CHP – Bottom Yet to Be Seen

CHP debuted at the PSE through an IPO priced at 10.75. As of this writing, it is trading 4.36 a 59% discount to its IPO price. It even reaches a low of 3.97. We believe that this is not yet the bottom.

CHP has in its balance sheet a goodwill of 27.8 Billion as of December 31, 2016. According to its filing, the goodwill is attributable to the assembled workforce and dealer network. It arose from the acquisition of the majority interest (60%) of what is now the wholly owned subsidiaries of CHP from CHP’s controlling stockholder for a sum of 47.8 Billion.

A closer scrutiny of CHP’s booked goodwill will show that nothing of its assembled workforce and dealer network provides the company a “moat” or a competitive advantage that can justify the goodwill. In fact, in 2016 its assembled workfoce and dealer network consumes 0.32 Peso for every 1 Peso of revenue/sales while competitors EAGLE consumes only 0.1 Peso and HLCM consumes .06 Peso. In that year, CHP was able to generate a Net Income of 0.06 Peso for every 1 Peso of revenue. That is meager compared to 0.31 Peso for EAGLE and 0.17 of HLCM.

In the present era of cheaper imported cement, the goodwill that CHP had acquired or built-up should have made it invincible from the competitive pressures created by the cheaper cement. The goodwill was no “moat”. The imported cement made their market and eats from CHP. It pressured the revenue and ultimately the cash flows and net income of CHP.

Because the goodwill was no “moat” and “shield.” The goodwill constitute 55% of CHP’s assets as of year-end of 2016. As of the year-end 2106, total equity of CHP is 28.6 Billion Pesos. Had the goodwill been written-off at that time, CHP would only have and equity of 824 Million Pesos. That would translate to a 0.16 per share of equity.

Because CHP was paying CEMEX 47.8 Billion Pesos, the IPO proceeds was not enough to fully pay CEMEX. CHP borrowed another 16 Billion Pesos to fully pay CEMEX. This leaves CHP heavily indebted.

The era of cheaper imported cement dwindles CHP’s operating cash flows and net income. After paying the costs of its debt and the massive debt itself what will be left for growth/expansion and for its stockholders?

We believe that CHP has not yet reached bottom. We see it coming down to 0.50. Sell it now and buy it a lot a cheaper later.