In the Last Twelve Years, Philippine Income Inequality Has Declined Substantially

In the last twelve years, Income Inequality in the Philippines has declined substantially, primarily because income growth in the lowest classes have outpaced that of the upper classes. From 2006 to 2018, average per capita incomes for the poorest decile grew by a CAGR of 11.1% a year, while the incomes for the richest decile grew by a CAGR of only 2.81% during the same period. The average Filipino's income also grew by a decent CAGR of 5.1% a year.  As a result, the richest decile, which once towered over the poorest decile by almost 20 times income in 2006, now has a less intimidating ratio of less than 8 times income of the poorest class. For the average Filipino, that ratio has been cut in half, from 5.4 times the poorest decile in 2006 to just 2.8 times in 2018.

Related Links: Why Do Filipinos Love Duterte So Much? Because Income Growth was Fastest Among the Poorer Classes!

Source: Family Income and Expenditure Survey 2018

Just How Reasonable are the Rates of Return of the Water Concessionaires: Manila Water Company and Maynilad?

President Duterte has gone to war with two of the biggest oligarchs in the country, namely the Ayalas and Manny Pangilinan, who operate the water concessionaires Manila Water and Maynilad. He has threatened to arrest them and have them thrown in jail for plunder and syndicated estafa. Specifically, they have been accused of the following:

1. Renegotiating and extending their 1997 contracts thirteen years prior to their expiration in 2022 without the benefit of public bidding.
2. Attaching onerous provisions in the revised contracts that include transferring their income tax burden to the consumers and prohibiting government regulators, the MWSS (Metropolitan Waterworks and Sewerage System), from discharging its mandate to regulate the rate of charges that the companies will collect from the consumers.
3. Collecting environmental fees intended to build water treatment facilities without actually building such facilities, resulting in the pollution of Manila Bay.

As a result, the MWSS has cancelled the extension of the water contracts to 2037 and the government is drafting revised water concession contracts that exclude the terms the President considers onerous.

Plunging Share Prices

Unsurprisingly, with their futures in limbo, the stocks of the water concessionaires have taken deep dives since the President launched his war late last year but have recovered some ground with the prospect of impending contract renegotiations.

Here is the chart for Manila Water:

And here's the chart for Metro Pacific Investments Corporation, Maynilad Water Services' holding company. Maynilad itself was publicly listed in the Philippine Stock Exchange (PSE) until its voluntary delisting in 2017.

Impressive Financials

Both companies have been among the biggest and most profitable companies listed in the PSE, pulling roughly Php 20.0 billion (US$ 392 million) in revenues and Php 6.0 billion (US$ 118 million) in net income each.

Naturally, both companies have stacked up very decent rates of return for their respective shareholders in the last five years. For instance, Manila Water's Return on Equity (ROE) for the last five years (2014 to 2018 plus the last 12 months) have averaged 14.34%. Maynilad's ROE (2015 to 2017) was an even more impressive 21.41%.

Global Comparisons

Now how do these returns stack up, globally?

After scanning Capital IQ for publicly-listed companies comparable to the Water Concessionaires, I arrived at a list of 74 companies that are primarily in the business of Water Supply. Here's the list:

Company Name	Exchange:Ticker	Country of Operations	Revenue (US$ M)	Market Cap (US$ M)
Aguas Andinas S.A. (SNSE:AGUAS-A)	SNSE:AGUAS-A	Chile	703.00	2,622.70
American States Water Company (NYSE:AWR)	NYSE:AWR	California	471.90	3,107.00
American Water Works Company, Inc. (NYSE:AWK)	NYSE:AWK	USA	3,558.00	22,519.30
Aqua Spólka Akcyjna (WSE:AQU)	WSE:AQU	Poland	40.71	54.47
AquaVenture Holdings Limited (NYSE:WAAS)	NYSE:WAAS	Americas	192.70	856.00
Artesian Resources Corporation (NasdaqGS:ARTN.A)	NasdaqGS:ARTN.A	USA	81.90	344.40
AS Tallinna Vesi (TLSE:TVEAT)	TLSE:TVEAT	Estonia	70.90	259.90
Athens Water Supply and Sewerage Company S.A. (ATSE:EYDAP)	ATSE:EYDAP	Greece	357.70	895.80
Beijing Capital Co.,Ltd (SHSE:600008)	SHSE:600008	China	7,873.40
Beijing Enterprises Water Group Limited (SEHK:371)	SEHK:371	Global	3,528.10	5,235.50
Beijing Water Business Doctor Co., Ltd. (SZSE:300055)	SZSE:300055	China	130.30	905.30
Ben Thanh Water Supply Joint Stock Company (HNX:BTW)	HNX:BTW	Vietnam	20.10	9.43
Binh Duong Water - Environment Joint Stock Company (HOSE:BWE)	HOSE:BWE	Vietnam	109.60	142.10
Bohai Water Industry Co.,Ltd (SZSE:000605)	SZSE:000605	China	232.90	368.00
California Water Service Group (NYSE:CWT)	NYSE:CWT	USA	705.10	2,383.20
Chengdu Xingrong Environment Co., Ltd. (SZSE:000598)	SZSE:000598	China	643.90	2,033.50
China Everbright Water Limited (SGX:U9E)	SGX:U9E	China	673.10	690.70
China International Holdings Limited (SGX:BEH)	SGX:BEH	China	10.26	16.90
China Water Affairs Group Limited (SEHK:855)	SEHK:855	China	1,095.70	1,250.80
China Water Industry Group Limited (SEHK:1129)	SEHK:1129	China	124.30	97.60
Chongqing Water Group Co.,Ltd. (SHSE:601158)	SHSE:601158	China	818.70	3,956.80
Compagnie des Eaux de Royan (ENXTPA:MLEDR)	ENXTPA:MLEDR	France	41.93	26.61
Companhia Catarinense de Águas e Saneamento - CASAN (BOVESPA:CASN3)	BOVESPA:CASN3	Brazil	264.90
Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BOVESPA:SBSP3)	BOVESPA:SBSP3	Brazil	4,351.00	10,007.80
Companhia de Saneamento de Minas Gerais (BOVESPA:CSMG3)	BOVESPA:CSMG3	Brazil	1,196.80	2,049.30
Companhia de Saneamento do Paraná - SANEPAR (BOVESPA:SAPR4)	BOVESPA:SAPR4	Brazil	1,071.90	2,406.70
Consolidated Water Co. Ltd. (NasdaqGS:CWCO)	NasdaqGS:CWCO	Global	69.20	251.30
Eastern Water Resources Development and Management Public Company Limited (SET:EASTW)	SET:EASTW	Thailand	150.80	636.80
Essbio S.A. (SNSE:ESSBIO-C)	SNSE:ESSBIO-C	Chile	217.30	409.10
Esval S.A. (SNSE:ESVAL-C)	SNSE:ESVAL-C	Chile	253.70	328.10
Global Water Resources, Inc. (NasdaqGM:GWRS)	NasdaqGM:GWRS	USA	35.04	276.53
Grandblue Environment Co., Ltd. (SHSE:600323)	SHSE:600323	China	802.80	2,219.70
Guangdong Investment Limited (SEHK:270)	SEHK:270	China	1,899.70	14,122.20
Guangxi Nanning Waterworks Co., Ltd. (SHSE:601368)	SHSE:601368	China	210.20	757.30
Heilongjiang Interchina Water Treatment Co.,Ltd. (SHSE:600187)	SHSE:600187	China	66.70	615.70
Hyflux Ltd (OTCPK:HYFX.F)	OTCPK:HYFX.F	Global	111.60	7.90
Iguá Saneamento S.A. (BOVESPA:IGSN3)	BOVESPA:IGSN3	Brazil	214.30
Inversiones Aguas Metropolitanas S.A. (SNSE:IAM)	SNSE:IAM	Chile	703.00	1,071.90
Jiangsu Jiangnan Water Co., Ltd. (SHSE:601199)	SHSE:601199	China	138.30	528.00
Jiangxi Hongcheng Waterworks Co., Ltd. (SHSE:600461)	SHSE:600461	China	689.60	835.40
Kunming Dianchi Water Treatment Co., Ltd. (SEHK:3768)	SEHK:3768	China	230.00	309.70
Luzhou Xinglu Water (Group) Co., Ltd. (SEHK:2281)	SEHK:2281	China	207.80	147.00
Lydec S.A. (CBSE:LYD)	CBSE:LYD	Morocco	786.20	401.30
Manila Water Company, Inc. (PSE:MWC)		Philippines	417.10	462.80
Middlesex Water Company (NasdaqGS:MSEX)	NasdaqGS:MSEX	USA	135.10	1,084.40
Muscat City Desalination Company S.A.O.C. (MSM:MCDE)	MSM:MCDE	Oman	43.67	43.64
New England Service Company, Inc. (OTCPK:NESW)	OTCPK:NESW	USA	7.52	21.49
Nha Be Water Supply Joint Stock Company (HNX:NBW)	HNX:NBW	Vietnam	28.29	20.14
PBA Holdings Bhd (KLSE:PBA)	KLSE:PBA	Malaysia	83.30	88.00
Pennon Group Plc (LSE:PNN)	LSE:PNN	United Kingdom	1,869.20	5,822.40
Puncak Niaga Holdings Berhad (KLSE:PUNCAK)	KLSE:PUNCAK	Malaysia	106.00	33.00
Pure Cycle Corporation (NasdaqCM:PCYO)	NasdaqCM:PCYO	USA	27.75	296.05
Qian Jiang Water Resources Development Co;Ltd (SHSE:600283)	SHSE:600283	China	165.30	522.00
Ranhill Holdings Berhad (KLSE:RANHILL)	KLSE:RANHILL	Global	406.80	280.10
Saigon Water Infrastructure Corporation (HOSE:SII)	HOSE:SII	Vietnam	7.82	49.73
Salcon Berhad (KLSE:SALCON)	KLSE:SALCON	Malaysia	43.26	43.05
Severn Trent Plc (LSE:SVT)	LSE:SVT	United Kingdom	2,344.40	7,997.20
SIIC Environment Holdings Ltd. (SGX:BHK)	SGX:BHK	China	853.60	512.00
SJW Group (NYSE:SJW)	NYSE:SJW	USA	393.40	1,976.00
Société de Distribution d'Eau de la Côte d'Ivoire, S.A. (BRVM:SDCC)	BRVM:SDCC	Ivory Coast	176.60	42.70
Taliworks Corporation Berhad (KLSE:TALIWRK)	KLSE:TALIWRK	Malaysia	90.70	431.50
The Torrington Water Company (OTCPK:TORW)	OTCPK:TORW	USA	7.34	35.42
The York Water Company (NasdaqGS:YORW)	NasdaqGS:YORW		50.60	622.00
Thessaloniki Water Supply & Sewerage Co S.A. (ATSE:EYAPS)	ATSE:EYAPS	Greece	76.80	192.70
Thu Duc Water Supply Joint Stock Company (HOSE:TDW)	HOSE:TDW	Vietnam	21.13	8.80
TTW Public Company Limited (SET:TTW)	SET:TTW	Thailand	201.40	1,830.10
United Utilities Group PLC (LSE:UU.)	LSE:UU.	United Kingdom	2,393.80	8,867.70
Universal Technologies Holdings Limited (SEHK:1026)	SEHK:1026	China	34.54	148.32
Watlington Waterworks Limited (BER:WWW.BH)	BER:WWW.BH	Bermuda	11.99	26.66
WHA Utilities and Power Public Company Limited (SET:WHAUP)	SET:WHAUP	Thailand	59.60	731.60
Wodkan Przedsiebiorstwo Wodociagów i Kanalizacji S.A. (WSE:WOD)	WSE:WOD	Poland	9.82	8.36
Wuhan Sanzhen Industry Holding Co.,Ltd (SHSE:600168)	SHSE:600168	China	225.70	710.50
Yunnan Water Investment Co., Limited (SEHK:6839)	SEHK:6839	China	912.90	255.10
Zhongshan Public Utilities Group Co.,Ltd. (SZSE:000685)	SZSE:000685	China	300.10	1,821.80

Some are big, some are small. Many are in China or the ASEAN. But in every case, both Manila Water and Maynilad's Rates of Return tended to gravitate to the upper end of the spectrum, be it globally, Asia-wide, or in Southeast Asia and in every category of return. Manila Water's returns are highlighted in orange while Maynilad's are highlighted in yellow.

Global Returns:

Asian Returns:

Southeast Asian Returns:

Statistical Rankings

Both Manila Water's and Maynilad's Rates of Return are far above average on a global, Asian-wide, and Southeast Asian-wide basis.

Manila Water's Rates of Return are above the 75th percentile (meaning only 25% of the companies have higher returns) globally and in Southeast Asia in terms of ROA and ROC. Asia-wide, its returns are at least in the 83rd percentile in all categories of returns.

Maynilad's Rates of Return rank above the 90th percentile in all geographic categories and in all categories of return except one: global Return on Common Equity (ROCE) - where it ranks in the 65th percentile.

Conclusion:

The impending contract renegotiations and removal of the provisions deemed "onerous" by the Duterte administration will inevitably result in a much slower growth in water tariffs and higher costs for the water concessionaires. They will no longer be able to pass on their income tax burdens to the consumers, they will have to build expensive water treatment plants, and they will no longer enjoy uncontested and automatic rate increases.

All this will serve to lower their rates of return  and align them with international averages. The returns of Manila Water and Maynilad will closely resemble that of a regular water utility stock: safe but boring.

Source: Capital IQ, www.edge.pse.com.ph

Why Do Filipinos Love Duterte So Much? Because Income Growth was Fastest Among the Poorer Classes!

Incomes grew across the board.

But incomes grew fastest among the lower classes. The lowest decile gained the most, while the highest income decile grew the least.

The ratio of the highest income decile to the lowest income decile has narrowed, reducing income inequality further.

Source: FIES Philippines, 2012, 2015, and 2018, Philippine Statistical Authority

In 2018, Even Ayala Land Had a Less Than Stellar Year

Last time we looked at Ayala Land, its Installment Contract Receivables (ICRs) problem had gotten worse and not better.

In 2018, things are looking better - much better. A lot of its ICRs were sold off to affiliates like BPI Family Bank and the overall level of ICRs have gone down substantially.

But credit quality remains a problem.

As a percentage of the remaining ICRs, total past due and impaired ICRs has not changed much.

Ayala Land's Real Estate Receivables Problem Has Gotten Worse, Not Better

The Philippine Real Estate Bubble Has Also Burst For... Ayala Land!

Hong Kong Real Estate Prices Have Budged - But Only A Little - as of 3rd Qtr. 2019

On a monthly basis, Hong Kong Real Estate Prices have started showing some declines. But the declines are minimal. They have not reached correction levels of 10% or more.

But on a year-on-year basis, prices have merely flattened.

Even by class, prices have flattened.

And the most expensive class, Class E (>160 sq. m.), has declined the most but have not reached the magnitudes of past declines.

Hong Kong House Prices Haven't Budged - Yet

How low can Hong Kong Property Prices Go? Some Clues from the Not Too Distant Past.

How Crazy is the Philippine Real Estate Market? Prices have Climbed Almost 50% Since Duterte Took Office!

Philippine house prices have gone parabolic. They have climbed 49.30% since President Duterte took office in the second half of 2016. Year-on-year price increase as of the 3rd Qtr 2019 is an astounding 21.20%. Prices have outpaced inflation by a wide margin, 139.88 percentage points.


How long can this go on? Not long, considering sales volumes dropped by more than  25% in 2018, indicating that more and more people cannot afford the high price levels.

The Not So Obvious Real Estate Bubbles

We all know about the high price of real estate in San Francisco and Los Angeles. Both metro areas boast one of the highest Median Home Price to Median Income ratios in the country. In 2018, the ratio for Los Angeles was an eye-watering 9.44 times median income. San Francisco was not too far behind with a ratio of 9.24 times median income. The sheer unaffordability of many homes has spawned a crisis of homelessness in those cities. Even tech workers, whose high wages have pushed up real estate prices in Silicon Valley, are forced to sleep in their cars and vans.

Yet those real estate markets are not technically in a bubble, and their ratios are just a shade over one standard deviation of their historical house price to income ratios. For instance, LA's historical ratio for the past 29 years has been at a lofty 7.11 times income, not too far from the current 9.44 times income. The same holds true for San Francisco. Its historical average is 7.57 versus the current 9.24 times income.

Even the global cities of Miami and New York are well within their historical averages. Miami's affordability ratio for 2018 was 6.06 times income - not far from its historical average of 4.71. New York's affordability ratio for 2018 was 5.25 times income - a shade below its historical average of 5.26 times income.

Median House Price to Median Income Ratios
Metropolitan Area	2018	Mean	Std Dev	Z Score
Los Angeles-Long Beach-Anaheim, CA	9.44	7.11	2.14	1.09
San Francisco-Oakland-Hayward, CA	9.24	7.57	1.65	1.01
Miami-Fort Lauderdale-West Palm Beach, FL	6.06	4.71	1.54	0.88
New York-Newark-Jersey City, NY-NJ-PA	5.25	5.26	1.17	-0.01

So where are the bubbilicious markets? Where have home prices strayed very far from their historical affordability ratios? Does Midland, TX come to mind? How about Lubbock, TX? Birmingham, AL? All these places had affordability ratios of less than 4 times income in 2018 - below the US national average of 4.13 times income. But all are solidly in bubble land with affordability ratios more than 2 times their historical averages since 1990.

Midland, TX ratio stood at 3.08 in 2018 - almost three standard deviations away from its historical mean of just 2.33 times income. The probability of the ratio going higher is just 0.17%. Lubbock's ratio of 3.03 times income in 2018 is 2.58 standard deviations away from its historical mean of just 2.59 times income, giving an upside probability of 0.49%. Birmingham, AL's upside is slightly better 0.64% because its 2018 affordability ratio of 3.86 times income is 2.49 standard deviations away from its historical mean of 3.34 times income.

 According to data tabulated by Harvard University's Joint Center for Housing Studies, 37 metro areas out of 382 metros are in bubble markets:

None of them, with the exception of San Jose, CA of Silicon Valley, are in obvious real estate bubbles.

Will their affordability ratios normalize or have they reached a permanently higher plateau? Only time will tell. But if they do, the results can be just as catastrophic for the homeowners.

Only three metro areas out of 382 are in a depression. Their affordability ratios in 2018 were way below their historical mean:

1. Cape Girardeau, MO
2. Beckley, WV
3. Decatur, IL

The upside probabilities for these areas? More than 98%.


Source: State of the Nation's Housing, Joint Center for Housing Studies, Harvard University