A month in the Philippines: How active management helped us beat the traffic (and the market)
Burton Flynn and Ivan Nechunaev
June 2019
Running on the highway in search of hidden gems
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The cars on the highway are parked in standstill traffic. We run past them at full speed in humid 40°C weather. Our feet pound against the pavement, our bags slap against our backs, horns honk all around us.
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Manila is infamous for its horrendous traffic. Our taxi driver had taken a wrong turn and we were staring at tail lights as far as we could see. Making the next U-turn and getting back on track would have taken our car at least an hour. So instead of passively missing our next company meeting, we actively took matters into our own hands and ran back to the taxi stand. As a result, we made it to our meeting a little sweaty, but on time. Our efforts paid off as we discovered a deeply undervalued company.
Running back to the taxi stand
Uncovering deep value
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This company we met had been priced by investors well below book value for many years, despite owning a large land bank in one of the country’s fastest-growing provinces. However, recently the land has substantially increased in value, in large part because of the government’s initiatives motivating businesses to relocate from the expensive Metro Manila area to the provinces. Another factor driving the land prices even higher was Chinese investors developing industrial parks and business centers in strategic locations across the Philippine islands.
To take advantage of the opportunity, and partially motivated by intergenerational wealth transfer, a few months ago the company started monetizing its land holdings through sales and joint venture development deals, which can serve as a catalyst for unlocking shareholder value. Furthermore, some of the company’s land was revalued on the balance sheet earlier this year, further lowering its stock’s price-to-book multiple to 0.2x.
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It was clear to us that this little-known company which no analyst covers and which finally woke up from its deep sleep to monetize the assets represented an attractive investment opportunity. Validating this investment thesis involved three separate meetings with the Chairman, CEO, and an independent director, as well as reputation checks with dozens of independent sources from our local network. We also made site visits to the company’s assets located several hours away from Manila by car. This type of due diligence is only possible due to our commitment to spending significant time on the ground.
Seeing first-hand a land holding company's assets located three hours from Manila
Learning the universe of companies
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We spent an entire month in the Philippines, visiting 60 publicly listed companies. Meeting the CEOs and management teams in person gave us insight that no amount of desktop research would ever provide. It is exactly in these on-location meetings and site visits where we uncover hidden gems, reveal alpha-producing ESG practices, and find the keys to unlock shareholder value – but even to meet
these businesses in emerging markets, one often has to go to great lengths. Like when we showed up late, dusty, and short of breath for our meeting with a billionaire owner after taking the stairs to the 43rd floor when an elevator refused to work. Or the time we talked a traffic officer into giving our taxi driver a warning instead of a ticket, saving ourselves the precious fifteen minutes needed to get to our meeting on time.
Beyond meeting companies’ management, we actively sought to gain a thorough understanding of the Philippine market dynamics through full immersion into the local business environment: from attending the largest economic forum of the season where we were the only foreign investors, to participating and asking questions in companies’ annual shareholder meetings, to visiting market regulators and learning about their sustainability reporting initiatives, to meeting local investors including a gentleman known as "the Warren Buffett of the Philippines".
Visiting a $200m construction company
Building our network
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We were impressed by the size and prominence of the Philippine alumni network of the Wharton School, the business school which we also attended. The fellow alumni hold the highest positions in the local business, economic, and political circles. We were told by many sources that the Wharton network and brand are unmatched in the Philippines, and we were surprised to see a building named Wharton Parksuites in the portfolio of a listed property development company we visited.
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Nearly every day of our trip we had lunch with one of dozens of great alumni and made new friends with whom we look forward to keeping in touch. Not only are they an accomplished and ambitious – yet a friendly, down-to-earth and welcoming – group of people, but they also willingly helped with reputation checks and shared first-hand local insights. Our meeting with the US ambassador to the Philippines gave us particular insight into the recent influx of Chinese nationals. Had we not travelled to the country, expanding our network to that depth and width would surely have been impossible.
Having lunch with two Wharton alumni
(Classes of 1978 and 2018)
Enhancing our macro understanding
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Our deep dive gave us a few important observations about the Philippine economy. First of all, the country’s population surpassed 100m people a few years ago and is very young: the median age in the country is close to 24 years. Along with relatively stable GDP growth of about 6% in recent years, this expanding consumption
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of goods and services bodes well for the business environment. The current infrastructure development initiatives of the government – which are much needed, as we can personally testify after spending hours sitting on congested highways and bouncing around taxi back seats as drivers navigated worn roads – can further boost the economic growth.
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We also witnessed the surge of Chinese investments, businesses and workers in Manila and beyond. The current Philippine administration tries to attract Chinese funds for its gigantic infrastructure projects, at times going against the long-established relationship with the US, a matter that gives the US Embassy in Manila a lot of thinking these days. The presence of Chinese drives up the rent in business districts and prices of land and real estate, benefiting many businesses directly or indirectly. In addition to the land owner mentioned earlier, a few listed retailers whose stores we visited (both in luxury and mass-market segments) also take advantage of the additional demand coming from Chinese visitors. Will the increased investment and consumption last? Time will tell, but we will monitor the situation closely. As the CEO of the largest bank in the Philippines told us, the current Chinese impact is close to 1% of the GDP.
Attending the 2019 Pre-State of the Nation Economic and Infrastructure Forum
Discovering ESG improvements
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We were glad to reveal in our discussions with local financial market regulators and engagements with companies on ESG policies and standards that there are many local companies that implement sound ESG practices in their daily operations. Very often this drive for responsibility and proper risk management comes from the top, signaling that business leaders in the Philippines intend to steer their companies in a sustainable direction. Many are particularly cautious about climate change: the country of over 7,000 islands that sees at least a dozen typhoons every year feels the climate risks especially painfully.
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New sustainability reporting regulations announced by the Philippine Securities and Exchange Commission a few months ago require companies to start publishing sustainability reports early next year, but some issuers championed the initiative and already started reporting this year. We discussed the reporting standards in our meeting with the SEC and were impressed by the robustness of the required disclosures, including climate-related risks and economic value distribution among employees, suppliers, government, stockholders and community. We believe it is a major step in the right direction. Moreover, the vast majority of listed companies seem to be committed to transparency as they were willing to answer the dozens of ESG questions which we ask as part of our extensive proprietary ESG due diligence process.
Discussing new sustainability reporting requirements with the Corporate Governance Department of the Securities and Exchange Commission
Teambuilding in Boracay
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Emerging markets are home to not only high-quality investments, but also high-quality employees. However, as in looking for great companies, our quest for talent has also required a great deal of active searching. The Philippines proves to be one of the best places to find such talent due in part to excellent English and analytical skills – indeed, 3 of the past 10 global CFA Institute Research Challenge winning teams came from the Philippines.
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We have been very fortunate to add two extremely valuable team members based in the Philippines over the past couple of years. These two research assistants have recently both passed Level II of the annually administered prestigious and notoriously difficult CFA exam (the pass rate was only 44%). We spent one of our weekends with our research staff and their families in Boracay, bonding over food, snorkeling and a banana boat ride.
Riding a banana boat with our research team
The year ahead
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The Philippines was the first stop in the deep-dive journey that we have boldly embarked on: living in 12 emerging markets for 12 months!
While we have traveled to each of these countries a couple of times a year since the inception of the Evli Emerging Frontier Fund in 2013 to fulfil our promise to meet every company before we invest, this year we are taking a step further. We are living and breathing the markets in which we invest for the entire next year, full-time, with our families in tow. We strongly believe in active management and are willing to do what it takes to find hidden gems in yet undiscovered places.
We want to learn and to develop the deepest expertise and knowledge of these markets. We also aim to build the most extensive local networks, and we endeavor to continue our study of business success and failure patterns in the developing world.
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Furthermore, we see our mission in spreading the word about ESG and the positive impact that strong ESG practices and standards generate for companies’ employees, customers, communities and especially shareholders. As such, we will deeply engage in ESG matters with every company we meet, raising awareness globally, motivating the management to improve their sustainability policies, and analyzing extensive ESG data we collect to strengthen our investment decisions.
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Our next stop is Malaysia. Please stay tuned for a post on every one of these fascinating markets.