About a week ago, Nikkei Asian Review reported a significant increase, 24.6%, in car unit sales in 2016 compared to 2015. In addition, the paper stated that both market leaders Toyota (TM, Financial) and Mitsubishi (TSE:7211, Financial) plans to begin domestic car production of their Vios and Mirages car units in the subsequent years.
In 2016, Toyota had 44.14% market share of the Philippine car industry while Mitsubishi had 17.08%. Ford Motor Philippines had 9.37% market share. Toyota, Mitsubishi and Ford (F, Financial) grew their car units sales by 26.95%, 13.52% and 32.77%.
According to Nikkei Asian Review, the Philippines is the third-fastest growing automotive market in Southeast Asia following the leads of Singapore and Vietnam.
BMI Research Group, a subsidiary of Fitch Ratings since 2014, expects the Philippine passenger car market to outperform other ASEAN countries over its forecasted period from 2017 to 2020. The Department of Motor Vehicles differentiates a passenger from a commercial vehicle as a vehicle that does not transport persons for hire. In 2016, the Philippine passenger car market was 37% of total car units sales compared to 63% commercial vehicle unit sales.
Nonetheless, the research group also indicated that its recent proposed tax increase of the Philippine administration to car sales would affect its projections.
Secondary to Toyota’s market-leading share in the Philippine car market, reviewing Toyota’s domestic partner’s operations should be worthwhile.
Toyota Motor Philippines was incorporated in 1988. According to GT Capital (PHS:GTCAP, Financial), Toyota Motor Philippines is a joint venture of GT Capital Holdings, Toyota and Mitsui & Co. Ltd. (TSE:8301, Financial). GT Capital – currently the Philippines’ fifth-largest publicly listed holding firm with a market capitalization of 230 billion pesos ($4.6 billion) – owns 51% of Toyota Motor Philippines as of fiscal 2015. Toyota and Mitsui own 34% and 15%.
Toyota cars have been the top-selling brand in terms of units sold for both passenger and commercial vehicles in the Philippines since 2002.
(SEC 17-A Filing)
GT Capital
GT Capital was incorporated in 2007. It traces its history for as long as one of its bank interests, Metropolitan Bank and Trust Co. (Metrobank), has existed, which is since 1963.
The company is a major Philippine conglomerate with interests in market-leading businesses across banking, property development, power generation, automotive assembly, importation, distribution, dealership and financing and life and nonlife insurance (1).
According to its filing, GT Capital is the primary vehicle for the holding and management of the diversified business interests of the Ty family in the Philippines. As of 2015, GT Capital is 54.3% owned by Grand Titan while the remaining ownership remains listed in the public exchange. Grand Titan represents the Ty family’s equity investments in GT Capital and may easily be confused as one, GT equals Grand Titan.
(GT Capital Organizational Chart, SEC 17-A Filing)
Like other complex holding firms, such as the Ayala Corp. (AYALY, Financial), GT Capital has several ownership interests in different industries with market leading positions in the country.
(See Ayala Corp.: An Outstanding Philippine Company?)
(Recent 17-A and 17-2 Filings)
GT Capital’s automotive business contributed mostly to its operations more than anything else. Discussed below are different business components in the following order: automotive; banking, insurance and automotive financing; property development; and power generation businesses.
Automotive
GT Capital’s automotive business involves assembly, importation, distribution, dealership and financing. Automotive’s financing segment is included in banking and insurance business.
GT Capital’s 51% ownership of Toyota Motor Philippines, as discussed above, represents these aforementioned operations. Toyota Motor Philippines is also engaged in the distribution of Lexus brand motor vehicles in the Philippines.
In addition to GT Capital’s Toyota Motor Philippines stake, the former also owns 60% and 53.8% interests in automotive dealerships Toyota Manila Bay Corp. and Toyota Cubao. The two dealerships sell Toyota motor vehicles in Luzon, particularly in Metro Manila – capital region of the Philippines. Both dealerships entered into a merger agreement with the Toyota Manila Bay Corp. as the surviving entity in March 2016.
The dealerships also offer vehicle parts and accessories and provide after-sales services to Toyota motor vehicles. Nonetheless, Toyota Manila Bay Corp. financial figures are not included in this segment.
In fiscal 2015, the automotive business grew 11% and contributed 75.9%, or 120.8 billion pesos, in total GT Capital sales. Nine months into fiscal 2016, the car business grew another amazing 49.7% to 129.73 billion pesos – exceeding the entire sales of its previous 12 months of operations by selling 120,136 units from 87,138 units the prior year.
Unfortunately, GT Capital did not exactly provide operating profitability figures per revenue component (2).
Banking, life and nonlife insurance and automotive financing
GT Capital’s banking business involves a 25.2% interest in Metropolitan Bank & Trust (PHS:MBT, Financial) or Metrobank. Metrobank is the Philippines’ second-biggest bank as it had 1.4 trillion in assets as of September 2016, according to Banko Sentral ng Pilipinas – the country’s central bank. Metrobank also owns the controversial Philippine Savings Bank, which had about 183.8 billion pesos in assets as of September.
Life and nonlife Insurance
GT Capital operates its life insurance business through its 25.3% interest in Philippine AXA Life Insurance Corp. Philippine AXA Life Insurance offers personal and group life insurance products in the country, including investment-linked insurance products. Philippine AXA Life Insurance is the country’s fifth-largest in its industry comprising of 79.1 billion pesos in assets as of 2015, according to the country’s insurance commission.
In 2016, Philippine AXA Life Insurance bought Charter Ping An Insurance Corp. from GT Capital itself for 40 million euros ($39.56 million). Charter Ping An served as the Philippines’ fifth-largest nonlife insurer.
Banking and insurance sales are assumed to contribute to GT Capital’s net income of associates and jointly controlled entities.
Automotive financing
GT Capital provides financing for the acquisition of Toyota motor vehicles through its 40% interest in Toyota Financial Services Philippines Corp. The latter, according to GT Capital, offers retail loans and finance lease to its individual and corporate clients for the acquisition of brand-new and/or certified preowned Toyota vehicles.
GT Capital’s investment in Metro Pacific Investments (see power generation) is also included in this group as per its recent quarterly filing.
In fiscal 2015, banking and insurance sales grew 64.2% and contributed 3.5%, or 5.6 billion pesos, in total GT Capital sales. Nine months into fiscal 2016, sales grew another 58.9% to 6.5 billion pesos – again surpassing the whole 12-month operations in 2015.
Property development
GT Capital’s property development business involves its ownership of Federal Land and now a 51% from an initial 22.7% stake in another controversial property development firm, Property Company of Friends or Pro-Friends.
Founded in 1999, Pro-Friends earlier on was tied to complaints of delay in housing units turnover including misrepresentation in dealings among buyers and owners and use of substandard and defective construction materials among other complaints according to a reporting of a local newspaper.
In contrast, GT Capital’s willingness to use its option to increase its stake in Pro-Friends in mid-2016 indicated that progress toward a positive business development has been happening.
Pro-Friends focuses on the low-cost and economic housing segments, as well as retail space and business process outsourcing (BPO) office leasing. According to GT Capital, Pro-Friends completed 4,681 of its affordable homes in 2015 alone and has sold over 36,000 homes since it came into existence. GT Capital initially bought its stake in Pro-Friends in late 2015.
Federal Land, on the other hand, has a 40-year track record on property development organized by the Ty family. The property developer had 31 ongoing projects and had 104.3 hectares of land available for development as of 2014.
Real estate sales grew by 49.5% and contributed 6.6%, or 10.46 billion pesos, in total GT Capital sales in fiscal 2015. Nine months into fiscal 2016 the real estate business grew another 45.7% or 9.22 billion in sales.
Power generation
GT Capital operates its power generation business through its 51.3% direct ownership in holding company Global Business Power Corp. Global Business Power through its operating subsidiaries is one of the leading independent power producers in the Visayas region and Mindoro island – with the former as one of the other major group of islands found in the Philippines aside from Luzon and Mindanao.
In mid-2016, GT Capital and the Philippines’ sixth-largest holding firm, Metro Pacific Investments (PHS:MPI) – next to GT Capital itself with 217 billion pesos in market capitalization – entered an agreement where GT Capital was to sell its then entire 56% Global Business Power stake and as a result owning up to 15.55% of Metro Pacific Investments instead (3).
Through a vendor financing facility and cash payment arrangement, GT Capital ended up acquiring 15.55% of Metro Pacific Investments for 29.9 billion pesos while Metro Pacific Investments held the new 56% majority stake in the Global Business Power.
Among GT Capital’s exceptional performance in fiscal 2015, its power generation sales seems a downer with a negative 3.1% change to 18.4 billion pesos, which contributed 11.5% in total fiscal 2015 sales. Nine months into fiscal 2016, the power business lost 50% in sales to 6.84 billion pesos compared to 13.7 billion pesos the year prior.
The low earnings result would be a result of GT Capital’s new business arrangement with Metro Pacific Investments where it now logs its equity stake in the latter’s holding firm in its earnings in the banking financing segment rather than the original power generation component. In review, GT Capital no longer owns its stake in Global Business Power, having relinquished its stake as of May 2016.
Gain on sale (one-time gains) and previously held interest
As a result of series of mergers and agreements that had occurred to the already complex GT Capital business arrangements here are some of the one-time gains the holding firm recognized in the recent nine months of operations.
- 140 million pesos earned from previously held interests concerning the merger between Toyota Manila Bay Corp. and Toyota Cubao dealerships.
- 170 million pesos from selling Charter Ping An Insurance Corp. to Philippines AXA Life insurance.
- 1.85 billion pesos from selling Global Business Power to Metro Pacific Investments in a rather vendor financing-type of an arrangement.
Overall, GT Capital had five-year sales, profit growth and operating margin averages of 121%, 32.2% and 42.4% (4).
Market return
GT Capital had a one-year total return percentages of 2.08% compared to the broader Philippine Composite Index’s 14.76% (5).
Valuations
According to Financial Times data, GT Capital had a trailing 12-month price-earnings (P/E) ratio of 14.3 times and a price-book (P/B) ratio of 2.14 times. The holding firm does not have a trailing dividend yield.
Cash, debt and book value
As of September’s unaudited filings, GT Capital had $24 billion in cash and short-term investments and $92 billion in debts including bonds payable with a debt-equity ratio of 0.67 times compared to 0.82 in December 2015.
GT Capital also had 3.6% of its 279.7 billion assets in goodwill and intangibles while having a book value of $107.3 billion compared to $87.4 billion the year prior.
Cash flow
(17-2 Filing)
Nine months into fiscal 2016, GT Capital was able to deliver positive cash flow from its operations to 8.78 billion pesos compared to a loss in the year prior. Other than its solid profit growth for the period, GT Capital also received improved cash flow from increased payables and receivables including a 1 billion pesos dividend compared to 287 million pesos the year prior.
Capital expenditures were 8.4 billion pesos, leaving GT Capital with 343 million pesos in free cash flow, compared to negative 8.8 billion pesos the year prior. GT Capital also took in 36.98 billion pesos in loan while repaying 26.1 billion pesos in loan payables.
Also, GT Capital has a target of paying 3 pesos per share to its shareholders annually. In fiscal 2015, the company allocated 522.9 million pesos in dividends despite the fact that it had negative cash flow from operations. In March 2016, GT Capital decided to issue a total amount of 657.1 million pesos in regular and special dividends.
Conclusion
GT Capital carries an extensive history of strength and persistence of business development carefully managed by the 84-year-old George Ty and his family, the Philippines’ sixth richest with a net worth of $3.7 billion pesos in 2016 and GT Capital’s founder.
Secondary to this complex business arrangement involving several major companies, such as Toyota Motor Philippines and Metro Pacific Investment, there could be minimum of doubt that the business would go nowhere but continue to prosper.
Other than the impressive sales and profit growth figures, GT Capital also carried a supportive balance sheet with a current acceptable debt level.
Meanwhile, positive changes should be expected moving forward on GT Capital’s cash flow operations. As observed, the company seemed to demonstrate widely fluctuating levels of cash flow in recent years and therefore would deter some conservative long-term investors.
(Financial Times)
Using historical earnings multiple and growth rate figures along with a 20% margin, GT Capital has a value of 1,320 pesos per share. This would indicate that the company’s shares are trading almost at par at its current levels.
In summary, inconsistency in free cash flow and fairly valued shares make GT Capital giant an easy pass.
Notes
(1) The information here moving forward was gathered from GT Capital’s corporate filings in the Philippine Stock Exchange.
(2) Me: I would stand corrected if anyone could point me where the exact operating profit figures per segment are provided in GT Capital’s 17-A (Annual) and 17-2 (Quarterly) filings.
(3) Me: GT Capital raised its Global Business Power stake to 56% prior to selling the stake to Metro Pacific Investments' subsidiary Beacon Electric Asset Holdings.
(4) Morningstar data.
(5) Wall Street Journal and Morningstar data.
Disclosure: I do not have shares in any of the companies mentioned.
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