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  • Global Headwinds Bite Deeper In Latin America As Colombia Orders First Rate Cut In 2 Years [View article]
    Neal thank you for the feedback.
    Aug 5 06:37 PM | Likes Like |Link to Comment
  • Global Headwinds Bite Deeper In Latin America As Colombia Orders First Rate Cut In 2 Years [View article]
    Valuematters thank you for the insight into Argentina. I have been discussing what has been happening in Argentina with some other readers who live in Argentina. But your comments add a new level of depth to explaining the issues being faced by foreign companies in the country. The situation at the moment in Argentina intrigues me because the population seems strongly polarized they are either pro-CFK or anti CFK and her policies and there appears to be no middle ground.
    Aug 5 06:37 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    Veritas I think that is a very good summary of TEF's position. I am in the process of working with Mike to put together a valuation comparison against its peers which I hope will give some more guidance for readers.
    Aug 5 06:31 PM | Likes Like |Link to Comment
  • Global Headwinds Bite Deeper In Latin America As Colombia Orders First Rate Cut In 2 Years [View article]
    Some great points and I wholeheartedly agree.

    Argentina is a unique case in South America and the protectionism and interventionist policies of the government mixed in with an unstable economic environment will always push many investors away. Not because there are no opportunities but because it is a difficult and complex business environment to navigate. Which is in stark contrast to Colombia or even Peru (which is more heavily regulated) which have tried to make it as simple as possible for foreign companies and investors to do business. Brazil to a point will always succeed to a degree as you have pointed out because of size, the level of development achieved and the amount of resources it has access to. The reason for manufacturing in Brazil is because of the quotas and tariffs imposed on imports and the concessions given to local industry, which make it more economical to produce locally particularly if you want to sell your products in Brazil.

    Overall to date the Colombian government's policies as you have pointed out have been very good and the framework established is a solid framework. But I think they have reached the point where they need to start engineering better policies to build the domestic economy, which to some extent will affect the inflow of FDI.

    The positive for Colombia is that it can look at different South American countries and see what model they have used to develop and the pros and cons of that model. I would like to see the government take a more regulated approach particularly with oil and mining and strengthen the legal and regulatory framework. But if you know anything about the Colombian legal system and way of government that will never happen.

    Another factor is that the majority of state institutions are particularly weak and they are solely focused on foreign investment as a means of economic growth. This is great for foreign companies seeking cheap labor, access to resources and a liberal business environment but not so good for Colombia, its long-term growth or the population of Colombia except for those who act as the gate keepers to foreign investment, business and government in Colombia.

    I am hoping to see Colombia perhaps take a unique approach in Latin America, where they seek out and market their strengths to continue attracting capital and investment while seeking to minimize the damage locally and maximize the benefits to Colombia and its people. This could be done using a strong transparent and even handed economic, legal and regulatory framework. With policies enacted to maximize the retention of profits and liberalize the domestic business environment.

    I can get a grant from the government of Medellin/Antioquia to start a small business but it will only ever a micro-business such as juice stand, not anything that can grow and employ people or pay significant wages injecting cash in to the local economy. Plus there level of discretionary consumption in Colombia is too low to support anything than micro-businesses at this time.

    I would also be very interested in getting your view on Argentina at the moment and how CFK's policies are affecting your business there.
    Aug 4 09:07 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    User thank you for the additional insight. I agree but there are a number of investors including the company's management who are still arguing that Latam growth will allow the company to grow out of its troubles. Clearly it won't at this time nor for sometime. I think you have nicely summarized TEF's current position and why it has been sold down by the market and is valued at its current price.
    Aug 4 07:23 PM | Likes Like |Link to Comment
  • Global Headwinds Bite Deeper In Latin America As Colombia Orders First Rate Cut In 2 Years [View article]
    Valuematters, thank you for the comments. I agree, with Colombia not as far along the development curve the country is still able to benefit from catch-up growth and the pre-emptive cutting of the official rate was a good move. The country will still be very attractive for foreign investment for sometime to come. The key risk at this time that may delay or slow growth is if the internal security situation continues to escalate which will scare away foreign investment.

    I am also very impressed by the hands off approach taken by the Santos government with business, but they need to be aware that if you become an economy solely built on exports then your domestic economy doesn't grow. My biggest concern is that they are relying upon the 'trickle down effect 'to enrich and grow the domestic economy. This has been proven not to work in a number of other countries form across Eastern Europe at the end of the velvet revolution to other countries in South America. All this does it increase poverty and the disparity of wealth in the country over the long-run. This means they need to introduce policies that ensure a greater portion of the profits derived from exports are retained in the country so that it benefits local enterprise.

    The creation of law 1429 is a good development but it is not enough. It is one thing to create a legal framework to make establishing a small business easier or to make it easier to create a small company (SAS). But it is another to provide them with the opportunity to seriously participate in the economy. To date all it has done is promote the creation of backpacker hostels and sex tourism industry, both of which I see as bad for Colombia. You only need to look at Thailand to see where that ends up and the social problems that it creates.

    Domestic economic growth won't come through promoting low volume based budget tourism either by encouraging foreigners to stay and open hostels or backpackers to visit the country.

    The requirement is to remove the reliance upon exports to generate economic growth by having a stronger domestic economy with high levels of discretionary consumptions. This will stimulate the growth of small businesses increasing employment and help to lower the tremendous disparity in income and wealth that currently exists in Colombia.

    To do this the government needs to get serious about encouraging big business to retain profits in the country, make significant purchases in the country, spend greater portions of their budget in the local economy and employ locally if people are to benefit and a strong consumption based domestic economy is to grow.
    Aug 4 07:09 PM | Likes Like |Link to Comment
  • Gafisa: A Speculative Play On Brazilian Residential Property [View article]
    Charles thank you for the offer. I will do some further digging and see what I can come up with. If i need any help I'll email you some questions.
    Aug 4 06:53 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    Daro nice to see you pop by and thanks for the comments. I agree with your observation, other than Argentina I really haven't seen anyone with a smartphone in South America other than business people or tourists from the U.S, Europe, Korea or Japan.

    Sadly in Colombia if you walk down the street with a smartphone either holding it in your hand or talking on it you won't have it for long unless you get lucky and they don't what it is. The only iPhones I have seen have been with tourists. But when a smartphone is worth double the minimum monthly wage of around $330 USD, with 70% of the population earning that or less then they are extremely valuable items that are essentially unaffordable for the average person.

    Prepaid is where the business is and there are substantial opportunities in South America for telcos. It is essential that they customize their strategy to suit the local market, which TEF hasn't and I am still perplexed where their understanding of Latam demographics and socio-economics comes from. TEO (part owned by TI) have done very well in Argentina with a strategy focused on and customized to the local market. America Movil also does this exceptionally well and it is why they have such a large market share and have been so profitable.

    I agree with your last point and it is private equity firms who have been doing the numbers and watching TEF's asset sales with Bain and Co buying Atento for half of what TEF wanted. I think you will also see America Movil watching the asset sales carefully with a view to making appropriate acquisitions(if they fit their business model) in order to strengthen their position in South America.
    Aug 3 10:28 PM | Likes Like |Link to Comment
  • Global Headwinds Bite Deeper In Latin America As Colombia Orders First Rate Cut In 2 Years [View article]
    Allamad thank you for the feedback. There isn't that much secondary analysis available of stocks, investments, commodities and economics for Latin America outside of Brazil, Mexico and Argentina. Even for those three countries it isn't as widely available as it needs to be for investors to be informed, so I am trying to fill the gap, as a result comments are appreciated.

    I published an update on EC earlier this week and my conclusion was that the outlook for the company is not as bright as it could be. I'd like to see management publicly address the key risks surrounding the company i.e proven reserves and interrupted production and explain their strategy in depth for managing those risks. Until then it is a difficult company to make a decision.

    I will be publishing an update on CIB once I have had time to download and digest the Q2 numbers. I think that CIB is one of the best managed banks in Latam along with Peru's BAP and probably one of the better managed banks globally. I look forward to your comments when my CIB update is published.

    Both EC and CIB are personal favorites but there will come a time when management can't rely on catch-up growth to drive growth and they will need to start being more proactive in managing risks and driving growth strategies. For both EC and CIB that time is close.
    Aug 3 10:08 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    VIV is a company I have been looking at for sometime and as TEF's Brazilian sub it has been getting hammered. It would be interesting to run the numbers and see how it comes out. Will add that to my list.
    Aug 3 09:29 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    apoplectic, some very good points. The problem with the asset sale is that they are destroying value, selling assets at the bottom of the market for prices that are far less than what was paid or has cost them to acquire. Heavily leveraging the company to acquire assets on the belief that acquisitions automatically guarantee growth is a flawed business strategy and will ultimately only lead to a loss in value.

    I agree with your view on timing to acquire equities but that is also when value traps appear, TEF is cheap for a reason and the fact it is domiciled in Spain is only a small part of the reason. The stock was in free fall before Spain well and truly blew up.

    It is also likely that after it has completed its asset sales, deleveraged and refocused on its core business that the company is going to experience flat performance for the medium to long-term.

    I don't believe that the company will be able to realize the growth that it has been counting on in Latam because the level of discretionary spending isn't there, the availability of credit for consumers isn't there and the overall level of consumption in the region isn't there.

    I also doubt that in my lifetime we will ever see an advanced Latam with a broad based pluralist middle class with high discretionary spending and consumption like you see in Western Europe, the U.S or Australia. For all of these reasons I don't believe that investors will see a big bounce in the stock for sometime.
    Aug 3 09:24 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    I would tend to agree and I believe that the growth thesis that many investors are pushing with regard to Brazil and Latam as a whole is flawed for a variety of demographic and structural reasons.
    Aug 3 09:14 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    Frank thank you for the question, it came down to two different writing and analytical styles using different analytical methodologies, but when we both crunched the numbers we came up with the same view. I regret not focus on the valuation piece for the common shares here and using the numbers we crunched, but I tend to take a more thematic big picture approach while Mike is a hard numbers man.

    But this I hope, is the first of many more collaborative articles with Mike and I will pass your feedback and take it into account for future articles. If you have any more feedback, suggestions or companies you'd like covered please let me know.
    Aug 3 07:18 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    Igor thank you for the comments. The valuation piece is certainly missing and I removed it prior to publication in preference to the smartphone piece as space was at a premium. Apologies as it does need to be there to give a more complete picture.

    I think there is more to TEF's current valuation than merely its association with Spain. In my previous article I went into more detail on that, but the company was falling in value well before the current banking crisis in Spain brought Spain's parlous economic state and TEF among other Spanish companies to centre stage for investors and traders.

    Much of it has to do with high leverage, low margins and an expensive operating model. TEF has essentially leveraged itself up to the eyeballs to buy businesses and market share with view that if we build it they will come. In my experience that just doesn't work in business and it is why TEF is in so much trouble now. The company also has a lot of fat in its operating structure and that has also been priced in by the market.

    While a low ARPU is all well and good for indicating that there is opportunity for growth, the population of the market in which you are operating needs to have the disposable income to spend on your products and services, which in Latam as a whole they don't. That is why prepaid accesses exceed contract accesses. It is also why smartphone penetration is low.

    Until there is a significant demographic an socio-economic shift in Latam that broad based middle-class that can engage in high discretionary spending will never exist in Latam.

    An anecdotal observation, in Colombia where I live no one know owns a smartphone except for foreigners from the U.S and Europe. Almost everyone owns 2 prepaid phones because the cost of calling a phone outside of your service provider is prohibitive. Handsets for prepaid packages are super cheaper and heavily subsidized by the telcos, with Movistar (Telefonica) being the least popular and Comcel (AMX) the most popular. In Ecuador where I travel frequently, a lot of people don't own a cel lphone as they can't afford them and where they do it is prepaid.

    Overall I agree with your view and you have inspired me to write a follow-up piece on the valuation and with a peer comparison.

    Particularly as you point out that it is unlikely that of the slow-growth European telcos operating in overly saturated markets offer a good investment. You have also got me thinking that there needs to be a comparative analysis with the other major Latam players AMX and TI.


    Aug 3 05:48 PM | Likes Like |Link to Comment
  • Telefonica: Cheap For A Reason (Equity) [View article]
    dreadlord thank you for the comments, I would like to have done more on the valuation side in comparison to its competitors but space was at a premium and I had already covered that off in the previous article on Telefonica, but whole heartedly agree.

    As someone who lives in Colombia and travels extensively in Latin America, no one owns smartphones, because they can't afford them. Over the last few months the only people I have seen with smartphones have been foreign tourists. The affordability issue is why Blackberries and Alcatel and Chinese copies of Blackberries are so popular in Latam because they are cheap, affordable and can be bought as prepaid units. Perhaps RIMM should move from Canada to Colombia given the popularity of Blackberries here. Unless there is a sizable overnight demographic change it will be at least a decade before smartphones reach the penetration levels seen in the U.S.

    I agree with your last point but you also once established the company needs to generate sufficient business to remain profitable otherwise they simply can't continue operating. It will take years for the investment to reach fruition as you have pointed out. But there is no point in investing so heavily in entering the market and then selling your assets at fire sales prices because you can't sustain your presence, giving someone else the benefit of your hard work.

    While the Latam economies are not imploding they nor are they facing the issues seen in Europe they are still facing significant headwinds, Brazil in particular. When you take those into account with the demographic and other structural economic issues the markets are not as appealing for discretionary consume products as is commonly perceived.
    Aug 3 05:23 PM | Likes Like |Link to Comment