Sept 15, 2012 – The Sugar Water (In Depth Analysis of Pepsi Philippines or PIP)

(Personal Disclosures: FT does not have a position in the company, and this is primarily for information and knowledge purposes only.  Also, FT believes in independent research.  If you use any of the materials here, please acknowledge it, even if I’m just a blogger. 

Everything below is my own personal opinion, and is not related to anyone else’s or any firm’s analysis.  To be fair, no brokerage analyst anyway will make “kengkoy” posts such as these, but this is just my personal style of making something so esoteric and financial-geekdomness be more easily understood and accessible by common laymen.  Viewer and reader discretion is advised. Wahahaha! 😛

(Contact me via yu.nikki@gmail.com or facelesstrader@gmail.com for any queries. )

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So the first thing I was thinking when studying about Pepsi was this – Watch Pepsi commercials 😀  Yep, and of course sample the product by buying myself a Pepsi Max while working on this 🙂

Sorted from the most recent campaigns:

1.) Are you reddeh? – Over sa Pogi. Pepsi. Sarap Magbago. Papatol ba ang isang anghel sa isang bakulaw? (Can’t embed its latest, but watch it via clicking)

watch?v=sZRSV_VKycI&feature=player_detailpage

2.) Pepsi Philippines – “Di Pwede ang Pwede na Yan 

3.) Pepsi Max Philippine TV Ad 

4.) Overseas commercials – most notably the following:

A.) Pink/ Beyonce and Britney/ Enrique Iglesias – We will Rock You Pepsi Commercial

https://www.youtube.com/watch?v=W7jkygJ_QNo&feature=related

B.) Britney Spears Banned Pepsi Commercial with Bob Dole

https://www.youtube.com/watch?v=yu5dIRv9Czc&feature=related

C.)  Pepsi, this is how I roll!  Check out my new ride.

https://www.youtube.com/watch?feature=endscreen&NR=1&v=0AcNH6MdNAA

D.) Very Funny Pepsi Commercial – Kungfu

https://www.youtube.com/watch?feature=endscreen&NR=1&v=40DykbPa4Lc

*****

If you notice, Pepsi Global’s advertisements gear more to the youth, the sexy, the hip, the cool and the funny.  I think the Pepsi Philippines ad campaign is trying to somehow be a cool household name, by “attracting” the  “pogis”, the “jologs” and the “Mister Swabe” kinds to further push the cola sales revenues.  Hahaha.  Evidence of this is from its Facebook page garnering likes by people, who had fun watching their Pepsi Pogi commercials.  To be fair, I haven’t thoroughly compared it as extensively with its prime competitor – Coca Cola, but please go to youtube and google, just to easily find out how each of the Cola titans are battling themselves out, not simply in the shelves space, but also in the internet space.

In any case, it may be no wonder why Pepsi is stronger in the US rather than in the Philippines.  Just looking at the roster of cool people touting Pepsi in the States (the likes of Nicki Minaj, Britney Spears, Pink, Beyonce spring up, showing just how much star power Pepsi has over in the US rather than in the Philippines.)  I bet you Psy of the Gangnam fame will also be targeted by Pepsi Korea to be their endorser, or if not, then why not Mr and Mrs advertisement executives?  I bet you, Pepsi sales will skyrocket when Psy of Gangnam Style makes a Pepsi commercial.

*****

Pepsi Global’s Website (www.pepsi.com)

Pepsi Global’s Facebook Page

Pepsi Philippines’ Facebook Page

Pepsi Philippines’ Website

Pepsi Philippines (PIP) 

Remember this anecdote?


“Do you want to sell sugared water for the rest of your life, or do you want to come with me and change the world?” – what Steve Jobs said to Pepsi executive John Sculley to lure him to Apple

So for starters, Pepsi Philippines or PIP has been listed in the Philippine Stock Exchange ever since February 1, 2008.  I believe that the IPO price was P3.00, and there’s no stock split ever since (Can anyone kindly correct me if I’m wrong?)  A quick snapshot shows you that you can buy the entire Pepsi Philippines today for P14.78 Bil, or roughly 3.7 Bil shares at the last closing price of P4.00 a piece.

It’s too bad I cannot find the prospectus of this company in the website or in PSE for 2008, but the 2009 and 2010 annual reports have been quite handy and helpful in trying to understand this small cap consumer company. 😀  Most traders in the Philippines liken trading Pepsi’s shares with RFM Corporation (the Selecta Ice cream company famous for its Magnum and Cornetto products as well as its White King pasta division) primarily due to almost similar market capitalizations as well as being easily pushed up and down (primarily due to the relatively low public float levels).

Public Float Level of Pepsi Philippines (PIP)

A simple look at the top 20 holders of the common shares of PIP shows that the shares are heavily concentrated with Lotte Chilsung Beverage, Quaker Global Investments, as well as a few holding companies.  Assuming only 3% of the public float is being passed around by the traders, that’s just 100 Mil shares or (3700 Mil shares *3%).  It’s quite easy to pump and dump these kinds of stocks, especially if a few big players believe that the company’s valuations merits a higher price, or a lower price.  Only the owners of the company, who releases more shares to the public can fix the supply and demand distortion game in the markets.

This reminds me of a trading quote I read before:

“In a little market like pork bellies – it is not difficult to control the market – a big fish can move a little pond,” he said explaining that “in a smaller market, technical analysis might not work as well” if the hopes, fears and greed of the masses aren’t being reflected.

As you can see from this snapshot below, PIP’s shares have been semi-controlled by the likes of ATR Kim Eng and Philequity Partners (or basically Bofa-ML, since PEP is an affiliate of Merrill Lynch). And so far, these entities are up about 50 cents higher from their entry prices. Not bad at all. 🙂

I wasn’t able to check the average value turnover of Pepsi’s shares, but through watching the tape, I bet it trades around 4 Mil- 10 Mil shares in a single day, with a few exceptional days when there were huge crosses of 40 Mil shares, 30 Mil shares in other days.  Notice that when it first spiked, (a favorite breakout pattern of momentum technicians), volume was strong and the 1H2012 earnings was released, spurring a flurry of buyers willing to push the price just to get those shares.  So I know I’ve made quite a huge introduction already, let’s see below a deeper understanding of this business named Pepsi Philippines 😀

General Information

Pepsi Philippines is primarily engaged in manufacturing, sales and distribution of carbonated soft drinks and non-carbonated beverages to retail, wholesale, restaurants and bar trades.  It has two big divisions, the Carbonated Soft drinks (CSD) and the Non Carbonated Beverages or (NCB).  I listed below its well known brands, as well as a few new products I’ve been seeing launched in their Facebook page.  For instance, the Tropicana Coco Quencher was just released this Wednesday or Sept 12, 2012.  (Or at least, that’s the only time I saw it in Facebook, maybe it’s been in stores for awhile now, and I just wasn’t able to see it in stores.)

Carbonated Soft Drinks (CSD) 

1.)    Pepsi- Cola

2.)    7Up

3.)    Mountain Dew

4.)    Mirinda

5.)    Mug

Non Carbonated Beverages (NCB) 

1.)    Gatorade

2.)    Tropicana/ Twister

3.)    Lipton

4.)    Sting

5.)    Propel

New Products:

1.) Tropicana Coco Quench

******

I wish to actually give my readers a rundown about the Philippine Soft Drink Industry with sales revenues and market shares between the obvious titan in the Philippines (Coca Cola), but sadly data for these things isn’t easily found.  I checked google, but couldn’t find the data.  (So if you’re kind, please message me?).  I want to show data similar to what Mayor Mike Bloomberg did for America – something like this, but I want to see it in the Philippine context.  I want to see just how many sugar water Filipinos have been consuming for the past 20-30 years or even just a decade if you have data.  

Sales Revenues and Market Share of Pepsi versus the Philippine Soft Drink Industry

To give my readers a background of Pepsi Philippines’ two divisions, a simple check in its financials will help solve the problem. 🙂

Below are snapshots coming from the annual reports of Pepsi Philippines (2009, 2010) – sadly 2011 hasn’t been uploaded in their website and I can’t seem to find it in the disclosure, so I settled with the dry PSE annual report.  Hohum, quite a long report.  But it’s interesting anyway, so here:

So essentially, for the past 5 or so years, Pepsi has been trying to make the Philippine market a less “obese” nation, by giving us “healthier” alternatives and pushing their sports drinks, such as Gatorade, Sting, Tropicana, Lipton, and so forth.  They’ve been increasing their revenues by increasing the NCB mix (i.e. Non carbonated beverage market).  I just updated the mix, and Pepsi reports in many calendar years.  They have a fiscal year ending June, and a calendar year ending Dec, so note the dates below.  In any case, the math is simple, 70%- Colas, 30%- Non Carbonated Drinks.

Notice that gross revenues have been rising since 2005 from Php10 Bil to Php16.6 Bil, showing either market share growth in the cola business, or through the non carbonated beverage segments.  And to be fair to the company, 1H2012’s revenues are already Php 11.3 Bil or 15.7% higher versus the 1H2011’s gross revenues.  This company if, it can deliver just the same kind of 1H2012 revenues for the 2H2012 (I.E. If I normalize revenues to 22.6 Bil pesos, that would translate to a 32% pop in revenues from FY2011’s gross revenues of P17 Bil.)

Now perhaps the question is, if it will have sales of P22.6 Bil pesos for FY2012, how much can net income go ?  How did Pepsi increase 1H2012’s profits by a whopping 436%?  And can they sustain this?

Well the answer lies on a few simple things.  Check Gross Margin. Check Cost of Sales and of course, ask why volumes have been growing.  So that’s what we’ll be discussing below:

Pepsi Cola’s Syrup Formula

Primary Components:

1.) Sugar

2.) Packaging Materials

Key commodity inputs needed to make carbonated soft drinks include concentrates, sugar (cane or beet), glucose/fructose, aspartame, acesulfame-potassium, caramel colour, sodium benzoate, phosphoric and citric acids, caffeine, seasonings, carbon dioxide and specially treated water. (Glucose/fructose is a generic term for high fructose corn syrup or HFCS, now more commonly referred to as ‘corn sugar’.) The industry uses about 20 times as much corn sugar as it does cane/beet sugar as the sweetening agent. (Source: Canadian Soft Drink Industry Report)

Pepsi Philippines’ annual reports don’t disclose exactly how much sugar and packaging materials weigh on the cost of sales, but I’d make an assumption that sugar represents over half of the cost of sales.  The reason is because these sugary drinks aren’t called sugar water for no reason.  Also, the company cites it often in its statements to public news disclosures, that any increase in the price of sugar has a direct effect on the company’s net margin.

Listed below is a chart of sugar price, as well as the net margins of Pepsi Philippines.

Notice that when sugar spikes, Pepsi’s share price falls.  Also, when sugar prices fall, Pepsi’s shares rise.  This implies that the market is forward looking and is a rational market agent.  Pepsi essentially can sustain a high net margin and a high gross margin, if sugar doesn’t spike up.

I used the latest monthly price of sugar (http://www.indexmundi.com/commodities/?commodity=sugar&months=60) and tried to check how the net margins have fared every time sugar goes up or down.  Notice that for the year 2009, I’m quite surprised that despite sugar rising 59%, 2009 net margins didn’t fall, while in 2011 when sugar spiked up by 55%, net margin fell to as low as 1.45%.  I’d like to ask management about this weird occurrence, but what’s quite positive is that with the decrease in sugar prices for 2012, net margins have also recuperated back up to 5.1% for 1H2012.  My own estimate is that Pepsi Philippines will likely earn at least a 5% net margin, or an income of P1,130 Bil.

*****

Other Positive Reminders:

New Management since October 2010

1.) Lotte Group Synergies (Source: ABS CBN – Nov 9, 2010

The Lotte Group formally entered Pepsi Philippines last month after its beverage unit, Lotte Chilsung Beverage Co. Ltd., acquired a 34.4% stake worth P4.45 billion, making it the single largest shareholder in Pepsi Philippines. The buy-in valued Pepsi Philippines’ at P3.50 per share.

Lotte Chilsung, the listed South Korean bottler of US-based PepsiCo. Inc. for the past 30 years, is considered that country’s No. 1 beverage company with a 40% share in the softdrinks sector.

2.) Pepsi Philippines names Meralco COO Oscar Reyes as new chair (Rappler – July 18 2012)

The board of Pepsi-Cola Products Philippines Inc. has elected Oscar S. Reyes as its new chairman following organizational changes.

****

New Products and New Partnerships

1.) Sept 5, 2012 – Starmalls and Pepsi’s Exclusive Contract Agreement (Business Mirror)

STARMALLS Inc., the shopping center and office development arm of the Villar-owned  group of companies, signed an exclusive partnership with beverage maker Pepsi-Cola Products Philippines Inc. (PCPPI) to distribute the latter’s products in its malls.

In a statement, Starmalls said Pepsi-branded drinks, which include 7Up, Gatorade and Tropicana, will be exclusively sold in Starmall food courts, cinemas, wellness and fitness centers and terminal hubs.

2.) April 9, 2012 – PepsiCo Philippines launches new energy drink that ‘Pacqs’ a punch

The product was launched on March 25 across different networks, featuring Manny in a mock press conference where he revealed that Malungay helps him feel faster, stronger and braver.

“Sting Power Pacq epitomizes the functional differentiation and breakthrough communication which has driven PepsiCo’s portfolio transformation,” said Sunil D’Souza, country manager, PepsiCo Philippines. “In partnership with Pepsi-Cola Products Philippines Inc. (PCPPI), the Philippines team has raised the bar yet again. With PCPPI investing strongly behind the brand, PepsiCo Philippines plans to quickly change its trajectory in the energy segment.”

3.) February 21, 2012 – New Plants – PCPPI gives additional muscle to its Cagayan de Oro plant http://www.pepsiphilippines.com/news1.php?id=27

4.) February 21, 2012 – PCPPI to venture into coco water

http://www.pepsiphilippines.com/news1.php?id=28

*****

The Important Sugar Charts

Sugar 3 Month Time Frame

Sugar Yearly Time Frame

*****

At 14.78 Bil pesos, the company Pepsi is trading at roughly 13.07 X my personal estimated income of P1.13 Bil.

I think I’m kinda obviously  a bullish person for this sugar water company.

Just sing “Sugar, Sugar, oh Honey honey :D”

See ya around,

– Faceless Trader

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19 Responses to Sept 15, 2012 – The Sugar Water (In Depth Analysis of Pepsi Philippines or PIP)

  1. marvin says:

    nikki, quaker oats is a product of PIP also?

    Like

    • AL says:

      Yes PepsiCo., Inc. is a parent company of Quaker Oats according to Wikipedia. Btw next year is an election year a lot of people are expecting that PIP’s sales revenue should skyrocket…
      P.D. I dont have PIP anymore…:D

      Like

      • hello Al, question. why do people think a lot of PIP’s sales revenues would skyrocket? Also when you say skyrocket? How high is the rocket? 50% increase in sales? 70% increase in sales or 30%?

        -Thanks in advance. – FT

        Like

      • AL says:

        hi FT, come to think of it PIP made 436% on the first half of 2012, and sabe pag election year maraming nakikinabang at kumikita malamang isa na dito ang PIP syempre pag eleksyon left and right ang pa meryenda ng mga politoko ngayong normal year nag skyrocket na ang sales what more pa kaya next year (election year)…well Im just speculating, how high is the rocket? ewan ko. im just following the trend 😀

        Like

      • oks sige… obesity sa kakainom ng mga softdrinks. okie.

        Like

    • sa US ata, pero dita sa Pinas hindi eh. Quaker Oats Global is just a major shareholder.

      Like

  2. I like kengkoy post, nice article about $PIP…. PIP PIP HOORAY!!! Looking forward on your articles then!

    Like

  3. rita says:

    please research further. Pepsi is #3 brand in the US, after Coke and Diet Coke.

    and an endorsement from a celebrity, most especially from a faddish one like Psy, will not automatically generate sales.

    Like

  4. Alex says:

    How much is cost of High Fructuse Corn Syrup used by Pepsi? and total volume used in the production during the year?

    Like

    • hello alex,

      sorry late reply. I wasn’t able to read my blog for quite awhile now. Sorry sorry. I would think sugar (or high fructose corn syrup) is about half of Pepsi’s cost of sales. That seems to be the primary commodity that the company is most sensitive of, other than the packaging materials. Hope that helps. Exact figures I am not aware of. – Faceless Trader

      Like

  5. Joseph says:

    Look at PIP now! It’s been making new highs and I believe it’s not yet done. Higher consumption plus the coming elections are really good for this one. I’ll just wanted to cheer my fave pet. GO PIP!

    Thanks FT for this one! 4ThumbsUp!
    PD: One of my core shares.

    Like

    • good job 😀 I bought too.. sold on the way up to 5-5.40, ended up buying back higher around 5.70 areas and just held on to it na lang. Thanks and congrats Joseph for holding 🙂 Good job for holding as a core! 🙂

      Like

  6. Joseph says:

    Thanks FT! Congrats to both of us. Anyway, I like the way you made this in depth analysis. I’m hoping for few more analysis on few hotter stocks in the PSE. I wanted sana to request on particular ones but I leave the picking from you. I believe you have your fave or core shares.

    Btw, looking forward to meet you soon. Pit Señor!

    Like

  7. Brunsky says:

    Keep on holding. That’s all I can say. haha

    Like

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