group's Fear of Missing Out (FOMO)
VII. The Financial Index’s Fear of Missing Out (FOMO)
VIII. Q1 2024 Financial Performance by Sector
IX. Q1 2024 Financial Performance by Members
X. San Miguel’s Debt Hit Php 1.44 Trillion as the Spike in Short-term Debt Has Exceeded the Firm’s Cash Reserve
XI. Summary and Conclusion
Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy
The financial performance of the PSEi 30 and its members and the economy have departed from the price actions of the PSEi 30. Why this is unsustainable.
I. The Incredible Q1 2024 FOMO in the PSEi 30
The principal Philippine equity benchmark, the PSEi 30, found an interim trough at the end of October 2023 and rallied until April Fool’s Day 2024.
The PSEi 30 returned 2.04% in Q4 2023 and 7.03% in Q1 2024. Better yet, the PSEi returned 15.8% from its provisional nadir on October 27, 2023, through the end of March 2024.
Has the panic bidding spree been justified in the context of the economy or corporate fundamentals?
First, Q1 2024 GDP posted a slower-than-expected 5.7%.
As we previously explained, despite the diminishing trend in consumer spending, the "money illusion" or the devaluation of the Philippine peso magnified net export contribution to GDP on the expenditure side.
At the same time, "financialization" or extensive gearing of the bank-led financial industry played a crucial role in the growth of the industry side of GDP. (Prudent Investor 2024)
How about the Q1 2024 performance of the nation’s elite firms?
Nota bene:
-Older data, representing PSEi members of the specified Q1 end-of-period, presents an apples-to-oranges scenario. The PSEi periodically updates its constituents, which we labeled as 1A data.
-The older data also excludes data revisions.
-Current or 2023-2024 Q1 data provides a more accurate comparison as it reflects present members, labeled here as 1B data.
-The aggregates are overstated due to holding companies incorporating subsidiaries. (Prudent Investor 2024)
Here’s the summary of Q1 2024 YoY performance of the elite members of the PSEi 30.
II. The Two-Speed Economy: Q1 2024 PSEi 30 Firms Posted a Substantial Slowdown
-Using 1B, total revenues grew 8.3% or Php 129.64 billion
-Aggregate net income expanded by 6.5% or Php 14.92 billion
-Total cash reserves increased by 14.5% or Php 196.2 billion
-Published aggregate non-financial debt grew by 7.8% or Php 396.25 billion
Figure 1
The sectoral performance distribution table represents 1B. (Figure 1: topmost table)
Though revenue growth hit a record high in pesos compared to previous years (1A), Q1 2024 net revenue gains of Php 129.64 billion signified the smallest increase since 2021. (Figure 1: middle window)
The deceleration of revenue growth (1B) from 17.8% to 8.3% echoed the GDP. NGDP slowed from 14% in Q1 2023 to 8.8% in Q1 2024, while headline GDP eased from 6.4% to 5.7%. (Figure 1: lowest image)
Figure 2
Q1 2024 revenues-to-NGDP ratio hit 27.8%, the second highest in the last five years. If the GDP estimates are accurate, then the firms of PSEi 30 accounted for more than a quarter of the GDP.
Profits also took a breather. Net income growth dropped substantially from 20.6% in Q1 2023 to 6.5%, as reflected by the marginal differences, even as the net income aggregate hit a record high. (Figure 2, topmost chart)
That said, since the elite firms demonstrated a material slowdown in both revenue and income growth, this indicates that the GDP weakened more than the headline numbers suggest.
Self-evidently, the government was the primary beneficiary of the Q1 2024 5.7% GDP growth.
In other words, the government strengthened at the expense of the private sector.
III. Despite Tapering Financial Performance, Debt Absorption Increased for the PSEi 30
While the economy decelerated considerably, these firms worryingly gorged on more debt.
Non-financial debt expanded by 7.8% to a second all-time high of Php 5.48 trillion, a net increase of Php 396 billion (1A). The net peso increase fell slightly below Php 400 billion in 2022. (Figure 2, middle window)
The ratio of net non-financial debt to the PSEi net income surged from 12.8 in Q1 2023 to 26.6 in Q1 2024. Put another way, it required Php 26.6 of non-financial borrowings to generate Php 1 of income! This is assuming that the published bottom line is an accurate representation.
As a reminder, this buildup of debt excludes the banking sector. However, banks have utilized capital markets, particularly T-bills, to raise capital.
Last March, bond holdings of Philippine banks increased by 6.4%, while T-bills jumped 21.7%. The aggregate T-bill holdings of two PSEi 30 banks soared by 46.6%, or by Php 124.8 billion! (Figure 2, lowest graph)
To simplify, the PSEi 30 soared by 7% in Q1 2024, dismissing the risks of a slowdown as the economy continues to pile up leverage.
Incredible.
IV. Q1 2024 Consumer Slowdown: Decreasing Growth Rates in Retail Chains (Non-Construction and Food Services)
Nevertheless, the mounting strains on consumers were conspicuous.
Figure 3
While top consumer retail chains and property firms have been afflicted by decaying growth rates since 2022, Q1 2024 reinforced these underlying trends.
First, the non-food and construction retail chains.
SM retail’s revenue growth plunged from 10.6% in Q4 2023 to 2.7% in Q1 2024. Puregold sales increased from 5.3% to 6.7%, Robinsons retail slowed from 4.24% to 2.9%, Philippine Seven grew from 18.33% to 19.44%, SSI Group almost halved from 8.4% to 4.8%, but MRSGI expanded from 1.6% to 5.2%. (Figure 3, topmost image)
In aggregate, revenue growth slid from 8.23% to 5.1%, its slowest growth since 2021. Yes, revenue growth included the increased capacities from Q1 2023 to Q1 2024!
Next, the biggest food retail chains.
While growth improved marginally from Q4 2023, Q1 2024 reinforced the downtrend in sales growth of the largest food retail chains.
International sales pushed Jollibee’s aggregate sales higher from 8.4% in Q4 2023 to 11.3% in Q1 2024. AGI’s McDonald's posted slower growth, declining from 15.2% to 13.8%. Shakey’s sales growth more than halved, dropping from 16.22% to 6.3%, and the MAX Group suffered a revenue recession with two straight quarters of contraction at -0.14% and -2.1%. (Figure 3, middle window)
In aggregate, while sales growth of the four listed food retail firms increased from 9.3% to 10.9%, Q1 2024 signified the second slowest sales growth since 2021, largely driven by Jollibee’s dominant 77.5% share of the total.
Once again, this slowdown comes despite the added capacity!
V. Q1 2024 Consumer Slowdown: Declining Sales Growth in the Midstream and Downstream Real Estate Industry
How about the firms representing the downstream of the real estate industry?
Third, the leading home improvement and construction supplies retail chains, Wilcon Depot and All Home, also registered sales revenue growth recessions.
Despite store expansions, Wilcon posted -2.11% in Q4 2023 and -2.5% in Q1 2024. All Home likewise saw growth contraction of 5.0% and 5.5%. (Figure 3, lowest graph)
Rising accounts of vacancies were reflected in their sales.
Figure 4
Lastly, the biggest real estate companies.
Revenues of the top four real estate firms mirrored those of their consumer retail peers.
Sales growth of SM Prime Holdings dropped from 10.33% to 7.05%. While Ayala Land increased from 30.31% to 32.7%, smaller rivals Megaworld and Robinsons Land saw decelerations from 23.87% to 16.31% and 21.3% to 18.8%, respectively. (Figure 4, topmost chart)
Cumulative sales growth of the top four property firms slowed from 24.6% in Q1 2023 and 21.7% in Q4 2023 to 19.4% in Q1 2024.
VI. The SSI Group's Fear of Missing Out (FOMO)
Let me cite a specific example, a non-PSEi 30 issue.
While share prices of the largest high-end specialty retailer, the SSI Group, returned 68.3% in Q1 2024, ironically, sales growth year-over-year (YoY) eroded to 5.2% in Q1 2024 compared with 8.4% in Q4 2023 and 38.9% in Q1 2023. As such, net income dived 21.1% in Q1 2024, vis-à-vis the 4.5% growth in Q4 2023 and 573.4% in Q1 2023. (Figure 4, second to the highest and lowest graphs)
SSI expanded its stores from 516 in Q1 2023 to 534 in Q1 2024 (up 3.4%), supported by the increase in selling area from 99,597 sqm to 107,439 sqm (higher by 7.9%). SSI also increased its brands from 87 to 93 (up 7%).
Here is what they reported: “Sales during the 1st quarter of the year were impacted by the timing of the Easter holidays which occurred during the 1st quarter of this year, weaker spending, as more consumers traveled abroad, and the closure for renovation of one (1) Zara store, and the partial closure, also for renovation, of another Zara store, as well as by delayed deliveries for one of our larger footwear brands.” (PSE, 2024) [bold added]
Amazing rationalizations.
In any case, have the wealthy embraced parsimony?
So, riding on the FOMO (Fear of Missing Out) momentum from what seems like an orchestrated pump on the PSEi 30, speculators manically bid up on SSI shares, paving the way for increasing maladjustments between prices and its Q1 financial performance.
SSI plunged 10.6% this week, a day after its announcement (and after my tweet).
VII. The Financial Index’s Fear of Missing Out (FOMO)
More importantly, a similar displacement from the FOMO phenomenon has plagued the banking system.
Since the acme of 2022, the industry’s profit growth rate has steadily declined. It was up by only 2.95% in Q1 2024, down from 13% in Q4 2023 and 34.97% in Q1 2023 (let us close our eyes on their record Held-to-Maturity HTM holdings). (Figure 4, lowest graph)
Yet, the financial index soared by 12.4% YoY in Q1 2024 and 17% on YTD last March. As it stands, the index reached a 6-year high!
Even better, the three biggest banks of the PSEi 30 delivered a 17% net income growth in Q1 2024, a smidgen compared to the 40.9% in Q1 2023.
Strikingly, their PSEi 30 free float market cap weighting stormed to 21.3% at the end of March, an all-time high, and further expanded to a historic 22.8% at the week ending May 3rd.
As in the past, were the Other Financial Corporations (OFC) responsible for this?
Importantly, were such actions at the behest of financial authorities to impress upon the public the supposed "soundness" of the banking system?
The thing is, because "markets" have been running ahead or deviating from their fundamentals, this melt-up can be reckoned as "unsustainable."
Nonetheless, the partial divergence between corporate performance and GDP, on the one hand, and the surge in share price returns and actual corporate results, on the other, reflects the mounting distortions in market pricing caused by the BSP’s monetary and regulatory policies, as well as regulatory lapses in containing repeated attempts to manage market prices by undisclosed entities with likely access to depository accounts.
The deepening mispricing of the stock market exacerbates financial instability and market fragility, which could have severe economic repercussions.
VIII. Q1 2024 Financial Performance by Sector
By sector, financials and the property sector registered the fastest sales growth at 26.9% and 20.5%, respectively. (Figure 1, topmost table)
Nonetheless, holding firms and financials led the growth in the peso, with Php 68.9 billion and Php 32.7 billion, respectively. The same industries accounted for the largest share (in net gains) of the total with 53% and 25.2%, correspondingly.
The property and financial sectors also reported the swiftest net income growth at 22% and 17.1%, respectively. However, financials and services recorded the largest peso gains—Php 6.73 billion and Php 3.7 billion, respectively. Financials and services held the biggest shares at 45% and 24.5%, respectively.
While all non-financial sectors experienced similar growth rates of over 7%, holding firms accounted for the largest borrowings at Php 267.5 billion, followed by services at Php 59.1 billion.
In the meantime, the holding firms and services also saw the most significant net gains in cash reserves, with Php 94.1 billion and Php 30.05 billion, respectively.
It's likely that their substantial borrowings contributed to this surge in cash reserves.
IX. Q1 2024 Financial Performance by Members
Figure/Table 5
Among members of the PSEi 30, San Miguel Corporation recorded the largest net revenue increase of Php 46 billion, followed by JG Summit with Php 14.5 billion. In contrast, Aboitiz Equity experienced the largest sales contraction of Php 6.8 billion. Twenty-two of the 30 PSEi members posted net revenue increases in Q1 2024.
JG Summit and Converge reported the highest net income growth in pesos, with Php 6.849 billion and Php 3.393 billion, respectively. Conversely, San Miguel Corporation posted the largest deficit of Php 8.85 billion. Twenty-one of the 30 PSEi members saw increases in net income.
In contrast, San Miguel, Ayala Corp, and Aboitiz Equity reported the highest debt increases, amounting to Php 162.76 billion, Php 36.2 billion, and Php 33.2 billion, respectively.
Eighteen of the twenty-seven non-financial firms reported increases in debt. San Miguel accounted for 41.08% of the Non-Financial’s Php 396.3 billion total.
The crux: What happened to the BSP’s monetary policies? Why the sustained rapid debt expansion?
X. San Miguel’s Debt Hit Php 1.44 Trillion as the Spike in Short-term Debt Has Exceeded the Firm’s Cash Reserve
Figure 6
Despite a slight drop in interest expense, San Miguel Corporation’s debt skyrocketed to an electrifying Php 1.441 trillion in Q1 2024! (Figure 6, upper chart)
Meanwhile, SMC’s interest coverage ratio (ICR) fell to 1.6, its second-lowest Q1 ratio since 2020.
In this context, SMC’s debt levels accounted for 4.6% of the Philippines' total financial resources—its third-highest level—indicating a heightened concentration of leverage and systemic risk, akin to being "Too big to fail."
The surge in short-term debt relative to the firm’s declining cash reserves in Q1 2024 has led to the widest spread in San Miguel’s history.
Essentially, this is symptomatic of SMC’s escalating liquidity challenges, necessitating the firm to draw more liquidity from its internal finance and the financial system by borrowing more. SMC intensified its borrowing in 2021 and 2022 in response to the lowest ICR in 2020, and it's likely to continue this trend in the coming quarters.
It's crucial to understand that "what happens to San Miguel wouldn’t stay in San Miguel." As a systemic risk, SMC’s debt challenges can easily magnify into a ripple effect—or the intensifying risk of financial and economic contagion.
XI. Summary and Conclusion
In the end, the loosening of financial conditions has led to an increasing divergence between corporate share prices and fundamentals.
Furthermore, the PSEi 30’s Q1 2024 financial performance demonstrates a two-speed economy: a private sector slowdown, which has even affected the elites, translating to further hardship for the middle and lower classes, and a booming government.
___
References:
Prudent Investor Newsletters, Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness May 12, 2024
Prudent Investor Newsletters, Analyzing the 2023 Performance of the Philippine PSEi 30 Constituent Firms, May 5, 2024
SSI Group Q1 17-Q, May 15, 2024, pse.com.ph
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