瑞信-亚太地区-消费品行业-菲律宾消费品行业：制造机会——2019年下半年的经营杠杆优势-2019.6.21-34页.pdf

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.21 June 2019Asia Pacific/PhilippinesEquity ResearchConsumer Staples Philippines Consumer Sector SECTOR REVIEWResearch AnalystsHazel Tanedo63 2 858 7757hazel.tanedocredit-Manufacturing opportunity:Operating leverage a strength for 2H19Figure 1:Operating leverage to drive profitability012345610A11A12A13A14A15A16A17A18AURCFBEMPCNPFLTGSource:Company data,Credit Suisse estimatesWe care about operating leverage.Amid improving economic conditions,companies with high operating leverage are expected to benefit from higher profitability.For value-creating(ROEWACC)companies with healthy degrees of operating leverage(DOL),rising sales driven by macro tailwinds will imply higher profit margins and earnings.We recommend a stock selection based on this quantitative criterion.Manufacturing to pick up,margin improvement another 2H19 theme.We expect manufacturing to pick up in 2H19 as consumer demand is trending strong on several factors like improved inflation,the full impact of the exemption of income taxes of the lower income-level tiers,and better employment and remittance numbers.Looking at 2H19,we also expect consumer manufacturing companies to benefit from more favourable cost of inputs,which would provide some relief on margins.Value-creating companies.With consumer manufacturing utilisation rate now at 86%,we highlight companies that have set aside capex to increase capacities.We highlight URC and LTG as our top picks for consumer manufacturing,as we believe these companies are well capitalised to take advantage of better macro-economic norms over the next 12 months.21 June 2019Philippines Consumer Sector2Focus charts and tableFigure 2:Historical manufacturing gross-value added(in current prices)and growth ratesFigure 3:Manufacturing capacity utilisation at historical highs4.05.16.06.78.38.38.29.56.79.28.87.76.75.42468101214162.52.72.93.13.33.53.715-Q416-Q116-Q216-Q316-Q417-Q117-Q217-Q317-Q418-Q118-Q218-Q318-Q419-Q14-Qtr MT in P tr(LHS)%Growth(RHS)83.083.283.483.683.884.084.284.484.6Dec-13 May-14Oct-14Mar-15Aug-15Jan-16Jun-16Nov-16Apr-17Sep-17Feb-18Jul-18Dec-18(%)Source:Philippine Statistics Authority,Credit Suisse estimatesSource:CEIC,Credit Suisse estimatesFigure 4:DOL of consumer manufacturing firmsFigure 5:We prefer value-creating companies generating positive economic value012345610A11A12A13A14A15A16A17A18AURCFBEMPCNPFLTG02468101214161820CNPFEMPFBLTGURC19E ROECOE19E EPS growth(%)Source:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimatesFigure 6:Philippine consumer manufacturing valuations tableNameTickerRatingPriceTPU/DMcapP/E(x)ROE(%)EPS Growth(%)6/20/2019bn US$18A19E20E18A19E20E18A19E20ECentury Pacific FoodsCNPF.PSO15.018.020%1.018.116.114.418.918.417.915.112.511.8Emperador Distillers Inc.EMP.PSN7.57.61%2.318.817.115.210.410.811.42.89.912.3San Miguel Food and Beverage,Inc.FB.PSN103.593.0-10%11.831.427.825.117.619.020.114.612.810.7LT Group,Inc.LTG.PSO15.221.843%3.210.28.47.312.213.213.249.521.414.2Universal Robina CorporationURC.PSO173.6183.05%7.341.637.433.211.312.313.3-15.511.112.6Source:Company data,Credit Suisse estimates21 June 2019Philippines Consumer Sector3Manufacturing opportunity:Operating leverage a strength for 2H19Consumer goods manufacturing to bounce backOverall,2018 was a good year for the manufacturing industry,slowing down only in the last few months when both business and consumer confidence dipped due to inflation.In terms of output,manufacturing production decelerated in December 2018 and January 2019 at 11.7%and 0.7%,respectively.We expect manufacturing to pick up in 2H19 as consumer demand is trending strong and seen to prevail in the medium-term propelled by several factors like improved inflation,the full impact of the exemption of income taxes of the lower income-level tiers,and better employment and remittance numbers,to name a few.The growing retail landscape via new urban and urbanising areas in the provinces and digitisation will provide a larger platform for consumer manufacturers to sell their goods.An improvement in infrastructure through President Rodrigo Dutertes massive“Build,Build,Build”infrastructure development programme should also promote increased trade activity plus generate jobs and build businesses in the process.Investments and utilisation ratesIn March 2019,the average capacity utilisation rate of the overall manufacturing industry is was 84.4%,while that of food manufacturing in particular was at 85.3%.The supply-demand gap remains relatively modest as consumer demand is tempered by a high inflation rate and a moderately higher unemployment rate in 2017.Consumer companies for their part have,in the past few years,been beefing up their capital spending to expand capacities and keep up with the growing demand.After 2019,we expect utilisation rates to decrease gradually to 82%,then to the 77%by 2020.There are also prospects for a better future for manufacturing with the ongoing shift of manufacturing investments from China to South East Asia,given the increasing level of wages in China and the ongoing US-China trade war which may motivate foreign investors in manufacturing in China to relocate their operations to South East Asia to avoid the US high tariffs on Chinese exports.Operating leverage a strength over the next 12 monthsWe care about operating leverage because it makes a big difference to a companys earnings power and potential free cash flow growth.Amid improving economic conditions,companies with high operating leverage are expected to benefit from higher profitability.For Philippine consumer companies under our coverage,the average degree of leverage(DOL)is at 2,but there are some companies that fare higher like URC and LTG whose fixed costs have become more probable.Our sensitivities show that URC and EMP show most sensitive and strongest yield at 14-15%,equivalent to a 3-3.5%NI growth per 1%increment of sales revenue growth.LTG follows with NI growth at 12.5%,equivalent to 2.4%NI growth per 1%increase in revenue.Margin improvement is another theme to watch out for,as cost of inputs slowly trends downwards.Beneficiaries of better economic normsAmid improving economic conditions,companies with high operating leverage are expected to benefit from higher profitability.For these companies,rising sales will imply higher profit margins and thus higher earnings.We recommend a stock selection based on this quantitative criterion.We highlight consumer manufacturing companies that have the highest DOL and yet will continue to create value over the next 12 months.We highlight LTG and URC as our top picks.21 June 2019Philippines Consumer Sector4Table of contentsFocus charts and table2Manufacturing opportunity:Operating leverage a strength for 2H193Consumer goods manufacturing to bounce back.3Investments and utilisation rates.3Operating leverage a strength over the next 12 months.3Beneficiaries of better economic norms.3Consumer goods manufacturing to bounce back.5Pulling down overall productivity in 2018.5Demand to bounce back this year.6Retailers to provide the platform.8The government is also supporting the trade.10Investments and utilisation rates12Full capacities currently.12Supply“mitigators”.12Capex allocation to increase capacities,but is it enough?.13Opportunities abound.20Operating leverage a strength over the next 12 months22Which companies score high in the ranks?.22Revenue sensitivities.22Margin improvement as another theme for 2H19?.23Beneficiaries of better economic norms25Better outlook ahead.25Upside risks for the next 12 months.252020 value-creators.26Top picks in consumer manufacturing are LTG and URC.2721 June 2019Philippines Consumer Sector5Consumer goods manufacturing to bounce backPulling down overall productivity in 2018The Philippine manufacturing sector,particularly the consumer goods,has seen an uptrend in the past few years and it remains promising despite recent volatilities.From a slow growth in 2015,it was revitalised starting 2016,gathering speed in 3Q16 through 3Q18,and decelerating to a still moderate positive pace from 4Q18-1Q19 to reflect global slowdown which resulted in weakened external demand.Overall,2018 was a good year for the manufacturing industry,slowing down only in the last few months when both business and consumer confidence dipped due to inflation.The industry grew 3.2%in 4Q,lower than the 7.9%rate of the previous year but still a positive growth.In terms of output,manufacturing production decelerated in December 2018 and January 2019 at 11.7%and 0.7%respectively.Figure 7:Historical manufacturing gross-value added(in current prices)and growth rates4.05.16.06.78.38.38.29.56.79.28.87.76.75.42468101214162.52.72.93.13.33.53.715-Q416-Q116-Q216-Q316-Q417-Q117-Q217-Q317-Q418-Q118-Q218-Q318-Q419-Q14-Qtr MT in P tr(LHS)%Growth(RHS)Source:Philippine Statistical Authority(PSA)Factory output,as measured by the Volume of Production Index(VoPI),registered a YoY loss shrinking 10.1%in December 2018 and 4.1%in January 2019.VoPI continued to post a decrease of 9.2%in March 2019.During March 2018,an annual two-digit growth of VoPI at 11.0%was observed.Eight major industry groups pulled down the annual VoPI,led by furniture and fixtures(-25.5%),food manufacturing(-17.3%),and petroleum products(-17.2%).Overall,2018 was a good year for the manufacturing industryVoPI continued to post a decrease of 9.2%in March 201921 June 2019Philippines Consumer Sector6Figure 8:Value of production index and volume of production index(Feb 2018-March 2019)100120140160180200220240VaPIVoPI(Index)Source:Philippine Statistics AuthorityFigure 9:Year-on-year changes in production(Feb 2018-March 2019)-15-10-50510152025VaPIVoPI(%)Source:Philippine Statistics AuthorityDemand to bounce back this yearIn December 2018,the inflation rate started to slow down to 5.1%,from 6.0%in the previous month,with the lowering of global oil prices,the increase in rice supply and the recovery of the peso value.Inflation rate further eased to 4.4%in January 2019 and 3.8%in February,falling even lower than the expected 4%rate and the lowest since last year;certainly below the 8.38%average inflation rate of the country.Lower inflation rate entails lower input costs.These,together with the appreciation of the peso,the economic expansion opportunities,and the expected higher election-related spending,help regain consumer and business confidence.We expect the figures to improve in the coming months as we also see an increase in demand during summer,given the rise in the number of local and foreign tourists.Consumer demand remains strong and is seen to prevail in the medium term,propelled by several factors:(1)the improved inflation(now at 3%levels)coming from 6.7%in August 2018;(2)the full impact of the exemption of income taxes of the lower income-level tiers During March 2018,an annual two-digit growth of VoPI at 11.0%was observed.In December 2018,inflation started to slow down to 5.1%,from 6.0%in the previous monthConsumer demand remains strong and seen to prevail in the medium-term21 June 2019Philippines Consumer Sector7up to P250,000 annually;(3)historically highest employment data and lowest unemployment data starting 2016 to the present period,with a reported 826,000 new jobs created by the government up to 2018 and the business process outsourcing that remains strong;(4)overseas workers combined cash and personal remittances which was at an all-time high in 2018 at US$61.2 bn,accounting for 8.1%of gross national income.All of these translate into real increases in purchasing power and disposable incomes.The above consumer environment is concretised when seen through household expenditures.Spending is at an all-time high,with biggest items being food and non-alcoholic beverages,followed by other basics such as housing and utilities and transport.While the essentials are expected to dominate in the short-to-medium term,recent years numbers,nonetheless,point to a start of move towards non-essentials such as alcoholic beverages,restaurants and hotels,and miscellaneous items,growing at 11-14%in 2018.Of the total household spending,about 74%goes to essentials(food,utilities,transport,etc.)and is forecasted to inch up to 75%by 2021.In terms of goods,the retail basket consists mostly of food and drink spending.In 4Q18,food and non-alcoholic beverages took up as much as 42.8%of the total household expenditure.As poverty incidence declines and the middle class base grows,focus is expected to shift towards higher-quality products in more organised retail environments.This presents an attractive market for food manufacturers.Figure 10:74%of household spending goes to essentialsFigure 11:Business confidence recovered in the first quarter of 20190%10%20%30%40%Food and Non-Alcoholic BeveragesAlocholic Beverages and TobaccoClothing and FootwearHousingHousehold Goods and ServicesHealth Goods and Medical ServicesTransportCommunicationsLeisure and RecreationEducationHotels and CateringMiscellaneous Goods and Services01020304050607013-Q114-Q115-Q116-Q117-Q118-Q119-Q1Current QuarterNext QuarterSource:Philippine Statistics AuthoritySource:Bangko Sentral ng PilipinasThe Philippines is a particularly attractive market for consumer goods,given its large,young,upwardly mobile,working population.Of the countrys population of over 100 mn,about half are below 25 years old,most of whom are employed,as evidenced by the countrys high employment rate of 94.8%.These altogether translates to a large workforce base which,in the medium-to-long term,will help sustain and grow consumer demand.Demand for labour is also increasing as more foreign companies are setting up office in the country.The business process outsourcing(BPO)sector,for one,employs as many as 575,600 workers,with 700,000 additional opportunities forecast for medium-and high-skilled jobs by 2022.Such companies are not only offering more jobs in quantity,but also in the variety and opportunities for upward mobility,resulting in more disposable incomes that drive up consumption.Also backing the consumer purchasing power is the Overseas Filipino Worker(OFW)remittance that continues to be strong despite global economic downturns.In December 2018,remittances reached a record high of US$3.15 bn,3.6%higher than the US$3.04 bn peak in the previous year.Meanwhile,full-year 2018 cash remittances grew to US$28.94 The above consumer environment is concretised when seen through household expendituresAlso backing the consumer purchasing power is the OFW rem