The Bellwether – Issue 29, 30 and Special Issue

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Releasing the 29th, 30th and Special Issue of The Bellwether, as published by FMIC's IAG-Research.

This is a fortnightly publication on market action and outlook.

The following are the highlights of the issue:

The trouble with China

China and Fed exit magnify money flow reversal

SM Prime Holdings, Inc. (SMPH) tags merger as EPS accretive

Strong 2Q2013 GDP growth

D&L Industries, Inc. (DNL) high margin product tack rolls on and is key to earnings

Philippine National Bank (PNB) breaks away from flat: 20% max income growth likely in 2014 Earnings Target

2Q2013 Banking Update: Banks Book the Last of Big Time One Time Gains?

The trouble with China

 

Is China doing a U.S. subprime act?

 

China’s recent cash crunch made it looked like the U.S. during the 2008 crisis. But unlike U.S. banks that avoided interbank lending, it was China’s central bank that refused to lend. Three weeks ago, China’s 7-day bond rate tripled to 10.8% in two weeks and the interbank rate briefly rose to 25%. (See Fig. 8). The money market eased only after targeted liquidity injections by the People’s Bank of China (PBOC), the central bank of China. The event caused three issues to resurface: a China hard landing, China’s shadow banking and its likeness with the U.S. subprime credit, and China’s central bank tightening bias. The question is would the mix of these three risks cause a China-style U.S. subprime banking crisis? 

 

 

 

China and Fed exit magnify money flow reversal

 

Capital Outflows from EM to Grow

 

Capital outflows by emerging market (EM) residents will continue to grow. “Private” (non-reserve) outflows projected to reach $1T in 2013 based on a forecast by the International Institute of Finance (IIF), a third of which is equity investment. This is a 10-fold increase since the early 2000s.

 

 

 

SM Prime Holdings, Inc. (SMPH) tags merger as EPS accretive

 

 

 

SM Prime (SMPH) shareholders approved an increase of capital to Php40bn from Php20bn and change in business purpose of the mall operator to a mixed-used property developer, with mall as still the anchor business. SM Prime has 46 local malls and five malls in China; the latter contributing about 10% of earnings. But that contribution will even go down with the bigger emphasis on domestic expansion. The ratification accommodates the increased number of outstanding 28bn new shares from the current 17.4bn, paving the way for the merger of SM Land with SMPH to be completed by yearend, with the latter as the surviving entity. A tender offer will be done by SM Land for the property arms of SM Investments that will become SMPH’s divisions under the merged structure of the mall operator. These are SM Highlands Prime Inc. (HP) and SMDC, the high-rise property developer. SM Investments, the parent company, will inject assets into SM Land prior to the merger, boosting its direct and indirect ownership of SM Prime.

 

 

 

 

 

The following are the highlights of the 30^th issue:

   

Strong 2Q2013 GDP growth

 

We predict 2Q2013 GDP to accelerate to the level of 8.0%-8.5% based on the growth dynamics of Philippine election years. Historically, the local economy has been off to a strong start in the first quarter of election years and picks up momentum in the second quarter. This is due to election and government infrastructure spending peaking in 2Q as seen in the 2004, 2007 and 2010 elections, firing up Philippine consumption which is about three quarters of the domestic economy. We believe the momentum of 1Q2013 GDP growth of 7.8% (the best in Asia and above China’s 7.6%) will step up a gear in 2Q2013, specifically our estimate is a 20 - 70 bps increase on top of the 7.8% achieved in 1Q2013. That leads us to our forecast range of 8.0%-8.5%.

 

D&L Industries, Inc. (DNL) high margin product tack rolls on and is key to earnings

 

DNL sees a slower 15% growth in earnings 2014 to Php1.58bn versus this year’s anticipated 30% to Php1.38bn. Consensus growth estimate is 18% for 2014.

 

 

 

Philippine National Bank (PNB) breaks away from flat: 20% max income growth likely in 2014 Earnings Target

 

PNB sees earnings growth of 15% this year to Php5.4bn and maximum of 20% next year, the first time the bank is breaking away from flat earnings of Php4.7bn in 2011 and Php4.7bn in 2012. The consensus was 13% earnings growth for 2013 and 14% next year, based on Bloomberg. PNB’s 1Q2013 earnings of Php2.6bn, 112% above the year ago level and largely due to strong Treasury income, makes the full year 2013 target almost a done deal. 2Q2013 results are seen to benefit from further trading gains and nil MTM losses arising from the yield curve up-move.

   

 The following are the highlights of the special issue:

 

2Q2013 Banking Update: Banks Book the Last of Big Time One Time Gains?

 

 

 

The Last of One-Time Gains

 

Banks are booking maybe the last of the big time securities trading windfall. The latest RTB auction was swamped with lower-than-expected bids, settling at 3.25% as banks cashed in gains ahead of worries interest rates may rise than fall and limit the industry’s profit outlook next year. The US Fed QE3 tapering is causing upward rate pressure. Yet the Php900bn worth of SDA outflow come November could yet do the opposite. Whichever of the two forces prevail (the US Fed or SDA), banks bet accrual income would be key to next year’s earnings. Union Bank and Security Bank have cut their securities trading portfolio on the view rate hikes are just a matter of time. Union Bank made 71% growth in trading income in 1H2013. We believe accrual income would be key to next year’s bank earnings and there will be repositioning in government securities (GS) for this, in the dollar and peso books, but the latter would be more geared for building up the loan portfolio.

   

Download the full PDF here! Issue 29

Download the full PDF here! Issue 30

Download the full PDF here! Special Issue