What does a Trillion Peso Company Look like?

NYu
8 min readDec 11, 2018
As of Dec 11, 2018 — SM trades at Php 915/share with a market capitalization of P1.1 Tril and holds the largest weight in the Philippine Stock Index holding 13.94% weight in the total market.

The top line of a One Trillion Peso company looks like this. It earned in revenues sales roughly 307 Bil in the last nine months of 2018 an average of 34 Bil peso in a month or 1.13 Bil peso in a day.

If we annualized this number, it translates to 412 Bil peso sales in a year. How does one company sell that much goods in a day? Let us count the ways.

Reference: Philippine Stock Exchange Published Disclosures of SM Quarterly Report Filings

Roughly 73% of the 307 Bil in sales is accounted for in the Retail segment while 25% is taken account by the Property segment. Thus, we can essentially say SM Investments is largely a Retail focused company. Interestingly we are talking about sales only. Notice however that from a segment income perspective, Property generates 60% of income whereas Retail only provides 21%. That “Financial segment” while accounting for a mere 3% in sales generates almost 10% of the overall segment. This means that SM while investing so much in retail stores generates most of its income from property. Why and how come? Let us count the ways.

Just when you think Filipinos cannot spend any higher in 2018 due to the ongoing difficulty in inflation, peso devaluation and other kinds of problems, results show that net sales revenues increased by 12%, average income increased 13.5%. More importantly, EBIT margin is an astounding 19.8% (higher than 19.5% last year) and net margin is 13.6% (higher than 13.5% last year). Most of the revenues have been due to the increase in Retail Merchandise sales (70% of sales). The growth of an extra 20.9 Bil pesos for 2018 versus 2017 is due to opening new SM Stores, Supermarkets which still kept growing in sales. Imagine opening 3 SM Stores+4 SM Supermarkets+13 SM Save Mores+3 SM Hypermarkets+6 Waltermart Stores+71 Specialty Stores= 100 new stores of all varieties and all of them earning more for you in sales. What a great business. Expanding without Cannibalizing. Note too that with the ongoing “online shopping craze”, SM malls still kept at a healthy 49:51 ratio in 2018 versus 48:52 in 2017 on the Non-food versus Food group in sales contribution showing there is no distinct data yet that malls don’t have to simply be food outlets but a healthy 50–50 mix works.

Financial Operation Highlights for SM

As of 9M 2018, SM had 1729 stores nationwide. If you wish to know the breakdown, here’s what’s serving many Filipinos from child to grandparent:

Property:

Unbeknownst to many Filipinos, SM’s profitability stems mostly from his properties. While Property sales only contribute 25% in the topline, it delivers 60% on the bottom line.

1.) Construction Boom- Real Estate grew 23.7% to P25B in the last 3 years. All of the projects started bearing fruit from 2015–2017. Shore 2, Shore 3 and S Residences in Pasay City.

Shore 3 Residences is situated in Seaside Blvd. and Sunrise Drive, Mall of Aisa Complex, Pasay City. This is an easy spot within the area, with several landmarks and within the reach accessibility to all basic needs

  1. ) 26 SQM
  2. ) 27 SQM
  3. ) 28 SQM
  4. ) 27.28 sqm
  5. ) 37.37 sqm
  6. )58 sqm

Rough calculation = 250K-280K Php per sqm (I can assure you the pre-selling prices were not that high). As they say though, property is all about location, location, location and in the case of Pasay — it’s got the demand from Mainland Chinese buyers/renters and hence these prices.

Here’s how expensive it is to live within Mall of Asia complex. My rough approximation is 233K-277K/sqm.

Fame Residences in Mandaluyong averages 165K-174K/sqm

So far Grace Residences which is in Cayetano Boulevard, Brgy Ususan, Taguig has these pre-selling price lists.

Just took a sneak peak on how much condos in SM Jazz Residences in Makati are and the prices are approximately 230K/sqm. Living in the city essentially has gone up.

Rental in Shopping Malls is Crazy Rich Asian Business.

Every crazy rich person always has passive income in his arsenal and this Trillion peso company derives mainly from its mall operations which is 34.7Bil for the last nine months of 2018. That’s roughly 3.85B monthly revenues or 128Mil monthly daily sales from rent. Stop for a minute and imagine yourself collecting rental of 128Mil pesos a day. That is SM. The company increased 15 malls from the last 3 years and this brought the 12.5% increase in rent. The nice thing is that excluding these new malls, all their existing malls grew 8%. As of September 30, 2018, SM Prime had 71 malls in the Philippines with total GFA of 8.2 million square meters and 7 malls in China with total GFA of 1.3 million square meters. This means SM is averaging a whopping Php 3,652/ sqm because it doesn’t simply collect fixed rental. They derive a percentage of sales. (Just divide 34.7B sales versus 9.5M sqm). For trivia, SM Mall of Asia charges Php2,600/sqm/month

Many retail spaces have a rent fee that varies depending on your store’s sales: The better your store does, the more you must pay. Sometimes your rent is a percentage of your monthly sales, and sometimes it is simply a fixed monthly fee.

Taken from LeeChiu Property Consultants, Entrepreneur Magazine Article — 9/25/17
Taken from Seth Lui Blog — 6/20/18

1 square meter = 10.76 square feet so in Singapore its 376–645 SGD per sqm in Orchard town area or with a SGD/PHP rate of 38.5 approximately goes to 14,476–24,832/month.

I know Philippine rentals are crazy but Singapore takes crazier rates. What more in other countries? Maybe you can check HK and New York and Japan mall rates.

We will discuss in more detail this Property business of SM in the SMPH. Suffice to say, we know it’s a cash cow business.

Snapshots of News Articles Below (2018, 2017 and 2009.) We’ll talk about the history of the mall business and the trillion peso company it created over Filipinos’ lives.

https://www.entrepreneur.com.ph/news-and-events/which-high-end-villages-tripled-average-land-prices-in-the-last-6-years-a00200-20170925?ref=home_feed_1

Despite referencing an old 2017 article, it looks as if these land values tripling in very expensive villages just compares to how expensive a condominium price in Pasay city for 2018 is. Either way, the data speaks for itself.

What Will You Do with All That Cash? Study Noncurrent Assets in the Balance Sheet.

It is a great task to make so much money and invest it properly. In SM’s case, 822 Bil or 80% of its assets lies in non-current assets with 20% in cash equivalent deposits, inventory and working capital for ongoing development projects.- That’s essentially their short -term money — what their operations needs as ready money whenever possible. Meanwhile 80% is in long-term assets.

SM’s Noncurrent Assets Shows a huge chunk goes to Investment Properties. Landbanking. New Malls. New BPO Towers etc.

This tycoon knows where it makes its money. Malls. Towers and Landbanking. 300B out of 800B or roughly 36% goes into investment properties. Another interesting thing to note is 253B of the cash or 30.8% goes into joint ventures and investments in several companies. What this company does is make 15 years worth of earnings (822B divide by 50B net income) — into high generating big ticket high return assets instead of just rotting in cash. When it comes to cash flow generation and I’d have to say investment prowess, SM is one of the best in the Philippines — Investing in Properties (37%) , Land Banking(8%), JV in Other Businesses (30%) — the other 25% represents cold cash and receivables.

*****

Why Change Something Working Very Well? Expand Current Malls + Increase Landbanking. SM lays out its prospects for the future

Note that we haven’t delved much in this entire report about the financial services that contributed roughly half as large of an income as the 1,729 retail stores combined!

Simply put, if the US of America has FAANGS, the Philippines have the Sy Trillion Companies. SM Investments and SM Prime Holdings both hold a weighting of 13.94% and 8.98% share in the Philippines’ Index. Both are currently trading with 1 Trillion peso marketcaps.

About the Author: Nikki Yu, CMT enjoys reading about development in companies, startups, technology, money and finance.

--

--

NYu

I’ve been trading stocks for awhile but understandably I’m likely to trade or invest for the rest of my life. Here’s my way of thinking about things