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Hong Kong property stocks ‘not enticing enough’

EVEN after a plunge in Hong Kong property shares following months of protests in the city, Eastspring Investments says some of the biggest stocks in the sector remain unappealing because of their valuations.

John Tsai, a portfolio manager in Singapore, trimmed his holdings of Henderson Land Development Co. and Sun Hung Kai Properties Ltd. in July, and remains underweight on the sector. He cited expensive valuations and lower dividend yields relative to their peers and other sectors such as telecommunications.

“My view on Hong Kong property stocks is still cautious,” said Tsai, who manages almost $1 billion in Hong Kong equities and shares of Chinese companies listed in the city. “We are more value-biased and tend to focus on ‘cheaper’ stocks that seem to be overly beaten up and not appreciated.”

The pro-democracy protests that started in June have dented business at the biggest developers in Hong Kong. Used home prices have slid about 1% since mid-June, data from Centaline shows. The transaction value for new luxury homes slumped 31% in July to an eight-month low. Sun Hung Kai Properties, the city’s No. 1 builder, is offering new homes at a discount to entice buyers during the political crisis.

Henderson Land and Sun Hung Kai Properties are currently trading at a forward earnings multiple of 11 and 9.4 times respectively for 2020, while the Hang Seng Properties Index is at 8.9 times for the same period. The two stocks offer dividend yields of less than 5%, which has prompted Tsai to turn to telecommunications-related stocks for greater income.

In recent weeks, the fund manager has increased his holdings of Lifestyle International Holdings Ltd. and PCCW Ltd. that are yielding 8% and 7%, respectively.

Tsai prefers cheaper defensives as opposed to traditional ones such as health care where the valuations are too high, he said. — Bloomberg

Domestic market capitalization of select stock exchanges in Asia Pacific (August 2019)

Domestic market capitalization of select stock exchanges in Asia Pacific (August 2019)

How PSEi member stocks performed — September 23, 2019

Here’s a quick glance at how PSEi stocks fared on Monday, September 23, 2019.

 

Chicken industry wary of oversupply in response to ASF

CHICKEN prices have risen in response to the outbreak of disease in the hog industry, though chicken raisers said they were wary of any attempts to ramp up production and imports in response to African Swine Fever (ASF) as that may worsen oversupply should ASF be resolved in short order.

According to the United Broilers and Raisers Association’s (UBRA) price monitoring, the average price of regular-sized chicken was P96 per kilo, up from P91 in the previous week. Prime-sized chicken fetched an average of P93.69, up from P85.20 previously.

Asked whether consumers are avoiding pork because of ASF, UBRA President Elias Jose M. Inciong said in a phone interview: “It would seem so.”

He noted, however, that chicken inventories remain high, and he cautioned against “speculation” over how long consumers will shun pork.

“We should give the government leeway to get this ASF thing under control, and if we speculate that this is something that will last a long time, that is a dangerous business notion. What if it turns out they are able to control and apparently there are serious efforts to do so then you will have huge inventories of chicken both local and imported,” he said.

Chicken has benefited from irrational fears about pork consumption during the ASF outbreak in Rizal, Bulacan and Quezon City. The disease cannot be transmitted to humans.

The provinces of Cebu and Bohol have banned all shipments of pork products from outside sources in an effort to protect their farms, while meat processors have said their Christmas sales are at risk due to uncertainty about their ability to distribute items like ham across provincial borders.

According to the Philippine Statistics Authority (PSA), chicken production in the second quarter rose 3.1% to 477,110 metric tons (MT).

Mr. Inciong said one possible outcome is that the pork situation normalizes sooner than expected and the chicken industry finds itself with more production than the market can bear.

“There is a probability that this is all temporary. When things normalize, (then) you increase production or importation, you will have problems,” he said.

He said it is too early to tell whether production or imports should be increased in response to ASF.

“The sensible thing right now is to not go crazy on the possible mistaken notion that it will be a prolonged problem. What if they are able to solve it?” he said. — Vincent Mariel P. Galang

DTI to set up ecozones subsidizing start-up costs

THE Department of Trade and Industry (DTI) plans to establish economic zones for the start-up sector that will offer support for operating costs, capital, and digital infrastructure.

Trade Secretary Ramon M. Lopez told reporters at the DTI Innovation Conference on Monday that the department will offer support for the unique business needs of start-ups.

He said that DTI will offer direct and time-bound assistance to help cover costs that start-ups usually have to obtain from the private sector.

“We will really just accelerate more programs in this particular community. Right now, in practice, there is little effort because there’s no budget. If we say we want to support this, there should be a budget,” Mr. Lopez said in English and Filipino.

DTI is ultimately planning for a fund of P1 billion for the project, and hopes to propose the first P200-300 million in its 2020 budget.

“Start-ups operate under a different environment — it doesn’t have to be physical. It can be a co-working spaces type of arrangement all in one building or in one space. As long as all the other enablers (and) digital internet infrastructure are there to support their operations, lower their cost… Those are the usual needs of start-ups,” Mr. Lopez said.

Unlike Philippine Economic Zone Authority (PEZA) ecozones, the project is not limited to fiscal incentives but will also include rent assistance.

The program will be offered to Filipino-owned companies instead of export-oriented businesses.

“It could be a future export business model, but we’re not limiting it to exporters. These will be different guidelines, rules, and incentives — it’s really different from a PEZA system,” Mr. Lopez said.

Asked about the funding schemes on offer, Mr. Lopez said: “You just have to take it as levels, step by step. Maybe a segmentized type of support. But you try to still create that environment that will encourage them to be creative and innovative with their business model and give (them) more training, mentoring so that they can fine tune their business models to be relevant,” he said.

DTI is developing criteria for selecting potential start-ups for the eco-zones, focusing on new and unique business models, and trying to determine an appropriate period firms can stay in the zone and call on government support.

The project is authorized by the Innovative Startup Act or Republic Act No. 11337, which allows training programs and business registration subsidies. — Jenina P. Ibañez

PPA profit rises over 31% in first half

THE Philippine Ports Authority (PPA) said net profit grew by about a third during the first half, driven by higher revenue from an increase in shipping and trade volume during the period.

In its half-year report sent to reporters Monday, the port regulator said net profit hit P5.818 billion in the six months to June, jumping 31.34% from a year earlier.

Total revenue was P8.996 billion, up 12.08% year-on-year due to the increase in volume of shipments and dollar denominated tariff rates.

Cargo volume increased 3.74% to 128.667 million metric tons (MT) at the end of June, featuring an 8.91% increase in foreign cargo to 78.946 million MT, which helped offset the 3.54% decline in domestic cargo to 49.721 million MT.

Container volume measured in twenty-foot equivalent units (TEUs) rose 5.74% to 3.840 million TEUs during the six-month period. Domestic containers accounted for 1.554 million TEUs, an increase of 5.08%, while foreign containers accounted for 2.286 million TEUs, up 6.20%.

The number of passengers rose 4.79% in the first half to 44.778 million, largely due to a surge of passengers during the dry season. The PPA said the growth of sea travel as a reliable mode of transportation also drove up volumes.

Ship calls at PPA-operated ports rose 4.06% to 246.586 million in the six-month period.

PPA said results also improved due to an 11.63% decline in costs to P3.179 billion, driven by lower expenses associated with personnel services, land improvement and depreciation and amortization of intangible assets.

The agency has a budget of P5.816 billion for domestically-funded projects this year, of which P645.85 million had been utilized in the first six months to complete 17 projects and kickstart 57 more. There are also 17 projects under procurement, 31 for approval and nine that have been suspended.

Another P700 million was allotted for dredging projects this year, of which PPA utilized P115.20 million in the first half; and P2 billion for repair and maintenance works, of which P547.88 million was disbursed. — Denise A. Valdez

DTI may grant canned meat price hike of 2-5%

THE Department of Trade and Industry (DTI) is reviewing applications to raise retail prices from the canned meat and sardine industry, Secretary Ramon M. Lopez told reporters Monday.

Mr. Lopez, who spoke on the sidelines of the DTI Innovation Conference, said the requests to be granted higher prices on price-controlled goods were received before the outbreak of African Swine Fever (ASF) and are based on claims of higher production costs.

He said any adjustment in the suggested retail price (SRP) will be about 2-5% and will not exceed 10%.

The government has been keen to contain food prices after the inflation crisis of 2018, with agencies like the DTI seeking commitments from the food industry to control or delay retail price hikes.

In June, Mr. Lopez said that DTI will block proposals to increase canned goods prices, after President Rodrigo R. Duterte liberalized imports of mechanically deboned meat (MDM), a key raw material.

He told reporters on Monday that beyond MDM, DTI is considering in its review higher prices for the canned meat industry’s other raw materials, including oil, tin cans as well as fuel costs.

Mr. Lopez had instructed DTI not to release any changes in the SRP just yet, pending a reduction in the items covered by the list.

“We are also trimming down the SRP. We are bringing it down to its normal list of 140 plus. We are now at 250 — we enhanced it last year because of the inflation issue,” he said.

“Without ASF we’re back to normal times. Our inflation is down to 1.7%. Assuming it settles at 2%, that would be normal, so there’s no need really to expand that list because we are simply going back to our normal list.” — Jenina P. Ibañez

Hog cull still small compared to Vietnam, China — DA

THE Department of Agriculture (DA) said the hog cull following the outbreak of African Swine Fever (ASF) has totaled about 15,000 animals.

He also noted that a new outbreak was confirmed in a barangay in Antipolo, Rizal, which was reported two days ago.

“The total as of today (Monday) would now reach about 15,000 head,” Agriculture Secretary William D. Dar said at a news conference in Quezon City.

He said the culled pigs represent about 0.11% of the Philippines’ hog population of about 12.7 million head, which he said was a smaller proportion and also in absolute terms compared to the culls in ASF-affected neighbors like Vietnam and China.

According to the Food and Agriculture Organization, as of Sept. 20, China has culled about 1.17 million pigs, while Vietnam has culled more than 4.7 million.

“In this country because of the quarantine protocols that we have in place, we are able to contain (limit the culls to) this number and hope that everyone cooperates (to prevent a more rapid spread) of the disease,” he said.

The government has confirmed the disease in 12 barangays in the provinces of Rizal and Bulacan, including the Rizal capital of Antipolo, as well as Quezon City.

Mr. Dar said the culling of pigs within the one-kilometer radius follows proper protocols, which include collection of all hogs, killing them, and then burying or burning them; burning and burying them; and disinfecting the farms. — Vincent Mariel P. Galang

DoF sees no impact on infrastructure from aid suspension after UN probe

THE government’s economic team said it does not expect a major impact from the suspension of negotiations for pending aid grants from 18 countries that were critical of the Philippines’ handling of its drug war.

Finance Secretary Carlos G. Dominguez III said over the weekend that the suspension of loan and grant negotiations will “not have a significant impact on the country” as a majority of the grants are in the form of technical assistance and suggested that the government’s infrastructure program will remain the economy’s main driver.

“All proposed engagements with said countries… are technical assistance grants and hence will not significantly affect the infrastructure program of the government,” Mr. Dominguez told reporters in a phone message over the weekend.

In case of a funding gap, Mr. Dominguez said other sources can be tapped, like multilateral development banks. Bilateral partners have also “signified their intention to finance” projects.

“The rates offered by said countries (if ever) are no better than the rates already offered by multilateral development financial institutions and bilateral development partners,” he added.

Mr. Dominguez said current grants include $228.89 million from Austria, $4.71 million from Italy and $570,000 from Spain, which will not be affected.

The Office of the President issued a memorandum ordering the suspension of all talks for grant agreements from the 18 countries that supported a United Nations Human Rights Commission investigation into the Philippine drug war.

In an order dated Aug. 27 and signed by Executive Secretary Salvador Medialdea, President Rodrigo R. Duterte instructed government agencies and firms to halt negotiations on pending loans and grants from the 18 countries.

“All concerned officials are DIRECTED to suspend negotiations for and signing of loans and grant agreements with the governments of the countries that co-sponsored and/or voted in favor,” according to the document.

Meanwhile, Reuters reported that Economic Planning Secretary Ernesto M. Pernia believes the suspension will not affect infrastructure projects but confirmed that “some ODA” (Official Development Assistance) grants could be hit.

The 18 countries that supported the UNHRC investigation were Argentina, Australia, Austria, Bahamas, Bulgaria, Croatia, Czech Republic, Denmark, Fiji, Iceland, Italy, Mexico, Peru, Slovakia, Spain, Ukraine, the United Kingdom, and Uruguay. — Beatrice M. Laforga

DA distributes about P700M in farm equipment in Cordillera region

THE Department of Agriculture (DA) said it has given P700.44 million worth of project assistance to farmers’ groups in the Cordillera Administrative Region (CAR).

“The project assistance covers various farm machinery including tractors, irrigation systems, and harvesters; farming technologies including greenhouses; and other farm inputs,” the DA said in a statement.

The assistance was given to 42 farmers’ associations and cooperatives.

Agriculture Secretary William D. Dar awarded these to the farmers during a forum on Sept. 20 in La Trinidad, Benguet.

According to government data, production of palay, or unmilled rice, in the region accounted for 2.1% or 391,105 metric tons (MT) of the 2018 palay production of the Philippines of 19.066 million MT.

Mr. Dar also announced the revival this month of the Marcos-era “Kadiwa” program, a project of the DA and the Department of the Interior and Local Government (DILG) and Food Terminal, Inc., which seeks to cut out middlemen from the supply chain of farm produce.

The intended market for such produce is low-income consumers.

“We want to link farmers to markets in Metro Manila so that we can give them better opportunities to produce and earn more,” Mr. Dar said in a statement.

Meanwhile, he also directed the Philippine Center for Postharvest Development and Mechanization (PhilMech) to ensure that equipment being distributed to farmers is up to standard, after complaints from a Cordillera farmer.

“I am now directing the regional directors and the Philippine Center for Postharvest Development and Mechanization (PhilMech) to see to it that the equipment, facilities, and machinery that we give as grants be of high quality,” he said. — Vincent Mariel P. Galang

Not everyone’s option

House Bill No. 4157 or the Corporate Income Tax and Incentives Rationalization Act (CITIRA) is on its way to the Senate after being approved on third reading in the House of Representatives.

Of the changes introduced by this Bill — known also as Package 2 of the TRAIN Law — one that would be of interest to many taxpayers is the amendment on Optional Standard Deductions (OSD). The CITIRA Bill proposes to amend the OSD in two ways: (1) change the OSD base for individuals from gross revenue to gross income, and (2) limit the availability of OSD on corporations to those classified as Micro, Small, and Medium Enterprises, or MSMEs.

Currently, all taxpayers, whether individuals or corporations, subject to the regular income tax are allowed to avail of OSD. CITIRA, however, amends this. It retains the qualification of all individual taxpayers, but has provided additional requirements for corporations, i.e., corporate taxpayers must be classified as MSMEs, as determined by the Department of Trade and Industry (DTI).

On the other hand, the change in the base of the 40% OSD to gross income puts both individual and corporate taxpayers on the same footing.

How will these proposed changes affect us?

Under current tax law, OSD gives the taxpayer a choice of computing for tax-deductible expenses at 40% of gross sales or receipts, if the taxpayer is an individual, or on gross income, if a corporation. This is in lieu of itemizing expenses to be claimed as tax deductions.

A choice of OSD means less work since it does away with the listing of expenses and the determination of whether these expenses are allowed deductions of income. Each type of expense has its own elements to be allowed deductions in computing net income subject to tax. And because there is no need to list down the deductions made, the law does not require the attachment of audited financial statements to the income tax return in the case of individuals.

A choice of OSD also benefits the Bureau of Internal Revenue (BIR) in examining the books of taxpayers. Because there is no need to review the expenditures covered by the OSD, examiners can focus on the components of the gross revenue or gross income and determine its completeness and accuracy. In this way, the audit may be completed sooner, and examiners can also increase the number of taxpayers they can review.

Despite the benefits of using OSD, the number of taxpayers availing of the method is still low. Only 22% of individuals engaged in business chose OSD. A higher availment rate of 38% was recorded among taxpayers practicing a profession.

The OSD of 40% for individuals is currently being applied on gross sales or receipts to get the tax due. Based on Revenue Regulations (RR) No. 16-08, “gross sales” and “gross receipts” pertain to total sales or receipts earned by an entity in a taxable period without deducting the cost of the sales or services. To benefit from tax savings under the OSD, a taxpayer must have a profit margin of more than 60%. Hence, taxpayers with much smaller profit margins, usually those engaged in trading or manufacturing, will not choose OSD.

On the other hand, “gross income” is the net amount of gross sales or receipts after deducting sales returns, discounts, allowances, and cost of goods sold or services provided, where the cost of goods sold includes the purchase price or the cost to produce the merchandise, such as direct labor cost, and all expenses directly incurred in bringing the goods to their present location and the use of which could include import duties, freight, and insurance.

Gross income as the OSD base should be fairer and more favorable to individual taxpayers because they can deduct their cost of goods sold and cost of service. The OSD will just be in lieu of administrative and other non-operating expenses.

Will the numbers significantly change for corporations?

Based on the Magna Carta for MSMEs, MSMEs are primarily defined based on their total assets, inclusive of those arising from loans, but exclusive of the land on which the particular business entity’s office, plant, and equipment are situated. They must have value falling under the following categories: micro (not more than P3 million); small (P3,000,001 to P15 million); and medium (P15,000,001 to P100 million).

Based on the Philippine Statistics Authority (PSA), 924,724 business enterprises were operating in the Philippines in 2017, and of this, 99.56% are MSMEs.

Given these, the CITIRA Bill, in providing the option for the MSME sector to avail of the OSD, is upholding the objective of the government to promote, support, strengthen and encourage the growth and development of MSMEs by maintaining a conducive business environment in the form of a deduction option favorable to them in a given taxable year.

Meanwhile, based on the above definition, corporations having assets valued at more than P100 million will have no choice but to itemize their expenses claimed as deductions against income. These large enterprises comprise only 0.44% or just about 4,000 out of the total registered business enterprises.

In all cases, taxpayers must be cautious in exercising their right of choice because, with all the amendments introduced, Congress retains the provision that, once the choice has been made and was signified in the return, the choice is irrevocable for the taxable year for which the return was made.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

 

Maria Cecilia Lourdes R. Pilotin is a tax associate of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

pagrantthornton@ph.gt.com

Marcos vs Manglapus @ 30

In 1989, ex-President Ferdinand Marcos was dying. Exiled in Hawaii since February 1986, the Marcos family asked the Philippine government of President Corazon Aquino to let them to return to the country and allow Marcos to die here. Aquino refused, arguing that the return of the Marcoses would have dire consequences on political stability and economic recovery. Marcos took legal action and filed a special civil action suit for mandamus and prohibition with the Supreme Court. Made respondents were a number of senior officials of the Aquino administration led by then Department of Foreign Affairs Secretary Raul Manglapus. The writ of mandamus would order the respondents to issue the Marcoses the necessary travel documents to allow their return while the writ of prohibition would enjoin them from implementing the president’s ban.

On Sept. 15, 1989 the SC rendered its decision. In Marcos vs. Manglapus (G.R. No. 88211), by a slim majority of eight to seven, it, through Justice Irene Cortes as ponente, upheld the government ban on the return of the Marcos family. It ruled that the president has the power to impose such a ban and that she did not act arbitrarily or with grave abuse of discretion.

What power was the president exercising when she denied the right of the Marcos family to return to their country? In answering this question, Marcos vs. Manglapus clarified the nature and extent of the president’s executive power. The president, under the constitution, has specific powers; that is, powers explicitly granted to her by the constitution and enumerated therein. But “the powers of the president cannot be said to be limited only to the specific powers enumerated in the Constitution. In other words, executive power is more than the sum of specific powers so enumerated.”

The power involved was the president’s “residual unstated power” that is “implicit in and correlative to” the president’s constitutional duties to serve and protect the people, maintain peace and order, protect life, liberty and property, and promote the general welfare. This is a wide discretionary power that allows the president to fulfill her duties as “steward of the people” and “protector of the peace.” Aquino was exercising this power when she imposed the ban on the return of the Marcoses and clipped their right to return to their country.

The president’s residual unstated power is still subject to the constitution and to the judicial power to “determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government” (Article VIII, Section 1). In exercising its judicial review, the Court checks but does not supplant the executive. It merely ascertains whether the president has gone beyond the constitutional limits of her powers. It neither exercises the power vested in the president nor determines the wisdom of her acts. In Marcos vs. Manglapus, the Court resolved to determine whether Aquino’s claim that the return of the Marcoses would harm the national interest and the general welfare had factual basis. If such factual basis existed, the ban would be constitutional and there would be no grave abuse of discretion on Aquino’s part. The Court ruled affirmatively.

Students of constitutional law will note that the residual unstated power of the president, insofar as it is anchored upon and incidental to the promotion and protection of the general welfare (salus populi), is simply the police power of the state. The only significant difference is that whereas police power is traditionally vested in the legislature, Marcos vs. Manglapus underscored and highlighted that the executive too has inherent police power derived from and correlative to the constitutional duties and obligations of that office.

Since Marcos vs. Manglapus laid down the doctrine of the president’s residual unstated power three decades ago, no Philippine president has again used this power. To secure the legality and validity of their acts, presidents since Aquino have relied on the specific powers of their office; powers that have textually demonstrable basis and limits. President Fidel Ramos’s emergency power to solve the energy crisis was Congress-delegated (Article VI, Section 23(2)). President Joseph Estrada’s all-out war against the Moro Islamic Liberation Front (MILF) in 2000, President Gloria Macapagal-Arroyo’s “states of emergencies” in 2003, 2006, and 2008, and the incumbent’s perpetually extended martial law in Mindanao are all anchored on the specific power of the president as commander-in-chief (Article VII, Section 18). Even the incumbent’s three-year old “anti-drugs war” arguably rests on the presidency’s executive power (Article VII, Section 1) and duty to faithfully execute the laws (Article VII, Section 17). The laws in this instance being the Dangerous Drugs Act and related provisions of the Revised Penal Code. There is thus no need for President Rodrigo Duterte to invoke Marcos vs. Manglapus as legal ground for his forceful approach to eradicating the country’s narco-industry and he has happily not done so.

Reliance on the presidency’s specific powers is a fortunate development as these are checked and constrained by both Congress and the judiciary. The president’s residual unstated power, upon the other hand, is clipped more amorphously by a constitution that is still subject to judicial interpretation when the occasion is ripe for the Court to review the constitutionality of acts done on the basis of this power.

 

Millard Lim is a lecturer at the Department of Political Science of the Ateneo de Manila University.

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