A Medical Thriller in Manila

It has been far too long since my last visit - in fact nearly five years.  As a value seeker the Philippine stock market has been a difficult place for some time.  We had an overweight exposure there between 2010 and 2013, but as the market moved up and multiples expanded we were compelled to move out, booking good profits but leaving a lot on the table.

Philippine equities have been one of the best places in Asia to invest over the last five years; but the market is narrow and lacks liquidity.  A few families still control almost everything of importance both listed and unlisted.  All of which makes the country tricky for foreigners, especially if you have a large fund.

Still the country has among the best demographics you can find anywhere, and its economic trajectory is one of the best around.  So it is impossible to ignore.  The people offer several advantages.  In addition to widespread if imperfect English employees tend to be loyal, or at least less mobile.  I gleaned an interesting insight into what this means from a meeting with Luen Thai a Hong Kong listed textile company that has a large operation in the country sewing bags : both backpacks as well as some of the better brands.  They are there because while sewers with a similar level of experience are more productive in China, overall the average output of a large number employees in the Philippines is as good or possibly higher.  The reason is stability in Cebu compared to high turnover among the workforce in Guangdong.  It helps of course that the Philippines has preferential tariffs when exporting these categories of product to the US compared to China.

Another interesting observation is how some of the service industries in which the Philippines excels are moving up the value added chain.  The BPO business is booming, but its mix is changing.  There is more medical and accountancy back office, and less telemarketing.  Companies claim that the clarity and politeness of their staff enables them to win business from Indian competitors.  Not sure how those competitors would choose to respond to these claims.

A similar trend can be seen in the Overseas Foreign Workforce.  Approximately 10% of the country works somewhere else : a truly staggering statistic.  While the total number of OFWs does not seem to be growing much of late, remittances continue to rise – roughly by 5%+ p.a.  The explanation appears to be that here too the mix of that workforce is on the way up.  Maids in the Middle East continue to be in demand, but white collar workers and increasingly managerial level personnel, are also finding employment and at higher salaries:  one reason why the Peso, though down against the US$ in 2015, has held up better than most other Asian currencies.

I was located downtown for two days, the first at a conference organised by Maybank/Kim Eng.  This pan-Asian broker has been raising its game as their research is getting better at a time when much of the coverage is getting worse.  They are also investing in the business when many houses are focused on cutting costs.  My point person in Singapore, Richard Harding, is a true value contrarian and a good guy to know.  Maybank had rounded up an impressive roster of corporates, with many of the most important listed companies in that country in attendance.  My favourite, based on the businesses I met, was Concepcion Industrial.  That management team was able to articulate a clear and realistic strategy, and seem to operate in a reasonable growth context; but alas I am not the first person to notice that.  The share has already done well.

How to play the positive themes in the Philippines?  One thing OFWs almost always want is to buy a house back home.  Two listed companies target this market.  Vista Land is the largest.  We own Filinvest Land.  Both have large networks of agents all around the world and organise Tupperware-type parties in places where there this is a critical mass of Filipinos.  They can construct homes for less than $50,000, including land cost yet still make a good margin.  Impressive!  Filinvest Land also has a large instalment loan book with security over the very same houses it is building, and a spotless record of close to zero loan loss as a result.  Local brokers for some reason do not appreciate the value of this part of their business model.  For me it is one of two excellent reasons to own Filinvest rather than Vista, even though Vista in my opinion has a somewhat better land bank.

Recognising the excellent quality of nursing care with Filipinos active in hospitals all over the world, I acquired a couple of suites in a medical complex constructed and operated by Century, another listed property company.  While called the Centuria Medical Makati, it is not actually as close to the main Makati Hospital, arguably the country’s best, as one would like.  Terrible traffic downtown - some of the world’s worst - can mean any journey of over 1 km is an ordeal at the wrong time of the day.  The building is only just open.  Tenants needs time to settle in, so most of the units are still empty, including alas mine.  Yet the low cost X-ray department should attract business and one emergency room operator has signed up for substantial space.  There is still a fair amount of decoration in process and some snagging to sort out, but the building could well become a prestige destination in the healthcare space once it is operating properly.  It should look rather different and also be more active twelve months from now.  I am optimistic about this investment.

The location remains a drawback as it is not in the nicest part of town; but it is an area that is on the way up with a new shopping mall next door, a high-end apartment block going up on the next lot, and a major new office complex also in the works.  Happily my units are on the other side of the building away from all this construction, and have a good view.  

Medical is definitely a growth sector, but hard for investors to access.  There is no pure play.  Metro Pacific has the best portfolio of hospitals.  The plan is to spin that division off via an IPO at some point.  Still you would not buy Metro Pacific for that operation alone.  You have to like the other bits.  Fortunately as a proxy on infrastructure in the country in general the company has attractions.  Then there is Century.  Its first medical building sold fast.  If it starts to do more of them that would give it a point of difference set against other developers.  It is also the cheapest relative to net assets, but the balance sheet is not the best, and it is tier two not tier one player.  Tourism is another obvious area.  Again there are few pure investment plays other than the casino stocks and a couple of not especially distinguished hotel companies.  Meanwhile medical tourism ought to be booming; but no-one here does that yet as well as the Thais.  All in all there are no undiscovered gems in the Philippines for the voyaging equity investor in either of these spaces at this precise time.