Peter's Perspective
14th April 2016 by Peter Churchouse

This is Still Our Favourite Emerging Market Pick…

Two weeks ago, I stepped out onto the deck of my sailing yacht in the darkness, just before the break of dawn.

We were in the final stage of the Rolex China Sea Race, a 600 nautical mile race from Hong Kong to Subic Bay in the Philippines.

The faintest hint of wood smoke in the air told me we were closing in on our destination.

Map showing the starting point of the Rolex China Sea Race in Hong Kong, and it's end point in Subic Bay, Philippines.

I’ve done this race at least 20 times now…

This crossing had been fast but pretty bumpy. My crew was looking forward to that first rum and calamansi ashore, along with a hot shower and a dry bed.

As the sky gradually illuminated over the next 20 minutes I could just make out the spectacular mountains of the Luzon coast in the distance. We were still a long way off shore. I went down into the saloon and turned on my mobile phone.

Within a few seconds a familiar service provider appeared in the top left hand corner of the screen with a very respectable three bars of signal strength.

The crew were amazed to see a mobile signal so far out at sea. Having done this passage so many times before, it wasn’t a surprise to me.

In fact, the mobile service provider was a company whose parent business I know very well.

In my early investment banking days we helped the parent raise some capital in the international markets.

It was a tough sell.

I spent two weeks on the road with the CEO who was part of the family that owned the company. We criss-crossed Europe and the U.S. visiting sceptical fund managers.

It was the early 1990’s, and U.S. fund managers in particular were not well versed in emerging markets. And certainly not the Philippines.

We weren’t raising a lot of money, and I could understand much of the investor cynicism. The kleptocracy of Ferdinand Marcos had just come to an end a few years earlier.

It was hard work getting the deal over the line.

Today it would be a walk in the park.

My due diligence on the company meant I needed to deep-dive this company’s core businesses, and telecoms was one of them.

It was the very early days of mobile telecommunications in this part of the world. And it was easy to see how this would be a great business in a country that stretches through 2,000 miles and embrace thousands of often remote, unconnected towns and villages spread through more than 3,000 islands.

Mobile technology had real genuine transformational potential. And this company was poised to do exceptionally well.

More on the company in a moment, but our destination (and the finishing line) was Subic Bay.

This was originally one of several large military bases held and operated by the US military. These bases were handed back to local administration in the early 1990’s and have been transformed into various forms of business hub.

This one was now a major port and marine service area. Fedex took over the large airport there and operated its Asian hub from there for many years. Tourism has emerged and a smattering of other industries.

The “base” is still referred to as a base, with security operating at almost military levels. Checkpoints on all roads leading in and out control access to the area.

These places operate almost as separate duty free zones within the country. This one is huge, some 66,000 acres I was told.

Once inside our safe marina berth about eight hours later, driving through the base I saw more signs of the company whose mobile signal we picked up well out at sea. A bank branch (one of the Philippines larger banks) controlled by this family… some convenience stores, again the same parent company.

The next day we drove just outside the base to a friend’s house in a rather upmarket gated community, resplendent with golf course, beach resort, recreation facilities.

Our taxi driver was excited about taking a peak inside. He knew the place, but had never ventured inside the security gates.

“Only billionaires live here!” he proclaimed.

The land area of this enclave was huge. My friend reckoned about 150 houses had been built so far but the maps I saw suggested that this could end up many times the size of the existing development.

Who was the land owner and developer? Yep, you guessed it… the same company.

Who this company is and why they are a rare breed requires we take a step back in history.

The earliest documented European expedition to the Philippines was led by famed Portuguese explorer Ferdinand Magellan, making landfall in March of 1521.

Less than two months later, he would be dead, killed by the spears of a tribe he was attempting to convert to Christianity.

However, 1521 marked the beginning of 377 years of the Spanish Colonial Era up to 1898.

It was during this time that, in 1834, the Ayala Corporation (AC PM), was founded by Antonio de Ayala and Domingo Roxas.

Today this company is the largest and most diverse holding company in the Philippines, with interests in everything from utilities, to telecommunications, healthcare, real estate… banking. You name it.

Despite being around for over 180 years, it remains family-run. The former CEO who I did that capital raising roadshow with was Jaime Augusto Zóbel de Ayala II, who had taken the reigns from his father Jaime Zóbel de Ayala.

It’s rare to see a company pass from generation to generation over centuries. And even rarer to see it do so successfully.

This company thinks in the long-term. They look far beyond the time horizon of most companies and most investors. They look ahead to the next hundred years, not a paltry decade or so.

I got to think about the due diligence work I had done on the company all those years ago.

Their development projects were huge, involving thousands of acres of valuable urban land. These projects have and will take several generations to build out to completion.

It is the only company I know that has had the foresight to acquire land in sufficient scale near the centre of a capital city that would end up being developed as the capital city’s entire central business district. And would take 75 to 100 years to reach full development.

This company has built what is the Philippine equivalent of Manhattan. High rise offices, apartments, shopping centres, hotels – everything needed for a capital city downtown area.

It is called Makati, in Manila.

And an area of land nearby of such scale that it came to define the very essence of high end housing and living in this populous country. Again, a three or four generation project. It is still being built out.

Note, this isn’t a buy recommendation. For now…

Rather, I wanted to take the opportunity to introduce our readers to a real diversified blue chip and remind them that these companies do exist even in emerging Asia.

This company has delivered more than a 16% annualised return over the past three decades (that’s an 8,000% return overall)… and it’s still going strong.

I also wanted to reiterate our bullish stance on the Philippines. We made our broader recommendation to subscribers of The Churchouse Letter at the end of November 2013.

Since our recommendation, the Philippine market has outperformed Asian emerging markets by 25%, and broader emerging markets by over 37%.

The MSCI Philippines outperforms MSCI's Emerging Markets and Emerging Markets Asia funds.

We’ve also received a huge amount of feedback after our most recent issue of The Churchouse Letter (“To Leave Or Not To Leave“) – we’ve covered something that clearly a lot of our readership have very strong opinions on!

We appreciate getting such thought-provoking feedback, and apologies if we haven’t gotten back to you yet.

Good investing,

Peter Churchouse

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