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Cemex Holdings Philippines (CHP) saved by burned faithfuls; considered overpriced at 1.12/share

CHP debuted in the Philippine Stock Exchange through an initial public offering at a price of 10.75 Philippine Pesos per share raising a total of 25.1 Billion Philippine Pesos. The proceeds of such fund raising were all paid to the parent company CEMEX of Mexico. Proceeds of the IPO was not even enough, CHP borrowed around 14 Billion Philippine Pesos from BDO to make additional payment to the parent CEMEX of Mexico. Despite those payments CHP still owe the parent 1 Billion Philippine Pesos.

How did CHP became indebted to CEMEX? CEMEX sold the 40% of the operating companies Solid Cement and APO Cement to CHP. The acquisition of the 40% shares of the two operating companies created a goodwill of 27.9 Billion Philippine Pesos, that means the 40% shares of Solid Cement and APO Cement were acquired at around 40.1 Billion Philippine Pesos and of that purchase price only around 12.2 Billion Philippine Pesos could be attributed to tangible assets such as cement plants, equipment, machineries, and etc. The 27.9 Billion Pesos overprice was justified as goodwill which was attributed to the existence of an assembled workforce and established dealer network.

The transaction was a “steal” for CEMEX from the IPO investors. We viewed it as the profitable capital repatriation/exit of CEMEX from the local cement industry.

After the transaction, CHP struggled in the market as it faces fierce competition especially from the influx of cheap imported cement from neighboring Southeast Asian producers.

With a huge “Goodwill” firmly lodged in its balance sheet, over the years CHP gradually loses its value. From 10.75 Philippine Pesos IPO price to its lowest at 0.90 a 92% drop.

In 2018 it was reported that institutional investors held 13.68% of the outstanding shares of CHP, now only about 2.90% are being held by institutional investors.

On January 2020 just before the Covid-19 pandemic kicked-in, CHP was able to raise 12.8 Billion Philippine Pesos from the stock rights offering (SRO) It was a token recapitalization of CEMEX Mexico of its local unit CHP. The SRO was priced at 1.54 Philippine Pesos a share. But CHP faithfuls also took a good chunk of the SRO.

The SRO was timely, it gave CHP the needed liquidity in these times. But such liquidity will not be enough for its still massive debt with BDO when it becomes due sometime in 2024. We believe CHP will have to tap again its faithfuls to pay the debt.

After, the SRO we estimated the net asset value (NAV) of CHP to be at 1/share after taking the massive goodwill from its balance sheet. In these times, we believe CHP should not be in any ones portfolio right now. In these times, there is a great risk that shareholder will be wiped out. CHP has to go down to 0.50/share for a comfortable risk-reward ratio.

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