Bogus Broker

The year ends with a bang when the Philippine Stock Exchange (PSE) warned the investing public to undertake extreme caution and due diligence with respect to any solicitation of funds by companies that intend to be trading participants. PSE stated that there is no guarantee that such companies will be considered as trading participants as they will be required to undergo a comprehensive assessment based on qualifications under the law. Solicitation of funds by companies that intend to be trading participants may be considered a sale or distribution of securities in the Philippines that require registration with the Securities and Exchange Commission (SEC) under the Securities Regulation Code (SRC). Failure to obtain such registration subjects the seller of securities to civil and criminal penalties. Those who act as agents, dealers, brokers and salesmen in the solicitation of funds by companies that intend to be trading participants can be prosecuted and held liable under Section 28 of the SRC while penalties can be a maximum fine of P5 million or 21 years imprisonment or both under Section 73 of the SRC. Per the PSE Rules Governing Trading Rights and Trading Participants, the minimum qualifications for a company applying to be a trading participant is that it must be a duly registered domestic corporation authorized to transact as a broker or dealer in securities; must be composed of shareholders not exceeding such number under the law; and must have a minimum unimpaired paid-up capital of P100 million. PSE holds the right to assess the character of a company that intends to be a trading participant such as the reputation and qualification of its shareholders, management, nominee and other personnel. We do not know the reason why the PSE took time before warning the investing public about the solicitation of funds by companies that intend to be trading participants but what we do know is that this company is the financial technology startup known as Investagrams. In a gathering with the investing public on August 26, Investagrams announced its plan to launch an online stock trading platform known as InvestaTrade. Investagrams started a crowdfunding activity known as Investagrams Brokerage Pledge Campaign that provides benefits to donors depending on the amount donated. We must commend Investagrams for providing the investing public with free online stock trading products and services but the manner of funding an online stock trading platform does not justify the means.

Target Range

Philippine Stock Exchange (PSE) plans to require listed companies to disclose an offer price range for follow-on offerings of common shares. Pending determination of the final offer price the investing public must be guided by the offer price range in any transaction before the offer price setting date. Upon filing of the listing application, a listed company will be required to disclose in the prospectus the offer price range composed of a minimum offer price and a maximum offer price. The current listing rules do not require the disclosure of an offer price range for any type of public offering. By practice, listed companies planning to conduct a public offering indicate the maximum offer shares and the indicative offer price in their prospectus. Most investors are not aware that the indicative offer price is the maximum offer price and the final offer price could be lower than the indicative offer price. The proposed amendments to the listing rules will be limited to follow-on offerings of common shares because the minimum offer price is not determined by the issuer in Initial Public Offerings (IPO), the final offer price is determined by the issuer in Stock Rights Offerings (SRO) while the final offer price is not a material consideration in Preferred Shares Offerings (PSO). The proposed amendments to the listing rules came about when San Miguel Food and Beverage Inc (FB) filed with the Securities and Exchange Commission (SEC) a registration statement and preliminary prospectus for a follow-on offering involving the sale of 887 million common shares with an overallotment of 133.05 million common shares with an indicative offer price of P140 per share for a total of P142.8 billion. After the indicative offer price was set at an unreasonable premium the stakeholders adjusted it closer to the market price to make the follow-on offering marketable to the investing public. The underwriters reduced the follow-on offering involving the sale of 400.94 million common shares with an overallotment of 60.14 million common shares with a final offer price of P85 per share for a total of P39.2 billion. This could be uneventful to most investors but in the midst of the public debate on whether or not to require listed companies to disclose an offer price range for follow-on offerings of common shares, the bulls make money, the bears make money while the pigs get slaughtered!

Mega Sale

San Miguel Pure Foods Inc is renamed San Miguel Food and Beverage Inc (FB) after the P336.35 billion share swap transaction with San Miguel Corporation (SMC) involving the infusion of 216.97 million common shares of Ginebra San Miguel Inc (GSMI) and 7.86 billion common shares of San Miguel Brewery Inc (SMB) in exchange for 4.24 billion common shares of FB. As a holding company, FB now holds an ownership of 78.26% in GSMI and 51.16% in SMB while SMC now holds an ownership of 95.87% in FB. The underlying principle behind the consolidation is to create a business platform that can benefit from the shared synergies and unlocks the value of the combined business segments. In compliance with the Minimum Public Ownership rule, FB filed with the Securities and Exchange Commission a registration statement and preliminary prospectus for a follow-on offering involving the sale 887 million common shares with an overallotment of 133.05 million common shares with an indicative price of P140 per share for a total of P142.8 billion. Upon completion, the follow-on offering will be the largest in the Philippines and will make FB the largest consumer stock and an index component stock of the Philippine Stock Exchange. We believe that there will be strong demand for the follow-on offering since FB is considered as a proxy for the Philippine consumption due to its trusted brand names, broad product portfolio and leading market positions. FB can benefit from the stable economic growth, growing population base and consumer-driven economy. Based on the data compiled by the GlobalData, the household consumption expenditure as percentage of Gross Domestic Product is 73.5% while the addressable food and beverage market size as percentage of total food and beverage industry size is 41.8%. Moreover, FB had set a cash dividend policy of 60% of the annual net earnings, which is higher than the average dividend payout among listed companies. Through the combined business segments, FB plans to expand distribution network, enhance market penetration and increase production capacity to protect traditional markets and conquer emerging markets. But we believe that the follow-on offering indicative price of P140 per share as compared to the share swap transaction price of P79.82 per share is absurd. We do not know the reason why the follow-on offering indicative price was set at 75.4% premium but what we do know is that the underwriters will be forced to adjust it closer to the share swap transaction price to make the follow-on offering saleable to cornerstone investors in the midst of market unrest brought about by geopolitical tensions and macroeconomic headwinds.

Debt Trap

Philippines is set to increase government spending on infrastructure as percentage of Gross Domestic Product (GDP) via an P8.4 trillion infrastructure spending program. Based on the data compiled by the Department of Budget and Management (DBM) from 2010 to 2016, government spending on infrastructure as percentage of GDP averaged at 2.9%. DBM stated that the infrastructure spending program will increase government spending on infrastructure as percentage of GDP from 5.3% in 2017 to 7.4% in 2022. Out of the proposed 75 infrastructure projects, the National Economic and Development Authority stated that 35 had been approved while the rest are undergoing evaluation by the concerned government agencies. In order to finance the infrastructure spending program, the Philippines will need funding from international financial institutions, multilateral development banks and traditional creditor countries. But it had chosen the road less traveled by accepting the pledge by China to fund 18 infrastructure projects worth an estimated P731.7 billion. We must be aware that Chinese loans can be generous in the short-term but can be dangerous in the long-term. Chinese loans have interest rates between 2% to 3% while Japanese loans have interest rates between 0.25% to 0.75%. Moreover, Chinese-owned companies and Chinese workers rather than Filipino-owned companies and Filipino workers will be required to work on China-funded infrastructure projects. Known as the Belt and Road Initiative (BRI), China has been funding infrastructure projects in underdeveloped countries in exchange for diplomatic relations, natural resources and regional access. Based on a study conducted by the Center for Global Development, countries participating in the BRI that will default will find themselves in a Debt Trap. The study evaluated the present and future debt levels of the 68 countries hosting China-funded infrastructure projects and found that 23 countries are at risk of default. As the BRI expands in scope so do suspicion that it is a form of economic imperialism that gives China an undue leverage over underdeveloped countries. We must be concerned that its expanded commercial presence can lead to an expanded military presence as most of these China-funded infrastructure projects can be used for commercial and military purposes. China can use its leverage over the Philippines to expand its artificial islands in the West Philippine Sea and to support its territorial interests in the South China Sea. Entering into debt bondage with China is a wrong move for the Philippines.