SM Investments builds an empire

SM Investments eyes an ambitious land reclamation project and casino through its units SM Land and Belle Corp.

Henry Sy's ancestral home in Jinjiang in the Fujian province of China is one of the few reminders of the billionaire founder's humble beginnings. Today, the family’s wealth includes stakes in the Philippines’ biggest bank Banco de Oro (BDO) and the country’s biggest property company and mall operator SM Prime.

Not content with that, the family and its holding companies are looking for new areas of growth. Among the most ambitious is a plan to reclaim 300 hectares of land along Manila Bay, located close to SM Investment's massive Mall of Asia complex. “The stock of land is limited in Metro Manila,” Jose Sio, SM Investments’ chief finance officer, told FinanceAsia in a recent interview in the Philippines capital. Gesturing towards the sandy stretch that curves along the bay, visible from the company's office at Mall of Asia, he adds: “This is one of the opportunities [where] we can grow.”

The group is hoping to replicate the success it has had with Mall of Asia, which was also built on reclaimed land in the 1990s. SM Investments is the holding company for the Sy family’s sprawling business empire and it is 62%-owned by the Sy family. Sio has worked at the company for more than two decades. In jest, some inside the company call him the adopted son of Henry Sy. He is the only non-family member to sit in on the weekly meetings that the Sy family hold to discuss its major investments.

The Ps54.4 billion ($1.2 billion) reclamation project will be developed by SM Land, a subsidiary of SM Prime. However, SM Land's billion-dollar proposal has so far been dogged with controversy, which threatens to delay the project.

SM Land was given the go-ahead last year by Pasay City Council to press ahead with the reclamation project but only after a degree of drama. SM Land submitted an initial, unsolicited bid, triggering a 30-day bidding process. Rival developer Ayala Land signalled that it wanted to enter a rival bid but asked for a deadline extension. This request was denied, prompting Ayala to question the transparency of the process. 

In the absence of any bids, SM Land’s proposal was then approved by Pasay City Council. It then withdrew that approval in December, only to reinstate it shortly after, stating that it “violates [the] due process and the constitutional rights of SM Land.”

Analysts say that if SM Land wins the project it could add a significant amount of value to the group. But there are concerns over a potential bidding war.

“The question is whether it will happen on the terms proposed,” said one analyst at a bank, who declined to be named. “It still needs government approval and it is unlikely [that] it can proceed without a rebid,” he said.

The proposal still needs to be approved by the Philippines Reclamation Authority and the National Economic Development Authority (Neda), which is composed of cabinet secretaries and is chaired by the president of the Philippines.

With the Philippines due to hold elections in 2016, SM Investments is keen for the Manila Bay reclamation project to be given the formal go-ahead before then. When asked to comment on the timing for approvals, Sio said, “If you ask me when? I think one or two years.”

Under its proposal, SM Land plans to build a massive mixed-use development with 51% of the land allocated to the government upon completion.

Unsurprisingly, the group is eager to get started. “It will be better for all that things can start as soon as possible. Our vision here to develop 300 hectares will take us five to seven years," he said.

City of Dreams

Further down the Manila Bay, some 3,000 workers are busy building the $1.3 billion City of Dreams Manila casino. Belle Corp, which is 18%-owned by SM Investments, has partnered with Macau gaming operator Melco Crown Entertainment, to snare a share of Philippines' gaming market. The casino, which will have 365 gaming tables and more than 1,000 slot machines, is expected to open its doors in the final quarter of this year, according to Sio.

Belle holds one of four gaming licenses and will be competing with the Enrique Razon-led Bloomberry Resorts, which opened Solaire Resort and Casino in March 2013, and with Travellers International Hotel Group, a joint venture between Philippine conglomerate Alliance Global and Genting Hong Kong.

Sio sees potential in Philippines’ gaming market, given its appeal as a tourism destination. "The gaming revenue of Macau was $40 billion last year," Sio told FinanceAsia. "In Las Vegas, the gaming revenue is less than $10 billion so if we can get even just 10% of the Macau revenue we get $5 billion. That’s enough to sustain us.”

These two projects, ambitious as they are, have yet to have any impact on earnings. For now, the main money spinners at SM Investments are its holdings in BDO, SM Prime and SM Retail, which operates its supermarket and department stores.

Bank, property and retail

BDO, steered by Henry Sy’s oldest daughter Teresita Sy-Coson, contributed to 43% of SM Investment’s net income during 2013. A further 36% and 21% came from its property and retail interests, respectively.

BDO's strong contribution was thanks to gains in its loan portfolio and to trading and foreign exchange gains. Moving forward, Sio said he expects the contributions to be more balanced, with the bank, property and retail divisions each contributing about a third of total net income.

SM Investments has a planned total capital expenditure of Ps70 billion ($1.5 billion) for 2014, the bulk earmarked for its various property developments. According to Sio, SM Investments could fund this capex by issuing shares or debt or by using internally generated funds. He noted that selling shares is "an option" but that the company has no definite plans to do so at present.

The bank still has room to increase its borrowings. According to Sio, SM Investments currently has a gearing ratio of 38% debt and 62% equity. "Our covenant to the banks has always been the other way around, 70% debt and 30% equity," Sio said, adding that internally the company's aim is to balance it evenly, with 50% debt and 50% equity.

If it does raise debt, the company prefers to do so onshore because its revenue is denominated in pesos, Sio said. SM Investments is in the midst of issuing a Ps15 billion retail bond.

SM Investments' cautious financing strategy is shaped by its founder Henry Sy. "The founder migrated from China. His way of managing business is still a very conservative way," said Sio. "Philippines is still a developing country that could change very rapidly. It is important to us that the balance sheet is strong enough to withstand any sudden change in the economic environment,” Sio said.

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