Gate Crash

We should embrace change for constant improvement but there are some changes that create questions rather than answers. Confusion could lead to doubt and most investors demand an explanation from the Philippine Stock Exchange (PSE) when it announced its plan to ease the listing rules to allow more companies to go public and raise capital. For listing on the main board, the PSE proposed the removal of the P500 million minimum market capitalization and Earnings Before Interest, Taxation, Depreciation and Amortization (EBITDA) requirement and replace it with a 3-year cumulative net income. Moreover, the PSE proposed that companies should have a 3-year cumulative net income of at least P75 million, a net income of at least P50 million in the past year before listing, and a minimum total shareholders equity of at least P500 million. For listing on the emerging board, the PSE proposed the removal of the P100 million minimum authorized capital stock requirement and replace it with a P25 million paid-up capital. Moreover, the PSE proposed that companies should have a 3-year cumulative EBITDA of at least P15 million, a 3-year cumulative operating revenue of at least P150 million that increased by at least 20% in the past two years. The proposed amendments to the listing rules would encourage small companies with short operating history to list and increase the number of listed companies in the PSE. Compared to 932 in Bursa Malaysia, 724 in Stock Exchange of Thailand, 716 in Singapore Exchange Limited, 691 in Bursa Efek Indonesia, 380 in Ho Chi Minh Stock Exchange and 357 in Hanoi Stock Exchange, there are 272 listed companies in the PSE. For listing on the main board where most initial public offerings are listed, we are concerned that the removal of the minimum market capitalization and EBITDA requirement and replacing it with net income could encourage small companies with short operating history and unproven business models to go public and raise capital. Most investors are in favor of using EBITDA as a measure of business performance because it could show earnings before the influence of accounting. EBITDA is a dependable indicator of operational efficiency because it enables investors to focus on the core profitability without factoring capital expenditures. We believe that EBITDA is the preferable financial metric to use to evaluate whether small companies with short operating history and unproven business models deserve to gate crash into the roster of listed companies in the PSE.

Bad Bye

Most investors could not care less when a public company decides to delist its listed shares from the secondary market but there are some minority shareholders who felt shortchanged by the majority shareholders. Some argued that the tender offer price should be the same as the initial public offer price while some accepted the tender offer price rather than hold the untradeable listed shares. Historical cost method used in accounting where the price of an asset is based on its original cost when acquired cannot be used for the tender offer price because value changes over time. Although the voluntary delisting rules should not be blamed for the tender offer price, the Securities and Exchange Commission and the Philippine Stock Exchange should be commended for tightening the requirements for a public company to delist its listed shares from the secondary market. While the old voluntary delisting rules could be approved by the Board of Directors, the new voluntary delisting rules should be approved by shareholders who own at least 2/3 of the total outstanding and listed shares, at least 2/3 of the Board of Directors, and at least 2 of the independent directors. To further tighten the requirements for a public company to delist its listed shares from the secondary market, the new voluntary delisting rules require that the number of votes cast against the voluntary delisting should not be more than 10% of the total outstanding and listed shares, the minimum tender offer price should be higher than the highest valuation based on the fairness opinion and valuation report prepared by an independent valuation provider, and higher than the volume weighted average price of the listed shares for a year preceding the date of posting of the voluntary delisting disclosure. The new voluntary delisting rules expanded the supervisory capacity of the concerned government regulatory agencies on public companies that could be planning to support the short-term interests of the majority shareholders and elude the long-term interests of the minority shareholders. Those who have less in life should have more in laws and the new voluntary delisting rules are what we need to discourage public companies from delisting its listed shares from the secondary market at the expense of the public. We do know that the new voluntary delisting rules are not perfect but at least they serve the purpose of making it cumbersome for public companies to bend the rules without breaking it.

Bear Case

As the coronavirus infection rate escalates due to the absence of a coronavirus vaccine, the Philippines enters into an economic recession after the economic growth plunged to a new record low. We do know that the Philippines would enter into an economic slump due to the extension of the economic shutdown but what we do not know is the extent of the economic meltdown. Although the economic output as measured by the Gross Domestic Product (GDP) of -0.7% in 1Q20 was more than expected, the -16.5% in 2Q20 was worse than expected. The government tried to change the narrative by saying that despite the high inflation in 2018, delayed budget in 2019 and global pandemic in 2020, the Philippines have strong economic fundamentals as compared to the 1983 debt default, 1997 financial crisis and 2008 global recession. These infamous economic downturns pushed the Philippines on the verge of economic collapse and forced the government to take the lead to soften the hard impact of economic crash. Multidecade of countercyclical regulatory measures such as aggressive fiscal and accommodative monetary policies resulted to stable interest rates, positive credit rating, strong local currency, sound external sector and robust banking industry. But these economic gains could turn into economic pains as the pandemic thrashed most economic activities. The government stated that GDP projections had been reduced to -5.5% from -3.4% for 2020 and to 6.5% from 8.0% for 2021 to factor in the economic slowdown but we are not sure whether the Philippines could enter into a V-shaped economic recovery. Underemployment and unemployment rates worsened due to the enhanced community quarantine which restricted the movement of the population in response to the health protocols. Although the underemployment rate of 18.9% is below the recent high of 19.6%, the unemployment rate of 17.7% is above the recent high of 14.4%. The economic unrest could last longer than expected as millions went underemployed and unemployed. Even the employed were not spared as the government recommended to the private sector to implement pandemic-driven work arrangements such as work from home and work hours reduction. The government could not turn the economy around unless the economic solution is commensurate to the economic problem. Without private consumption, gross investment and net exports, government spending is the one that should take the wheel and steer. We do not have to be an economist to understand the bear case equation: no income + no spending = no growth.

Stuck Market

The new decade began with black swans that have shaken the nerves of most investors. After the economic damage caused by the Taal Volcano eruption and the regulatory debacle between the government regulators and the water concessionaires, the coronavirus epidemic in China is now a global pandemic. As the coronavirus continues to spread, the government declared a Luzon-wide enhanced community quarantine and placed the Philippines under a state of calamity. Based on the National Economic and Development Authority scenario estimates, economic growth as measured by the Gross Domestic Product could decrease to -0.6% in 2020 from 6.0% in 2019 if the coronavirus pandemic worsens. Before the health emergency becomes an economic catastrophe, investors rushed to escape from the meltdown. Fundamentals were thrown out. Technicals were thrown out. Fear of the unknown sets in and stocks were sold in haste. To stop the panic selling, the Philippine Stock Exchange amended its trading rules and adjusted the lower static threshold from 50% to 30% below the previous close. Although the clinical trial of an experimental coronavirus vaccine has started, it would not be available for general use for at least 12 months. The presence of a government lockdown and the absence of a coronavirus vaccine would make stocks vulnerable to collapse since no price is too low for a bear. The worse is yet to come so fasten your seatbelts and prepare for an economic crash that could lead to an unprecedented pandemic-driven economic crisis. We do know that stocks could plunge to new record lows but what we do not know is how low it could go. Although the coronavirus infection rate continues to escalate, the World Health Organization says that the coronavirus would be the first pandemic in history that could be controlled. Investors are taught to focus on value rather than price and when the latter is lower than the former then it is enough reason to buy. This could be a generational buying opportunity to those who have the financial strength to get stuck for a moment and weather the economic storm. Although we are entering a new era of severe economic downturn, this could be a chance to buy the oversold stocks of undervalued companies whose products and services we cannot live without. How long should you hold a stock? Warren Buffett says that if you do not feel comfortable owning a stock for 10 years then you should not own it for 10 minutes.