May 31, 2014 – The $House Always Wins?

Before anyone types me bashing messages, let it be known that I do have clients and have a vested self-interest in $House the stock.  Why I never hyped in social media is of course a conflict of interest.  Why will I hype something if I want to buy it as low as I possibly can?  This post is not meant for you to hype the stock, though I can pretty much assume it will be used as a hyping tool.  This is meant to inform people of the rationale why I invested in it in the first place during the Follow on offering price of P6.50, why I encouraged clients to place some position (note some! not all in!) at 6.70/6.80/6.90 and yes even to as high as P8.00 bucks and why I continue to buy (via averaging up at certain price levels.)  Whether you’re invested in the company for the right or wrong reasons, let me explain the risks and the rewards while you deal with your own business.  My point is not to persuade you to buy or sell the stock.  My point is to help make a useful discussion of the risks and rewards about this stock called 8990 holdings.

Is Deca Homes the next Subprime house of the Philippines?  (While I was reading the prospectus, this was the question I had in my mind.)  Look at how a Cebuano is advertising Deca Homes in Cebu.

Deca Homes Cebu – Own a House With No Down Payment!

https://www.youtube.com/watch?v=3-OlloAydXE (By the way, Cebuanos really have an English accent noh?  They aren’t like my Manila- English accent. hehe.)

Search around many youtube videos by a simple keyword search of Deca Homes and you will find abundant evidence on people residing in Deca homes, people explaining their own sentiment about the quality of these houses and their affordability.  You will also see some hate messages on some sewage problems.  In fairness, during the Cebu earthquake, a lot of the Deca houses stood the “earthquake” test showing that an P840,000 peso home with only 2,800 pesos amortization and (well I read the prospectus there is a downpayment of 12,000 pesos?) is enough to buy a house and ready for occupancy.

Are you interested to buy a house?  You can even go to Sulit.com (now known as OLX) – look at the number of Deca Homes in Davao.

http://www.olx.ph/index.php/classifieds+directory/q/deca+homes+davao+city

Maybe you can find a real estate agent there. 😛

*****

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The financials look great.  You look at the company, and you’d say to yourself.  Wow, low cost housing does make money.  You can construct houses in 8-10 days maximum due to the pre-cast production process.  It is efficient and has a 40% net income margin due to its abundance of tax holidays.  In fact, I sighed a huge “sigh, no one looks at the 900+mil income of house guys.” Everyone just doesn’t read news.  Hay buhay.  We silently just bought and just stuck to the fundamentals.  (Anyway, that’s what we’re here for – fundamentals even if at times these fundamentalists are called funny mentalists.)

Please read this news clip if you haven’t – > https://ph.news.yahoo.com/8990-holdings-profit-rises-30-p934m-154030485.html

You see, there are governments that have found Deca homes’ quality and efficiency wonderful that TPG Capital and Khazanah fund (of Malaysia) both invested at least 60% of the entire IPO float.  (wow talk about hoarding :P)

http://www.gmanetwork.com/news/story/361029/economy/companies/singapore-s-tpg-capital-banks-on-phl-mass-housing-market-invests-in-8990-holdings

Who is TPG Capital? Who is Khazanah?  Again, please check wikipedia! (uhm quick answer— mga whales – mga sovereign wealth funds and large private equity funds lang naman.  Hindi po sila mga planktons or headless chickens na hindi nagiisip at basta basta na lang bibili without looking at the prospectus, the site and the actual numbers.  These people actually earned their right to actually know where to put their billions to work.)

http://en.wikipedia.org/wiki/TPG_Capital

TPG Capital (formerly Texas Pacific Group) is one of the largest private equity investment firms globally, focused on leveraged buyoutgrowth capital and leveraged recapitalization investments in distressed companies and turnaround situations. TPG also manages investment funds specializing in growth capital, venture capital,public equity, and debt investments. The firm invests in a broad range of industries including consumer/retail, media andtelecommunications, industrials, technology, travel/leisure and health care.

http://en.wikipedia.org/wiki/Khazanah_Nasional

Khazanah Nasional Berhad is the investment holding arm of the Government of Malaysia entrusted to hold and manage the commercial assets of the government and to undertake strategic investments. Khazanah was incorporated under the Companies Act 1965 on 3 September 1993 as a public limited company. The share capital of Khazanah is owned by the Minister of Finance, a body corporate incorporated pursuant to the Minister of Finance (Incorporation) Act, 1957.

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What’s the expected growth for year 2014?  Their president Mr. Atencio states a 30% growth for year 2014 can be sustained because of the 66,000 backlog of homes.  With the cash flow it raised from the IPO proceeds, they can build more houses.   More houses, more revenues.  More revenues, more income and higher EPS.  Higher EPS, higher stock price in the long term. As for the risk of the home buyers not paying, there is the CTS gold financing where Pag-Ibig houses and Banks actually own the house.  As long as the occupant is not yet paying, the house is not his.  He is in effect paying P2,800 pesos amortization to the bank.  The accounts receivable risk is not in the hands of $House the developer, but within the bank.  (Ang takot ko dito, baka ma Lehman brothers tayo nito ah, parang CDO CMO all over again ba nanaman ito?  This is essentialy an interest rate sensitive stock.  Kaya please lang BSP, wag na wag niyo pong akyatin ang interest rates.  See where I’m going at?  Any investment has risks!  :P)

Luckily, as with the numbers – there is a 96% account receivable collection rate.  Where’s the growth?  Just look at the 3.6 Mil homes that is a backlog.  The much heralded queen stock of the year Double Dragon is essentially trying to supply to the low cost housing needs in the provinces.  The key question to ask is whether these houses are affordable, and if they can show the ability to pass on the financing risk to banks.  Well they always have BDO to pass the risks?  I dunno. 😛

So the main risk with investing in $House?

I guess basta walang mga Ninja buyers. (Ninja refers to No Income No Job Askaleros) — then investing in $House at a multiple of 10X (pag less than 7 price ka hehe.) should merit a good investment right?  Since 30% growth, 10X P/E. PEG ratio less than 1.  Just sit back, relax and party on 😛

Last price it traded at is 7.85?  Market cap of approximately 44 Bil pesos?  So assume you’re paying a company that can theoretically grow 30% income for year 2014 – we are looking at 3 Bil income?  (So 2 billion pesos more for the 3quarters to be on track with its forecast since 900 million earned already in the first quarter.)— and then 3 bil earns 4 Bil again next year?  I’m paying 11X forward P/E if I’m paying 7.85,  at least you’re a better informed buyer when I tell you that right?  Does this seem high?  Probably not really high, you really aren’t paying such a high premium to the growth of this company.

TPG Capital and Khazanah are just sitting back, relaxing with their billions… Relax investor or trader.  You’re in the big whales’ hands.

I think the opinion writer Mr. Conrado Banal III which wrote a really extensive and comprehensive good opinion about the risks and rewards of the company is just sitting back as well.

http://business.inquirer.net/170436/home-a-loan

Today, 8990 Holdings happens to be one of the biggest firms, if not the biggest, in the country’s mass housing development sector. It achieved such a lofty status after only 12 years, since its birth in 2002, having already built some 30,000 low-cost shelters in Angeles, Cebu, Davao, Cavite and Iloilo.

On Wednesday, the company listed some 1.2 billion shares on the exchange and, from the looks of it, could be an honest-to-goodness attempt to tap the market for funds by sheer force of circumstance. You see, when 8990 Holdings undertook a backdoor listing in 2012, the Pag-ibig Fund was rocked by problems, thanks to the infamous Global Asiatique scandal.

If low cost housing was such a great business model?  Why didn’t the Ayalas do this in the first place?

Quick Answer:  They didn’t think it was a great business model until Deca showed it to them.  Also, the D and E class are stereotyped as not able to pay for the houses.  It is quite difficult to do business with people who have “hand to mouth” existence. (ouch naman mga big boys).  They didn’t want the financing risk.  However, Deca showed them there’s a way to make money and pass the risk. (teka lang guys, ayoko nang subprime!).  Slowly but surely, the Ayala group had made a brand called Amaia to cater the 7,500 per month bracket.  Whats all these Federal Land houses catering to the mass housing needs?  Also, I do love Ayala properties but that is for another different post, and provided Ayala the stock can hopefully go just a few notches down from its upper echelon premium valuations.

Longer Answer:  Records showed for instance that 8990 Holdings obtained from the Pag-ibig Fund some P25-billion “take out” when it started its low-cost housing business in 2002. It fell to almost zero in recent years.

The low-cost housing business is the equivalent of the hand-to-mouth existence in the lucrative world of property development. What I am saying is that the big boys—Ayala, Megaworld, Filinvest, or Summit groups—would not want to touch mass housing.

Low-cost housing developers are guerilla-type warriors, building a few houses in a couple of hectares here and there, precisely because of limited capital. Without the “take-out” arrangement with the Pag-ibig Fund, their cash flow would be taxed.

Low-cost housing thus obtained a reputation for being a low-margin business because of the market segment it served—the low-income groups—although the segment presented the biggest demand for shelter. The government estimated the housing backlog in the country at only 3.6 million units, which was rather conservative. This could mean that our government was embarrassed to admit the real score. Anyway, 8990 Holdings already proved that mass housing could be a high-margin business, when it applied its own (i.e., proprietary) technology to reduce the construction cost, by turning to pre-cast housing models, which cut down costs some more by shortening the construction time to 10 days max.

Still, in-house financing could burden the finances of property developers even among the big boys, who at least had the big banks for support with mortgage deals. In the case of 8990 Holdings, it knew all along its job was to build low-cost houses efficiently, and it could not last for long in the mortgage game because it was not a bank in the first place.

And so it conducted the P9-billion FPO, with some P5.6 billion of the proceeds going to debt payment and land banking. Some P3.3 billion in secondary offering will go to the original three founders of the business.

Isn’t this a bad thing that the offering allowed the original three founders of the business an exit?

True, the owners sold 3.3 Bil pesos in secondary offering, but they still have a huge stake.

http://business.inquirer.net/64001/a-bankers-useful-insights-on-home-loans

 

The $House always wins? Especially with the big whales?

– Faceless Trader

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7 Responses to May 31, 2014 – The $House Always Wins?

  1. Stop hyping where the hell are you when HOUSE shares are falling last May, if you really believe in this crappy fundamental b****** post the best time to prove is to buy when it was being sold down

    yeah good posting when it is already up by 20%

    Like

  2. Vic Duran says:

    Nice post. It is however important to note that Ayala Land is already offering low-cost housing to its newest brand, Bella Vita – http://www.bellavita.ph/

    Like

    • Vic Duran says:

      Nice post. It is however important to note that Ayala Land is already offering low-cost housing through its newest brand, Bella Vita – http://www.bellavita.ph/ – It shows that ALI recognizes that there is good potential on this end of the business and it’s already adjusting its strategy.

      One thing I could clearly remember when I attended “BPI Trade’s Usapan: Philippine Property” last Thursday, is that ALI mentioned during the event that they saw bigger earnings on their Avida and Amaia brands compared to their high-end Alveo and Ayala Premier brands. This must be the reason why they launched BellaVita – which, up to now, is not known to many, but is already existing. Truth is, BellaVita was launched more than 2 years ago. ALI has already established position for competing for the Lower C and D market.

      Like

  3. Vic Duran says:

    Nice post. It is however important to note that Ayala Land is already offering low-cost housing through its newest brand, Bella Vita – http://www.bellavita.ph/ – It shows that ALI recognizes that there is good potential on this end of the business and it’s already adjusting its strategy.

    One thing I could clearly remember when I attended “BPI Trade’s Usapan: Philippine Property” last Thursday, is that ALI mentioned during the event that they saw bigger earnings on their Avida and Amaia brands compared to their high-end Alveo and Ayala Premier brands. This must be the reason why they launched BellaVita – which, up to now, is not known to many, but is already existing. Truth is, BellaVita was launched more than 2 years ago. ALI has already established position for competing for the Lower C and D market.

    Like

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