This is is a guest contribution by Mark Mobius, Executive Chairman, Franklin Templeton.
Whenever we visit Mexico, we always stop at Monterrey because so many major Mexican firms are headquartered there.
Monterrey is located in the north of Mexico, in the state of Nuevo Leon bordering the US. Since the city lies at the foothills of the Sierra Madre Oriental mountain range, there are spectacular mountain views each direction. As you get out of the city there are canyons, trails and roads crossing deserts as well as forests. Bisecting the city is the Santa Catarina River, which is really a dry riverbed most of the year on the surface but with flowing underground water.
Industrialisation was accelerated in the mid 19th century with the construction of the Fundidora de Fierro y Acero de Monterrey, a steel-producing company that accelerated the already fast industrialisation of the city and became one of the world’s biggest at that time. Mexico’s steel industry still is centered in Monterrey. There are thousands of manufacturing companies in and around the city including many transnational conglomerates. The greater Monterrey city has a population of over three million and is one of the most industrialised parts of the country. The city accounts for about 95% of the Nuevo Leon state population.
ECONOMY
As with the US, Mexico has been hit with deteriorating confidence and tighter credit with banks hunkering down for any unexpected problems. One very dramatic indicator of the slowdown was the 50% year-on-year decline in auto production in January. A higher price of oil is good for the Mexican government since a substantial portion of government income comes from Pemex, the oil monopoly. In 2008, when oil prices were high, the government had a revenue windfall of US$22 billion. Some of that will be used to stimulate the economy and some for stabilisation funds and pension restructuring. The government announced a fiscal package to stimulate the economy in January and included 25 measures to support low-income families by reducing the operation cost of small and medium-size businesses and lowering or freezing the utility rate, expanding credit availability, extending unemployment benefits and increasing infrastructure spending.
CURRENCY
The weak peso means that visiting Mexico is now cheaper than before. Some experts believe that the peso is too weak and should strengthen but others have said that it will weaken to the MXN 15/US$ range by the end of the year. The Central Bank, Banxico, has used over a billion dollars to intervene in the foreign exchange market. but they still have about US$83 billion in international reserves. Remittances from Mexican workers abroad, particularly in the US, are falling, and might even fall by 15% to 20% this year but the amount is still huge at US$25 billion in 2008. One big problem is narcotics crime, which seems to be growing and causing confidence in the government to be eroded.
Mark Mobius
MEXICAN BANKING
Mexico’s population of 107 million is young, with 45% below the age of 19. But the population is getting older and the median age is expected to increase from 25 to 31 by 2020, so a more economically active population will develop. The population is currently under-banked. Credit to the private sector as a percent of GDP is only 14% in Mexico while it is about 70% in Chile. Foreign-owned banks dominate with BBVA and Santander of Spain.
Banamex is owned by Citibank of the US, Scotiabank and HSBC of the UK together control over 87% of all deposits, while locally-owned Banorte has the remaining 13%.
COMPANY VISITS
A major provider of wireless communications in Latin America:
A strong growth in subscribers was experienced in the fourth quarter of 2008. This effectively contributed to market share gains at the expense of operating margins. Management thesis remained the same: this was a phase to grow the client base, which would eventually contribute to incremental usage of both voice and data, expanding Average Revenue Per User (ARPU). The management believes that mobile penetration in the region will not be as significantly impacted as usage. The current 80% penetration should expand to 90% by 2010. The company expanded its subscriber base by 10.1 million in the fourth quarter of 2008, making it the best quarter ever, highlighting remarkable performances in Colombia, Brazil and Ecuador. In 2008, the company added 29.3 million subscribers, 2.3% more than a year before, totalling 182.7 million wireless subscribers and 3.8 million fixed lines, for a total of 186.6 million lines.
Mexico's leading manufacturer and marketer of tissue products:
Management was optimistic that sale volumes could be maintained in 2009. An anticipated growth of 2%-3%, even with the economy shrinking 2%, was expected. Although raw material prices have come down, the devaluation of the Mexican peso against the US dollar absorbed those gains. Capacity utilisation rate is currently 93%. They increased prices for household goods by 8% in March and prices for infant products by 6% in April. They are analysing a project to generate their own energy with natural gas. The facility will also produce steam, which they can use in their bathroom tissue production. This makes the electricity generation much more efficient for them, potential savings total 15% of their electricity costs. A high and sustainable dividend yield, solid balance sheet, strong cash generation, conservative management, defensive nature and excellent profitability led us to maintain a positive view on the company.
Premier media group in Latin America:
The company has been diversifying into other segments in the media industry but still strongly relies on the TV broadcasting business unit, which comprises 50% of the group’s revenues. In this regard, the upfront sales season was lethargic since most corporate clients remained cautious about the short-term economic outlook, given the sluggish economic performance in Mexico and the US. The management expects its revenues to be more resilient than those of US companies due to the different nature of its client base. The company generates US$500 million in revenues on the back of its Pay TV, programming exports and publishing distribution in the US and Latin America. On the other hand, the company faces approximately US$700 million in US dollar-denominated costs, which leaves the company reasonably hedged, operationally.
The gaming segment has two businesses: lottery machines and the bingo parlours. The lottery machines have faced some problems as a result of the very strong competition from the government, which has 8,000 terminals versus the 5,000 terminals installed by the group. Business needs to triple before it can be profitable, and as a result, the company is now evaluating if they should continue with the lottery business. On the other hand, the bingo parlour is doing well. They have opened 13 branches in 2007 and should have ended 2008 with 19 centres. The company plans to open 8 to 10 centres annually until it reaches the 65 granted by the license. In 2009, sales are estimated to reach 1,500 million Mexican peso. The venture in Spain is doing extremely well in terms of market share on the back of exclusive content such as the broadcasting of football matches or F1 racing events. In revenue terms, however, improvements are needed.
OUTLOOK
Slowing growth and recession concerns has had an impact on stock markets globally. Mexico is no exception, especially due to its trade relations with the US economy. We are, however, satisfied with the developments we witnessed in Mexico and expect the companies there to recover once investor confidence returns and the macroeconomic situation improves.
Dr. Mark Mobius
Executive Chairman, Templeton Asset Management
Source: Citywire.co.uk
