Splash Holdings SPH PM
March 05, 2011 - 12:09pm EST by
2011 2012
Price: 2.45 EPS $0.07 $0.25
Shares Out. (in M): 750 P/E 30.0x 10.0x
Market Cap (in $M): 1,570 P/FCF 30.0x 10.0x
Net Debt (in $M): -500 EBIT 100 200
TEV ($): 1,070 TEV/EBIT 10.0x 5.0x

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All numbers in Philippine Pesos

I am drinking the Lee Kwan Yew Kool-Aid instead of the Jim Chanos Kool-Aid on China. China is definitely on its way to regaining its world dominance.  I think Jim Chanos' long-term view that China will go bust has more than 95% chance of being wrong.  

Chanos used the Russia analogy to explain that no non-open democracy ever lived long enough.  While it is true that many closed societies ended up collapsing, I offer the scenario of Taiwan and Singapore as the two countries that started out as very autocratic and now have some semblance of openness.  

This TED video is a view from a British author that contradicts Chanos' long-term view:  http://www.ted.com/talks/martin_jacques_understanding_the_rise_of_china.html

We all know the obvious facts:
1. China was the world's biggest total GDP (not per capita) until 1840s.  China probably reached its peak in the mid 1600s.  They achieved this with their own system, mixed with their own culture of Confucianism, industriousness, frugality, etcetera.
2. China's land mass is similar to the USA
3. Just like the USA , China has over 30 provinces and the people from each region have different personalities.  (Just as the song from the Beach boys about East Coast girls and West Coast girls)
4. China has 3 times the U.S.A. population.

In short, China is closer to USA than CNN would like you to believe.

So then, some people claim that the fate of Japan will happen to China as well.  If you remember,  in the 1980s, there were so many Japanese tourists on Fifth Avenue, enjoying their wealth, that they literally bought one of the buildings, the Rockefeller Center. All of a sudden, sushi started tasting better. Movies like "Gung Ho" and songs like "Domo Arigato Mr. Roboto" were permeating to our society.  According to Buffett (one of the very old OID transcripts), "There was a time, American manufacturing had an inferiority complex during the 1980s to the Japanese ...but America bounced back."  I agree. America will continue to do well and will bounce back from 2008.  Japan went into the lost decade in the 1990s.  Will the same thing happen to China? I doubt it.  For one, China has the scale in terms of population and land size to "regain" their dominance.  For another, China is starting from such a very small income per capita.  Also, China has been the superpower before.  Japan is just too small.  

Last year, we just learned that the Chinese supercomputer  beat the U.S. supercomputer.  More amazingly, they achieved this with software algorithms, not just brute hardware power.  We also learned the fastest train from China runs over 50 kilometers per hour faster than the fastest Japanese or French trains.  People say that the Chinese can only "copy".  Well, how were they able to make their trains faster and their software algorithm faster if they did not have their own ingenuity?  Chanos had a caveat. He said that if China starts making planes, then his thesis could be wrong.  Well, China is on its way.  Don't ask me, ask the CEOs of Bombardier and Boeing.

So how do we play this China trend?

As many fellow VIC'ers can attest, it is too hard to explain capital markets with mainland Chinese businessmen at this juncture in their history.   History has proven that when a country starts getting more dominant, the neighbors will benefit as well.  I recommend to look at China's neighbors - Southeast Asia.  

In terms of risk reward, one of the neighbors that I have some optimism for the next 6 years is the Philippines.  The incumbent President, elected last year, was the son of Cory Aquino.  He is on a campaign to clean up corruption. Just last month, a general dramatically shot himself (in front of his mother's grave) in the midst of an embezzlement scandal.  Now, another impeachment trial is going on against one of the judges for corruption.  Granted, the Philippines has had a never ending series of false starts -- looked really good on paper, but never delivered. I cannot say for sure that this time it will be positive for good.  But the good news is my idea will not require Philippines to do well for the stock to do well. The stock I am going to recommend is a stock that is good to forget about and hold for the next five years.

Splash Holdings manufactures and markets skin care, hair care, and natural beauty products. The Company markets its products on an international basis.   In short, they are like the "Colgate-Palmolive" or "Proctor & Gamble" of the Philippines.  By the way, because of its early relationships with the USA, Philippines was always the first or second country in Asia to have Coca-cola, Proctor & Gamble, and Colgate-Palmolive products.  However, Splash was entrepreneural enough to gain a sizeable market share in some markets by understanding the local needs and desires of the Filipino population. For example, in the Philippine skin care market, Splash has the leading market share at 14%, beating rivals like Unilever.
in Millions (Pesos) TTM 2009 2008 2007 2006 2005
Revenues 2747 2719 3165 3011 2,399 2,693
Gross Prof   1241 1661 1536 1305 1447
EBITDA 143 49 305 375 298 340
EBIT 81 3 258 324 220 230

Since it is copyrighted material, I cannot post it but you can get the HBS Case study at harvardbusiness.org . It is really recommended because it covers the Philippines, the history of Splash, etcetera. The guy started with a few thousand pesos and grew a business empire.

Looking at the financials above, you can see that 2009 looked like a trough year.  Splash hired many multi-national consultants over the last few years. So the company has become quite "fat". I think that over time, this business should easily go back to near 10% EBIT margins as the consultants are not re-hired.  CEO has stated very optimistic earnings estimtes for the coming 2011.  

Market Cap        1.57  Billion Pesos
Net Cash&Equiv 5 00 Million Pesos
Book Value per share 3.82

Splash right now is trading at an enterprise value of 1.077 Billion Pesos.  Book value per share is 3.82.  I believe for a steady consumer staples business such as Splash. It is a "Tom Russo" kind of stock, but with returns that should be better than the U.S. counterparts.  this stock can easily trade back to at 3 Billion Enterprise Value per share in five years. Adding an extra 1 billion of cash from Free cash flow, I arrive at target price of 8.25 pesos. Triangulating it to the current book value per share of $3.82. This would be roughly less than 2 times book value per share in five years time, which is not a stretch either.    


Earnings rebound from the troughs. 
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