Cemex Holdings Philippines (CHP) Unravels

Undescripts.com has previously reported that CHP may have overpaid its parent, Cemex Mexico, in the acquisition of the controlling interest in the two cement operating companies it now wholly owns resulting to the booking of a massive goodwill in its balance sheet which at year-end 2016 constitute 55% of CHP’s assets.  The massive goodwill was justified by the existence of an assembled workforce and dealer network in the two cement operating companies. However, scrutiny on CHP’s finances showed that in the face of fierce competition in the cement industry its much touted “workforce” and “dealer network” fails to provides a “moat” for them.  Its “workforce” and “dealer network” did not present cost advantages to the company as other cement companies showed lower costs than them allowing the other cement companies to easily enter the market and capture significant market shares.  We expected then that CHP’s massive “goodwill” will unravel itself.  Please see our previous report.

On February 9, 2017 CHP issued a press release announcing their 2017 full-year results.  CHP reported that revenue declined from 24.3B to 21.8B due to lower cement prices.  Prices of cement were low because of the fierce competition in the industry with the influx of imported cement.  CHP’s “workforce” and “dealer network” did not deter other cement companies and cement importers from entering the market.  This event shatters the justification of the massive “goodwill” booked in its balance sheet.

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Blockchain is changing how we use and think about money.

The poor results of CHP makes its share price expensive.  CHP, as of end of February 15, 2018, is trading at 4.01.  With the poor results, it is now trading at 29.85 PE ratio as compared to Holcim Philippine’s (HLCM) 17.49.

The price of CHP has gone down 56.88% from a year ago to 4.01 resulting to a price-t- book ratio of 0.7077.  We sensed that the market is now recognizing the impairment of its goodwill,thus, a share price lower than its book value.  With the current price of CHP some institutional investors have gobbled it up.  Institutional investors are reportedly now holding 13.68% of CHP’s total oustanding shares.

Undescripts.com maintains that the price of CHP has still to go down to make it a rational investment. At the current price its PE ratio is unjustifiable, its stock price has to go down further to align its PE ratio to its peers. In the meantime we cannot expect any dividend from CHP as it is presently struggling with its earnings.

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ABS – Wait and See

ABS set a new 52-week low as of December 12, 2017 trading session when it reached 34.75. Over this period, the share price is down 21.56%.  Although, the shares is at lowest during the 52-week period, we cannot recommend to buy or sell the same at the moment.  The following is a discussion of why we do not recommend to buy or sell it in the meantime.

 

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Blockchain is changing how we use and think about money.

We are in the period of technological disruption.  Broadcast is no longer the prime platform for news, information and entertainment as it was in the 1990s.  The internet and mobile has replaced broadcast as the primary go-to place for news, information and entertainment.  In the advent of mobile internet, people now spend more time on their computers and mobile devices than in their television sets.  This technological sea change is most evident in the recent elections in the Philippines and in the US, where information proliferated in the internet more particularly in the social networking sites impacted the elections more than the mainstream broadcast media outlets.

ABS is the local broadcast giant. For the 9-month period of 2017, 52% of the revenue of ABS came from advertising revenue from its broadcast unit.  The said revenue provides virtually all of the net income of ABS of 2.3 Billion.  As what has been said there is a technological sea change in the telecommunications and media industry and this technological disruption gradually erodes the revenue of ABS.  In the 9-month period of 2017 advertising revenue of ABS is down 517 Million or 3% lower year-on-year.

The technological disruption affecting ABS’ business would be a convenient reason to recommend to sell it but we do not.  First, ABS is generating positive operating cash flows and free cash flows.  EBITDA for 2016 was 9.85 Billion and for 9-month period 2017 EBITDA is 7.03 Billion.  Second, ABS is the local leader in content creation and content is still king.  ABS has invested in capabilities to create local content.  It has Star Magic, ABS-CBN University and it has invested in studios and sound stages.  Its capabilities to create world class content is hard to replicate.  Third, it has been doing something to mitigate the effects of disruption.  It has gradually balanced advertisement revenue with consumer sales.   This endeavor of ABS, makes-up our reason to recommend to wait and see before recommending buying or selling it.

ABS is doing something to mitigate the effect of technological disruption.  It ventured into mobile telecommunications with ABSCBNmobile.  So far, this venture has not been profitable.  Another venture is Kidzania, which in the meantime has also not been so profitable.  Its cable, satellite and broadband distribution platform has not provide meaningful contribution to the bottom line.  To us the more promising investments ABS have made is its investments in digital and interactive media more specifically in Iwanttv and TFC.tv.

ABS, no doubt, has great catalog of great contents and has the ability to create best-in-class content.  In the age of broadcast erosion and internet dominance, ABS must find a way to sell its content directly to the consumers as what Netflix is doing. We believe, Iwanttv and TFC.tv are steps in the right direction.  Presently, there contributions to the bottom line is insignificant.  This is so because Iwanttv and TFC.tv are not world-class.  They are mediocre platforms.  The challenge of ABS is to make Iwanttv and TFC.tv world-class.  Those platforms should be like Netflix, Amazon Prime, Fox Plus or NBA Game Time.

ABS has word-class content creation capabilities.  Content capabilities would be not so valuable if it does not have a world-class delivery platform to its consumers where consumers can actually enjoy the content and pay for it.  In the meantime, ABS has a cash pile and positive operating cash flows.  With its cash pile let us wait for few more periods to see whether ABS will be able to build a world-class internet delivery platform direct to consumers as a hedge to the declining broadcast business . Let us wait and see then.